10,740.8
2
1
FIT FOR
2018
3
NOVEMBER 17 →
MERCK ENTERS INTO
STRATEGIC ALLIANCE
WITH PFIZER IN
IMMUNO-ONCOLOGY
Merck and Pfizer will jointly develop and commercialize
a highly promising anti-PD-L1 antibody from the
Merck research pipeline. In value terms, the transaction
is the largest so far in the biopharmaceutical industry
for a single asset at this stage of development. Immuno-
oncology is about mobilizing the body's own immune
system to fight tumor cells.
9
8
MERCK LAUNCHES
"PROUD TO BE
AN ORIGINAL"
EMPLOYEE CAMPAIGN
Merck kicks off a global communications campaign called
"Proud to be an Original". The campaign offers Merck's
39,000 employees worldwide the opportunity to express
their pride in working for Merck.
AUGUST 1 →
NEW CFO
TAKES OFFICE
Marcus Kuhnert joins Merck as Member of the
Executive Board and Chief Financial Officer.
4
SEPTEMBER 30 →
AUGUST 27 →
Subsequent to a doubling in the value of
Merck shares since the beginning of 2011,
Merck announces a share split in a ratio
of 1:2. The share split became effective on
June 30.
MERCK ANNOUNCES
→ Healthcare comprises the Merck Serono, Consumer Health, Allergopharma and Biosimilars businesses.
→ Life Science refers to the business of Merck Millipore.
→ Performance Materials corresponds to the business of the same name.
Company structure
↑
MERCK GROUP
"WE ARE ALL PURSUING ONE
GOAL: DELIVERING GROWTH WITH
OUR IDEAS AND COMMITMENT
TO OUR DAILY WORK. TO BENEFIT
OUR PATIENTS, OUR CUSTOMERS,
OUR SHAREHOLDERS AND OUR
SOCIETY."
KARL-LUDWIG KLEY, Chairman of the Executive Board of Merck
MERCK GROUP
SHARE SPLIT
Highlights 2014
MERCK GROUP ->
HIGHLIGHTS
of 2014
MARCH 26 →
MAY 2 →
ACQUISITION OF
AZ ELECTRONIC
MATERIALS
Through the acquisition of AZ for around € 1.9 billion,
Merck expands its existing, highly profitable Liquid
Crystals business with high-tech electronic materials.
AZ materials are widely used in integrated circuits,
flat-panel displays and light-emitting diodes, making
AZ an important partner to the
leading global electronic manufacturers.
↑
Effective January 1, 2015 Merck changed the structure of its financial reporting. As of the first quarter of 2015, the following three business
sectors will be used for reporting purposes:
MERCK BREAKS
PHARMACEUTICAL
TREND/2 →>
MARKETS
IN MOTION
12 - 17
The middle class is growing - worldwide. As incomes
rise, so do consumption and health awareness.
Merck sees these new markets as future hubs, and is
becoming even more international.
TREND/3 →>>
A CRYSTAL
CLEAR FUTURE
18-25
treatment.
The digital revolution is changing people's lives
around the globe. With its expertise in liquid
crystals and insights into future trends, Merck,
the technology leader, is a key driver of future
developments.
HEALTH FOR
EVERYONE
26-31
For many people around the world, access to
innovative health solutions is more of a dream
than a reality. In order to change this, Merck has
committed itself to numerous projects, for instance
in the fight against schistosomiasis.
Table of contents
ANNUAL REPORT Table of contents
TO OUR SHAREHOLDERS →
32-41
CORPORATE GOVERNANCE →
142-165
TREND/4 →>
GROUND AT A NEW
While life expectancy is increasing, birth rates
are declining, even in many dynamic emerging
countries. Merck is the global leader in fertility
YOUNGER
MANUFACTURING SITE
IN CHINA
Merck holds the groundbreaking ceremony
for its new pharmaceutical manufacturing site
in Nantong, China. The new facility will be
Merck's second-largest worldwide. As of 2017,
it will mainly focus on the bulk production
and packaging of medicines referenced in China's
essential drug list.
6
5
SEPTEMBER 1 →
GROUNDBREAKING
CEREMONY FOR
NEW GLOBAL
FOR LONGER
6-11
HEADQUARTERS
a contemporary global headquarters is clearly taking
SEPTEMBER 22 →
MERCK ENTERS INTO
AN AGREEMENT TO
ACQUIRE SIGMA-ALDRICH
Merck announces an agreement to acquire Sigma-Aldrich
for US$ 17.0 billion. The combination would establish
one of the leading players in the US$ 130 billion global
life science industry. On December 5, Sigma-Aldrich
shareholders approve the merger with Merck.
SEPTEMBER 18 →
MERCK ANNOUNCES
PLANS TO STRENGTHEN
THE EXECUTIVE BOARD
Effective January 1, 2015, Stefan Oschmann becomes
Vice Chairman of the Executive Board. On the same date,
Belén Garijo becomes a Member of the Executive Board
and assumes the leadership of the Healthcare business sector.
MAGAZINE →
The world is changing at breathtaking speed. Megatrends, which characterize the deep-seated
social and technological changes taking place around the globe, are one reason. In this
Annual Report, we take a closer look at four global trends. Our magazine shows how Merck is
meeting them, positioning itself optimally for the future and taking decisive steps to help
shape tomorrow.
TREND/1 →>
The expansion of the Merck site in Darmstadt into
034
Biosimilars
Consumer Health
10,700.1
5.5
1,762.0
1,610.8
9.4
15.6
15.1
3,122.9
3,069.2
11,291.5
1.7
28.7
3,387.7
3,253.3
4.1
30.0
30.4
2.66
2.77
-4.0
27.7
4.60
3.7
11,500.8
ANNUAL REPORT 2014
DELIVERING GROWTH
MERCK
MERCK GROUP
KEY FIGURES
€ million
Total revenues
Sales
Operating result (EBIT)
Margin (% of sales)
11,095.1
EBITDA
EBITDA pre one-time items
Margin (% of sales)
Earnings per share (€)1
Earnings per share pre one-time items (€)¹
Business free cash flow
Change
2014
2013
in %
Margin (% of sales)
Allergopharma
4.39
2,605.1
2011
→
2,723.8
2010 →
2,545.0
MERCK GROUP →
Merck is a leading company for innovative and top-quality
high-tech products in healthcare, life science and performance
materials. Around 39,000 Merck employees work in 66 countries
to improve the quality of life for patients, to foster the success
of customers and to help meet global challenges.
MERCK GROUP
BUSINESS SECTORS AND BUSINESSES
2,964.9
as of January 1, 2015
Group
Healthcare
Life Science
Performance
Materials
Business sectors
Merck Serono
Merck Millipore
Performance
Materials
Businesses
Merck
4.8
2012 →
2013 →
2,960.0
-12.0
'Taking into account the share split; previous year's figures have been adjusted accordingly. See "Earnings per share" in the Notes to the Consolidated Financial Statements.
MERCK GROUP →
SALES
€ million
MERCK GROUP
EBITDA PRE ONE-TIME ITEMS
€ million
3,253.3
2014 →
11,291.5
10,700.1
2012 →
2011 →
9,905.9
2010 →
8,928.9
2014 →
3,387.7
2013 →
Letter from Karl-Ludwig Kley
shape. The symbolic groundbreaking officially marks
the launch of the "ONE Global Headquarters" project.
The Executive Board
104 Consumer Health
109
Merck Serono
097
Merck Group
084
Information and Service
258
Review of forecast against actual business developments
Course of business and economic position
084
082
257 AUDITOR'S REPORT
Macroeconomic and sector-specific environment
080
080 REPORT ON ECONOMIC POSITION
Performance Materials
256 RESPONSIBILITY STATEMENT
115
Corporate and Other
038
"What one has wished for in youth, in old age
one has in abundance." More and more
people can relate to this quote from Johann
Wolfgang von Goethe as life expectancies
steadily increase worldwide. Birth rates,
meanwhile, are sinking. These developments
are reflected in the portfolio of products
and services from Merck - including those that
treat infertility and further cancer research.
YOUNGER
FOR LONGER
AGING POPULATIONS
TREND/1 →
5
The full Consolidated Financial Statements can be found on
our website at: ar2014.merckgroup.com
141 SUBSEQUENT EVENTS
REPORT IN ACCORDANCE WITH SECTION 315 (4)
OF THE GERMAN COMMERCIAL CODE (HGB)
REPORT ON EXPECTED DEVELOPMENTS
REPORT ON RISKS AND OPPORTUNITIES
140
134
22 3
122
Merck Millipore
077 Employees
121
Notes to the Group accounts
044
166-255
STATEMENTS →
CONSOLIDATED FINANCIAL
with respect to its composition
164
Report of the Supervisory Board
162
145
144 Capital structure and governance bodies of Merck KGaA
Statement on Corporate Governance
42-141
REPORT →
GROUP MANAGEMENT
067 Research and Development at Merck
040 Merck Shares
FUNDAMENTAL INFORMATION
168 Consolidated Income Statement
Objectives of the Supervisory Board
169
ABOUT THE GROUP
059 Corporate Responsibility
Consolidated Statement of Changes in Net Equity
172
Internal management system of the Merck Group
Consolidated Cash Flow Statement
171
Objectives and strategies of the Merck Group
055
050
Consolidated Balance Sheet
170
The Merck Group
044
Consolidated Statement of Comprehensive Income
174
Profit after tax
15.1
15.6
151.2
9.4
Financial result
Profit before income tax
Income tax
1,610.8
-2.1
Net income
-205.0
-1.8
1,557.0
-222.2
17.2
1,762.0
-7.7
Attributable to non-controlling interests
4,014.6
5.8
-0.1
-1.8
13.8
4.0
11,291.5
3.9
- 6.9
5.0
874.5
12.0
0.2
6.4
9.1
4,250.2
3.6
1.8
0.1
1.7
2,152.2
0.8
0.7
-3.5
1,388.6
Performance Materials 170.6
168.4
Including cost of sales, which increased by 15.9% to € 3,526
million in 2014, the Merck Group recorded gross profit of € 7,974
million (2013: € 8,053 million). The strong increase in cost of sales
was due among other things to organic sales growth in all divi-
sions, as well as the first-time consolidation of AZ. As part of the
purchase price allocation, the acquired inventories of AZ were
stepped up to fair values on the date of first-time consolidation.
In 2014, € 45 million of this step-up was recognized as an expense
in cost of sales. In addition, cost of sales of the Performance
Materials division rose due to the amortization of intangible assets
in connection with the AZ purchase price allocation. Along with
stronger sales growth in regions with lower margins as well as
isolated production and supply bottlenecks in the Merck Serono
division, gross margin, i.e. gross profit as a percentage of sales,
declined to 70.6% (2013: 75.3%) in 2014. In addition to the afore-
mentioned effects, the sharp decline in royalty, license and com-
mission income also had a negative effect on gross margin.
GROUP MANAGEMENT REPORT → REPORT ON ECONOMIC POSITION → Merck Group
89
The increase in research and development costs was mainly attri-
butable to Merck Serono and included in particular expenses for
provisions set up for unavoidable subsequent costs that are likely
to be incurred in connection with the discontinuation of clinical
development programs. Consequently, 79% of Group-wide research
and development spending was attributable to this division (2013:
78%). The Group research spending ratio (research and develop-
ment costs as a percentage of sales) rose accordingly to 15.1%
(2013: 14.1%).
MERCK GROUP
RESEARCH AND DEVELOPMENT COSTS BY DIVISION 2014
€ million/in %
10
Royalty, license and commission income declined by - 47.0% to
€ 209 million in 2014 (2013: € 395 million). This sharp drop of
€ -186 million was mainly due to the decrease in royalty and
license income in the Merck Serono division. Total revenues (sales
plus royalty, license and commission income) rose by 3.7% to
€ 11,501 million (2013: € 11,095 million).
Merck Millipore → 162.6
10
Consumer Health 22.3
%
79 Merck Serono 1,343.7
In 2014, the improvement in other operating expenses and income
(net) to € - 258 million (2013: € −718 million) mainly reflected
the adjustment of provisions for litigation, lower expenses from
one-time items and higher foreign exchange gains (see also
"Other operating expenses and income" in the Notes to the Group
accounts). However, other operating expenses and income were
affected in 2014 by higher impairments of intangible assets in
connection with the discontinuation of clinical development pro-
grams in the Merck Serono division.
Owing to the good performance of the Merck share price com-
pared with the DAX, expenses from additions to provisions within
the scope of the Merck Long-Term Incentive Plan (LTIP) were
higher in 2014 than in the previous year. The intrinsic value of
Merck Share Units (MSUs) was recognized under the respective
functional costs in the income statement depending on the field of
activity of the eligible participants. MSUs are virtual Merck shares
that eligible executives and employees could receive at the end of
a three-year performance period within the scope of the LTIP.
As a result of the development of income and expenses
described above, the operating result (EBIT) of the Merck Group
increased by 9.4% to € 1,762 million in 2014.
The improvement in the financial result by € 17 million to € – 205
million was largely attributable to the positive development of the
interest result (see also "Financial result" in the Notes to the Group
accounts).
Income tax expenses of € 392 million (2013: € 180 million) led
to a tax ratio of 25.2% (2013: 12.9%). The low tax ratio of the
previous year was attributable to one-time deferred tax income
(see also "Income tax" in the Notes to the Group accounts).
3.3
13.0
'The disclosure of amortization of intangible assets (excluding software) has been changed. See "Accounting and measurement principles" in the Notes to the Group accounts.
-44.9
12.1
-392.2
1,164.8
-3.5
-179.5
-1.7
-212.7
118.4
10.3
1,209.1
-3.7
11.3
-3.7
-7.5
1,157.3
-0.1
10.2
-6.9
1,202.2
-0.1
-0.6
8.4
11.2
-44.3
5.5
(of which: amortization of intangible assets)'
The consolidated income statement of the Merck Group is as
follows:
Administration expenses
-5.2
29.5
-5.3
-567.0
-4.8
-537.5
Royalty, license and commission expenses
(-5.7)
(43.0)
0.5
-16.4
- 28.9
-3,088.5
(-762.0)
(-719.0)
(of which: amortization of intangible assets)'
-27.5
-3,104.9
Marketing and selling expenses'
-608.6
- 5.4
-562.4
- 5.3
Net income, i.e. profit after tax attributable to Merck share-
holders, in 2014 was € 1,157 million (2013: € 1,202 million).
Taking the share split into account, this resulted in earnings per
share of € 2.66 (2013: € 2.77).
460.4 -64.1
-6.7
-718.1
-2.3
-257.7
Other operating expenses and income
(64.6)
13.1
-1.0
-197.1
(-1.5)
(-3.8)
(of which: amortization of intangible assets)'
-14.1
-1,506.6
-15.1
-1,703.7
Research and development costs'
8.2
-46.2
(-2.3)
- 79.0
75.3
(91.2)
100.0
10,700.1
100.0
11,291.5
209.3
in %
€ million
in %
€ million
in %
591.4
€ million
2013
2014
→ Merck Group
GROUP MANAGEMENT REPORT → REPORT ON ECONOMIC POSITION
Total revenues
Royalty, license and commission income
Sales
CONSOLIDATED INCOME STATEMENT
MERCK GROUP →
Change
88
5.5
1.9
101.9
(-44.8)
15.9
-484.7
-28.4
-3,041.7
(-49.2)
8,053.4
70.6
7,974.4
Gross profit¹
Operating result (EBIT)
11,500.8
(-94.0)
-3,526.4
Cost of sales'
3.7
405.7
103.7
- 47.0
-185.7
3.7
395.0
11,095.1
-31.2
The key financial indicator used to steer operating business,
EBITDA pre one-time items, climbed 4.1% to € 3,388 million
(2013: € 3,253 million). The resulting EBITDA pre margin of
30.0% nearly reached the year-earlier level (30.4%). The reconcil-
iation of the operating result (EBIT) to EBITDA pre one-time items
is presented under "Internal management system of the Merck
Group".
No
Eurobond 2010/2015
980.8
2,878.5
Cash and cash equivalents
of which:
41.9
3,095.9
35.5
7,384.5
40.3
10,480.4
Current assets
in %
€ million
in %
€ million
in %
€ million
Change
Dec. 31, 2013
Current financial assets
2,199.4
2,410.5
Trade accounts receivable
Non-current assets
15.6
2,095.6
64.5
13,434.1
59.7
15,529.7
1,009.6
185.5
Dec. 31, 2014
214.2
1,897.7
497.6
1,507.2
Other current assets
1,474.2
1,659.7
Inventories
2,021.4
2,235.6
-211.1
of which:
BALANCE SHEET STRUCTURE
Net assets and financial position
03 →
857
826
2.3
02->
846
2013
801
0.7
01 →
807
2014
%
1 Quarterly breakdown unaudited.
EBITDA PRE ONE-TIME ITEMS AND CHANGE BY QUARTER1
€ million/change in %
MERCK GROUP →
The development of EBITDA pre one-time items in the individual
quarters in comparison with 2013 is presented in the following
overview:
→ Merck Group
GROUP MANAGEMENT REPORT → REPORT ON ECONOMIC POSITION
04 →>
3.1
831
878
Merck Group
GROUP MANAGEMENT REPORT → REPORT ON ECONOMIC POSITION →
91
Merck Serono → 1,830.9
51
Not presented: Decline in Group EBITDA pre one-time items by € -166 million due to Corporate and Other.
Consumer Health 169.4
%
→ 658.6
MERCK GROUP →
Merck Millipore
25
25
Performance Materials → 894.8
EBITDA PRE ONE-TIME ITEMS BY DIVISION - 2014
€ million/in %
MERCK GROUP →
€ -166 decline due to Corporate and Other. With a share of 51%
(2013: 54%, excluding Corporate and Other), Merck Serono's con-
tribution to EBITDA pre one-time items was the highest among all
the operating divisions. The percentage contributions of Merck
Millipore and Consumer Health remained at the previous year's
level of 19% and 5% respectively.
The increase in EBITDA pre one-time items was mainly attribut-
able to the Performance Materials division, which achieved the
strongest rise in EBITDA pre one-time items of all the operating
divisions with an absolute increase of € 115 million. The division
thus increased its share of Group EBITDA pre one-time items by
two percentage points to 25% (2013: 23%). This excludes the
795
10.5
19
Intangible assets
11,395.5
Property, plant and equipment
929.4
909.2
-385.0
303.6
671.1
910.9
1,011.1
3,257.5
1,600.5
1,820.1
626.1
3,561.1
30.0
1,757.1
28.1
5,850.6
29.2
7,607.7
824.8
11,801.0
45.4
11,069.2
53.2
NET FINANCIAL DEBT
MERCK GROUP →
Merck Group
GROUP MANAGEMENT REPORT → REPORT ON ECONOMIC POSITION →
93
The doubling of pension provisions to € 1.8 billion resulted
mainly from the lowering of the discount rates used to calculate
the present value of the defined benefit obligations of old-age
pension plans. The resulting actuarial losses were recognized in
the Consolidated Statement of Comprehensive Income and, taking
into account deferred taxes, lowered the equity of the Merck
Group.
Equity increased by € 732 million to € 11,801 million (2013:
€ 11,069 million). This increase was mainly driven by total com-
prehensive income generated in 2014 (see the Consolidated State-
ment of Comprehensive Income in the consolidated financial
statements). This was countered by dividend payments, the result
transfer to E. Merck KG as well as the acquisition of the non-
controlling interests in AZ Electronic Materials S.A. (see Consoli-
dated Statement of Changes in Net Equity in the consolidated
financial statements). Owing to the sharp increase in the balance
sheet total, the equity ratio declined to 45.4% as of December 31,
2014 (2013: 53.2%).
The first-time consolidation of AZ as of May 2, 2014 also had an
effect on the consolidated balance sheet as of December 31, 2014.
As part of the purchase price allocation for the AZ acquisition, the
acquired assets and liabilities were measured at fair values in the
balance sheet. On the date of first-time consolidation, this led to
an increase in intangible assets (excluding goodwill) by € 1,051
million. The goodwill from the transaction amounted to € 818 mil-
lion. The payment of the purchase price totaling € 1,875 million
was made fully in cash. Further information on the purchase price
allocation for the AZ acquisition can be found under “Acquisitions
and divestments as well as assets held for sale and disposal groups"
in the Notes to the Group accounts.
Owing to a weaker euro, positive foreign exchange effects
resulted, which increased total assets by around € 0.9 billion as of
December 31, 2014.
67.0
Within the scope of the global alliance entered into with Pfizer
Inc., USA, in November 2014 on the development and commer-
cialization of the anti-PD-L1 antibody, the Merck Group received
an upfront payment of US$ 850 million (€ 678 million). Based on
the collaboration agreement, Merck will co-market XalkoriⓇ, a
drug for the treatment of non-small cell lung cancer, with Pfizer
in the United States and certain other major markets over a multi-
year period. Other current assets of € 294 million were capitalized
for the entitlement to the right. Both the upfront payment received
and the value of the right to co-market XalkoriⓇ were recognized
in the balance sheet as deferred revenues under other liabilities,
leading to an increase of nearly € 1 billion in the balance sheet
total as of December 31, 2014.
The total assets of the Merck Group amounted to € 26,010 million
as of December 31, 2014. This represents an increase of € 5,192
million or 24.9% over December 31, 2013 (€ 20,819 million). This
sharp increase was primarily attributable to the following devel-
opments:
GROUP MANAGEMENT REPORT → REPORT ON ECONOMIC POSITION → Merck Group
92
24.9
5,191.5
20,818.6 100.0
26,010.1 100.0
6.6
731.8
The issue of a hybrid bond with a volume of € 1.5 billion as
well as higher other financial liabilities led in 2014 to an increase
of around € 1.9 billion in liquid assets as well as financial liabili-
ties, which relates to the financing of the planned acquisition of
Sigma-Aldrich. Currency hedging transactions completed for the
expected purchase price payment in U.S. dollars for the acquisi-
tion of Sigma-Aldrich in 2015 resulted in high positive market
values that increased equity without affecting profit or loss as of
December 31, 2014.
175.3
1,635.5
1,599.6
18.7
3,898.8
25.4
6,601.4
24.9
5,191.5
100.0
20,818.6
100.0
2,702.6
26,010.1
343.2
1,528.3
919.7
2,647.2
9,867.2
Total assets
1,143.8
Other non-current assets
2,990.4
224.1
90
69.3
Total change
494.7
1,364.1
440.4
Total liabilities and equity
Equity
Other non-current liabilities
Provisions for pensions and other post-employment benefits
Non-current provisions
Non-current financial liabilities
Current liabilities
of which:
2,424.4
Other current liabilities
561.7
Current provisions
1,539.4
Trade accounts payable
2,075.9
Current financial liabilities
of which:
Non-current liabilities
Acquisitions/
divestments
The increase in financial liabilities as well as liquid assets is related
to the financing of the planned acquisition of Sigma-Aldrich. Net
financial debt rose by only € 252 million to € 559 million (2013:
€ 307 million), even though the payment of the purchase price
for AZ amounting to around € 1.9 billion was financed in 2014.
Organic growth
1 Quarterly breakdown unaudited.
%
90
2014
684
01 →
15.4
593
2013
632
02->
-19.3
784
BUSINESS FREE CASH FLOW AND CHANGE BY QUARTER¹
€ million/change in %
614
- 28.0
853
Q4 →
675
730
-7.6
95
GROUP MANAGEMENT REPORT → REPORT ON ECONOMIC POSITION →
Merck Group
MERCK GROUP →
BUSINESS FREE CASH FLOW BY DIVISION - 2014
€ million/in %
Performance Materials → 699.6 25
03->
MERCK GROUP →
The distribution of business free cash flow across the individ-
ual quarters as well as the percentage changes in comparison with
2013 were as follows:
vious year's level. The composition of this financial indicator is
presented in the Group management report under "Internal Man-
agement System of the Merck Group".
Inventories
Trade accounts payable
Working capital
% of sales
Change
Dec. 31, 2014
Dec. 31, 2013
€ million
in %
2,235.6
2,021.4
214.2
10.6
1,659.7
1,474.2
185.5
12.6
-1,539.4
-1,364.1
-175.3
12.9
2,355.9
2,131.5
224.4
10.5
20.9%
19.9%
Working capital increased in 2014 by € 224 million. Approximately
two-thirds of this increase were due to the first-time consolidation
of AZ. Consequently, working capital increased to 20.9% of sales
(2013 19.9%).
Business free cash flow of the Merck Group was € 2,605 million
in 2014 (2013: € 2,960 million), which did not meet the high pre-
15
Trade accounts receivable
Exchange rate
effects
4
59.7
64.5
69.4
71.1
74.7
Total assets
Equity
Asset coverage
76.0
82.4
69.4
66.7
62.0
Asset ratio
Non-current assets
Finance structure
46.5
40.0
40.6
37.5
28.0
Liabilities (total)
Overall assessment of business performance and economic
situation
Merck can look back on a very successful 2014. The good devel-
opment of the operating businesses made it possible to seamlessly
build on the excellent results of 2013. Major progress was made
with the implementation of the “Fit for 2018" transformation and
growth program. With the acquisition of AZ and the formation of
strategic partnerships, Merck succeeded in securing future growth
and profitability. In particular, the planned acquisition of Sigma-
Aldrich represents a milestone for the Group's Life Science busi-
ness.
Group sales increased by 5.5% to € 11.3 billion in 2014. The
acquisition of AZ, which was completed at the beginning of May
2014, increased sales by 3.3%. Sales rose not only as a result of
acquisitions, but also organically by 4.0%. Whereas in the past
years exchange rate developments of key currencies negatively
affected sales, only a slight negative effect of -−1.8% resulted in
2014.
The development of EBITDA pre one-time items, which increased
in 2014 to € 3,388 million (2013: € 3,253 million), also shows the
sustainable profitability strength of the Merck Group. Business
free cash flow amounted to € 2,605 million in 2014 (2013: € 2,960
million), falling short of the previous year's excellent figure.
The solid accounting and finance policy of the Merck Group is
reflected by the very good key balance sheet figures. The equity
ratio as of December 31, 2014 was 45.4%, thus remaining at a
very good level. Net financial debt only rose from € 307 million to
€ 559 million, despite the financing of the purchase price payment
of € 1.9 billion for the acquisition of AZ. This shows that thanks
to its high financing power, Merck is well-prepared for the an-
nounced acquisition of Sigma-Aldrich. Against the backdrop of
the superb liquidity position and financing base as well as the
excellent business development, the economic position of the
Merck Group can be assessed positively overall. It represents an
ideal starting basis for future organic and inorganic growth.
Current liabilities
Non-current assets
Total assets
46.3
Consumer Health 124.0
Not presented: Decline in Group business free cash flow by € - 215 million due to Corporate and Other.
56
Merck Serono → 1,577.2
In 2014, all four operating divisions generated lower business free
cash flow than in 2013. The Merck Serono division generated
business free cash flow amounting to € 1,577 million (2013:
€ 1,787 million), thus raising its contribution to Group business
free cash flow to 56% (2013: 55%). This excludes the decline of
€ - 215 million due to Corporate and Other. Performance Materials
contributed € 700 million (2013: € 788 million) to this Group
financial indicator, equivalent to 25% (2013: 24%). Taken together,
the Merck Millipore and Consumer Health divisions contributed
19% (2013: 21 %) to Group business free cash flow.
The investments in property, plant, equipment and software
included in the calculation of business free cash flow as well as
advance payments for intangible assets increased in 2014 by
18.2% to a total of € 528 million (2013: € 446 million). The in-
vestments in property, plant and equipment included therein
amounted to € 485 million in 2014 (2013: € 408 million), of which
€ 220 million was attributable to strategic investment projects
each with a project volume of more than € 2 million; the remainder
was attributable to smaller capital spending projects.
In 2014, significant investments were approved for the expan-
sion of the Darmstadt site. Some of these investments will serve to
upgrade global headquarters. This includes the construction of an
Innovation Center, a Visitors Center and an employee restaurant.
A new laboratory building involving a total investment of € 65
million will bundle the pharmaceutical research activities of the
Merck Serono division as of 2017. Moreover, OLED production
capacity in the Performance Materials division will be expanded
by an investment of € 31 million in order to meet growing market
demand.
Production facilities at two further locations of the Merck
Serono division are being significantly expanded. At the Aubonne
site in Switzerland, € 27 million is being invested in a new pack-
aging unit and at the Bari site in Italy, € 49 million is being invested
in the expansion of the existing filling unit.
In 2014, the two rating agencies Moody's and Standard &
Poor's adjusted Merck's long-term credit ratings owing to the
expected higher level of debt in the course of the acquisition of
Sigma-Aldrich. While Standard & Poor's has now issued a rating
of "A" with negative outlook, (previously: "A" with stable outlook),
Moody's changed its rating from "A3" with stable outlook to "Baal"
with negative outlook. An overview of the development of Merck's
rating for the period from 2009 to 2014 is presented in the Report
on Risks and Opportunities.
In October 2014, Merck renewed its Debt Issuance Program
with a volume of € 15 billion. The Debt Issuance Program forms
the contractual basis for issuing bonds, thus giving the company
flexibility in its issuing activities. It represents an important ele-
ment of the Group's financing activities.
96
The development of key balance sheet figures is as follows:
MERCK GROUP
KEY BALANCE SHEET FIGURES
in %
GROUP MANAGEMENT REPORT → REPORT ON ECONOMIC POSITION
→ Merck Group
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Equity
Equity ratio
45.4
53.2
48.1
47.4
→ 419.0
€ million
Merck Millipore
MERCK GROUP
No
1,349.7
1,348.2
1.5
0.1
Eurobond 2009/2015
(Nominal volume €100 million)
Dec. 2015
3.6151
No
100.0
100.0
Eurobond 2006/2016
March 2015
(Nominal volume €250 million)
5.875
No
218.4
222.4
-4.0
-1.8
Eurobond 2009/2016
(Nominal volume € 60 million)
Nov. 2016
4.000
60.0
60.0
Eurobond 2009/2019
June 2016
€ 1,350 million)
in %
€ million
WORKING CAPITAL
Sales
Merck Group
Rest of World
Emerging Markets
North America
Europe
€ million/change in %
SALES COMPONENTS BY REGION - 2014
MERCK GROUP →>
The Rest of World region, i.e. Japan, Africa and Australia/
Oceania, generated € 875 million (2013: € 842 million) or 8% of
Group sales, as in the previous year. Organic and acquisition-
related growth was dampened by negative foreign exchange effects
(-6.9%), which were mainly attributable to the Japanese yen.
Overall, sales increased by 3.9% in this region in 2014.
2013.
Sales in North America amounted to € 2,152 million (2013:
€ 2,078 million) and thus increased by 3.6% or € 74 million in
comparison with the previous year. With a slight organic sales
increase of 1.7% and coupled with acquisition-related increases of
1.8%, North America's contribution to Group sales was 19%, as in
able to the acquisition of AZ. Europe's contribution to Group sales
thus fell to 35% (2013: 37%).
Sales in Europe only increased slightly by 0.8% to € 4,015
million (2013: € 3,985 million). This increase was mainly attribut-
Dynamic business in the Emerging Markets region, which encom-
passes Latin America and Asia excluding Japan, fueled global or-
ganic sales growth, accounting for around 80% of the total in-
crease in organic sales of the Merck Group. The growth rate in the
Emerging Markets region was 9.1%, corresponding to an absolute
organic sales increase of € 347 million. In particular, the Merck
Serono division was the main driver of this development. Taking
into consideration acquisition-related increases as well as negative
foreign exchange effects, Merck increased its sales in the Emerging
Markets region by a total of 12.0% to € 4,250 million (2013:
€ 3,796 million). In 2014, the region thus increased its contribu-
tion to Group sales by two percentage points to 38%.
180
87
Merck Group
GROUP MANAGEMENT REPORT → REPORT ON ECONOMIC POSITION →
(Nominal volume
Book value
Dec. 31, 2014
Book value
Maturity
Interest rate (%)
Financial Covenant
€ million
Dec. 31, 2013
€ million
Change
(Nominal volume € 70 million)
Dec. 2019
3.375
No
3,142.7
1,481.5
47.1
Other financial liabilities
No
Total financial liabilities
1,012.8
5,637.0
555.2
3,697.9
457.6
82.4
1,939.1
52.4
Cash and cash equivalents
Current financial assets
Net financial debt
1Fixed by interest rate swaps.
2,878.5
2,199.4
559.1
980.8
2,410.5
306.6
1,897.7
-211.1
252.5
193.5
- 8.8
82.3
2Merck has the right of first-time premature repayment in June 2021 for this tranche of the hybrid bond issued in December 2014; the nominal interest rate stated above has been fixed
until this date.
3 Merck has the right of first-time premature repayment in December 2024 for this tranche of the hybrid bond issued in December 2014; the nominal interest rate stated above has been
fixed until this date.
94
GROUP MANAGEMENT REPORT → REPORT ON ECONOMIC POSITION → Merck Group
4.250
This illustrates yet again the high internal financing power of the
Merck Group. Expected future cash flows such as repayments and
interest from financial liabilities are presented under "Management
of financial risks" in the Notes to the Group accounts.
496.7
496.7
4,624.2
less:
4.500
69.1
69.0
Total bonds
0.1
0.1
Eurobond 2010/2020
(Nominal volume
€ 1,350 million)
March 2020
No
1,344.1
1,343.1
0.1
Hybrid bond KGaA 2014/2074
1.0
Hybrid bond KGaA 2014/2074
€ 1,000 million)
Dec. 2074²
2.6252
No
No
986.2
986.2
(Nominal volume
(Nominal volume
3.3753
€ 500 million)
Dec. 2074³
-18.0
-1,119.7
-19.4
-95.3
-1,024.4
9.3
in %
(-)
(-)
(-)
(-)
Cost of sales²
4,855.3
(of which: amortization of intangible assets)²
Gross profit²
-1.4
5,783.3
191.7
5,975.0
106.5
- 48.5
-180.3
6.5
372.0
6,060.4
103.3
1.7
94.9
100.0
5,688.4
100.0
3.3
€ million
84.0
- 85.4
5,036.0
1,839.8
-180.7
€ million
in %
Rest of World
698.0
970.7
138.5
32.6
Rebif®
Organic growth in %
-0.2
-6.0
1.5
-9.6
-547.3
88.5
-9.0
Royalty, license and commission expenses
(-7.4)
(43.9)
(-596.7)
(-552.8)
(of which: amortization of intangible assets)²
-1.8
33.4
-31.9
-1,813.6
- 30.8
-1,780.2
Marketing and selling expenses²
-3.6
-518.3
€ million
% of sales
€ million
904
2013
Rebif® →
2014
SALES AND ORGANIC GROWTH OF KEY PRODUCTS
€ million/organic growth in %
MERCK SERONO→
16
28
56
100
4.1
18.1
0.7
5.9
Organic growth in %
% of sales
ErbituxⓇ
143.6
256.6
503.5
903.7
€ million
2
7
53
38
100
-0.4
21.1
Emerging Markets
ErbituxⓇ →
882
628
Gonal-fⓇ →
Change
20131
2014
101
Total revenues
Royalty, license and commission income
Sales
RESULTS OF OPERATIONS
MERCK SERONO
The results of operations developed as follows:
GROUP MANAGEMENT REPORT → REPORT ON ECONOMIC POSITION → Merck Serono
Merck Serono's General Medicine franchise (including Cardio-
Metabolic Care), which consists of products to treat cardiovascular
diseases and diabetes, among others, generated organic sales
growth of 3.9%. Including negative foreign exchange effects,
sales amounted to € 1,671 million (2013: € 1,643 million). In par-
ticular, the organic sales growth of the beta-blocker Concor® and
organic sales of products to treat thyroid disorders (Euthyrox®)
developed well. The decline in sales of Glucophage®, which is used
to treat diabetes, to € 378 million (2013: € 394) was largely due to
the impact of negative currency effects in the first half of 2014, as
well as supply constraints in Europe.
At € 394 million, sales by the Endocrinology franchise, which
mainly consists of products to treat metabolic and growth disor-
ders, reached the year-earlier figure. Organic growth of 2.0% was
offset by negative foreign exchange effects. Sales of the growth
hormone Saizen®, the top-selling product of this franchise, saw an
organic increase of 4.0% as well as negative foreign exchange
effects of -3.3%. Consequently, sales amounted to € 237 million
(2013: € 235 million).
In 2014, Merck Serono generated organic sales growth of 9.1%
with Gonal-f®, the leading recombinant hormone used in the
treatment of infertility. Including adverse foreign exchange effects,
sales increased by 7.1% to € 628 million (2013: € 586 million).
Sales of Gonal-f® rose in all regions, with the highest absolute
growth achieved in the Emerging Markets region. The other prod-
ucts in the Fertility portfolio also developed positively.
in %
23.9
8.1
9.1
5.9
-0.2
1,840
1,865
%
296
244
394
GlucophageⓇ →>
EuthyroxⓇ →>
378
401
ConcorⓇ →>
428
586
-1.4
North America
MERCK SERONO →
Total
1,855.1
-1.3
31.7
1,577.2
32.6
1,787.1
-11.7
Development of sales and results of operations
In 2014, the Merck Serono division generated organic sales growth
of 3.6%. Taking negative foreign exchange effects of −1.9% into
account, divisional sales rose overall by 1.7% to € 5,783 million
(2013: € 5,688 million). All the division's franchises contributed to
the organic sales growth, with the highest absolute sales increase
coming from the Fertility franchise. The Oncology franchise also
achieved good organic sales growth with the biopharmaceutical
Erbitux®. Used in the treatment of relapsing forms of multiple
sclerosis, RebifⓇ performed well despite increasing competitive
pressure. From a geographic perspective, as in previous years,
the Emerging Markets region was the division's main growth
driver, particularly in the General Medicine franchise (including
CardioMetabolic Care).
The development of sales in the individual quarters in com-
parison with 2013 as well as the respective organic growth rates
are presented in the following overview:
MERCK SERONO
SALES AND ORGANIC GROWTH BY QUARTER 1,2
€ million/organic growth in %
1 Quarterly breakdown unaudited.
↑ ↑ ↑
01->
02->
03 ->
Q4 →
2014
2013
2 Previous year's figures have been adjusted, see "The Merck Group" in the Group management report.
%
1,375
4.2
1,389
1,446
3.0
1,468
1,465
1,830.9
31.4
30.9
1,786.6
MERCK SERONO
MERCK SERONO
KEY FIGURES
€ million
Total revenues
Sales
Operating result (EBIT)
Margin (% of sales)
EBITDA
Margin (% of sales)
EBITDA pre one-time items
Margin (% of sales)
Business free cash flow
¹Previous year's figures have been adjusted, see "The Merck Group" in the Group management report.
4.5
97
2014
20131
in %
5,975.0
5,783.3
6,060.4
-1.4
5,688.4
1.7
956.5
793.1
20.6
16.5
13.9
1,786.0
Change
Europe
1,413
2.8
2,424.3
-1.4
-0.3
1,291.9
1.0
-0.1
1,666.9
13.5
-5.3
400.2
5,783.3
5.2
-5.6
3.6
-1.9
-1.7
0.9
29.0
8.2
-0.4
1.7
In 2014, sales of the key products of the Merck Serono division
developed as follows:
The drug Rebif®, which is used to treat relapsing forms of
multiple sclerosis, only posted a slight organic sales decline in
2014, despite increasing competitive pressure from oral formula-
tions. Amid currency headwinds of -1.2%, Rebif® sales amounted
to € 1,840 million (2013: € 1,865 million). In North America,
which generated 53% of Rebif® sales (2013: 51%) and is the
largest market for this product, sales increased to € 971 million in
2014 (2013: € 956 million). Price increases compensated for lower
sales volumes, leading to an organic sales increase of 1.5%. In
Europe, which accounts for 38% of sales (2013: 40%) and is the
second-largest region for the product, sales of Rebif® declined or-
ganically by -6.0% to € 698 million due to competition (2013:
€ 745 million). Together, the Emerging Markets and Rest of
World regions continued to account for a 9% share of sales.
In 2014, sales of the oncology drug Erbitux® showed organic
growth of 5.9%. Including the foreign exchange impact of – 3.4%,
which primarily stemmed from the Japanese yen and Latin Amer-
ican currencies, sales increased overall by € 22 million to € 904
million (2013: € 882 million). Merck Serono achieved organic
growth in all three regions in which it holds the marketing rights.
In Europe, the top-selling region for Erbitux® with a share of 56%
(2013: 57%), sales totaled € 504 million (2013: € 501 million),
which includes organic growth of 0.7% and insignificant negative
exchange rate effects. At 18.1%, the Emerging Markets region
generated the strongest organic growth, delivering sales of € 257
million for the division's oncology drug (2013: € 232 million).
This region's contribution to total Erbitux® sales thus increased
to 28% (2013: 26%). In the Rest of World region, Erbitux® sales
declined slightly to € 144 million (2013: € 149 million), since
organic growth of 4.1% was unable to offset negative foreign
exchange effects of -7.7%. Business developments were positive
in Japan, where organic growth amounted to 7.2%. This was
mainly attributable to the approval of Erbitux® in head and neck
cancer.
100
GROUP MANAGEMENT REPORT REPORT ON ECONOMIC POSITION
Merck Serono
MERCK SERONO→
SALES AND ORGANIC GROWTH OF REBIF® AND ERBITUX® BY REGION - 2014
Total change
Acquisitions/
divestments
Exchange rate
effects
Organic growth
1,419
98
GROUP MANAGEMENT REPORT REPORT ON ECONOMIC POSITION
Merck Serono
SALES BY REGION - 2014
€ million/% of divisional sales
7
Rest of World → 400.2
Emerging Markets → 1,666.9 29
%
North America 1,291.9
22
42
Europe → 2,424.3
1,497
Europe, the division's top-selling region, posted a slight organic
sales decline of -1.4% and a negative foreign exchange impact of
-0.3%, thereby generating sales of € 2,424 million (2013: € 2,467
million). The share of divisional sales accounted for by Europe
declined to 42% (2013: 43%). Some western European countries
recorded a decline in sales.
Sales in North America amounted to € 1,292 million in 2014,
which was slightly more than the previous year (2013: € 1,280
million). Rebif® and the Fertility franchise were primarily respon-
sible for the organic sales increase of 1.0%. Unfavorable foreign
exchange effects were responsible for a decline of -0.1%. The
North America region contributed 22% to the division's sales
(2013: 23%).
In the Rest of World region, sales grew organically by 5.2%,
mainly powered by the good sales performance of Erbitux® and
strong demand for products from the Fertility franchise. Including
negative exchange rate effects of -5.6%, which were primarily
attributable to the Japanese yen, sales totaled € 400 million (2013:
€ 402 million). Once again, the Rest of World region contributed
7% to divisional sales.
GROUP MANAGEMENT REPORT → REPORT ON ECONOMIC POSITION → Merck Serono
MERCK SERONO →
SALES COMPONENTS BY REGION - 2014
€ million/change in %
Europe
North America
Emerging Markets
Rest of World
Merck Serono
99
99
Sales
At 13.5%, the strongest organic growth was achieved in
Emerging Markets, the division's second-largest region in terms of
sales. Consequently, the share of sales generated by the Emerging
Markets region increased by two percentage points to 29%, there-
by demonstrating the growing importance of this region. All fran-
chises contributed to the organic sales growth of the division. The
main drivers were Erbitux®, Gonal-f® (treatment of infertility) and
medications to treat cardiovascular diseases and thyroid disorders.
Taking negative currency effects of - 5.3% into account, sales rose
by a total of 8.2% to € 1,667 million (2013: € 1,540 million).
- 5.3
EBITDA pre one-time items
-219.7
Change
20131
2014
Consumer Health
GROUP MANAGEMENT REPORT → REPORT ON ECONOMIC POSITION →
Total revenues
Royalty, license and commission income
Sales
RESULTS OF OPERATIONS
CONSUMER HEALTH
€ million
The results of operations developed as follows:
3.2
-2.2
5.4
766.1
Consumer Health
-13.3
-5.3
- 8.0
18.7
Rest of World
106
in %
€ million
in %
-32.7
-250.7
Cost of sales²
3.2
23.8
100.4
745.0
100.4
768.8
-5.0
-0.2
0.4
2.9
0.4
2.7
3.2
24.0
100.0
742.1
100.0
766.1
in %
€ million
2.5
-243.0
-4.6
385.8
Rest of World → 18.7
3
Emerging Markets → 385.8 50
€ million/% of divisional sales
CONSUMER HEALTH →
SALES BY REGION - 2014
GROUP MANAGEMENT REPORT → REPORT ON ECONOMIC POSITION → Consumer Health
2 Previous year's figures have been adjusted, see "The Merck Group" in the Group management report.
180
6.5
04->
47
197
1.4
03 →
204
179
8.5
02 →>
185
2013
182
5.7
201
Europe → 361.1
%
0
5.2
-54.9
1.6
-56.5
0.5
0.6
4.6
361.1
Emerging Markets
North America
Europe
Total change
Acquisitions/
divestments
Exchange rate
effects
Organic growth
Sales
€ million/change in %
SALES COMPONENTS BY REGION - 2014
CONSUMER HEALTH →
In Europe, the Consumer Health division generated organic
sales growth of 4.6% supported by positive foreign exchange
effects of 0.6%, which led to an increase in sales to € 361 million
(2013: € 343 million). Strong sales volumes of Femibion®, a nutri-
tional supplement for pregnant women, local brands in Germany
as well as Apaisyl®, a French brand of insect repellent and skin
care products, more than offset weaker demand for BionⓇ as well
as NasivinⓇ, which, for example, was impacted by a mild winter.
The share of divisional sales accounted for by Europe remained
constant at 47% in 2014 (2013: 46%).
The performance of these two brands was very strong particularly
in Indonesia and the Philippines.
From a geographic perspective, the division's two most important
regions, namely Emerging Markets and Europe, delivered solid or-
ganic growth rates. The Emerging Markets region, which accounts
for 50% of sales (2013: 51%) and is the division's largest region,
posted organic sales growth of 7.1% and a negative foreign ex-
change impact of -4.6%. Sales in this region thus increased by a
total of 2.5% to € 386 million (2013: € 376 million). NeurobionⓇ
in particular proved to be a growth driver and achieved double-
digit growth rates in Latin America. Sales benefited from the focus
on consumer-oriented marketing activities. For instance in the
growth market of Brazil, the anti-diarrheal Floratil® achieved a
double-digit growth rate. In Asia, the growth drivers included
not only Neurobion® but also the iron supplement Sangobion®.
105
North America 0.5
7.1
01 →
-32.7
3.2
EBITDA
(-)
(-)
(-)
(-)
(of which: one-time items)
17.6
1.6
1.2
8.9
160.4
1.4
Depreciation/Amortization/Reversals of impairments
-7.5
-12.2
21.8
162.1
19.6
149.9
Operating result (EBIT)
-11.5
-0.2
10.5
20.9
171.0
23.0
Administration expenses
structuring measures included under this item. Adjusted for
amortization and one-time items, the Consumer Health division
reported EBITDA pre one-time items of € 169 million (2013: € 172
million), thus nearly reaching the earnings level of 2013 despite
higher marketing and selling expenses. The EBITDA margin pre
one-time items was 22.1% in 2014 (2013: 23.2%).
In 2014, the division's gross profit rose by 3.2% to € 518 million.
Consequently, gross margin was unchanged at 67.6%. Higher
marketing and selling expenses were largely related to the estab-
lishment of a consumer-oriented global marketing concept of the
division to strengthen strategic brands. The decline in other oper-
ating expenses and income (net) to € -13 million (2013: € -2 mil-
lion) was primarily attributable to the one-time expenses for re-
1 Previous year's figures have been adjusted, see "The Merck Group" in the Group management report.
2 The disclosure of amortization of intangible assets (excluding software) has been changed. See "Accounting and measurement principles" in the Notes to the Group accounts.
-1.7
-3.0
23.2
172.4
22.1
169.4
-0.2
0.2
7.8
1.2
9.0
EBITDA pre one-time items
Other one-time items
Acquisition-related one-time items
Gains/losses on the divestment of businesses
Integration costs/IT costs
Restructuring costs
-6.2
-10.6
-1.5
-7.7
- 1.7
Other operating expenses and income
(-2.4)
(-2.7)
(of which: amortization of intangible assets)²
5.6
-15.9
-38.7
-287.2
-39.6
-303.1
Marketing and selling expenses²
(-0.3)
3.2
67.6
502.0
67.6
518.1
Gross profit²
(-)
(-)
(-)
(-)
(of which: amortization of intangible assets)²
16.1
Royalty, license and commission expenses
-2.6
-0.3
(-)
(-)
(-)
(-)
(of which: amortization of intangible assets)²
2.1
-0.5
-2.9
-21.8
-2.9
-22.3
Research and development costs²
0.9
-0.3
-3.6
-26.9
-3.6
-27.2
Administration expenses
6.2
-0.2
-0.3
-2.4
-13.0
180
(15.8)
%
The development of EBITDA pre one-time items in the indi-
vidual quarters in comparison with 2013 is presented in the fol-
lowing overview:
After eliminating depreciation and amortization, and adjusted for
one-time items, EBITDA pre one-time items declined by -1.3% to
€ 1,831 million and the EBITDA margin pre one-time items was
31.7% (2013: 32.6%).
The strong improvement in other operating expenses and income
(net) in 2014 mainly reflected the adjustment of provisions for
litigation (see also “Other operating income and expenses” in the
Notes to the Group accounts), as well as to the reduction in one-
time expenses. Other operating expenses and income were affected
by higher one-time expenses and impairments of intangible assets
in connection with the discontinuation of multiple research proj-
ects (see "Intangible assets" in the Notes to the Group accounts).
Merck Serono
GROUP MANAGEMENT REPORT REPORT ON ECONOMIC POSITION
102
The division's research spending ratio increased to 23.2%
(2013: 20.7%). In 2014, an assessment of the R&D pipeline took
place, leading to a prioritization of research activities and the
discontinuation of multiple research projects. Provisions, which
increased research and development costs in 2014, were set up for
future expenses of the discontinued projects. In addition, invest-
ments in the Biosimilars pipeline led to higher research and devel-
opment costs.
to lower royalty, license and commission income, but also to
stronger sales growth in regions with lower margins as well as
isolated production and supply bottlenecks.
Taking into account the development of sales and total reve-
nues as well as cost of sales, the gross profit of the Merck Serono
division fell by € -181 million to € 4,855 million, leading to a gross
margin of 84.0% (2013: 88.5%). This decrease was primarily due
Royalty, license and commission income, which is reported under
total revenues along with sales, dropped substantially in 2014
by -48.5% to € 192 million (2013: € 372 million). This was due
primarily to lower royalty and license income from HumiraⓇ,
Avonex® and EnbrelⓇ. Among other things, the agreement reached
with Bristol-Myers Squibb in 2013 on the co-promotion of
Glucophage in China had a slightly positive effect on commis-
sion income in comparison with the previous year.
MERCK SERONO→
Previous year's figures have been adjusted, see "The Merck Group" in the Group management report.
2The disclosure of amortization of intangible assets (excluding software) has been changed. See "Accounting and measurement principles" in the Notes to the Group accounts.
-24.2
32.6
1,855.1
31.7
1,830.9
-31.8
-61.5
-3.8
- 19.8
62.3
6.2
EBITDA pre one-time items
-1.3
EBITDA PRE ONE-TIME ITEMS AND CHANGE BY QUARTER 1,2
€ million/change in %
%
2014
MERCK SERONO ->
BUSINESS FREE CASH FLOW
butable to both higher capital spending as well as the development
of inventories as well as trade accounts receivable, with foreign
exchange effects accounting for the increase in both balance sheet
items in 2014.
In 2014, the Merck Serono division's business free cash flow
amounted to € 1,577 million, falling short of the very high level
of € 1,787 million in 2013. The decline of € 210 million was attri-
Development of business free cash flow
2 Previous year's figures have been adjusted, see "The Merck Group" in the Group management report.
1 Quarterly breakdown unaudited.
3.6
492
475
04->
467
-4.0
03 ->
449
475
-4.8
02 →
452
2013
438
→>
0.1
Q1
438
Other one-time items
€ million
Acquisition-related one-time items
2.4
- 501.4
-0.6
-36.9
Other operating expenses and income
(-)
(-1.0)
(-)
(-1.0)
(of which: amortization of intangible assets)²
14.1
-8.8
-165.6
-1,178.1
-23.2
-1,343.7
Research and development costs²
8.5
-17.2
-3.6
-202.5
2014
-3.8
-20.7
464.5
-92.7
Operating result (EBIT)
Integration costs/IT costs
42.5
Restructuring costs
-0.6
31.4
1,786.6
30.9
1,786.0
-164.0 -16.5
(-184.4) (-97.5)
(189.1)
(4.7)
(of which: one-time items)
17.5
993.5
14.3
829.5
Depreciation/Amortization/Reversals of impairments
20.6
163.4
13.9
793.1
16.5
956.5
Gains/losses on the divestment of businesses
GROUP MANAGEMENT REPORT → REPORT ON ECONOMIC POSITION → Merck Serono
EBITDA
as well as advance payments for intangible assets
766.1
3.2
745.0
768.8
in %
20131
2014
Change
1 Previous year's figures have been adjusted, see "The Merck Group" in the Group management report.
Consumer Health
GROUP MANAGEMENT REPORT → REPORT ON ECONOMIC POSITION →
Business free cash flow
Margin (% of sales)
EBITDA pre one-time items
Margin (% of sales)
EBITDA
Margin (% of sales)
Operating result (EBIT)
Sales
Total revenues
€ million
KEY FIGURES
CONSUMER HEALTH
742.1
CONSUMER HEALTH
3.2
162.1
1 Quarterly breakdown unaudited.
€ million/organic growth in %
Investments in property, plant and equipment, software
SALES AND ORGANIC GROWTH BY QUARTER 1,2
CONSUMER HEALTH
FemibionⓇ and FloratilⓇ, as well as by local brands in Germany,
where an increase in the market share of FemibionⓇ was achieved.
The development of sales in the individual quarters in com-
parison with 2013 as well as the respective organic growth rates
are presented in the following overview:
In 2014, sales by the Consumer Health division rose 3.2% to € 766
million (2013: € 742 million). Organic growth of 5.4% was coun-
tered by a negative foreign exchange impact of -2.2%. Organic
sales growth was mainly driven by the strategic brands Neurobion®,
Development of sales and results of operations
-28.1
172.5
124.0
23.2
22.1
-1.7
172.4
169.4
23.0
20.9
-6.2
171.0
160.4
21.8
-7.5
149.9
104
19.6
-14.9
-11.7
1,787.1
1,577.2
-104.4
54.6
-2.4
-152.0
41.7
-21.8
39.7
-229.5
-1.3
1,855.1
1,830.9
in %
20131
2014
Change
¹Previous year's figures have been adjusted, see "The Merck Group" in the Group management report.
Changes in inventories
103
Business free cash flow
Changes in trade accounts receivable
GROUP MANAGEMENT REPORT → REPORT ON ECONOMIC POSITION → Merck Serono
The development of business free cash flow in the individual
quarters in comparison with 2013 is presented in the following
overview:
-164.3
377
MERCK SERONO→
2 Previous year's figures have been adjusted, see "The Merck Group" in the Group management report.
1 Quarterly breakdown unaudited.
04 →
03 →
- 26.3
486
- 30.6
383
512
02
→
12
2013
340
41.2
01->
480
2014
%
BUSINESS FREE CASH FLOW AND CHANGE BY QUARTER 1,2
€ million/change in %
337
449
68.4
4.6
115.1
14.8
'The disclosure of amortization of intangible assets (excluding software) has been changed. See "Accounting and measurement principles" in the Notes to the Group accounts.
46.6
(EBIT) to € 611 million was due among other things to the de-
scribed AZ inventory revaluation, which was recognized as an
expense as well as additional one-time expenses in connection
with the acquisition of AZ. During the determination of EBITDA
pre one-time items, these one-time effects from the inventory re-
valuation were added back. EBITDA pre one-time items thus in-
cludes the adjusted earnings contribution from AZ. Along with the
very successful business performance of Liquid Crystals, EBITDA
pre one-time items thus rose in 2014 by 14.8% to € 895 million.
The EBITDA margin pre one-time items fell to 43.4% (2013:
47.5%), reflecting in particular the lower margin of the AZ busi-
ness.
GROUP MANAGEMENT REPORT → REPORT ON ECONOMIC POSITION Performance Materials
The development of EBITDA pre one-time items in the individual
quarters in comparison with 2013 is presented in the following
overview:
PERFORMANCE MATERIALS
EBITDA PRE ONE-TIME ITEMS AND CHANGE BY QUARTER¹
€ million/change in %
The development of the results of operations was significantly
influenced by the inclusion of AZ. In particular, the sharp increase
in cost of sales in 2014 related mainly to the first-time consolida-
tion of AZ. The inventories from the acquisition were stepped up
to fair values on the date of first-time consolidation. In 2014, the
step-up of € 45 million was included as an expense in cost of
sales. In addition, cost of sales rose due to the amortization of
intangible assets in connection with the AZ purchase price alloca-
tion. As a consequence of these one-time expenses, the consoli-
dated contribution of AZ to divisional gross profit was low in
2014. The gross margin of Performance Materials fell accordingly
to 52.3% (2013: 62.6%). The decrease in the operating result
9.4
4.6
-5.1
47.5
779.7
11.1
2.8
43.4
894.8
68.4
12.2
6.0
4.9
765.8
Quarterly breakdown unaudited.
37.8
-46.1
2014
Development of business free cash flow
01 →>
Change
in %
894.8
39.0
2013
2014
EBITDA pre one-time items
€ million
PERFORMANCE MATERIALS
BUSINESS FREE CASH FLOW
time consolidation effect was offset by the adjustment amounting
to € 145 million. Higher capital spending in 2014 also lowered
cash flow. Consequently, the improvement in EBITDA pre one-
time items could not offset the higher level of cash outflows
overall.
In 2014, the Performance Materials division generated business
free cash flow of € 700 million (2013: € 788 million). The sharp
increase in trade accounts receivable as well as inventories was
related to the acquisition of AZ, among other things. This first-
113
167
43.6
239
186
197
04 →>
03 →>
243
209
→
8.3
Q2
22
226
2013
207
-10.1
90
%
23.4
803.6
Administration expenses
(3.7)
(of which: amortization of intangible assets)'
17.4
-25.2
- 8.9
-145.4
- 8.3
-170.6
Research and development costs'
101.4
-28.3
-1.7
-27.8
-2.7
-56.1
-13.4
0.2
-0.1
-1.3
-0.1
−1.1
Royalty, license and commission expenses
(6.0)
(-0.6)
(-11.1)
(-11.7)
(of which: amortization of intangible assets)'
17.3
779.7
-26.2
(-2.8)
(-2.3)
(-0.5) (22.6)
Other operating expenses and income
(-3.7)
(-)
70.9
79.6
6.9
112.5
9.3
192.1
EBITDA pre one-time items
Other one-time items
Acquisition-related one-time items
Gains/losses on the divestment of businesses
Integration costs/IT costs
Restructuring costs
(-)
EBITDA
Depreciation/Amortization/Reversals of impairments
-6.4
-41.8
39.8
653.3
29.7
611.5
Operating result (EBIT)
25.9
-12.3
-2.9
-47.9
-2.9
-60.2
(of which: one-time items)
14.8
4.0
as well as advance payments of intangible assets
01 →>
657
2014
%
1 Quarterly breakdown unaudited.
€ million/organic growth in %
SALES AND ORGANIC GROWTH BY QUARTER'
→
MERCK MILLIPORE
Discovery and Development Solutions business field as of
March 31, 2014. Including these effects, sales rose overall by 2.1%
to € 2,682 million (2013: € 2,628 million). The development of
sales in the individual quarters in comparison with 2013 as well as
the respective organic growth rates are presented in the following
overview:
In 2014, the Merck Millipore division posted solid organic sales
growth of 4.5%, which was driven by Process Solutions. The
organic increase was countered by negative foreign exchange
effects of -1.7%. In addition, the division's sales declined by
-0.7% in comparison with 2013 owing to the divestment of the
Development of sales and results of operations
-15.2
493.8
419.0
24.5
24.6
2.5
642.8
658.6
22.4
22.3
1.5
589.8
598.9
10.0
10.8
10.4
262.0
3.7
669
2013
659
-9.2
In North America, the division achieved organic sales growth
of 3.7%, which was mainly driven by the Process Solutions busi-
ness area and its products for biopharmaceutical manufacturing,
supported by the solid sales performance of the Lab Solutions
business area. Sales in North America rose to € 725 million (2013:
€ 711 million), which represented an unchanged share of 27% of
Merck Millipore's global sales in 2014.
In 2014, the Merck Millipore division achieved organic growth in
all regions. Accounting for an unchanged 39% of divisional sales,
Europe remained the division's largest geographic market, delivering
organic growth of 2.7% and sales of € 1,036 million (2013: € 1,010
million). In this region, the strong sales increases achieved by the
Process Solutions business area more than offset the slightly weaker
business of the Lab Solutions and Bioscience business areas.
27
North America →725.0
Europe 1,036.3
39
%
25
25
Rest of World 248.1.
9
Emerging Markets → 673.1
€ million/% of divisional sales
289.2
SALES BY REGION - 2014
→ Merck Millipore
GROUP MANAGEMENT REPORT REPORT ON ECONOMIC POSITION
116
654
5.9
→
Q4
706
639
4.5
661
666
03 ->
02->
MERCK MILLIPORE →
Investments in property, plant and equipment, software
2.1
2,682.5
-16.8
01 →
165
90
%
2014
1 Quarterly breakdown unaudited.
€ million/change in %
BUSINESS FREE CASH FLOW AND CHANGE BY QUARTER1
PERFORMANCE MATERIALS
The development of business free cash flow in the individual
quarters in comparison with 2013 is presented in the following
overview:
Performance Materials
GROUP MANAGEMENT REPORT REPORT ON ECONOMIC POSITION →
114
-11.2
787.8
699.6
Business free cash flow
144.6
Adjustments first-time consolidation of AZ Electronic Materials
42.6
-143.4
Changes in trade accounts receivable
37.2
-98.8
Changes in inventories
36.1
-71.7
-97.6
199
2013
179
02->
1.9
2,645.3
2,696.5
Change
in %
2013
2014
EBITDA pre one-time items
Margin (% of sales)
Business free cash flow
Margin (% of sales)
EBITDA
Margin (% of sales)
Operating result (EBIT)
Sales
Total revenues
€ million
2,627.5
KEY FIGURES
MERCK MILLIPORE
115
Merck Millipore
GROUP MANAGEMENT REPORT → REPORT ON ECONOMIC POSITION →
167
12.4
04 →>
188
220
-24.1
03 →
167
202
-11.1
MERCK MILLIPORE
-151.6
108
-177.8
Change
109
Business free cash flow
EBITDA pre one-time items
Margin (% of sales)
Margin (% of sales)
EBITDA
Margin (% of sales)
Operating result (EBIT)
Sales
Total revenues
€ million
KEY FIGURES
PERFORMANCE MATERIALS
PERFORMANCE MATERIALS
GROUP MANAGEMENT REPORT → REPORT ON ECONOMIC POSITION Performance Materials
2 Previous year's figures have been adjusted, see "The Merck Group" in the Group management report.
Quarterly breakdown unaudited.
64
-8.6
04 →>
58
37
- 64.1
03 →
13
51
-28.9
02->
36
2014
2013
in %
2,060.5
GROUP MANAGEMENT REPORT REPORT ON ECONOMIC POSITION →
110
Thanks to higher demand for OLED displays, the Advanced
Technologies business unit made a good contribution to the or-
ganic growth of the division.
The Pigments & Cosmetics business unit achieved slight or-
ganic sales growth in 2014. Xirallic® pigments, which are primarily
used in automotive coatings, as well as technical functional mate-
rials were the main drivers. Including negative currency effects,
sales of the Pigments & Cosmetics business unit reached the year-
earlier level.
sales growth thanks to continued demand for high-quality (e.g.
ultra high-definition) and large-size televisions. This growth was
also bolstered by sales volume developments of the new UB-FFS
technology, which is mainly used in smartphones and tablet PCs.
Higher sales volumes were partly offset by the customary price
declines for liquid crystals.
The Liquid Crystals business unit again maintained its market
leadership position in liquid crystal materials in 2014. The two
leading technologies (PS-VA and IPS) registered strong organic
In 2014, sales of the Performance Materials division grew by
25.4% to € 2,060 million (2013: € 1,642 million). Both solid or-
ganic growth of 4.1% as well as acquisition-related sales increas-
es of 22.8% or € 375 million contributed to this increase. Adverse
foreign exchange effects lowered sales by -1.5%. Organic growth
was delivered by all the existing business units, namely Liquid
Crystals, Pigments & Cosmetics and Advanced Technologies, with
Liquid Crystals making the largest absolute contribution to sales
growth. The acquisition-related sales growth was due to the first-
time consolidation of AZ as of May 2, 2014, the integration of
which has been completed.
Development of sales and results of operations
-11.2
787.8
47.5
43.4
699.6
14.8
779.7
2013
894.8
39.0
4.9
765.8
803.6
39.8
29.7
- 6.4
653.3
611.5
25.4
1,642.1
2,059.6
25.3
1,644.4
46.6
Performance Materials
21
01 →
CONSUMER HEALTH →
The increase in these two balance sheet items lowered business
free cash flow in 2014, whereas their development in 2013 had a
positive impact on this financial indicator. Higher capital spend-
ing in 2014 also lowered business free cash flow.
In 2014, business free cash flow of the Consumer Health division
declined by € - 48 million or -28.1% to € 124 million. This de-
crease was primarily the outcome of changes in inventories and
trade accounts receivable in comparison with the previous year.
Development of business free cash flow
107
2 Previous year's figures have been adjusted, see "The Merck Group" in the Group management report.
1 Quarterly breakdown unaudited.
-3.1
38
39
04→>
58
-16.5
49
03 →
35
16.7
02 →>
41
2013
39
5.0
01->
41
2014
%
EBITDA PRE ONE-TIME ITEMS AND CHANGE BY QUARTER 1,2
€ million/change in %
CONSUMER HEALTH →
The development of EBITDA pre one-time items in the individual
quarters in comparison with 2013 is presented in the following
overview:
GROUP MANAGEMENT REPORT → REPORT ON ECONOMIC POSITION → Consumer Health
BUSINESS FREE CASH FLOW
€ million
Change
2014
16
2014
%
BUSINESS FREE CASH FLOW AND CHANGE BY QUARTER 1,2
€ million/change in %
CONSUMER HEALTH
The development of business free cash flow in the individual
quarters in comparison with 2013 is presented in the following
overview:
Consumer Health
GROUP MANAGEMENT REPORT → REPORT ON ECONOMIC POSITION →
Previous year's figures have been adjusted, see "The Merck Group" in the Group management report.
-28.1
172.5
124.0
2.2
-14.3
- 22.5
2.0
160.0
-4.1
-10.5
Business free cash flow
Changes in trade accounts receivable
Changes in inventories
advance payments for intangible assets
Investments in property, plant and equipment, software as well as
-1.7
172.4
169.4
EBITDA pre one-time items
in %
20131
-20.6
- 8.6
The development of sales in the individual quarters in comparison
with 2013 as well as the respective organic growth rates are pre-
sented in the following overview:
-
2,059.6
in %
Change
€ million
in %
€ million
in %
€ million
2013
2014
Total revenues
Royalty, license and commission income
Sales
RESULTS OF OPERATIONS
PERFORMANCE MATERIALS
The results of operations developed as follows:
Performance Materials
GROUP MANAGEMENT REPORT REPORT ON ECONOMIC POSITION →
112
25.4
22.8
-1.5
4.1
2,059.6
Performance Materials
33.4
31.9
-8.9
10.4
207.6
100.0
1,642.1
100.0
417.5
Marketing and selling expenses¹
4.9
50.0
62.6
1,027.3
52.3
1,077.3
(-45.2)
(-1.2)
(-46.4)
(of which: amortization of intangible assets)'
Gross profit¹
59.3
-366.1
-37.6
Rest of World
-617.1
-983.2
Cost of sales¹
25.3
416.1
100.1
1,644.4
100.0
2,060.5
-1.4 -63.1
0.1
2.3
0.0
0.9
25.4
-47.7
PERFORMANCE MATERIALS
23.3
-0.9
406
7.0
576
%
1.8
1.1
%
Emerging Markets → 1,524.4 74
10
Rest of World → 207.6
→ 192.8
Europe
383
04 →>
03 →
431
02->
506
2013
421
01 →
402
2014
€ million/% of divisional sales
SALES BY REGION - 2014
PERFORMANCE MATERIALS →
1 Quarterly breakdown unaudited.
€ million/organic growth in %
SALES AND ORGANIC GROWTH BY QUARTER1
576
6.9
7
North America → 134.8
4.4
1,524.4
Emerging Markets
57.5
61.4
0.4
-4.3
134.8
17.4
16.9
0.1
0.4
192.8
North America
19.8
Europe
Total change
Acquisitions/
divestments
Exchange rate
effects
Organic growth
Sales
SALES COMPONENTS BY REGION 2014
PERFORMANCE MATERIALS ->
In North America, sales grew by 57.5% to € 135 million (2013:
€ 86 million). This was driven by the acquisition-related sales
increase of 61.4%. Organic sales declined by -4.3% due to
weaker demand from the cosmetic industry for products from the
Pigments & Cosmetics business unit. Consequently, the region
contributed 7% to divisional sales in 2014 (2013: 5%).
The division achieved sales of € 193 million in Europe (2013:
€ 164 million). The rise in sales was almost solely attributable to the
first-time consolidation of AZ. The European share of divisional
sales in 2014 was 9% (2013: 10%).
sales in this region reached € 208 million (2013: € 156 million).
The share of sales attributable to the Rest of World region thus
remained unchanged at 10%.
The Rest of World region, which is dominated by Japan, re-
corded organic sales growth of 10.4%. The acquisition of AZ
contributed 31.9% of this increase. Including a foreign exchange
impact of -8.9%, which largely stemmed from the Japanese yen,
Accounting for 74% of sales (2013: 75%), the Emerging Markets
region again generated the vast majority of the division's sales.
This is due to the concentration of liquid crystal customers as well
as high-tech materials from the new AZ business unit in Asia. The
division achieved organic sales growth of 4.4% in this region.
Sales in the Emerging Markets region rose by 19.8% due to the
acquisition of AZ. Taking negative foreign exchange effects of
-0.9% into account, sales in this region rose to a total of € 1,524
million (2013: € 1,237 million).
111
GROUP MANAGEMENT REPORT → REPORT ON ECONOMIC POSITION Performance Materials
€ million/change in %
Sales developed very positively in the Emerging Markets region,
which delivered organic sales growth of 9.1%. Despite currency
headwinds of -4.2%, sales rose to € 673 million (2013: € 642
million). The strong organic sales development was fueled by
good demand for products from all the division's business areas,
with Process Solutions delivering double-digit growth rates in
particular. The share of divisional sales generated by the Emerging
Markets region therefore increased by one percentage point to
25%.
As a result of significant currency headwinds of – 7.8%, espe-
cially relative to the Japanese yen, sales in the Rest of World region
declined to € 248 million (2013: € 263 million). With slight organic
growth of 2.5%, this region's share of divisional sales declined to
9% (2013: 10%).
-844.1
Nevertheless, the residual net risk could have critical negative
effects on the net assets, financial position and results of opera-
tions and its occurrence is considered possible. Merck rates this as
a medium risk overall.
example, Venezuela, Argentina, Russia, and Greece. Corresponding
sales strategy measures have been introduced in these countries to
minimize the impact on business.
The destabilization of political systems (as for example in Ukraine
and the Middle East) and the possible establishment of trade bar-
riers as well as foreign exchange policy changes can lead to de-
clines in sales in certain countries and regions. Diversification in
terms of products, industries and regions serves to mitigate poten-
tial negative effects. The effects of corresponding risks are taken
into account to the best of ability in the business plans for the
countries and regions concerned. In particular, our business can
furthermore be affected by macroeconomic developments in, for
Risk of destabilization of political systems and the
establishment of trade barriers
Likewise, in its Life Science and Performance Materials business
sectors, Merck must adhere to a multitude of regulatory specifica-
tions regarding the manufacture, testing and marketing of many
of its products. Specifically in the European Union, Merck is sub-
ject to the European chemicals regulation REACH. It demands
comprehensive tests for chemical products. Test procedures can be
costly and time-intensive, and lead to a rise in manufacturing
costs. Moreover, the use of chemicals in production could be re-
stricted, which would make it impossible to continue manufactur-
ing certain products. Merck is constantly pursuing research and
development in substance characterization, and in the possible
substitution of critical substances in order to reduce the occur-
rence of this risk and therefore views it as unlikely. Nevertheless,
it is still classified as a medium risk given its potential critical
negative impact on the net assets, financial position and results of
operations.
Risk of stricter regulations for the manufacture, testing and
marketing of products
In the Healthcare business sector, the familiar trend towards
increasingly restrictive requirements in terms of drug pricing,
reimbursement and approval is continuing. These requirements
can negatively influence the profitability of Merck's products, also
through market referencing between countries, and jeopardize the
success of market launches and new approvals. Close communi-
cation with health and regulatory agencies serves as a preventive
measure to avert risks. An estimation of the risks is market- and
product-specific; overall the risk is seen as being likely for Merck
and could have a critical negative impact on the net assets, finan-
cial position and result of operations. It is therefore classified as a
medium risk.
Risk of more restrictive regulatory requirements regarding
drug pricing, reimbursement and approval
As a global company, Merck faces political and regulatory changes
in a large number of countries and markets.
Political and regulatory risks and opportunities
BUSINESS-RELATED RISKS AND
OPPORTUNITIES
Market risks and opportunities
125
The internal control system at Merck makes it possible to lower
the risk of material misstatements in accounting to a minimum.
However, no internal control system regardless of its design -
can entirely rule out a residual risk.
The effectiveness of Merck's internal control system with regard
to accounting and the compliance of financial reporting by the
individual companies is confirmed by both the local managing
director and the local chief financial officer when they sign the
single-entity reporting. All the structures and processes described
are subject to regular review by Group Internal Auditing based on
an annual audit plan set out by the Executive Board. The results of
these audits are dealt with by the Executive Board, the Supervisory
Board and the Finance Committee.
For the assessment of balance sheet items, Group Accounting
closely cooperates with Group Risk Management in order to cor-
rectly present potential balance sheet risks. For special issues,
such as the measurement of intangible assets within the scope of
company acquisitions or pension obligations, external experts are
additionally involved where necessary. For the Group accounting
process, Merck uses a standard SAP software tool in most countries.
Via a detailed authorization concept to limit user rights on a need-
to-have basis, and in line with the principles of the separation of
duties, the system contains both single-entity reporting and the
consolidated financial statements.
The accounting process is designed at all levels to ensure a
clearly defined segregation of duties and assignment of responsi-
bilities to the units involved in the accounting process at all times
within the scope of dual control.
Group Accounting provides support to the local contacts and
ensures a consistently high quality of reporting throughout the
entire reporting process.
Group Accounting also ensures the timely central management
of changes to the equity holding structure and correspondingly
adapts the Merck Group's scope of consolidation. The individual
companies have a local internal control system. Where financial
processes are handled by a Shared Service Center, the internal
control system of the Shared Service Center is additionally applied.
Both ensure that accounting complies with IFRS (International
Financial Reporting Standards) and with the Merck Group account-
ing guidelines.
company and of the subsidiaries, which are reported to Group
Accounting; the guidelines are adapted to reflect changes in the
financial regulatory environment and are updated in accordance
with internal reporting requirements. Intra-group transactions are
eliminated during the consolidation process. This gives rise to the
need for a mirrored entry at the corresponding subsidiaries that is
monitored during the consolidation process.
The internal control system is geared to ensuring the accuracy of
the consolidated accounting process and the implementation of
internal controls for the preparation of compliant financial state-
ments with reasonable assurance. The Group Accounting function
centrally steers the preparation of the consolidated financial state-
ments of Merck KGaA as the parent company of the Merck Group.
This Group function defines the reporting requirements that the
Merck subsidiaries must meet as a minimum requirement. At the
same time, this function steers and monitors the scheduling and
process-related requirements of the consolidated financial state-
ments. The Group-wide accounting guidelines form the basis for
the preparation of the statutory financial statements of the parent
Key tools
With respect to the accounting process, the internal control
system measures are intended to reduce the risk of material false
statements in the consolidated accounting process of the Merck
Group.
The control system is subject to continuous further develop-
ment and is an integral component of the accounting and financial
reporting processes in all relevant local units and Merck Group
functions.
GROUP MANAGEMENT REPORT → Report on Risks and Opportunities
The objective of the internal control system for accounting is to
implement controls that provide assurance that the financial
statements are prepared in compliance with the relevant account-
ing laws and standards. It covers measures designed to ensure the
complete, correct and timely conveyance and presentation of in-
formation that is relevant for the preparation of the consolidated
financial statements and the management report of the Merck
Group.
Merck competes with numerous companies in the pharmaceutical,
chemical and life science sectors. Rising competitive pressure can
have a significant impact on the quantities sold and prices attain-
able for Merck products.
The possibilities offered by the development and approval of
biosimilars represent opportunities for Merck. For instance, over
the past two and a half years, Merck has moved forward with the
development of its own Biosimilars business unit and has entered
into partnerships with Dr. Reddy's Laboratories Ltd., India, among
others, to co-develop a portfolio of biosimilars in oncology.
Moreover, in April 2014, a Brazilian market partnership was es-
tablished with Bionovis SA, Brazil, (Bionovis SA) for a portfolio
of biosimilars. Although a significant contribution to sales is not
to be expected before the medium to long term, the expenditure
required for this has already been taken into account in Merck's
planning.
(0.4) (-0.8)
1,527.8
57.0
1,493.0
56.8
34.8
In 2014, the risk-benefit profile of individual development
projects in the R&D portfolio was analyzed, leading to the prior-
itization of projects. This prioritization resulted in the termination
of multiple development projects. Overall, the termination of the
projects had a critical negative impact on the net assets, financial
position and results of operations.
Risks of discontinuing development projects and
regulatory approval of developed medicines
Sometimes development projects are discontinued after high levels
of investment at a late phase of clinical development. Decisions –
such as those relating to the transition to the next clinical phase
are taken with a view to minimizing risk. Furthermore, there is a
risk that the regulatory authorities either do not grant or delay
approval, which can have an impact on earnings. Additionally,
there is the danger that undesirable side effects of a pharmaceutical
product could remain undetected until after approval or registra-
tion, which could result in a restriction of approval or withdrawal
from the market.
Special mention should be made of the strategic alliance be-
tween Merck and Pfizer Inc., USA, (Pfizer Inc.) as a research and
development opportunity in the Pharmaceuticals business. By
making the required investments jointly and combining their
strengths and expertise, the two companies will maximize the
potential value of the research compound MSB0010718C, an
anti-PD-L1 antibody from Merck. Owing to the relatively long
cycles in active ingredient development, Merck expects that the
positive effects of its anti-PD-L1 antibody will be reflected in the
results of the Healthcare business sector in the medium to long
term and sees opportunities for an increase in future sales and
profitability.
Risks and opportunities of research and development
For Merck, innovation is a major element of the Group strategy.
Research and development projects can experience delays, expected
budgets can be exceeded, or targets remain unmet. Research and
development are of special importance to the Pharmaceuticals
business. In the course of portfolio management, Merck regularly
evaluates and, if necessary, refocuses research areas and all R&D
pipeline projects.
Nevertheless, the market risk is still classified overall as a me-
dium risk owing to its likely probability of occurrence and critical
negative impact.
Opportunities due to the further development of the
Biosimilars business unit
frontation in this issue and will conduct negotiations with the aim
of clarifying the situation.
In the pharmaceutical sector, both Merck's biopharmaceutical
products and classical pharmaceutical businesses are exposed to
increased competition from competing products. In the chemical
sector, risks are posed by not only cyclical business fluctuations
but also, particularly with respect to liquid crystals, changes in the
technologies used or customer sourcing strategies. Merck uses
close customer relationships and in-house further developments
as well as precise market analyses as mitigating measures.
Risk due to increased competition and customer
technology changes
Antennas that can receive signals transmitted in the high fre-
quency range (e.g. Ka and Ku band) can also be realized with the
aid of corresponding liquid crystal mixtures. As a result, mobile
data exchange could improve significantly in a wide variety of
fields of application. Since liquid crystal materials for antennas
are currently being developed, the market launch of liquid crystal
antennas could still take a few years. Consequently, positive
effects on the financial results of the Performance Materials busi-
ness may only materialize in the medium to long term.
term.
Merck is pursuing a strategy of leveraging its expertise as the
global market leader in liquid crystals in order to develop new fields
of application for innovative liquid crystal technology, e.g. liquid
crystal windows (LCW) or mobile antennas. With the acquisition
of its long-standing cooperation partner Peer+ B.V., Netherlands,
(Peer+ B.V.) Merck is further advancing the development of the
future-oriented market for LCW. Thanks to licrivision™ technology,
LCW create new architectural possibilities. Through progressive
brightness control, they can for example increase a building's
energy efficiency. In 2015, the first pilot projects for LCW will
begin, meaning that the technology will require intensive develop-
ment work prior to market readiness. Consequently, Merck expects
that the potential positive effects on the results of the Performance
Materials business will only materialize in the medium to long
Opportunities due to new application possibilities
for liquid crystals
energy. Merck thus sees the possibility of significant market
growth for OLED applications in the medium to long term and
thus related opportunities for Merck.
GROUP MANAGEMENT REPORT Report on Risks and Opportunities
126
Merck is building on more than ten years of experience in manu-
facturing organic light-emitting diode (OLED) materials as well as
a strong portfolio of worldwide patents in order to develop ultra-
pure and extremely stable materials that are precisely tailored to
customer requirements. The development in the OLED market is
being driven by the diversification of applications for OLED dis-
plays. While OLED displays are mainly used today in small-area
displays, for example smartphones, more and more large-area dis-
plays could also be based on OLED technology in the future. In
order to overcome the technical and financial obstacles of the
mass production of large-area OLED displays, Merck has been co-
operating since the end of 2012 with Seiko Epson Corporation,
Japan (Seiko Epson). This cooperation has opened up new avenues
in the manufacture of OLED displays. The combination of durable
OLED materials from Merck and inkjet printing technology from
Seiko Epson makes it possible to quickly and precisely produce
high-resolution OLED displays using inkjet technology. The inkjet
printing of large OLED displays can resolve the productivity prob-
lems of the conventional vapor-deposition processes. In addition,
this technique deposits material only in the areas where diodes are
actually created, thus enabling the optimal use of materials and
Opportunities due to a new technology in the manufacture
of OLED displays
Merck is in negotiations with a competitor regarding potential
patent infringements in the Performance Materials division. Merck
maintains that the competitor's patent infringement assertion is
invalid owing to relevant prior art. The competitor has threatened
to file patent infringement lawsuits. Merck is prepared for a con-
INTERNAL CONTROL SYSTEM FOR THE
CONSOLIDATED ACCOUNTING PROCESS
Opportunities are assessed in their respective specific business
environment. Marketing measures for operational planning are
usually quantified in relation to sales, EBITDA pre one-time items
and business free cash flow. Net present value, the internal rate of
return (IRR), the return on capital employed (ROCE) and the amor-
tization period of the investment are primarily used to assess and
prioritize investment opportunities. Similarly, scenarios are fre-
quently set up to simulate the influence of possible fluctuations
and changes in the respective factors on results. There is no over-
arching, systematic classification of the probability of occurrence
and impact of opportunities.
Opportunities
Explanation
Very likely
Likely
Possible
Unlikely
Explanation
Risk matrix
Impact
RISK MATRIX
The combination of the two factors results in the risk matrix below,
which shows the individual risks and their significance to Merck.
< € 5 million
Critical negative impact on the net assets, financial position
and results of operation
€ 5-20 million
> € 50 million
Degree of impact
DEGREE OF IMPACT
> 80%
51-80%
20-50%
<20%
Probability of occurrence
PROBABILITY OF OCCURRENCE
The significance of risks to Merck is calculated on the basis of
their possible negative impact on the forecast financial targets in
conjunction with the probability of occurrence of the respective
risk. In line with these two factors, risks are classified as "high",
"medium" or "low". The underlying scales for measuring these
factors are shown below:
Risks
€ 20-50 million
Substantial negative impact on the net assets, financial position
and results of operations
Moderate negative impact on the net assets, financial position
and results of operations
Insignificant negative impact on the net assets, financial position
and results of operations
GROUP MANAGEMENT REPORT Report on Risks and Opportunities
124
>80%
51-80%
20-50%
<20%
Probability of occurrence
Low
Low
Low
Low
< € 5 million
Medium
Medium
Medium
Low
High
High
High
Medium
Medium
Medium
Medium
Medium
€ 5-20 million
€ 20-50 million
> € 50 million
1.4
RISK AND OPPORTUNITY ASSESSMENT
-16.4
-1,152.3
(-48.0)
9.1
-4.2
-0.1
4.8
248.1
2.5
-7.8
-0.4
-5.7
2,682.5
4.5
673.1
-1.7
2.1
The sales performance of each of the division's three business areas
varied in 2014. Whereas the two top-selling business areas, Lab
Solutions and Process Solutions, generated higher sales due to
price and volume increases, sales of the Bioscience business area
nearly remained stable.
The Process Solutions business area, which markets products
and services for the pharmaceutical production value chain, gen-
erated sales organic growth of 8.9%, which was the highest rate
within the Merck Millipore division. This increase resulted mainly
from higher demand from the biotech industry for purification
and sterilization products as well as filtration systems. Taking into
account negative foreign exchange effects of -1.1% as well as the
-1.8% decrease in sales due to the divestment of the Discovery
and Development Solutions business field, sales amounted to
€ 1,187 million in 2014 (2013': € 1,121 million). Process Solutions
thus accounted for 44% of divisional sales (2013: 43%).
Sales by Lab Solutions, which accounted for a 41% share (2013:
42%) of divisional sales, generated organic sales growth of 1.9%
with its broad range of products for researchers and scientific lab-
oratories. Currency headwinds of -2.4% led to slightly lower sales
of € 1,093 million (2013': € 1,099 million) for the business area.
Higher sales were primarily achieved by the Lab Water and Bio-
monitoring business fields.
The Bioscience business area, which primarily markets products
and services for academic and pharmaceutical research laborato-
ries, recorded a slight organic sales decline of -0.5%. Including
adverse foreign exchange effects of -0.9%, sales amounted to
€ 402 million (20131 : € 408 million). Here, for instance, lower
demand for antibodies dampened sales. However, this was largely
mitigated by higher demand from diagnostic laboratories for cell
analysis products. At 15%, the business area's share of divisional
sales was unchanged in 2014.
'Previous year's figures have been adjusted owing to an internal reorganization.
118
GROUP MANAGEMENT REPORT REPORT ON ECONOMIC POSITION
→ Merck Millipore
MERCK MILLIPORE →
SALES COMPONENTS BY BUSINESS AREA - 2014
-0.7
€ million/change in %
1.9
0.2
Marketing and selling expenses'
117
GROUP MANAGEMENT REPORT → REPORT ON ECONOMIC POSITION →
Merck Millipore
MERCK MILLIPORE →
SALES COMPONENTS BY REGION - 2014
€ million/change in %
Europe
North America
Emerging Markets
Rest of World
-2.0
Merck Millipore
Organic growth
Exchange rate
effects
Acquisitions/
divestments
Total change
1,036.3
2.7
0.3
-0.4
2.6
725.0
3.7
Sales
Bioscience
Lab Solutions
Process Solutions
Change
in %
€ million
in %
2,682.5
14.0
2,696.5
100.0
0.5
100.5
2,627.5
100.0
55.0
2.1
20131
€ million
17.8
- 3.8
-21.4
2,645.3
100.7
51.2
1.9
Cost of sales¹
-1,168.7
-43.6
(of which: amortization of intangible assets)'
Gross profit¹
(-47.6)
0.7
in %
€ million
2014
The results of operations developed as follows:
MERCK MILLIPORE
→
RESULTS OF OPERATIONS
Sales
Royalty, license and commission income
Total revenues
Sales
Organic growth
Exchange rate
effects
Acquisitions/
divestments
Total change
402.5
-0.5
-0.9
-1.4
1,092.6
1.9
-2.4
-0.5
1,187.4
8.9
-1.1
-1.8
6.0
-43.9
123
-159.8
If the occurrence of the identified opportunities is rated as
likely, they are incorporated into the business plans and the short-
term forecasts. Trends going beyond this or events that could lead
to a positive development of the net assets, financial position and
results of operations are presented in the following report as op-
portunities. These could have a positive effect on Merck's medium-
term prospects and lead to a positive deviation from forecasts.
1.8
(of which: amortization of intangible assets)'
(-)
(-)
Other operating expenses and income
-105.9
-3.9
-120.7
-4.6
14.8
-12.3
Operating result (EBIT)
-2.8
289.2
262.0
10.0
27.2
10.4
Depreciation/Amortization/Reversals of impairments
309.7
11.5
327.8
12.5
-18.1
-5.6
(of which: one-time items)
10.8
(-)
-6.1
-6.1
-31.5
-835.2
-31.8
-8.9
1.1
(of which: amortization of intangible assets)'
(-151.8)
(-151.9)
(0.1)
(-0.1)
Royalty, license and commission expenses
-15.6
2.3
-0.6
-0.6
0.5
-3.1
Administration expenses
-110.4
-4.1
-99.2
-3.8
-11.2
11.3
Research and development costs'
-162.6
-16.1
(17.3)
(-17.3)
(-)
15.8
2.5
1The disclosure of amortization of intangible assets (excluding software) has been changed. See "Accounting and measurement principles" in the Notes to the Group accounts.
GROUP MANAGEMENT REPORT → REPORT ON ECONOMIC POSITION → Merck Millipore
119
Despite higher production costs and slightly lower royalty, license
and commission income, gross profit rose by 2.3% in 2014 to
€ 1,528 million, leading to a higher gross margin of 57.0% (2013:
56.8%). In comparison with the previous year, Merck Millipore
increased its operating result (EBIT) by 10.4% to € 289 million.
After eliminating depreciation and amortization, and adjusted for
one-time items, EBITDA pre one-time items, the most important
performance indicator, climbed 2.5% to € 659 million, which
was mainly due to an increase in gross profit. This resulted in a
stable EBITDA margin pre one-time items rise of 24.6%. (2013:
24.5%).
The development of EBITDA pre one-time items in the indi-
vidual quarters in comparison with 2013 is presented in the fol-
lowing overview:
MERCK MILLIPORE
→
EBITDA PRE ONE-TIME ITEMS AND CHANGES BY QUARTER1
€ million/change in %
1 Quarterly breakdown unaudited.
-3.2
%
2014
170
01->
4.8
162
2013
166
02->
6.3
156
161
03 →
90
16.6
-0.9
-53.2
32.5
EBITDA
598.9
22.3
589.8
22.4
9.1
1.5
Restructuring costs
Integration costs/IT costs
Gains/losses on the divestment of businesses
Acquisition-related one-time items
Other one-time items
EBITDA pre one-time items
11.9
31.6
-0.4
16.6
658.6
24.6
25.4
23.9
0.5
3.2
642.8
24.5
-13.5
7.7
2.1
GROUP MANAGEMENT REPORT → Report on Risks and Opportunities
157
MERCK MILLIPORE
Business free cash flow
419.0
493.8
-15.2
120
The development of business free cash flow in the individual
quarters in comparison with 2013 is presented in the following
overview:
BUSINESS FREE CASH FLOW AND CHANGE BY QUARTER1
€ million/change in %
1 Quarterly breakdown unaudited.
GROUP MANAGEMENT REPORT REPORT ON ECONOMIC POSITION
-6.0
→ Merck Millipore
90
2014
54
-32.9
81
2013
125
02->
-19.9
157
%
-54.4
Changes in trade accounts receivable
107.8
04→>
163
168
-3.0
Development of business free cash flow
Despite higher EBITDA pre one-time items, business free cash flow
of the Merck Millipore division decreased to € 419 million in 2014
(2013: € 494 million). The decline of -15.2% was largely due to
the increase in trade accounts receivable in 2014. Higher capital
spending as well as an increase in inventories as of December 31,
2014 also lowered this key performance indicator. The increase
in the two balance sheet items inventories and receivables as of
December 31, 2014 was especially due to foreign exchange effects.
MERCK MILLIPORE →
BUSINESS FREE CASH FLOW
€ million
2014
2013
Change
in %
EBITDA pre one-time items
658.6
642.8
2.5
Investments in property, plant and equipment, software
as well as advance payments for intangible assets
-141.0
-121.7
15.9
Changes in inventories
-44.2
-21.3
03 →
04 →>
01 →
139
-166.0
-196.7
-15.5
-214.7
-281.2
109
In 2014, administration expenses reported under Corporate and
Other decreased to € 195 million (2013: € 206 million). The net
amount of operating expenses and income improved to € - 42 mil-
lion (2013: €47 million), as increased operating foreign currency
gains more than offset the higher level of one-time items. In 2014,
the foreign currency result showed income of € 53 million (2013:
€ 32 million) and one-time expenses amounted to € 60 million
(2013: € 47 million).
Overall, EBIT improved 5.6% to € - 245 million (2013: € - 260 mil-
lion) and EBITDA by 7.3% to € – 226 million (2013: € – 244 mil-
lion). Adjusted for one-time effects, EBITDA pre one-time items
totaled € -166 million in 2014 (2013: € -197 million). The business
free cash flow reported under Corporate and Other amounted to
€ -215 million in 2014 (2013: € - 281 million).
122
GROUP MANAGEMENT REPORT Report on Risks and Opportunities
REPORT ON RISKS AND OPPORTUNITIES
Risks and opportunities are inherent to entrepreneurial activity.
Merck has put systems and processes in place to identify risks at
an early stage and to counteract them by taking appropriate action.
At Merck, opportunity management is an integral component of
internal decision-making processes such as short- and medium-
term operational planning and intra-year business plans.
RISK AND OPPORTUNITY MANAGEMENT
Merck is part of a complex, global business world and is therefore
exposed to a multitude of external and internal influences. Every
business decision is therefore based on the associated risks and
opportunities.
In our internal risk reporting, risks are defined as possible
future events or developments that could lead to a negative devi-
ation from our forecast (financial) targets. In parallel, opportuni-
ties are defined as possible events or developments that imply a
positive deviation from our planned (financial) targets. Identified
future events and expected developments are taken into account
in internal planning provided that it can be assumed that their
occurrence is likely in the planning period. The risks and opportu-
nities presented in the following risk and opportunities report are
those possible future events that could respectively lead to a neg-
ative or positive deviation from the topics covered by planning.
Risk management process
The objective of our risk management activities is to recognize,
assess and manage risks early on and to implement appropriate
measures to minimize them. The responsibilities, objectives and
process of risk management are described in our internal risk
management guideline. The business heads, managing directors of
Merck subsidiaries, and the heads of Group functions are specified
as employees with responsibility for risks. The group of consoli-
dated companies for risk reporting purposes is the same as the
group of consolidated companies for the consolidated financial
statements. Every six months, the risk owners assess their risk
status and report their risk portfolio to Risk Management. Merck
uses special risk management software in the context of these
activities.
If risk-mitigating measures can be taken, their impact on risk
is also assessed. The residual risk after the implementation of
mitigation measures is presented in the internal risk report as net
risk. The planned timeframe for implementation and the assumed
mitigation effect are tracked by Group Risk Management.
Group Controlling & Risk Management forms the organizational
framework for risk management and reports directly to the Group
Chief Financial Officer. Group Risk Management uses the infor-
mation reported to determine the current risk portfolio for the
Merck Group, presenting this in a report to the Executive Board,
the Supervisory Board and the Finance Committee with detailed
explanations twice per year. Furthermore, significant changes in
the assessment of the risks already known and new significant
risks can be reported at any time and are communicated to the
corporate bodies on an ad hoc basis.
For the standard process, a lower limit for reporting risks is set
at a value of € 5 million and for the ad hoc process at a value of
€ 25 million. Risks below these limits are steered independently
within the business sectors. The relevant timeframe for internal
risk reporting is five years. The effects of risks described in this
Report on Risks and Opportunities are presented as annual values.
The assessment of the risks presented relates to December 31,
2014. There were no relevant changes after the end of the report-
ing period that would have necessitated an amended presentation
of the risk situation of the Group.
Within the scope of audits, Group Internal Auditing regularly
reviews the performance of risk management processes within the
units and, at the same time, the communication of relevant risks
from the operating units to Group Risk Management.
Opportunity management process
The risk management system described concentrates on business
risks, and not on opportunities at the same time. The Merck
Group's opportunity management process is integrated into our
internal controlling processes and carried out in the operating
units on the basis of the Group strategy. The divisions analyze and
assess potential market opportunities as part of strategy and plan-
ning processes. In this connection, investment opportunities are
examined and prioritized in terms of their potential value propo-
sition to Merck in order to ensure an effective allocation of re-
sources. Merck selectively invests in growth markets to leverage
the opportunities of dynamic development and customer proximity
at a local level.
-7.3
-244.0
-23.7
-5.6
131
11.5
117
-226.0
GROUP MANAGEMENT REPORT → REPORT ON ECONOMIC POSITION →
Corporate and Other
121
CORPORATE AND OTHER
Corporate and Other comprises Group administration expenses for
Group functions that cannot be directly allocated to the divisions,
such as Finance, Procurement, Legal, Communications and Human
Resources. Corporate costs additionally encompass expenses for
central, non-allocated IT functions, including expenses related to
the expansion and harmonization of IT systems within the Merck
Group. Accordingly, Corporate and Other has no sales to report.
Gains or losses on operational currency hedging are also disclosed
under Corporate and Other.
CORPORATE AND OTHER
-21.9
€ million
KEY FIGURES
-259.7
-245.1
2013
2014
Change
in %
EBITDA pre one-time items
EBITDA
Operating result (EBIT)
Business free cash flow
Further risks include the risk of operational failures due to force
majeure, for example natural disasters such as floods or earth-
quakes, which could lead to a substantial interruption or restriction
Damage and product liability risks
Effect on earnings due to the expected decline in RebifⓇ sales
of business activities. Insofar as it is possible and economical to
do so, the Group limits its damage risks with insurance coverage,
the nature and extent of which is constantly adapted to current
requirements. Although the occurrence of these risks is considered
unlikely, an individual event could have a critical negative effect
on the net assets, financial position and results of operations and
is therefore classified as a medium risk.
Companies in the chemical and pharmaceutical industries are
exposed to product liability risks in particular. Product liability
risks can lead to considerable claims for damages and costs to
avert damages. Merck has taken out the liability insurance that is
standard in the industry for such risks. However, it could be that the
insurance coverage available is insufficient for individual cases.
Although the occurrence of product liability claims in excess of
the existing insurance coverage is considered unlikely, individual
cases could still have a critical negative effect on the net assets,
financial position and results of operations. Merck therefore rates
potential product liability risk as a medium risk.
Risks due to product-related crime and espionage
Owing to its portfolio, Merck is exposed to a number of sector-
specific crime risks. This relates primarily to products, including,
among other things, counterfeiting, illegal channeling, misuse as
well as all types of property crime, including attempts at these
crimes. Crime phenomena such as cybercrime and espionage could
equally affect our innovations or innovation ability as such; this
includes in particular undesirable losses of information in all rel-
evant possible ways, both in the IT area as well as with respect to
non-IT-based threats.
To combat product-related crime, Merck established an inter-
nal coordination network covering all functions and businesses
("Merck Anti-Counterfeiting Operational Network") several years
ago. In addition, security measures are in use to protect products
against counterfeiting. Innovative technical security solutions and
defined preventive approaches are used to ward off dangers relat-
ing to cybercrime and espionage. Measures to prevent risks and to
prosecute identified offenses are conducted in all the relevant
crime areas in close and trustworthy cooperation with the respon-
sible authorities.
128
Risk and opportunity management in relation to the use
of financial instruments
Opportunities due to an expanding local presence in
high-growth markets
In the coming years, Merck still anticipates above-average growth
for all its business sectors in the markets of Latin America, the
Middle East and Africa as well as Asia. In order to further enable
this growth, Merck has moved forward with several investment
projects, such as the construction of new production facilities for
liquid crystals and the establishment of a new Merck Serono site
in China. Moreover, Merck is strengthening its activities in Africa
through strategic investments as well as geographic expansion in
selected regions. The greater local presence and customer proximity
could lend Merck a key competitive edge and, in the medium to
long term, offer the opportunity for significant additional growth
in sales and EBITDA pre one-time items.
FINANCIAL RISKS AND OPPORTUNITIES
As a corporate group that operates internationally and due to its
presence in the capital market, Merck is exposed to various finan-
cial risks and opportunities. Above all, these are liquidity and
counterparty risks, financial market risks and opportunities, risks
of fluctuations in the market values of operational tangible and
intangible assets, as well as risks and opportunities from pension
obligations.
In the area of financial risks and opportunities, Merck uses an
active management strategy to reduce the effects of fluctuations
in exchange and interest rates. The management of financial risks
and opportunities by using derivatives in particular is regulated
by extensive guidelines. There is a ban on speculation and deriv-
ative transactions entered into are subject to ongoing risk man-
agement procedures. Trading, settlement and control functions are
strictly separated.
Liquidity risks
In order to ensure its continued existence, a company must be able
to fulfill its commitments from operating and financial activities
at all times. Merck therefore has a central Group-wide liquidity
management process to reduce potential liquidity risks. Further-
more, Merck has a multi-currency revolving credit facility of € 2
billion with a term of five years and an extension option of one
year that, above and beyond the Group's positive operating cash
flow, ensures continuing solvency if any liquidity bottlenecks
occur. As our loan agreements do not contain any financial cove-
nants, these agreed lines of credit can be accessed even if Merck's
credit rating should deteriorate. Additionally, Merck has a com-
mercial paper program with a maximum volume of € 2 billion as
well as a debt issuance program that forms the contractual basis
for the issue of bonds with a nominal volume of up to € 15 billion.
A purchase price of US$ 17 billion is payable for the planned
acquisition of Sigma-Aldrich. This is covered by cash on hand as
well as further syndicated credit lines with a bank consortium and
currency hedging. Some of the credit lines are being successively
replaced by the issuance of bonds.
Quality controls along the entire value chain reduce the risks
related to product quality and availability. This starts with the
qualification of our suppliers. Quality controls also include com-
prehensive quality requirements for raw materials, purchased
semi-finished products and plants, as well as long-term strategic
alliances in the case of supply- and price-critical precursor prod-
ucts. Merck is dependent on individual suppliers of precursor
products for some of its main products. In the event that one of
these suppliers curtails or discontinues production, or supply is
disrupted, this could possibly have a critical negative impact on
the Merck business concerned. With long-term strategic alliances
for precursor products critical to supply and price as well as alter-
native sourcing strategies, Merck reduces the probability of occur-
rence of these risks and rates them as unlikely. Overall, these are
classified as medium risks.
GROUP MANAGEMENT REPORT Report on Risks and Opportunities
Risks of dependency on suppliers
Slight decline
Conditions imposed by national regulatory authorities could
result in a temporary ban on products/production facilities, and
possibly affect new registrations with the respective authority.
Merck takes the utmost effort to ensure compliance with regula-
tions, regularly performs its own internal inspections and carries
out external audits. Thanks to these quality assurance processes,
the occurrence of a risk is unlikely, however cannot be entirely
ruled out. Depending on the product concerned and the severity of
the objection, such a risk can have a critical negative impact on
the net assets, financial position and results of operations. There-
fore, Merck rates this as a medium risk.
Overall, the liquidity risk is rated as unlikely.
In particular, Merck Serono will be increasingly investing in the
modernization and expansion as well as the new construction of
production facilities in order to meet the increasing demand for
Merck pharmaceuticals. Owing to these investment activities and
the slight decline in EBITDA pre one-time items, Merck expects a
slight decrease in business cash flow for the Healthcare business
sector in 2015.
Business free cash flow
and particularly the anti-PD-L1 antibody within the scope of the
strategic alliance with Pfizer. The expenses incurred in this con-
nection are likely to be offset to a large extent by the share of the
upfront payment from Pfizer attributable to 2015. These develop-
ments, as well as the absence of royalty income for HumiraⓇ and
the impact of the expected significant drop in sales of Rebif® on
earnings, are likely to lead to a slight decline in EBITDA pre one-
time items.
In 2014, Merck already resolutely prioritized its research and de-
velopment activities in the Healthcare business sector and discon-
tinued various projects. For 2015, Merck will drive strategically
important projects forward, which will lead to increasing research
and development costs. An important part of this will be the
further development of the hypoxia-activated prodrug TH-302
EBITDA pre one-time items
Merck expects organic sales of the Healthcare business sector in
2015 to remain at the 2014 level. For Rebif®, the top-selling prod-
uct in Healthcare, Merck assumes a sharp organic sales drop as a
result of high competitive pressure in the United States and also in
Europe. However, it is expected that this decline in sales will be
compensated for by continued growth in Emerging Markets and
by growth of the other key products. The Consumer Health busi-
ness, for which Merck expects to see strong organic sales growth,
will also help to offset the decline.
Sales
'Information relating to the past for the Healthcare business sector refers to the former Merck Serono and Consumer Health divisions, which have been part of the newly created
Healthcare business sector since January 1, 2015.
- Higher investments in property, plant and equipment within the scope of current
strategic growth projects
Slight decline in EBITDA pre one-time items
- Positive foreign exchange effects
- Absence of HumiraⓇ royalty income
GROUP MANAGEMENT REPORT → Report on Risks and Opportunities
127
Risks and opportunities of product quality and availability
Risk of a temporary ban on products/production facilities or
of non-registration of products due to non-compliance with
quality standards
Merck is required to comply with the highest standards of quality
in the manufacture of pharmaceutical products (Good Manufac-
turing Practice). In this regard Merck is subject to the supervision
of the regulatory authorities.
On a positive note in comparison with 2013, the FDA warning
letter received in 2011 was closed, thus eliminating the risk result-
ing from this warning letter of a ban on importing products to the
United States.
Counterparty risks
Counterparty risks arise from the potential default by a partner in
connection with financial investments, loans and financing com-
mitments on the one hand and receivables in operating business
on the other.
As for counterparty risks from financial transactions, Merck
reviews all positions relating to trading partners and their credit
ratings on a daily basis. Merck manages financial risks of default
by diversifying its financial positions and thereby by the active
management of its trading partners. Significant financial transac-
tions involving credit risk are entered into with banks and indus-
trial companies that have a good credit rating. Moreover, Merck's
large banking syndicate the multi-currency revolving credit
facility of € 2 billion was syndicated by 19 banks – reduces possible
losses in the event of default.
3,387.7
- Slight organic
growth
-
- Slight portfolio
effect
- Moderately positive
foreign exchange
effect
Slight increase due
EBITDA pre
one-time items
to operating business
developments and
positive foreign
exchange effects;
- Healthcare: organic at the 2014 level; significant decline in RebifⓇ sales,
compensated for by growth contribution from Emerging Markets and other key
products by sales
- Life Science: moderate organic growth
- Performance Materials: slight organic increase compared with 2014; strong
portfolio effect due to the inclusion of AZ Electronic Materials for a full fiscal year
- Targeted intensification of R&D programs and thus higher research and
development costs for Merck Serono
- Adverse impact due to the absence of HumiraⓇ royalty income and declining
RebifⓇ sales for Merck Serono
- Low double-digit percentage increase for Performance Materials due to the
consolidation of the AZ acquisition for a full year and a moderate increase for
Life Science
- Strong organic growth in the Consumer Health business
- Low double-digit percentage increase in expenses for Corporate and Other due
to the absence of currency hedging gains in 2014 as well as to the expected
expenses for the "ONE Global Headquarters" project in 2015.
11,291.5
Key assumptions
In terms of opportunities, Merck believes that the greatest
potential lies in the business-related topics of the operational areas.
Thanks in particular to the expansion of our business in Latin
America, the Middle East and Africa as well as in Asia, the further
intensification and focusing of research and development activi-
ties, for instance the collaboration with Pfizer Inc., Bionovis SA,
Peer+ B.V. and Seiko Epson, and other activities as part of the "Fit
for 2018" transformation and growth program, Merck has launched
changes that hold significant opportunities in the medium to long
term beyond the underlying forecast period.
Merck is pursuing the possibilities that are arising and takes
the expected effects into account in the forecast development of
its key performance indicators, namely sales, EBITDA pre one-
time items and business free cash flow. Merck will actively seek
opportunities above and beyond these and move ahead with their
implementation. In the event that opportunities arise in addition
to the forecast developments, or that these occur more quickly
than anticipated, this could have correspondingly positive effects
on Merck's net assets, financial position and results of operations.
134
GROUP MANAGEMENT REPORT Report on Expected Developments
REPORT ON EXPECTED DEVELOPMENTS
The key financial performance indicators of the Merck Group,
namely sales, EBITDA pre one-time items and business free cash
flow, remain unchanged. Based on these steering parameters, the
following report provides a forecast for fiscal 2015 of the develop-
ment of the Merck Group and its three business sectors: Health-
care, Life Science and Performance Materials. Since the internal
planning process for 2015 was already based on the new segmen-
tation, the Report on Expected Developments also reflects this new
structure. Key changes relate to the composition of the Pharma-
ceutical business - consisting of the previous Merck Serono and
Consumer Health divisions under the umbrella of the new
Healthcare business sector, as well as the renaming of the Merck
Millipore business to the Life Science business sector. More
detailed information on the segmentation, which took effect on
January 1, 2015, can be found under "The Merck Group" (pages
44-49) in this Annual Report.
Sales
In September 2014, Merck and the U.S. life science company Sigma-
Aldrich entered into a merger agreement according to which Merck
would acquire Sigma-Aldrich. Sigma-Aldrich shareholders ap-
proved the merger with Merck at an extraordinary shareholders'
meeting on December 5, 2014. From today's perspective, the ac-
quisition is still expected to close by mid-2015. The successful
completion of the transaction is subject to the required antitrust
clearances.
FORECAST FOR THE MERCK GROUP
MERCK GROUP
FORECAST 2015
€ million
Actual results 2014
Forecast 2015
The forecast for expected business developments in 2015 will
initially be presented without taking the Sigma-Aldrich acquisi-
tion into account. Separate forecasts for the effect of the acquisi-
tion of Sigma-Aldrich have been prepared for the Merck Group as
well as the Life Science business sector, to which the acquisition
relates. They are based on a potential first-time consolidation of
Sigma-Aldrich in mid-2015.
- Expected slight increase in EBITDA pre one-time items
- Further improvement in working capital management
Business free
FORECAST 2015
€ million
Actual figures for 2014¹
Forecast for 2015
Key assumptions
GROUP MANAGEMENT REPORT Report on Expected Developments
HEALTHCARE
Sales
6,549.4
Organic at the
previous year's level
2,000.3
Slight decline
Business free
cash flow
1,701.2
EBITDA pre
one-time items
FORECAST FOR THE HEALTHCARE BUSINESS SECTOR
136
In the event of the successful acquisition of Sigma-Aldrich and
the first-time consolidation in mid-2015, Merck expects double-
digit growth rates for the sales of both the Group and the Life
Science business sector in 2015 as compared with 2014. Very
strong growth of EBITDA pre one-time items and business free
cash flow is anticipated for the Merck Group, while double-digit
growth rates would be expected for the Life Science business
sector.
2,605.1
Slight increase
cash flow
GROUP MANAGEMENT REPORT → Report on Expected Developments
135
Sales
In 2015, a slight organic increase in sales in comparison with 2014
is expected for the Merck Group. Moreover, due to the inclusion of
AZ Electronic Materials for a full fiscal year, a slightly positive
portfolio effect is expected. Regarding the most important foreign
currencies for the Merck Group, in 2015 it is assumed that on an
annual average, the U.S. dollar, the Swiss franc and major Asian
currencies will appreciate against the euro compared with the pre-
vious year. Furthermore, the value of Latin American currencies
versus the euro is expected to decline. Overall, a moderately posi-
tive foreign exchange effect is expected to result for the Merck
Group.
Merck expects organic sales in the Healthcare business sector
in 2015 to remain at the previous year's level. For Rebif®, Merck
Serono's top-selling product, Merck assumes a sharp organic sales
decline compared with 2014, as a result of continued high com-
petitive pressure in North America and in Europe. However, this
decrease in sales is likely to be compensated for by continued
growth in Emerging Markets and by growth of the business sector's
other key products by sales. Moderate organic sales growth in the
Life Science business sector is assumed for 2015, which is likely to
be driven especially by the Process Solutions and Lab Solutions
business areas. For the Performance Materials business sector,
slight organic sales growth is expected. Furthermore, a noticeable
portfolio effect is expected for this business sector, as 2015 will be
the first year that AZ Electronic Materials has been consolidated
for a full fiscal year.
EBITDA pre one-time items
Owing to the expected operating development and positive for-
eign exchange effects, a slight increase in EBITDA pre one-time
items, the key financial indicator used to steer operating business,
is expected for the Merck Group in 2015 compared with 2014. At
least EBITDA pre one-time items should reach the previous year's
level.
For the Healthcare business sector, a slight decline in EBITDA pre
one-time items can be assumed overall. The targeted intensifica-
tion of the strategically important research and development pro-
grams, especially for the development of the anti-PD-L1 antibody
and TH-302 at Merck Serono, will lead to higher expenses in 2015.
Moreover, declining sales of Rebif® and the absence of HumiraⓇ
royalty income will adversely affect EBITDA pre one-time items.
For the Performance Materials business sector, Merck assumes that
the full consolidation of AZ Electronic Materials will lead to a low
double-digit percentage increase in EBITDA pre one-time items.
The Life Science business sector is forecast to see a moderate in-
crease in EBITDA pre one-time items in 2015.
For EBITDA pre one-time items of Corporate and Other, Merck
expects a low double-digit percentage decline. In 2014, the ex-
pense was largely lowered due to positive effects from currency
hedging transactions, which are no longer expected in 2015 owing
to the significant decline in the value of the euro versus major
foreign currencies. In addition, Merck expects higher expenses in
2015 for the "ONE Global Headquarters” project at Group head-
quarters in Darmstadt.
Business free cash flow
Despite planned investments in growth projects, business free cash
flow of the Merck Group is forecast to increase slightly in 2015 in
line with the forecast development of EBITDA pre one-time items.
Forecast taking into account the successful acquisition of
Sigma-Aldrich
The overall view of the risk situation of the Group, which is de-
rived from the summary of the risks described on the basis of their
impact and probability of occurrence, leads Merck to the assess-
ment that the risks are not of a nature to threaten the existence of
the Group as a going concern, either individually or collectively.
Merck is confident that it will continue to successfully master the
challenges arising from the above risks in the future as well.
- Sales growth in Emerging Markets and of other key products by sales will
compensate for the significant organic decline in sales of Rebif®.
The successful closing of the FDA warning letter and the
settlement of patent litigation with Israel Bio-Engineering Project
Limited Partnership (IBEP) had a positive effect on the risk situa-
tion of the Merck Group. Above and beyond this, with respect to
high and medium risks Merck has determined only minor changes
although the assessment of the individual risks has of course
altered over the fiscal year as a result of changing external condi-
tions. Thanks to the risk reduction measures taken - such as the
consistent implementation of management action (organizational
responsibility and process improvements), existing insurance cov
erage and accounting precautions Merck's significant risks in
particular have been further minimized in net terms.
Although the number of risks reported is higher than the identified
specific opportunities, Merck considers the distribution of risks
and opportunities to be balanced. A balanced overall view within
the Group is also supported by the fact that total revenues and
business success are built on a diversity of pharmaceutical and
chemical products for a variety of industries. As the markets differ
in their structure and economic cycles, this diversification helps to
lower risk. This diversification will be strengthened by the take-
over of AZ, which has already occurred, the planned acquisition
of Sigma-Aldrich and the alliance with Pfizer. It is also an expres-
sion of Merck's strategy to further develop Merck as a leading
company for innovative and top-quality high-tech products in
healthcare, life science and performance materials.
A-
BBB+
A
• Moody's
• S&P
Moody's
S&P
P2
A3
Baa1
BBB-
Baa2
2009->
2010-
A2
2011-
OVERVIEW OF RATING DEVELOPMENT:
comparison with the previous year as well as the negative outlook
of both rating agencies is due to the expected higher debt level in
the course of the Sigma-Aldrich transaction. In line with market
procedures, Merck's financing conditions are closely tied to its
rating. The better a rating, the more favorably Merck can generally
raise funds on the capital market or from banks.
-
GROUP MANAGEMENT REPORT → Report on Risks and Opportunities
129
The solvency and operational development of trading partners are
regularly reviewed as part of the management of operational
counterparty risks. Sovereign risks are also analyzed. The volume
of receivables of each customer is capped in line with their credit
ratings. Risk-mitigating measures, such as credit insurance, are
utilized as appropriate. Nevertheless, defaults by isolated trading
partners, even those with outstanding credit ratings, cannot be
entirely ruled out, although rated as unlikely (further information
can be found in "Credit risks" under “Management of financial
risks" in the Notes to the Group accounts).
Counterparty risk is classified as a medium risk overall owing
to the unlikely probability of occurrence with a potential critical
negative effect.
Financial market opportunities and risks
REPORT ON RISKS AND OPPORTUNITIES
As a result of its international business activities and global cor-
porate structure, Merck is exposed to risks and opportunities from
fluctuations in exchange rates. These result from financial trans-
actions, operating receivables and liabilities, forecast future cash
flows from sales and costs in foreign currency. Merck uses deriv-
atives to manage and reduce the aforementioned risks and oppor-
tunities (further information can be found in "Derivative financial
instruments" in the Notes to the Group accounts). Foreign ex-
change risks with a potential critical negative effect on the net
assets, financial position and results of operations are rated as
possible.
Risks of impairment on balance sheet items
The carrying amounts of individual balance sheet items are sub-
ject to the risk of changing market and business conditions and
thus to changes in fair values as well. The need for write-downs
could lead to significant non-cash profit burdens and changes in
balance sheet ratios. This applies in particular to the high level of
intangible assets including goodwill, which mainly derive from
the purchase price allocations made in connection with past
acquisitions (further information can be found under "Intangible
assets" in the Notes to the Group accounts). All relevant risks were
assessed during the preparation of the consolidated financial
statements and taken into account accordingly. Merck rates risks
beyond this as low.
Risk and opportunities from pension obligations
Merck has commitments in connection with pension obligations.
The present value of defined benefit obligations can be signifi-
cantly increased or reduced by changes in the relevant valuation
parameters, e.g. the interest rate or future salary increases. Pen-
sion obligations are regularly assessed as part of annual actuarial
reports. Some of these obligations are covered by the pension pro-
visions reported in the balance sheet, while other obligations are
externally funded (further information can be found under "Pro-
visions for pensions and other post-employment benefits" in the
Notes to the Group accounts). To the extent that pension obliga-
tions are covered by plan assets consisting of interest-bearing
securities, shares, real estate, and other financial assets, decreasing
or negative returns on these assets can adversely affect the fair
value of plan assets and thus result in further additions to pension
provisions. By contrast, rising returns increase the value of plan
assets, thereby resulting in excess cover of plan liabilities. Merck
increases the opportunities of fluctuations in the market value of
plan assets on the one hand and reduces the risks on the other by
using a diversified investment strategy. The risk due to pension
obligations is possible, could moderately impact the net assets,
financial position and result of operations, and is considered to be
medium.
130
GROUP MANAGEMENT REPORT Report on Risks and Opportunities
Assessments by independent rating agencies
The capital market uses the assessments published by rating agen-
cies to help lenders assess the risks of a financial instrument.
Merck is currently rated by the agencies Standard & Poor's and
Moody's. While Standard & Poor's issued a long-term rating of A
with a negative outlook, Moody's issued it a Baal rating with a
negative outlook. The drop in the Moody's rating by one grade in
Future refinancing, particularly the financing of the Sigma-
Aldrich acquisition, and monetary deposits are subject to the risks
and opportunities of interest rate fluctuations. These are also
managed and reduced using derivatives. Interest rate risks with a
potentially significantly negative impact are considered unlikely
and pose medium risks overall.
2012→
2013 →
2014-
GROUP MANAGEMENT REPORT Report on Risks and Opportunities
INFORMATION TECHNOLOGY RISKS
Merck uses a variety of IT systems and processes in order to opti-
mally focus and adequately support its globalization. Trends in
information technology offer various opportunities but also harbor
risks for Merck.
-Increasing research and development costs due to the prioritization and
intensification of Merck Serono research and development projects, especially in
connection with the further development of the anti-PD-L1 antibody within the
scope of the strategic alliance with Pfizer; offset to a significant extent by the
upfront payment from Pfizer attributable to 2015
Increasing international networking and the related possibility of
IT system abuse are resulting in cybercrime risks for Merck, such
as the failure of central IT systems, the disclosure of confidential
research and business development data, the manipulation of IT
systems in chemical process control, or an increased burden or
adverse impact on IT systems as a result of virus attacks. The en-
tire Merck Group has global security guidelines and information
protection management for IT and non-IT areas, each with orga-
nizational and technical standards for access rights as well as in-
formation and data protection, based on ISO 27001.
Additionally, IT applications used globally form the basis
for the contractual delivery of products and solutions. The failure
of business-critical IT applications could therefore have a direct
influence on Merck's ability to deliver; likewise this applies to
the failure of a data center. To achieve the required service
quality, Merck uses a quality management system certified to
ISO 20000:2011. In addition, to reduce the risk of failure, Merck
operates several redundantly designed data centers.
132
Despite the mitigating measures taken and functional conti-
nuity plans, the effects of cybercrime or the failure of business-
critical IT applications and their influence on the net assets, finan-
cial position and results of operations are considered a medium
risk owing to potentially significant negative effects.
As a company with global production operations, Merck is exposed
to risks of possible damage to people, goods and its reputation.
Audits, consulting and training on environmental protection and
occupational health and safety minimize these risks to people and
the environment. In order to ensure the continuity of plant and
equipment, Merck monitors these risks both at its own sites as well
as at suppliers and contract manufacturers. By adhering to high
technical standards, our rules of conduct and all legal require-
ments in environmental protection and occupational health and
safety, Merck ensures the preservation of goods and assets. Suffi-
cient appropriate accounting measures have been taken for the
environmental risks known to us. Nevertheless, Merck classifies
these as a high risk since a critical negative impact on the finan-
cial position cannot be ruled out.
ACQUISITION RISKS
Irrespective of the fact that Merck has successfully completed ac-
quisitions made in the past, the risk of conducting the acquisition
and integration exists for future transactions. This includes among
other things the inability to meet sales volume targets and higher
integration costs than expected, as well as the failure to meet
synergy goals. In addition, the currently planned acquisition of
Sigma-Aldrich is subject to antitrust clearance and if the acquisi-
tion is not conducted, fines could become payable to the acquisi-
tion target. Thanks to strong due diligence processes and closely
managed integration processes, Merck rates the probability of oc-
currence of this risk as unlikely. However, owing to the amount of
potential fines, the overall risk could have a critical negative effect
on the net assets, financial position and results of operations and
is therefore classified as a medium risk.
GROUP MANAGEMENT REPORT → Report on Risks and Opportunities
133
OVERALL VIEW OF THE RISK AND
OPPORTUNITY SITUATION AND
MANAGEMENT ASSESSMENT
ENVIRONMENTAL AND SAFETY RISKS
Recruiting and retaining specialists and talent at Merck are
therefore one of the key priorities for the company and are man-
aged through the targeted use of, for instance, employer branding
initiatives, global talent and succession management processes as
well as competitive compensation packages. Nevertheless, employee-
related risks that affect business activities are possible, even though
their impact is difficult to assess. Merck rates this as a medium
risk.
Merck's future growth is highly dependent on its innovativeness.
Therefore, the expertise and engagement of employees in all sectors
in which Merck operates are crucial to the success of the company.
The markets relevant to Merck are characterized by intensive
competition for qualified specialists and by demographic chal-
lenges. Staff turnover risks specific to countries and industries
have to be identified ahead of time and specifically addressed in
order to keep the skills and expertise critical to success and busi-
ness within the company.
HUMAN RESOURCES RISKS
Source: Own illustration.
LEGAL RISKS
Merck generally strives to minimize and control its legal risks.
Merck has taken the necessary precautions to identify threats and
defend its rights where necessary.
Nevertheless, Merck is still exposed to litigation risks or legal
proceedings. These include in particular risks in the areas of product
liability, competition and antitrust law, pharmaceutical law, patent
law, tax law, and environmental protection. As a research-based
company, Merck has a valuable portfolio of industrial property
rights, patents and brands that could become the target of attacks
and infringements. The outcome of future proceedings or those
currently pending is difficult to foresee. Generally, it is not possible
to rule out that Merck will face third-party claims arising from the
same issue despite the conclusion of legal proceedings. Court or
official rulings or settlements can lead to expenses with a signifi-
cant impact on our business and earnings.
Tax risks are reviewed regularly and systematically by Group
Tax. Corresponding standards and guidelines are used in order to
identify tax risks at an early stage as well as to review, evaluate
and correspondingly minimize them. Measures to reduce risks are
coordinated by Group Tax together with the subsidiaries abroad.
Merck views the legal matters described below as the most
significant legal risks. This should not be seen as an exhaustive
list of all legal disputes currently ongoing.
GROUP MANAGEMENT REPORT → Report on Risks and Opportunities
131
Risks from product-related and patent law disputes
The litigation risk with Israel Bio-Engineering Project Limited
Partnership ("IBEP") was eliminated as of the end of 2014. IBEP
asserted claims for property rights and the payment of license fees
for the past and the future. The legal disputes were connected to
the financing of the development of medical research projects in
the early 1980s. Merck had taken appropriate accounting mea-
sures for these legal disputes in the past. In 2014, Merck achieved
a settlement with IBEP according to which the legal disputes were
settled in exchange for a sum of money. The settlement led to
lower cash payments than previously expected.
Merck is involved in a patent dispute in the United States with
Biogen IDEC Inc. (Massachusetts, USA) ("Biogen”). Biogen claims
that the sale of Rebif® in the United States infringes on a Biogen
patent. The patent in question was granted to Biogen in 2009 in
the United States. Subsequently, Biogen sued Merck and other
pharmaceutical companies for infringement of this patent. Merck
defended itself against all allegations and brought a countersuit
with the claim that the patent was invalid and not infringed on by
Merck's actions. A Markman hearing took place in January 2012,
however a decision has not yet been announced. The parties are
currently engaged in court-ordered mediation proceedings that
have not yet officially ended. It is currently not clear when a
first-instance decision will be made. Merck has taken appropriate
accounting measures. Given the potential critical negative effects
of the legal dispute on the financial position in case of a negative
decision, Merck nevertheless classifies this as a high risk.
Risks due to antitrust and other government proceedings
RaptivaⓇ: In December 2011, the federal state of São Paulo sued
Merck for damages because of alleged collusion between various
pharmaceutical companies and an association of patients suffering
from psoriasis and vitiligo. This collusion is alleged to have been
intended to increase sales of the medicines from the companies
involved to the detriment of patients and state coffers. Moreover,
patients are also suing for damages in connection with the product
Raptiva®. Merck has taken appropriate accounting measures for
these issues. Risks in excess of this with a substantial negative
effect on the net assets, financial position and results of opera-
tions cannot be ruled out, but are considered unlikely. This is rated
as a medium risk.
In one jurisdiction, Merck is subject to a government investi-
gation regarding compliance with foreign exchange transfer re-
strictions. In this connection, the responsible authorities are inves-
tigating whether import prices led to impermissibly high foreign
exchange transfers. Appropriate accounting measures have been
taken for repayments and fines that are estimated to be probable
due to the uncertain legal situation in the affected country. Merck
rates this as a medium risk since significant negative effects on
the financial position cannot be ruled out.
Risks from drug pricing by the divested Generics Group
Paroxetine: In connection with the divested generics business,
Merck is subject to antitrust investigations by the British Compe-
tition and Market Authority (CMA) in the United Kingdom. In
March 2013, the authorities informed Merck of the assumption
that a settlement agreement entered into in 2002 between Generics
(UK) Ltd. and several GlaxoSmithKline companies in connection
with the antidepressant drug paroxetine violates British and Euro-
pean competition law. Merck, the then owner of Generics (UK) Ltd.,
was allegedly involved in the negotiations for the settlement
agreement and is therefore liable. The investigations into Generics
(UK) Ltd. started in 2011, without Merck being aware of this. It is
considered likely that the CMA will impose a fine on Merck. Merck
has taken appropriate accounting measures. Given the lawsuit's
potential substantial negative impact on the financial position,
Merck classifies this as a medium risk.
The most significant individual risks in the divisions have
been named in the report above, with business-related risks being
the most significant to Merck alongside the legal risks.
Risks due to cybercrime and the failure of business-
critical IT applications
at least at the 2014
level
The impact of these risks on business operations depends on
the respective individual case, product-specific factors, the value
chain, as well as on regional aspects in particular. Group Security
is responsible for the overall coordination of all measures in this
area. Overall, the threat resulting from crime in general is seen as
being likely for Merck and is classified as a medium risk.
GROUP MANAGEMENT REPORT → Report in accordance with Section 315 (4) of the German Commercial Code (HGB)
141
capital is only to be implemented insofar as the bearers or credi-
tors of option or conversion rights or the conversion obligations
on warrant bonds, option participation certificates, option partici-
pation bonds, convertible bonds, convertible participation certifi-
cates or convertible participation bonds issued against contribu-
tions that are issued or guaranteed by the company or a subordinate
Group company on the basis of the authorization resolution of the
Annual General Meeting of May 9, 2014 to May 8, 2019, utilize
their option or conversion rights or, to fulfill their conversion
obligation insofar as they are obliged to fulfill their conversion
obligation, or insofar as the company exercises an option, wholly
or in part, of granting shares in the company instead of paying the
sum of money due and to the extent that in each case a cash set-
tlement is not granted, or own shares or other forms of fulfillment
are used. Each issue of new shares shall take place at the deter-
mined option or conversion price, pursuant to the aforementioned
authorization resolution. The new shares participate in the profit
from the beginning of the fiscal year in which they are created;
insofar as this is legally permissible, the Executive Board may,
with the approval of the Supervisory Board, and in deviation from
Section 60 (2) AktG, stipulate that the new shares also participate in
the profit for a past fiscal year. The Executive Board is authorized,
with the approval of the Supervisory Board and of E. Merck, to
stipulate the further details of the implementation of the increase
in contingent capital.
The company is not authorized to acquire its own shares.
The company has not entered into any material agreements
subject to a change of control pursuant to a takeover offer nor has
it entered into any compensation agreements with the members of
the Executive Board or employees in the event of a takeover offer.
SUBSEQUENT EVENTS
Subsequent to the balance sheet date, no events of special impor-
tance occurred that could have a material impact on the financial
position and results of operations of the Merck Group.
03
CORPORATE
GOVERNANCE
->
Pages 142-165
144
145
162
164
Capital structure and corporate bodies of Merck KGaA
Statement on Corporate Governance
Report of the Supervisory Board
Objectives of the Supervisory Board with respect to its composition
144
Moreover, the share capital is contingently increased by up to
€ 16,801,491.20 composed of up to 12,924,224 no-par value
bearer shares (Contingent Capital II). This increase in contingent
CORPORATE GOVERNANCE → Capital structure and corporate bodies of Merck KGaA
The Articles of Association also encompass contingent capital.
The share capital is contingently increased by up to € 66,406,298.40
divided into 51,081,768 shares (Contingent Capital I). The con-
tingent capital increase serves to grant exchange rights to
E. Merck KG in accordance with Article 33 of the Articles of
Association to enable the conversion of its equity interest. The
shares carry dividend rights from the beginning of the fiscal year
following the year in which the conversion option is exercised.
The Articles of Association can be amended by a resolution
by the Annual Meeting that requires the approval of the general
partners. The resolutions of the General Meeting are, notwith-
standing any statutory provisions to the contrary, adopted by a
simple majority of the votes cast. Where the law requires a capital
majority in addition to the voting majority, resolutions are adopted
by a simple majority of the share capital represented in the vote.
The Articles of Association of the company specify the authorized
share capital. The Executive Board is authorized, with the approval
of the Supervisory Board and of E. Merck KG, to increase the share
capital on one or several occasions until April 26, 2018 by up to a
total of € 56,521,124.19 by issuing new shares against cash and/or
contributions in kind (Authorized Capital). The Executive Board is
authorized to exclude, with the approval of the Supervisory Board,
the statutory subscription right of the limited liability shareholders
in the case of capital increases against cash contributions if the
Merck does not expect any significant new technologies or
product launches in the liquid crystals field in 2015. Merck antic-
ipates moderate organic sales growth in Pigments & Functional
Materials and Integrated Circuit Materials overall.
EBITDA pre one-time items
For 2015, Merck forecasts a low double-digit percentage increase
in EBITDA pre one-time items compared with 2014, resulting from
a strong portfolio effect, the planned realization of synergies from
the acquisition of AZ Electronic Materials, and positive foreign
exchange effects. Merck is planning to maintain the profitability
of liquid crystals at a high level.
Business free cash flow
In 2015, Merck expects a low double-digit percentage improve-
ment in business free cash flow compared with 2014 as a result of
the increase in EBITDA pre one-time items. This increase takes
account of the fact that Merck will make considerable invest-
ments in property, plant and equipment for future technologies
in 2015.
GROUP MANAGEMENT REPORT → Report on Expected Developments
139
SUMMARY
Slight organic sales growth of the Merck Group is assumed for
2015, which is likely to be driven by the Life Science business
sector in particular. In addition to this, Merck expects a slight
portfolio effect due to the first-time consolidation of AZ Electronic
Materials for a full fiscal year.
Together with positive foreign exchange effects, the business
development of the Merck Group is likely to lead to a slight increase
in EBITDA pre one-time items. However, it is expected that
EBITDA pre one-time items will at least reach the previous year's
level. A slight decline in EBITDA pre one-time items in the Health-
care business sector due to targeted investments in strategic re-
search and development projects, a significant decline in sales of
Rebif® and the absence of royalty income for Humira® should at
least be offset by the other two business sectors. Low double-digit
percentage growth of EBITDA pre one-time items for the Perfor-
mance Materials business sector is likely, while a moderate increase
is expected for the Life Science business sector. As a consequence
of this development and despite investments in strategic growth
projects, Merck anticipates a slight increase in business free cash
flow in 2015 compared with 2014.
In the event of the successful acquisition of Sigma-Aldrich in
mid-2015, Merck expects double-digit sales growth for the Group
and the Life Science business sector in 2015, as compared with
2014. Very strong growth of EBITDA pre one-time items and busi-
ness free cash flow for the Merck Group is anticipated, while
double-digit growth rates are expected for the Life Science busi-
ness sector.
140
GROUP MANAGEMENT REPORT Report in accordance with Section 315 (4) of the German Commercial Code (HGB)
REPORT IN ACCORDANCE WITH SECTION 315
OF THE GERMAN COMMERCIAL CODE (HGB)
(4)
The following information is provided in accordance with Section
315 (4) of the German Commercial Code and the explanatory report
pursuant to Section 176 (1) sentence 1 of the German Stock
Corporation Act (AktG).
As of the balance sheet date, the company's subscribed capital
is divided into 129,242,251 no-par value bearer shares plus one
registered share. Each share therefore corresponds to € 1.30 of
the share capital. The holder of the registered share is E. Merck
Beteiligungen KG. It is entitled and obliged to appoint one-third
of the members of the Supervisory Board representing the limited
liability shareholders. If the holder of the registered share is a
general partner, he or she has no such right of appointment. The
transfer of the registered share requires the company's approval.
The approval is granted at the sole discretion of the personally
liable general partner with an equity interest, namely E. Merck KG.
Pursuant to the information on voting rights submitted to us
in accordance with the German Securities Trading Act (WpHG), on
December 31, 2014 no shareholders owned direct or indirect
investments exceeding more than 10% of the voting rights.
According to the Articles of Association of Merck, the general
partners not holding an equity interest who form the Executive
Board are admitted by E. Merck KG with the consent of a simple
majority of the other general partners. A person may only be a
general partner not holding an equity interest if he or she is also
a general partner of E. Merck KG. In addition, at the proposal of
E. Merck KG and with the approval of all general partners not
holding an equity interest, further persons who are not general
partners not holding an equity interest may be appointed to the
Executive Board.
issue price of the new shares is not significantly lower than the
stock exchange price of already listed shares carrying the same
rights, as defined in section 203 (1) and (2) and section 186 (3)
sentence 4 of the German Stock Corporation Act (AktG), at the
time when the Executive Board finally fixes the issue price, and if
the proportion of the share capital represented by the new shares
for which the subscription right is excluded does not exceed 10%
of the share capital available at the time of the resolution of the
Annual General Meeting or – if this amount is lower - of the share
capital available at the time of exercising this authorization. This
upper limit shall be reduced by the prorated amount of shares that
are sold during the term of the authorized capital under exclusion
of shareholders' subscription rights pursuant to section 71 (1) no.
8 sentence 5 and section 186 (3) sentence 4 of the German Stock
Corporation Act, as well as shares that must be issued to redeem
option or convertible bonds, as long as the bonds have been issued
during the term of this authorization under exclusion of subscrip-
tion rights. In addition, with the approval of the Supervisory
Board, the subscription right of the shareholders can be excluded
in order to enable E. Merck KG to exercise its right pursuant to
Article 32 (3) of the Articles of Association to participate in a
capital increase by issuing shares or freely transferable share sub-
scription rights and to enable E. Merck KG to exercise its right
pursuant to Article 33 of the Articles of Association to convert its
equity interest into share capital. Moreover, with the approval of
the Supervisory Board, the subscription right of the shareholders
can be excluded as far as this is necessary, in order to grant sub-
scription rights for new shares to holders of warrants and convert-
ible bonds issued by the company or its subsidiaries, to the extent
to which they would be entitled after exercising their option and
conversion rights or fulfilling their option and conversion obliga-
tions. Lastly, with the approval of the Supervisory Board, the sub-
scription right of the shareholders can be excluded in order to
exclude fractional amounts from the subscription right.
Merck expects low double-digit percentage growth in the Perfor-
mance Materials business sector in 2015 compared with 2014.
Slight organic sales growth is anticipated, supplemented by a
strong portfolio effect due to the inclusion of AZ Electronic Mate-
rials for a full fiscal year. In the Liquid Crystals business, Merck
assumes continued good volume growth amid the customary price
decline for established products in this industry. This forecast is in
line with the expectations of Display Search, a market research
firm for the display sector, which continue to anticipate a strong
increase in the surface area of global flat-panel displays produced
in 2015.
CAPITAL STRUCTURE AND CORPORATE BODIES OF
MERCK KGAA TOTAL CAPITAL
The general partner E. Merck KG holds around 70% of the
total capital of Merck KGaA (equity interest); the shareholders
hold the remainder, which is divided into shares (share capital).
E. Merck KG is excluded from the management of business activ-
ities. The general partners with no equity interest (Executive
Board) manage the business activities. Nevertheless, due to its
substantial capital investment and unlimited personal liability,
E. Merck KG has a strong interest in the businesses of Merck KGaA
operating efficiently in compliance with procedures, and exercises
its influence accordingly. Merck KGaA's participation in the
profit/loss of E. Merck KG in accordance with Articles 26 et seq.
of the Articles of Association further harmonizes the interests of
the shareholders and of E. Merck KG. E. Merck KG appoints and
dismisses the Executive Board. In addition, E. Merck KG has created
bodies - complementing the expertise and activities of the Super-
visory Board to monitor and advise the Executive Board. This
task applies primarily to the Board of Partners of E. Merck KG.
Based on the provisions of the German Stock Corporation Act, the
Articles of Association of Merck KGaA and the rules of procedure
of the various committees, Merck KGaA has a set of rules for the
Executive Board and its supervision that meet the requirements of
the Code. The investors, who bear the entrepreneurial risk, are
protected as provided for by the Code.
The General Meeting of Merck KGaA
The nineteenth General Meeting of Merck KGaA was held on
May 9, 2014 in Frankfurt am Main, Germany. At 63.85%, the
proportion of share capital represented at the meeting was slightly
lower than in the previous year. In 2013, the proportion of share
capital represented was 67.54%.
146
CORPORATE GOVERNANCE → Statement on Corporate Governance
In particular, the Annual General Meeting passes resolutions
concerning the approval of the annual financial statements, the
appropriation of net retained profit, the approval of the actions of
the Executive Board members and the Supervisory Board members,
as well as the choice of the auditor. Changes to the Articles of
Association likewise require the adoption of a resolution by the
General Meeting.
The shareholders of Merck KGaA exercise their rights at the
General Meeting. They may exercise their voting rights personally,
through an authorized representative or through a proxy appointed
by the company. The proxy is in attendance throughout the dura-
tion of the General Meeting. All the documents and information
concerning upcoming General Meetings (including a summary
explanation of shareholder rights) are posted on our website.
Moreover, the General Meeting is webcast live on the Internet
from its commencement until the end of the speech by the Chair-
man of the Executive Board. The introductory speeches by the
Chairman of the Executive Board and the Chairman of the Super-
visory Board are recorded in order to make them available to
interested members of the public at any time after the meeting.
In this way, we are satisfying the high transparency requirements
of the Merck Group.
Statement of Compliance
In accordance with section 161 AktG, applying the provisions of
the German Corporate Governance Code correspondingly, the
Executive Board and the Supervisory Board issued the following
statement of compliance with the recommendations of the Govern-
ment Commission of the German Corporate Governance Code:
"Declaration of the Executive Board and the Supervisory
Board of Merck KGaA on the recommendations of the Govern-
ment Commission of the German Corporate Governance Code
pursuant to section 161 AktG.
Since the last statement of compliance on February 28, 2014,
the Merck Group has complied with the recommendations of the
Government Commission of the German Corporate Governance
Code in the versions dated May 13, 2013 and June 24, 2014 and
published in the official section of the German Federal Gazette
during its period of validity with the following exceptions:
Contrary to section 4.2.5 sentence 5 and sentence 6 of the
German Corporate Governance Code, certain information on the
compensation of Executive Board members has not been included,
nor have the model tables provided for this purpose been utilized.
It seems doubtful as to whether the largely repetitive provision of
identical information in two additional tables contributes to the
transparency or the understandability of the Compensation Report
(see section 4.2.5 sentence 3 of the German Corporate Governance
Code).
Contrary to section 5.3.2 of the German Corporate Governance
Code, the Supervisory Board has not established an audit com-
mittee. However, an audit committee does exist in the form of the
Finance Committee of the Board of Partners of E. Merck KG, which
to a large extent exercises the duties described in section 5.3.2 of
the Code. Due to the relatively limited authority of the supervisory
board of a KGaA in comparison with that of an AG, this therefore
satisfies the requirements of the German Corporate Governance
Code.
Contrary to section 5.4.1 para 2 sentence 1 of the German
Corporate Governance Code, an age limit is not taken into account
when proposing candidates for election to the Supervisory Board
pursuant to the published objectives of the Supervisory Board. The
age of Supervisory Board members is not a criterion for their qual-
ifications and competence. Moreover, we do not wish to forego the
many years of experience of Supervisory Board members.
Contrary to section 7.1.2 sentence 4 of the German Corporate
Governance Code, owing to the way in which the German legal
holidays fall in May 2015, in this isolated instance the interim
report can only be made publicly accessible slightly after the
allotted 45-day time limit from the end of the reporting period.
In view of future compliance with the current recommenda-
tions of the Government Commission of the German Corporate
Governance Code, the Executive Board and the Supervisory Board
declare the following: With the exception of the aforementioned
deviations from section 4.2.5 sentences 5 and 6 (disclosure of
compensation), section 5.3.2 (audit committee), section 5.4.1 para
2 sentence 1 (age limit), and section 7.1.2 sentence 4 (publication
deadline), the company will comply with the recommendations of
the Code in the version dated June 24, 2014."
Darmstadt, February 27, 2015
For the Executive Board
For the Supervisory Board
s. Karl-Ludwig Kley
s. Wolfgang Büchele
Merck KGaA
MERCK KGAA
For a clearer understanding, the following gives a general
explanation of the application of German company law at Merck
with additional references to the General Meeting and shareholder
rights.
Merck KGaA applies the Code analogously where these regula-
tions are compatible with the legal form of a KGaA. In order to
€ 565,211,241.95
EXECUTIVE BOARD OF MERCK KGAA
SHAREHOLDERS HOLD
THE SHARE CAPITAL
THE GENERAL PARTNER
E. MERCK KG HOLDS
THE EQUITY INTEREST
€ 168,014,927.60
GENERAL MEETING
SUPERVISORY BOARD
See "Merck KGaA" (page 145).
Monitoring
Monitoring
€ 397,196,314.35
BOARD OF PARTNERS OF
E. MERCK KG
CORPORATE GOVERNANCE → Statement on Corporate Governance
STATEMENT ON CORPORATE GOVERNANCE
145
The Statement on Corporate Governance contains the State-
ment of Compliance, relevant information on practices within
the company as well as a description of the procedures of the
corporate bodies.
JOINT REPORT OF THE EXECUTIVE BOARD
AND THE SUPERVISORY BOARD
ACCORDING TO SECTION 3.10 OF THE
GERMAN CORPORATE GOVERNANCE CODE
INCLUDING STATEMENT OF COMPLIANCE
The German Corporate Governance Code is geared toward the
conditions found in a German stock corporation ("Aktiengesell-
schaft" or "AG") and does not take into consideration the special
characteristics of a corporation with general partners (“Kommandit-
gesellschaft auf Aktien" or "KGaA") such as Merck KGaA. Given the
structural differences between an AG and a KGaA, several recom-
mendations of the German Corporate Governance Code are to be
applied to a KGaA only in a modified form. Major differences
between the two legal forms exist in terms of liability and manage-
ment. While, in the case of an AG, only the AG is liable as a legal
entity, the general partners of a KGaA also have unlimited personal
liability for the company's obligations (section 278 (1) of the
German Stock Corporation Act - "AktG"). At Merck KGaA, this
pertains to both E. Merck KG - which pursuant to Art. 8 (5) of the
Articles of Association is excluded from management and represen-
tation as well as to the managing general partners, who together
make up the Executive Board of Merck KGaA. The members of the
Executive Board of Merck KGaA are therefore subject to unlimited
personal liability. Unlike an AG, their executive authority is not
conferred by the Supervisory Board, but rather by their status as
general partners.
Consequently, in addition to other responsibilities typical of
the supervisory board of an AG (see description of the procedures
of the Supervisory Board on page 157 et seq.), the supervisory
board of a KGaA does not have the authority to appoint the man-
agement board, draw up management board contracts or specify
compensation of the management board. This legal form also
involves special features with regard to the General Meeting. For
example, in a KGaA, many of the resolutions made require the
consent of the general partners (section 285 (2) AktG), particularly
also the adoption of the annual financial statements (section 286
(1) AktG).
enable shareholders to compare the situation at other companies
more easily, to a broad extent we base corporate governance on
the conduct recommendations made by the Government Commis-
sion of the German Corporate Governance Code and forego having
our own, equally permissible, code. The recommendations of the
Code in both of the last two versions dated May 13, 2013 and
June 24, 2014, the intent and meaning of which are applied, were
complied with in the period between the last Statement of Compli-
ance issued on February 28, 2014 with three exceptions. In the
future, the recommendations of the Code will again be adhered to
with four exceptions. Further details can be found on page 146.
Sales
General partners with no equity interest
- Increase in EBITDA pre one-time items
Merck expects that continued increasing investments in research
and development activities in the pharmaceutical and biotech in-
dustries will also have a positive impact on the Process Solutions
business area in 2015. Process Solutions supplies consumables
and services for pharmaceutical and biotech companies. It is an-
ticipated that the Lab Solutions business area will benefit from the
expected slight growth of the global laboratory product market.
Development of the Bioscience business area is expected to remain
subdued. It is therefore likely that the Process Solutions and Lab
Solutions business areas will be the strongest drivers of growth in
the Life Science business sector in 2015.
Sales
137
- Significant reduction in inventories
cash flow
- Improvement in EBITDA pre one-time items
- Strong increase
419.0
Business free
one-time items
- In line with the development of sales
- Growth will be driven especially by the Process Solutions and Lab Solutions
business areas, as well as the Emerging Markets
Overall, Merck expects moderate organic sales growth in the
Life Science business sector in 2015 compared with the previous
year. From a geographic perspective, a sharp increase particularly
in Emerging Markets is anticipated in 2015.
- Moderate increase
- Moderate organic
growth
2,682.5
Sales
Key assumptions
Forecast for 2015
Actual figures for 2014
€ million
FORECAST 2015
LIFE SCIENCE
FORECAST FOR THE LIFE SCIENCE BUSINESS SECTOR
GROUP MANAGEMENT REPORT → Report on Expected Developments
- Considerable investments in future technologies
658.6
EBITDA pre one-time items
EBITDA pre
Business free cash flow
- Positive foreign exchange effects
In line with the forecast organic sales development and continuous
efficiency improvements, EBITDA pre one-time items is expected
to also increase moderately.
- Scheduled realization of synergies from the acquisition of AZ Electronic Materials
- Strong portfolio effect
- Strong portfolio effect due to the inclusion of AZ Electronic Materials for a full
fiscal year
- Continued good volume increase in liquid crystals, amid the customary price decline
for established products
-Low double-digit
percentage increase
Business free
cash flow
- Low double-digit
percentage increase
- Strong portfolio
effect
- Slight organic
increase
894.8
EBITDA pre
one-time items
699.6
Sales
Forecast taking into account the successful acquisition of
Sigma-Aldrich
2,059.6
In the event of the successful acquisition of Sigma-Aldrich and
first-time consolidation in mid-2015, Merck expects double-digit
growth rates in the Life Science business sector for sales, EBITDA
pre one-time items and business free cash flow in 2015 compared
with 2014.
138
GROUP MANAGEMENT REPORT Report on Expected Developments
PERFORMANCE MATERIALS
FORECAST FOR THE PERFORMANCE MATERIALS BUSINESS SECTOR
FORECAST 2015
€ million
Actual figures for 2014
Forecast for 2015
Key assumptions
Merck expects a strong increase in the business free cash flow of
the Life Science business sector. This increase will stem not only
from the improvement in EBITDA pre one-time items, but also a
significant reduction in inventories.
11,725.22
33,517.81
47,000.00 34,287.67
30,517.81
50,750.00 48,262.89
33,517.81
Gregor Schulz²
Karl-Heinz Scheider
3,750.00 2,250.00
3,000.00
3,000.00
30,517.81
Helga Rübsamen-Schaeff²
33,517.81
30,517.81
Theo Siegert
Alexander Putz²
3,000.00
Tobias Thelen²
2 Since May 9, 2014.
11,725.22
33,517.81
153
As a member of corporate bodies of E. Merck KG, Wolfgang Büchele received an additional payment of € 140,000 for performing this function in 2014 (2013: € 140,000).
As a member of corporate bodies of E. Merck KG, Johannes Baillou received an additional payment of € 9,590 for performing this function in 2014 (2013: € 140,000).
As a member of corporate bodies of E. Merck KG, Frank Binder received an additional payment of € 8,220 for performing this function in 2014 (2013: € 120,000).
As a member of corporate bodies of E. Merck KG, Michaela Freifrau von Glenck received an additional payment of € 80,000 for performing this function in 2014 (2013: € 80,000).
As a member of corporate bodies of E. Merck KG, Siegfried Karjetta received an additional payment of € 137,260 for performing this function in 2014 (2013: € 100,000).
As a member of corporate bodies of E. Merck KG, Rolf Krebs received an additional payment of € 10,274 for performing this function in 2014 (2013: € 150,000).
As a member of corporate bodies of E. Merck KG, Hans-Jürgen Leuchs received an additional payment of € 9,590 for performing this function in 2014 (2013: € 140,000).
As a member of corporate bodies of E. Merck KG, Albrecht Merck received an additional payment of € 120,000 for performing this function in 2014 (2013: € 120,000).
As a member of corporate bodies of E. Merck KG, Helga Rübsamen-Schaeff received an additional payment of € 139,727 for performing this function in 2014 (2013: € 0).
As a member of corporate bodies of E. Merck KG, Gregor Schulz received an additional payment of € 130,411 for performing this function in 2014 (2013: € 0).
As a member of corporate bodies of E. Merck KG, Theo Siegert received an additional payment of € 150,000 for performing this function in 2014 (2013: € 150,000).
As a member of corporate bodies of E. Merck KG, Tobias Thelen received an additional payment of € 135,890 for performing this function in 2014 (2013: € 80,000).
3 In 2013, variable compensation was replaced by compensation for meeting attendance.
1 Until May 9, 2014.
45,750.00 882,094.54 847,367.84
58,500.00
750.00 3,000.00 25,666.44 72,019.33
17,587.82
202,158.94
823,594.54 599,458.90
24,916.44 51,431.51
(Vice Chairman until May 9, 2014)
Total
Heiner Wilhelm¹
50,750.00 48,262.89
33,517.81
3,750.00 2,250.00
3,000.00
47,000.00 34,287.67
30,517.81
3,000.00
Jens Frank¹
Dietmar Oeter²
Jürgen Glaser¹
11,725.22
47,000.00 34,287.67
Edeltraud Glänzer
8,692.83
16,610.96 33,712.33
Ownership, purchase or sale of shares in the company by
members of the Executive Board and of the Supervisory
Board
3,750.00 3,000.00 66,008.90 49,012.89
3,000.00 3,000.00 50,000.00 49,012.89
3,750.00 3,000.00 50,750.00 49,012.89
750.00 3,000.00 17,360.96 49,012.89
750.00 3,000.00 17,360.96 49,012.89
3,000.00
33,517.81
11,725.22
16,610.96 34,287.67
30,517.81
11,725.22
34,287.67
16,610.96
11,725.22
47,000.00 34,287.67
Michaela Freifrau von Glenck
16,610.96
47,000.00 34,287.67
34,287.67
11,725.22
33,971.92 95,025.78
49,012.89
50,750.00 49,012.89
750.00 3,000.00
750.00 3,000.00 17,360.96
3,750.00 3,000.00
11,725.22
34,287.67
47,000.00
Albrecht Merck
11,725.22
30,517.81
16,610.96 34,287.67
23,450.43
33,221.92 68,575.35
Rolf Krebs' (Chairman until May 9, 2014)
750.00 2,250.00 17,360.96 44,655.16
3,000.00 3,000.00 50,000.00 49,012.89
750.00 3,000.00 17,360.96 49,012.89
3,750.00 3,000.00 50,750.00 49,012.89
3,000.00
33,517.81
30,517.81
Siegfried Karjetta²
11,725.22
Hans-Jürgen Leuchs'
As of December 31, 2014, the members of the Executive Board and
of the Supervisory Board either directly or indirectly held 25,997
shares of Merck KGaA. Their total ownership represents less than
1% of the issued shares of Merck KGaA. Transactions executed
by members of the Executive Board and of the Supervisory Board
are disclosed on the Merck website at www.merckgroup.com/
investors → Corporate Governance → Directors' Dealings.
Before an Executive Board member takes on honorary offices,
board positions or other sideline activities, this must be approved
by the Personnel Committee of the Board of Partners of
E. Merck KG. The Chairman of the Executive Board, Karl-Ludwig
Kley, and the Chief Financial Officer, Marcus Kuhnert¹, are both
members of the Executive Board of E. Merck KG. This does not,
however, lead to conflicts of interest.
Reporting
responsible for the Merck Serono and Consumer Health divisions as well as
for the Allergopharma and Biosimilars business units (until Dec. 31, 2014)
Kai Beckmann
Darmstadt, Head of Group Human Resources
Belén Garijo Lopez
Frankfurt am Main, responsible for the Healthcare business sector
(since Jan. 1, 2015)
Marcus Kuhnert¹
Haan, Chief Financial Officer (since August 1, 2014)
Bernd Reckmann
Seeheim-Jugenheim, responsible for the Performance Materials
and Life Science business sectors
Matthias Zachert
Bonn, Chief Financial Officer (until March 31, 2014)
no board positions
no board positions
(b) - Banco Bilbao Vizcaya Argentaria S.A., Bilbao, Spain
- L'Oréal S.A., Clichy, France
no board positions
Munich, Vice Chairman (since Jan. 1, 2015),
no board positions
Stefan Oschmann
- BMW AG, Munich (Vice Chairman)
Gabriele Eismann²
Many guidelines specify how the sites and employees of the
Merck Group are to observe the principles in their daily work. The
Group function Environment, Health, Safety, Security & Quality
steers these global activities and ensures compliance with regula-
tory requirements, standards and business needs throughout the
entire Group. In this way, Group-wide risks are minimized and
continuous improvement is promoted in the areas of Environ-
ment, Health, Safety, Security and Quality. Corporate Responsibility
reports are also published at regular intervals.
'Mr. Kuhnert has been a member of the Executive Board of E. Merck KG since August 1, 2014. Mr. Zachert left the Executive Board of E. Merck KG on March 31, 2014.
156
PROCEDURES OF THE EXECUTIVE BOARD,
SUPERVISORY BOARD, BOARD OF
PARTNERS AND ITS COMMITTEES
Members of the Executive Board of Merck KGaA
Notes on memberships of statutory supervisory boards and
comparable German and foreign supervisory bodies (section 285
No. 10 HGB in conjunction with section 125 (1) sentence 5 AktG).
Member
Karl-Ludwig Kley
Darmstadt, Chairman
CORPORATE GOVERNANCE → Statement on Corporate Governance
Memberships of
(a) statutory supervisory boards and
(b) comparable German and foreign supervisory bodies of corporations
(a) Bertelsmann SE & Co. KGaA, Gütersloh
- Bertelsmann Management SE, Gütersloh
- Deutsche Lufthansa AG, Cologne
no board positions
'Mr. Kuhnert has been a member of the Executive Board of E. Merck KG since August 1, 2014. Mr. Zachert left the Executive Board of E. Merck KG on March 31, 2014.
The general partners with no equity interest (Executive Board)
manage the business activities in accordance with the laws, the
Articles of Association and the rules of procedure. They are ap-
pointed by E. Merck KG in accordance with the consent of a simple
majority of the other general partners. The members of the Execu-
tive Board are jointly responsible for the entire management of the
company. Certain tasks are assigned to individual Executive Board
members based on a responsibility distribution plan. Each Execu-
tive Board member promptly informs the other members of any
important actions or operations in his respective business area. The
Executive Board is responsible for preparing the annual financial
statements of Merck KGaA and of the Group as well as for approv-
ing the quarterly and half-year financial statements of the Merck
Group. In addition, the Executive Board ensures that all legal
provisions, official regulations and the company's internal policies
are abided by, and works to achieve compliance with them by all the
Merck has created the Code of Conduct as a set of rules and
regulations intended to help our employees to act responsibly and
to make the right decisions in their daily work.
Based on a corporate culture that places the fundamental company
values - courage, achievement, responsibility, respect, integrity
and transparency - at the center of our entrepreneurial actions,
the Code of Conduct helps those involved in the business process
to implement the values when dealing with one another on a daily
basis.
Values and compliance
CORPORATE GOVERNANCE → Statement on Corporate Governance
154
The Supervisory Board commissioned KPMG AG Wirtschafts-
prüfungsgesellschaft, Berlin, to audit the Group financial state-
ments and the Group management report for 2014. The auditor
responsible for auditing the consolidated financial statements
changes regularly in accordance with the statutory requirements.
Manfred Jenal is currently leading the audit engagement and has
been the auditor-in-charge of the engagement since fiscal 2008.
Neither party identified any conflicts of interest. Moreover, the
Supervisory Board agreed with KPMG AG that the auditor shall
inform the Supervisory Board without delay of any grounds for
bias or disqualification occurring during the audit if these cannot
be immediately rectified. Additionally, the auditor must imme-
diately report to the Supervisory Board any findings and issues
which emerge during the audit that have a direct bearing upon the
tasks of the Supervisory Board. The auditor shall inform the
Supervisory Board or note in the audit report any circumstances
determined during the audit that would render inaccurate the
Statement of Compliance made by the Executive Board and the
Supervisory Board. It has also been agreed with the auditor that in
order to assess whether the Executive Board has fulfilled its obli-
gations in accordance with section 91 (2) AktG, the audit will also
cover the company's early warning risk identification system.
Moreover, the auditor is required to examine and evaluate the
accounting-relevant internal control system insofar as this is
necessary and appropriate for assessing the accuracy of financial
reporting.
Accounting and audits of financial statements
Merck KGaA prepares its consolidated financial statements and
Group management report in accordance with International
Financial Reporting Standards (IFRS), as applicable in the EU, as
well as the supplementary rules applicable under section 315a (1)
of the German Commercial Code (HGB) and as stipulated by our
Articles of Association. The Group financial statements and the
Group management report are prepared by the Executive Board
and examined by an auditor, taking into account the generally
accepted standards for the audit of financial statements promul-
gated by the Institut der Wirtschaftsprüfer (IDW).
In order to ensure a high level of protection for insider infor-
mation, in 2011 the Executive Board issued an internal insider
guideline applicable throughout the Merck Group worldwide. This
guideline informs employees about their responsibilities under
insider trading laws and gives clear instructions for compliant
behavior. In addition, it describes the function of the insider com-
mittee in detail. Moreover, our Code of Conduct, which is binding
on all employees, also contains an explicit, detailed reference to
the ban on using insider information. Within the scope of obliga-
tory training courses on the Code of Conduct, all employees are
instructed on the subject of insider trading.
Financial Officer is vested with the authority to make the final
decision on handling potential insider information.
Dealing properly with insider information is very important to us.
Our insider committee examines the existence of insider informa-
tion, ensures compliance with legal obligations and prepares any
necessary measures. The members of the insider committee are
appointed by the Executive Board; at least two members work in
Group Legal & Compliance. The insider committee meets at regular
intervals, yet also meets when circumstances require. The Chief
Dealing with insider information
To ensure the greatest possible transparency, all documents
concerning the General Meeting are available on the company
website. Additionally, some parts of the General Meeting are
webcast live on the Internet.
Regular press conferences, investor meetings on the occasion
of investor conferences as well as road shows offer another plat-
form for dialogue. The company presentations prepared for this
purpose are also available on the Merck KGaA website. In addition,
the Investor Relations team is always available to private and
institutional investors who wish to receive further information.
Information subject to disclosure requirements, as well as infor-
mation that is not, can be accessed worldwide on the Merck KGaA
website (www.merckgroup.com), which is the company's most
important publication platform. Apart from a detailed financial
calendar, quarterly and half-year financial reports covering the past
three years are available here in German and English. In addition,
in line with the legal requirements, ad hoc announcements are
published on the website. These contain information on circum-
stances that could impact the Merck share price.
It is Merck KGaA's objective to provide the latest information to
all shareholders, media, financial analysts and interested members
of the public, while creating the greatest possible transparency.
For this reason, Merck uses a wide range of communication plat-
forms to engage in a timely dialogue with all interested parties
about the situation of the company and business changes. Merck's
principles include providing factually correct, comprehensive and
fair information.
The Code of Conduct explains the principles for dealings with
business associates, general partners, colleagues and employees,
as well as the communities in which we operate. Thus, it supports
all employees in acting ethically - not only in their dealings with
one another, but also outside the company. The Code of Conduct
is thus the main set of rules of our compliance program.
To Merck, compliance means observing legal and company-
internal regulations and the basic ethical principles anchored in
the company values. With the Code of Conduct and the various
unit-specific ethical compliance rules, the values are integrated
into daily work and business practice. The Code of Conduct
is binding on all employees, both at headquarters and in the
subsidiaries. The Compliance Office monitors observance of the
Code of Conduct with support from corresponding auditing and
training programs throughout the Group. All employees are called
upon to report compliance violations to their supervisor, Legal,
HR or other relevant departments. Merck created the position of
Group Compliance Officer (GCO) in 2002. This employee is
responsible for setting up, maintaining and further developing our
global compliance program. By taking appropriate measures, the
GCO and his team, including regional and divisional compliance
officers, help to lower the risk of serious legal violations of, for
instance, antitrust law or anticorruption rules. A further focal area
of the Compliance program is ensuring legally and ethically
correct dealings with medical professionals and adhering to the
transparency requirements. Since October 2013, the Group Com-
pliance Officer has agreed extensive measures with the affected
areas of the company in order to establish an internal framework
of rules as well as the corresponding approval and documentation
processes that ensure truthful publication. The role of the Group
Compliance Officer is reflected in the subsidiaries, which ensure
that compliance measures are implemented in the countries. By
reorganizing the Compliance function, as of 2013 Compliance
tasks in the regions are largely performed by full-time Compliance
Officers. As a result, a higher level of compliance expertise is
based locally and the increasing tasks, above all in the pharma-
ceutical sector, are taken into account. At the same time, the
management structure was streamlined and the reporting lines for
the countries were consolidated regionally. Regular regional and
global compliance meetings are held to promote the exchange
of information within the compliance organization. Newcomer
training seminars were introduced in 2010 for newly appointed
compliance officers. These seminars serve to build up compliance
expertise and strengthen cooperation within the compliance
organization. This Group-wide network is used to steer the global
compliance program.
Within the scope of this program, a high degree of importance
is attached to regular compliance seminars of the Merck Compli-
ance Training Plan, which are conducted as Web-based training
courses and on-site events. By presenting various training topics,
particularly on the Code of Conduct, corruption, antitrust and
competition law as well as health care compliance, they serve to
sensitize employees and management to the consequences of
compliance violations and to show ways of avoiding them. Since
Merck set up a central SpeakUp line, employees have been able to
report compliance violations by telephone or via a Web-based
application in their respective national language. The SpeakUp
line is available 24 hours a day, free of charge. Case numbers
enable anonymous, two-way communication. The reports received
are individually reviewed. If a compliance violation exists, corre-
sponding corrective action is taken based on concrete action
plans. If necessary, disciplinary measures are taken. These can
range from a simple warning up to the dismissal of the employee
who violated a compliance rule. In 2010, Merck set up a compliance
committee to guide these processes. The Compliance Committee
consists of members from various Group functions; they are
involved in reviewing compliance violations and introducing
countermeasures. The joint work in the Compliance Committee
enables processes between the various Group functions to be
optimized. Further significant elements of the Compliance program
include requirements on locally identifying and assessing risks
and reporting these, both within the subsidiary abroad and to the
Group functions. Group Compliance regularly reviews and assess-
es the implementation status of the Compliance program at the
subsidiaries abroad. In cooperation with Group Internal Auditing,
the Compliance Office regularly reviews the implementation of
Group-wide compliance measures at the subsidiaries abroad. The
audits regularly focus on the local compliance structure, the com-
pliance measures taken, as well as the existence of corresponding
compliance guidelines and processes.
companies of the Merck Group. A Group-wide guideline defines in
detail which transactions require prior Executive Board approval.
The Executive Board provides the Supervisory Board with
regular, up-to-date and comprehensive reports about all company-
relevant issues concerning strategy, planning, business develop-
ments, the risk situation, risk management and compliance. The
rules of procedure of the Executive Board and of the Supervisory
Board as well as a Supervisory Board resolution regulate further
details on the information and reporting duties of the Executive
Board vis-à-vis the Supervisory Board.
The Executive Board informs the Board of Partners and the
Supervisory Board at least quarterly of the progress of business
and the situation of the company. In addition, the Executive Board
informs the aforementioned boards at least annually of the com-
pany's annual plans and strategic considerations.
One of our major climate protection objectives is to achieve a
20% reduction in our greenhouse gas emissions by 2020 measured
against the 2006 baseline.
formulated by the national and international associations of the
chemical industry in the Responsible Care guidelines. The Respon-
sible Care Global Charter developed by the International Council
of Chemical Associations (ICCA) in 2006 puts even more emphasis
than before on overall responsibility for products, supply chains
and the community. Merck signed this expanded version of
Responsible Care for the entire Group in February 2007. In addition,
Merck was one of the first companies in 2014 to sign the new
version of the Responsible Care Global Charter, which is currently
being rolled out internationally. We report our ecological, eco-
nomic and social performance transparently in accordance with
the internationally recognized principles of the Global Reporting
Initiative (GRI), taking into account the requirements of the
German Sustainability Code and the principles of the UN Global
Compact.
At Merck, closed-loop thinking guides the way in which we
address environmental concerns and environmental protection
issues. To this end, we integrate precautionary measures into our
planning processes. Our Environment, Health and Safety Policy
with its principles and strategies implements the guidelines
Adherence to environmental and safety standards
INFORMATION ON CORPORATE
GOVERNANCE PRACTICES
In its report to the General Meeting, the Supervisory Board
discloses any conflicts of interest involving its members and how
they were dealt with. Consultancy agreements as well other service
and work contracts of a Supervisory Board member with Merck
require the approval of the Supervisory Board. In fiscal 2014, there
were neither conflicts of interest nor consultancy agreements or
other service or work contracts with Merck KGaA involving
Supervisory Board members.
Avoidance of conflicts of interest
155
CORPORATE GOVERNANCE → Statement on Corporate Governance
The Executive Board, the Supervisory Board and the Finance
Committee are regularly informed about the current risk portfolio
of the Group and the individual companies. More detailed infor-
mation can be found in the Report on Risks and Opportunities on
page 122.
Risk and opportunity management
The Executive Board informs the supervisory bodies at least
once a year about the key compliance issues.
The Compliance department reports regularly to the Executive
Board, informing it of the status of compliance activities (including
training status), compliance risks and serious compliance viola-
tions.
Within the framework of their work, all Executive Board and Super-
visory Board members of Merck KGaA are exclusively committed
to the interests of the company and neither pursue personal inter-
ests nor grant unjustified advantages to third parties.
Frank Binder¹
CORPORATE GOVERNANCE → Statement on Corporate Governance
Mechthild Auge
1,849
7,311
2,185
2014
1,200
21
4,799
8,141
765
6,785
2,797
Stefan Oschmann
2013
1,000
19
14,984
4,334
52
1,100
(€ thousand)
Number of
MSUs³ (units)
Johannes Baillou¹
(€ thousand)
(€ thousand)
Current members
2014
3,534
1,300
5,265
12,211
1,147
7,765
4,196
Karl-Ludwig Kley
2013
53
(€ thousand)
9,990
5,786
333
7
882
3,392
462
1,684
107
(since August 1, 2014)
2013
2014
1,200
28
3,549
8,141
765
2014
Marcus Kuhnert
1,457
4,951
1,457
2014
1,000
41
3,049
8,141
765
1,233
4,855
Kai Beckmann
2013
800
40
2,895
9,990
1,233
2,797
5,542
(€ thousand)
Variable
compensation²
b) the development of the EBITDA pre margin during the per-
formance cycle as a proportion of a defined target value with
a weighting of 30%.
148
CORPORATE GOVERNANCE → Statement on Corporate Governance
Depending on the development of the KPIs, at the end of the
respective performance cycle, the members of the Executive Board
are granted between 0% and 150% of the MSUS they could be
eligible to receive.
Based on the number of MSUs granted, the members of the
Executive Board receive a cash payment at a defined point in time
in the year following the expiration of the three-year performance
cycle. The value of an MSU corresponds to the average closing
price of Merck shares in Xetra® trading during the last 60 trading
days prior to January 1 after the performance cycle. The payment
amount is limited to three times the reference price. The members
of the Executive Board invest 50% of the payment amount in
Merck shares. One-third of these shares may be sold at the earliest
one year after termination of the performance cycle, another third
after two years, and another third after three years.
In fiscal 2014, the following total values were specified for
members of the Executive Board, which resulted in the respective
number of MSUs they were eligible to receive based upon the de-
finitive reference price of Merck shares (60 trading days preceding
January 1, 2014) of € 122.84: Karl-Ludwig Kley € 1.5 million
(12,211 MSUS), Stefan Oschmann € 1.0 million (8,141 MSUS),
Kai Beckmann € 1.0 million (8,141 MSUs), Marcus Kuhnert
€ 0.4 million (3,392 MSUs), and Bernd Reckmann € 1.0 million
(8,141 MSUs). For fiscal 2015, the Personnel Committee authorized
the Chairman of the Personnel Committee to assign potential
numbers of MSUS to the Executive Board members for a per-
formance cycle from January 1, 2015 to December 31, 2017. The
following total values were defined as the initial basis: Karl-Ludwig
Kley € 1.5 million, Stefan Oschmann € 1.0 million, Kai Beckmann
€ 1.0 million, Belén Garijo Lopez € 1.0 million, Marcus Kuhnert
€ 1.0 million, and Bernd Reckmann € 1.0 million.
The following maximum compensation amounts for variable
compensation components, which were applicable for the first
time in 2014, have been agreed.
Karl-Ludwig Kley
Stefan Oschmann
Kai Beckmann
Marcus Kuhnert
Bernd Reckmann
Additional benefits
The members of the Executive Board also receive certain additional
benefits, mainly contributions to insurance policies, personal
security expenses, as well as a company car, which they are entitled
to use privately. In 2014, personal security expenses were included
for the first time. The amounts for the previous year have been
adjusted accordingly. Overall, the value of other additional bene-
fits totaled € 156 thousand in 2014 (2013: € 161 thousand). Of this
amount, in 2014 € 53 thousand was attributable to Karl-Ludwig
Kley (2013: € 52 thousand); € 21 thousand to Stefan Oschmann
(2013: € 19 thousand); € 41 thousand to Kai Beckmann (2013:
€ 40 thousand); € 7 thousand to Marcus Kuhnert; € 28 thousand
to Bernd Reckmann (2013: € 26 thousand); and € 6 thousand to
Matthias Zachert (2013: € 24 thousand).
One-time payment
a) the performance of the Merck share price compared to the
DAX® with a weighting of 70%, and
Subject to the resolution of the Personnel Committee each
year, under the Merck Long-Term Incentive Plan the members of
the Executive Board could be eligible to receive a certain number
of virtual shares Merck Share Units (MSUS) at the end of
a three-year performance cycle. The number of MSUs that could
be received depends on the total value defined for the respective
person and the average closing price of Merck shares in Xetra®
trading during the last 60 trading days prior to January 1 of the
respective fiscal year (reference price). In order to participate in
the Plan, members of the Executive Board must personally own an
investment in Merck shares equivalent to 10% of their respective
fixed annual compensation, taking into account the equity interest
held in E. Merck KG as a personally liable general partner. It is not
permitted to sell these shares during the performance cycle. After
termination of the three-year performance cycle, the number of
MSUS to be granted then is determined based on the development
of two key performance indicators (KPIs). These are:
-
-
CORPORATE GOVERNANCE → Statement on Corporate Governance
147
COMPENSATION REPORT
(The Compensation Report is part of the audited Notes to the
Group accounts).
Compensation of members of the Executive Board of
Merck KGaA
Contrary to management board members of German stock corpo-
rations, the members of the Executive Board of Merck KGaA are
not employed officers of the company. Rather, they are personally
liable general partners of both Merck KGaA and the general partner
E. Merck KG, and in this capacity they receive profit-based
compensation from E. Merck KG. Given this context, the stipu-
lations of the German Corporate Governance Code concerning
the compensation of management board members of publicly
listed German stock corporations as well as the individual disclo-
sure thereof do not apply to the Executive Board members of
Merck KGaA. Nevertheless, Merck KGaA has decided to disclose
the individual compensation of each Executive Board member in
the following report.
Contrary to publicly listed German stock corporations, at
Merck KGaA it is not the Supervisory Board, but the Board of
Partners of E. Merck KG that decides on the amount and composi-
tion of compensation. E. Merck KG has transferred the execution
of this right to its Personnel Committee. Among other things, the
Personnel Committee is responsible for the following decisions:
contents of contracts with Executive Board members, granting of
loans and advance salary payments, approval for taking on hon-
orary offices, board positions and other sideline activities, as well
as the division of responsibilities within the Executive Board of
Merck KGaA. The compensation system defined by the Personnel
Committee for Executive Board members takes into account various
aspects relevant to compensation, including the responsibilities
and duties of the individual Executive Board members and their
status as personally liable partners, their individual performance,
the economic situation, performance and prospects of the company,
normal compensation levels (by way of peer comparison) and the
rewards structure otherwise in place in the company. The relation-
ship between Executive Board compensation and the compen-
sation of top management and the workforce as a whole is also
taken into account, also in a multi-year assessment. The Personnel
Committee regularly commissions an independent compensation
consultant to review the appropriateness of compensation.
(€ thousand)
Features of the compensation system
Fixed compensation
Fixed compensation is paid in the form of 12 equivalent monthly
installments. The table on page 149 provides an overview of the
amount of the fixed compensation paid in 2013 and 2014.
Variable compensation
Variable compensation is based on the three-year rolling average
of profit after tax of the E. Merck Group. The Personnel Committee
of E. Merck decides at its own and equitable discretion on consid-
eration of exceptional factors of certain importance. From the net
income determined in this manner, the members of the Executive
Board receive individually fixed per mille rates based on the net
income of the E. Merck Group.
Additionally, in exceptional cases the Personnel Committee of
E. Merck KG, which is responsible for the compensation of the
Executive Board, may grant one-time payments voluntarily and at
its own discretion.
Additional variable compensation (Merck Long-Term
Incentive Plan)
In 2012, a long-term variable compensation component known as
the Merck Long-Term Incentive Plan was added to the variable
compensation of the members of the Executive Board. It aims to
enhance the sustainability of the compensation system and to
align it not only with target achievement based on key perfor-
mance indicators, but above all with a sustainable performance of
Merck shares.
The compensation paid to the Executive Board members of
Merck KGaA in fiscal 2014 comprises fixed components, variable
compensation components and additions to pension provisions.
Benefits in kind and other benefits are additionally granted.
Merck Long-Term Incentive Plan
Variable
compensation
(€ thousand)
Total variable
compensation
components
4.5
8,000
CORPORATE GOVERNANCE → Statement on Corporate Governance
Total compensation
Accordingly, the following total compensation results for the
members of the Executive Board of Merck KGaA broken down by
performance-independent and performance-related components:
Performance-independent
components
Performance-related
components
Total
149
Expense recorded
in the period for
share-based
compensation5
Without a
long-term
incentive effect
With a long-term incentive effect
Fixed
compensation
Additional
benefits¹
6,000
1,500
8,000
4.5
total amount)
(€ thousand)
2,000
8,000
4.5
9,800
1,500
Merck Long-Term
Incentive Plan
(times the respective
6,000
8,000
1,500
6,000
4.5
8,000
1,500
6,000
4.5
2,797
Fair value
(€ thousand)
2013
5,460
144
224
342
2,465
10,586
0
32,533
CORPORATE GOVERNANCE → Statement on Corporate Governance
151
The surviving dependents' pension grants the spouse a lifelong
surviving dependents' pension amounting to 60% of the pension
entitlement, and dependent children either a half-orphan's or an
orphan's pension maximally until the age of 25.
Benefits in the event of termination of duties as an
Executive Board member
The employment contracts of Karl-Ludwig Kley, Stefan Oschmann,
Kai Beckmann and Bernd Reckmann each contain a post-contractual
non-competition clause. An amount equal to 50% of the average
contractual benefits paid to the respective Executive Board member
within the past 12 months prior to leaving the company shall be
provided as compensation for each year of the two-year non-
competition period. During the period of the non-competition
clause, other employment income and pension payments will be
credited toward this compensation. Within certain time limits,
E. Merck KG has the possibility to dispense with adherence to the
non-competition clause with the consequence that the obligation
to make the compensation payments shall cease to apply.
The contracts of the Executive Board members continue to
provide for the continued payment of fixed compensation to sur-
viving dependents for a limited period of time in the event of
death. Above and beyond this and existing pension obligations,
no further obligations exist in the event of the termination of the
contractual relationships of the Executive Board members.
Miscellaneous
115
2,963
605
2,143
'Due to Matthias Zachert's departure, he will no longer have any entitlement to pension payments.
Service cost
2014
1,127
549
2013
1,179
The members of the Executive Board do not receive additional
compensation for serving on the boards of Group companies.
Amount of pension
Dec. 31, 2014
13,380
771
108
144
215
0
provisions as of
Total
Should members of the Executive Board be held liable for
financial losses while executing their duties, under certain cir-
cumstances this liability risk is covered by a D&O insurance policy
from Merck KGaA. The D&O insurance policy has a deductible in
accordance with the legal requirements and recommendations of
the German Corporate Governance Code.
Pension payments to former members of the Executive Board
or their surviving dependents amounted to € 11,220 thousand
in 2014 (2013: € 7,494 thousand). Pension provisions totaling
€ 120,674 thousand exist for the pension entitlements of this
group of persons (2013: € 103,615 thousand).
Total compensation
2014
2013
(Chairman since May 9, 2014)
77,517.81 34,287.67
11,725.22
3,750.00
3,000.00 81,267.81 49,012.89
Michael Fletterich
(Vice Chairman since May 9, 2014)
62,258.90 34,287.67
11,725.22
Bernd Reckmann
47,000.00 34,287.67
11,725.22
27, 2013
As of April
2013
2014
Compensation of the Supervisory Board members of
Merck KGaA
The compensation of the Supervisory Board members is defined
by Article 20 of the Articles of Association of Merck KGaA. The
members of the Supervisory Board receive fixed compensation of
€ 47,000 per year. The Chairman receives double this amount and
the Vice Chairman receives one and a half times this amount. In
addition, the members receive additional compensation of € 750
per meeting.
152
The individual values are presented in the following table:
in €
Wolfgang Büchele
Payments to former Executive Board members and their
surviving dependents
Fixed compensation
CORPORATE GOVERNANCE → Statement on Corporate Governance
Variable compensation³
2013
2014
2013
Until April
26, 2013
Compensation
for meeting attendance
2014
Matthias Zachert¹
Crocifissa Attardo
Marcus Kuhnert
1,2336
5,541
1,457
2014
5,283
156
18,306
40,026
3,904
27,649
12,694
Total
2013
4,900
161
9,990
3,284
24
1,000
Bernd Reckmann
1,000
3,534
9,990
1,233
5,793
1,457
17,581
Matthias Zachert
250
6
762
1,018
0
(until March 31, 2014)
2013
2014
54,944
26
29,382
70
650
55
400
47
6,780
40
650
62
The percentage entitlement increases up until retirement by two percentage points per year of service up to 70% for Kai Beckmann and Bernd Reckmann as of 2016. Their pension entitlement
was thus increased in 2014.
For Marcus Kuhnert, as of 2016 the percentage entitlement will increase up until retirement by 2 percentage points per year of service up to 70%.
The pension provisions and the service cost are presented in the
following table.
€ thousand
Kai Beckmann
Karl-Ludwig Kley
Stefan Oschmann
900
Percentage
entitlement
300
Pensionable
compensation
8,012
(€ thousand)
3 Number of the potential MSUS subject to target achievement. For details see page 148. The actual number of MSUS to be granted after the expiration of the three-year performance
cycle may deviate from this. The share split that took effect on June 30, 2014 does not affect the number of MSUS granted. The 1:2 stock split was compensated for by a doubling in
the accounting value of an MSU.
4Fair value on the date of the grant (date of the legally binding entitlement). The amount of a potential payment is thus not predefined. Payment is subject to target achievement and is
only made on a specified date after the expiration of a three-year performance cycle. The fair value was calculated using a Monte Carlo simulation based on the previously described
KPIs. The expected volatilities are based on the implicit volatility of Merck shares and the DAX® index in accordance with the remaining term of the Long-Term Incentive Plan tranche.
The dividend payments incorporated into the valuation model orient towards medium-term dividend expectations.
"In accordance with IFRS the expense recorded for 2013 includes the values for the 2012 and 2013 Long-Term Incentive Plan tranches. In accordance with IFRS, the expense recorded in
2014 includes the values for the Long-Term Incentive Plan tranches 2012, 2013 and 2014.
6The Personnel Committee of E. Merck KG decided on February 6, 2014 that Matthias Zachert will only receive payments under the LTIP for the 2012 tranche. The MSUS granted in 2013
(9,900 units) will not lead to a payment.
150
CORPORATE GOVERNANCE → Statement on Corporate Governance
1Personal security expenses were included for the first time in 2014. The amounts for the previous year have been adjusted accordingly.
2The one-time payments for 2013 granted to Karl-Ludwig Kley, Stefan Oschmann, Kai Beckmann, Bernd Reckmann and Matthias Zachert as well as the one-time payment for 2014
granted to Karl-Ludwig Kley and Stefan Oschmann are included in the variable compensation components for 2013 and/or 2014.
The individual contractual pension obligations grant the members
of the Executive Board entitlement to a lifelong old-age pension
or surviving dependents' pension in the event of reaching the
individual contractually agreed age limit, permanent disability or
death. As an alternative to an old-age pension, upon reaching the
age limit specified in their individual contracts, the members of
the Executive Board have been offered the possibility to receive
their pension entitlement in the form of a one-time lump-sum
payment calculated in accordance with actuarial principles.
The amount of the old-age pension is determined by a percentage
share of pensionable compensation defined by the Personnel
Committee.
The individual values are presented in the following table:
Karl-Ludwig Kley
Stefan Oschmann
Kai Beckmann
Marcus Kuhnert
Bernd Reckmann
Pension provisions
- Biotest Pharmaceuticals Corporation, Boca Raton, FL, USA
(b) - Biotest US Corporation, Boca Raton, FL, USA (until December 31, 2014)
(a) Merck KGaA, Darmstadt (since May 9, 2014)
(a) - Merck KGaA, Darmstadt (since May 9, 2014)
-4SC AG, Martinsried (since January 2, 2015)
(a) - Merck KGaA, Darmstadt
(a) - Merck KGaA, Darmstadt (since May 9, 2014)
(b) - Kemira Oyi, Helsinki, Finland
(a) - Fortas AG, Rösrath (Chairman)
- Travel Asset Group Ltd., London, United Kingdom (Chairman)
(b) Oras Invest Ltd, Helsinki, Finland
(a) - Merck KGaA, Darmstadt (until May 9, 2014)
de Haen Carstanjen & Söhne, Düsseldorf
Düsseldorf, Managing Partner of
Theo Siegert
(a) - Merck KGaA, Darmstadt
(until December 31, 2014)
161
- Biotest Seralc NV, Evere, Belgium (until December 31, 2014)
The Personnel Committee is responsible for, among other things,
the following decisions concerning members and former members
of the Executive Board: contents of and entry into employment
contracts and pension contracts, granting of loans and advance
payments, changes to the compensation structure and adaptation
of compensation, approval for taking on honorary offices, board
positions and other sideline activities, as well as division of: respon-
sibilities within the Executive Board of Merck KGaA. The Personnel
Committee passes its resolutions by a simple majority - in matters
concerning the Chairman of the Executive Board unanimity is
required. The Chairman of the Committee regularly informs the
Board of Partners of its activities.
CORPORATE GOVERNANCE → Statement on Corporate Governance
The Personnel Committee meets at least twice a year. Further
meetings are convened as and when necessary. Meetings of the
Personnel Committee are attended by the Chairman of the Executive
Board of Merck KGaA unless the Committee decides otherwise.
The Personnel Committee has four members. Up until January 26,
2014 these were: Frank Stangenberg-Haverkamp (Chairman), Jon
Baumhauer, Rolf Krebs and Theo Siegert. Since January 26, 2014,
the Personnel Committee comprises Frank Stangenberg-Haverkamp
(Chairman), Johannes Baillou, Wolfgang Büchele and Theo Siegert.
Personnel Committee
The Board of Partners may confer the responsibility for individual
duties to committees. Currently the Board of Partners has three
committees in place: the Personnel Committee, the Finance Com-
mittee, and the Research and Development Committee.
The Board of Partners supervises the Executive Board in its manage-
ment of the company. It informs itself about the business matters
of Merck KGaA, and may inspect and examine the company's
accounts and other business documents, and the assets for this
purpose. According to Article 13 (4) of the Articles of Association
of Merck KGaA, the Executive Board requires the approval of
E. Merck KG for transactions that are beyond the scope of the
Group's ordinary business activities. For such transactions to be
approved, approval must first be obtained from the Board of
Partners of E. Merck KG. The Board of Partners convenes as and
when necessary; however, it meets at least four times a year. The
members of the Executive Board of Merck KGaA are invited to all
meetings of the Board of Partners, unless the Board of Partners
resolves otherwise in individual cases. The members of the Board of
Partners may convene a joint meeting with the Supervisory Board
of Merck KGaA if so agreed by the chairmen of the two boards.
(a) - Merck KGaA, Darmstadt (since May 9, 2014)
Altmann Analytik GmbH & Co. KG, Munich
Munich, Managing Partner of
Tobias Thelen
(b) DKSH Holding Ltd., Zurich, Switzerland
- Henkel AG & Co KGaA, Düsseldorf
- E.ON SE, Düsseldorf
(a) Merck KGaA, Darmstadt
- Biotest (UK) Ltd., Solihull, United Kingdom (until December 31, 2014)
Umkirch, Pediatrician
Memberships of
Helga Rübsamen-Schaeff
(b) DKSH Holding Ltd., Zurich, Switzerland
- Henkel AG & Co KGaA, Düsseldorf
- E.ON SE, Düsseldorf
(a) - Merck KGaA, Darmstadt
(a) Merck KGaA, Darmstadt
- Zeton International Inc., Burlington, ONT, Canada
(b) Zeton B.V., Enschede, Netherlands
(a) Merck KGaA, Darmstadt
- Merz Pharmaceuticals GmbH, Frankfurt/Main
- Merz GmbH & Co. KGaA, Frankfurt/Main
Ganymed Pharmaceuticals AG, Mainz (Chairman)
Düsseldorf, Managing Partner of de Haen Carstanjen & Söhne, Düsseldorf
Schriesheim, Commercial Director of the Castel Peter Winery, Bad Dürkheim
Theo Siegert
Finance Committee
Albrecht Merck
160
Langenburg, Managing Director of AiCuris GmbH & Co. KG, Wuppertal
Gregor Schulz
On January 26, 2014 a new election of the Board of Partners was
held. The Board of Partners now consists of the following members:
CORPORATE GOVERNANCE → Statement on Corporate Governance
Bad Dürkheim
Schriesheim, Commercial Director of the Castel Peter Winery,
Albrecht Merck
Darmstadt, Physician
Siegfried Karjetta
Römerberg, Chairman of the Executive Board of Linde AG, Munich
Wolfgang Büchele
and General Partner of E. Merck KG
Darmstadt, Chairman of the Executive Board
Frank Stangenberg-Haverkamp
and General Partner of E. Merck KG, Chairman
Vienna, Austria, Vice Chairman of the Executive Board
Johannes Baillou
(b) comparable German and foreign supervisory bodies of corporations
(a) other statutory supervisory boards and
Member
The Finance Committee has four members. Up until January 26,
2014, these were: Theo Siegert (Chairman), Johannes Baillou,
Wolfgang Büchele and Frank Stangenberg-Haverkamp. Since
January 26, 2014, the Finance Committee comprises Theo Siegert
(Chairman), Johannes Baillou, Wolfgang Büchele and Tobias
Thelen.
TO ITS COMPOSITION
quarterly reports. Furthermore, the Finance Committee recommends
to the Chairman of the Supervisory Board annual audit focuses for
the auditors. It also recommends an auditor for the annual financial
statements and management report as well as auditors for the
audit review of the abridged financial statements and interim
management report contained in the half-year financial report for
the Board's corresponding suggestion to the General Meeting. In
addition, the Finance Committee is concerned with the financial
position, results of operations and liquidity of Merck, as well as
accounting, internal auditing, risk management and compliance
issues. Upon request of the Board of Partners, the Finance Com-
mittee examines investment projects that must be approved by the
Board of Partners and provides recommendations pertaining thereto.
The Supervisory Board shall have at least one member who has
experience in managing medium- or large-sized family-owned
companies.
Family company
165
CORPORATE GOVERNANCE → Objectives of the Supervisory Board with respect to its composition
The Supervisory Board has more than three members who have
the corresponding experience. This includes both Supervisory
Board members who were or still are management board members
or directors in such companies, as well as Supervisory Board
members who have gained experience in supervisory bodies of
German and/or foreign companies of this size.
The Supervisory Board shall have at least three members who
have experience in managing or supervising a medium or large-
sized company.
Management experience
Merck is currently meeting this objective for the composition
of the Supervisory Board. At present, the Supervisory Board has
more than four members who have in-depth knowledge and expe-
rience of the pharmaceutical and chemical industries. More than
four Supervisory Board members also have executive experience
in companies that operate specifically in the pharmaceutical and/
or chemical sectors.
In-depth knowledge of the fields relevant to the company
The Supervisory Board shall have at least four members with
in-depth knowledge and experience of fields that are important to
the company, including at least one expert in pharmaceuticals and
one in chemicals.
Overall, the Supervisory Board's policy is to optimally meet its
monitoring and advisory duties by having a diversity of members.
Diversity includes, in particular, internationality as well as differ-
ent experience backgrounds and career paths. The proportion of
women on the Supervisory Board is also considered to be an aspect
of diversity. When preparing proposals for election or delegation,
due consideration shall be given in individual cases to the extent
to which different, yet complementary professional profiles, career
and life experiences, as well as appropriate representation of
both genders can benefit the work of the Supervisory Board.
Additionally, the Supervisory Board shall support the Executive
Board in its efforts to increase diversity within the company.
Professional qualifications and personal expertise are the two
most important prerequisites for appointments to seats on the
Supervisory Board. When proposing Supervisory Board candidates
for election or delegation, the Supervisory Board will always give
top priority to these prerequisites, which are essential for fulfilling
its legal duties.
Expertise and diversity
In accordance with section 5.4.1 (2) of the German Corporate Gov-
ernance Code, the Supervisory Board has specified the following
objectives with respect to its composition and reports on the status
of their implementation below.
Objectives of the Supervisory Board with respect to its
composition
The Supervisory Board of Merck KGaA currently consists of 16
members, eight of whom represent the shareholders and a further
eight who represent the employees. The eight employee represen-
tative members are elected by employee delegates pursuant to the
provisions of the German Co-determination Act (Mitbestimmungs-
gesetz "MitbestG"). These consist of six company employees,
including a senior executive, as well as two union representatives.
The Supervisory Board has no statutory proposal right with respect
to electing the delegates or employee representatives. Owing to
a delegation right of E. Merck Beteiligungen KG, two of the eight
shareholder representatives are specified. The Supervisory Board
likewise has no statutory proposal right with respect to exercising
this delegation right. The remaining six shareholder representatives
are elected by the General Meeting. In accordance with section 124
(3) sentence 1 AktG, the Supervisory Board shall propose to the
General Meeting Supervisory Board members for election. These
proposals require a majority of the votes of the shareholder repre-
sentative members of the Supervisory Board. The next scheduled
election to the Supervisory Board shall take place at the 2019
General Meeting. The General Meeting is not required to follow
the election proposals. The appointment objectives that the Super-
visory Board sets forth below therefore do not represent require-
ments to be met by those eligible to elect or to delegate members.
Instead, they are intended to express the objectives pursued by
the Supervisory Board in office with regard to its advisory and
monitoring functions.
The Supervisory Board currently has multiple members who
have the appropriate management experience in family-owned
companies of this size.
General notes on the composition of the Supervisory
Board
Internationality
The present composition of the Supervisory Board satisfies
this objective. More than three Supervisory Board members have
entrepreneurial experience in Europe, covering a wide range of
countries. More than three Supervisory Board members have
experience in management positions in companies that operate
globally.
Ingelheim, Graduate chemist
Pages 166-255
CONSOLIDATED FINANCIAL
STATEMENTS
04
Every year, the Supervisory Board will provide information in
the Annual Report on the status of implementing its objectives.
The achievement of the aforementioned objectives shall be
pursued initially until 2015, taking into account applicable law
within the scope of elections and reelections, delegations as well
as court appointments of replacement members if these become
necessary. All Supervisory Board members will correspondingly
influence those eligible to elect or delegate. Taking into consider-
ation the aforementioned criteria and in accordance with its duties
under German stock corporation law, the Supervisory Board
proposes to the General Meeting the candidates it believes to be
best suited in each case and will continue to do so in the future.
An age limit for Supervisory Board members is not specified since
age is not a criterion for qualifications and expertise. Moreover,
we do not wish to forego the many years of experience of Super-
visory Board members.
No age limit
Moreover, no one shall be proposed for election to the Super-
visory Board who simultaneously serves on a body of or advises a
major competitor of the company, or owing to another function,
e.g. advisor to major contract partners of the company, could po-
tentially become involved in a conflict of interest. No Supervisory
Board member serves on a body of or advises a major competitor,
or provides consultancy services thereto. No Supervisory Board
member performs a function that could lead to a lasting conflict
of interest.
members are to be delegated. Taking this into account, the Super-
visory Board considers four shareholder representatives to be an
appropriate number of independent members. In the Supervisory
Board's estimation, the objectives concerning independent members
are currently met. In particular, the Supervisory Board does not
believe that membership of the Board of Partners of E. Merck KG
conflicts with independence. The Board of Partners exists comple-
mentary to the competencies and the activities of the Supervisory
Board. It is not to be expected that this will lead to material and
not merely temporary conflicts of interest. It should also be taken
into account that due to its substantial capital investment and
unlimited personal liability, E. Merck KG has a strong interest in
the businesses of Merck KGaA operating efficiently and in com-
pliance with procedures, counteracting from the outset conflicts
of interest between E. Merck KG and Merck KGaA and thus also
corresponding conflicts of interest between the members of the
respective corporate bodies.
The Supervisory Board is to have an adequate number of indepen-
dent members. Assuming that the status of being an employee
representative per se does not justify doubts with respect to the
independence criteria within the meaning of section 5.4.2 of the
German Corporate Governance Code, normally all employee rep-
resentatives should be independent within the meaning of the
Code. In any case, at least four of the shareholder representatives
on the Supervisory Board should be independent. According to the
Articles of Association of Merck KGaA, six members representing
the shareholders are to be elected by the General Meeting and two
Number of independent members/no material conflicts of
interest
The Supervisory Board currently consists of 37.5% women,
which it considers a satisfactory percentage. This is based on both
the percentage of women in management positions at Merck, as
well as the fact that the supervisory boards of other companies
have a comparable percentage of women.
Six women are currently members of the Supervisory Board of
Merck KGaA. This corresponds to 37.5% of the Supervisory Board.
When nominating candidates for election to the Supervisory
Board or making proposals for delegation, the Supervisory Board
shall examine whether the percentage of women can be increased
by suitable candidates.
Women on the Supervisory Board
The Supervisory Board shall have at least three members with
business experience in the main sales markets of Merck KGaA.
Currently, the main sales markets of Merck KGaA are Europe,
North and Latin America, and Asia-Pacific.
The Finance Committee holds at least four meetings a year,
at least one of which is a joint meeting with the auditor of
Merck KGaA. Further meetings are convened as and when neces-
sary. Meetings of the Finance Committee are attended by the Chief
Financial Officer of Merck KGaA. Other members of the Executive
Board of Merck KGaA may attend the meetings upon request by
the Committee. These meetings regularly include the Chairman of
the Executive Board. The Finance Committee is responsible for,
among other things, analyzing and discussing the annual finan-
cial statements and the respective report of the auditor of the
annual financial statements and management report, as well as the
half-year financial report (including the report of the auditors for
the audit review of the abridged financial statements and interim
management report contained in the half-year report) and the
According to section 5.4.1 (2) and (3) of the German Corporate
Governance Code, the Supervisory Board shall specify concrete
objectives regarding its composition which, while considering the
specifics of the enterprise, take into account the international
activities of the enterprise, potential conflicts of interest, the number
of independent Supervisory Board members, an age limit to be
specified for the members of the Supervisory Board, and diversity.
OBJECTIVES OF THE SUPERVISORY BOARD WITH RESPECT
At its meeting on July 31, 2014, the Supervisory Board focused
intensively on the report of the Executive Board on business
performance in the second quarter of 2014. In addition, KPMG
explained the report on the first half of 2014. Risk management
within the company was a further topic. The Head of Risk
Management presented the status report for the first half of 2014.
No risks that threaten the continued existence of the company
were identified.
The meeting held on May 13, 2014 focused on current busi-
ness developments in the first quarter of 2014. The report of the
Research and Development Committee of the Board of Partners of
E. Merck KG was a further focus of the meeting. The Supervisory
Board also dealt with the report of the Group Compliance Officer
and the report of the Group Data Privacy Officer.
Following the Annual General Meeting on May 9, 2014, at which
the elections of the new shareholder representatives on the Super-
visory Board were held, an inaugural meeting took place at which
Mr. Wolfgang Büchele was elected the new Chairman of the Super-
visory Board and Mr. Michael Fletterich was elected Vice Chairman.
At the meeting held on February 28, 2014, the Executive
Board first reported on business performance during 2013. In
addition, the Supervisory Board intensively addressed the annual
financial statements and consolidated financial statements for
2013 and the corresponding management reports. The auditor
explained the audit report. The Executive Board reported on the
financial statements. Furthermore, the Supervisory Board resolved
upon the Statement of Compliance with the German Corporate
Governance Code as well as the Statement on Corporate Gover-
nance, which simultaneously includes the joint report of the Exec-
utive Board and Supervisory Board. The Supervisory Board also
approved the proposals to be made to the Annual General Meeting.
Lastly, the Executive Board presented the plans for fiscal 2014.
Five Supervisory Board meetings were held in fiscal 2014. Four of
the meetings were ordinary Supervisory Board meetings while the
one on May 9, 2014 was an inaugural meeting. At these meetings,
the Supervisory Board discussed the reports of the Executive Board
in detail and discussed company developments and strategic issues
together with the Executive Board.
Key topics of the Supervisory Board meetings
The cooperation with the Executive Board was characterized by
intensive, trustworthy exchange. During fiscal 2014, the Executive
Board provided the Supervisory Board with regular written and
verbal reports on the business development of Merck KGaA
and the Merck Group. In particular, the Supervisory Board was
informed about the market and sales situation of the company
against the background of macroeconomic development, the
financial position of the company and its subsidiaries, along with
their earnings development, as well as corporate planning. Within
the scope of quarterly reporting, the sales and operating results
were presented for the Merck Group as a whole, and broken down
by division. Aside from the Supervisory Board meetings, the
Chairman of the Supervisory Board also maintained and continues
to maintain a regular exchange of information with the Chairman
of the Executive Board.
Cooperation with the Executive Board
The Supervisory Board again properly executed its duties in 2014
in accordance with the law as well as the company's Articles of
Association and rules of procedure. In particular, the Supervisory
Board monitored the work of the Executive Board diligently and
regularly.
CORPORATE GOVERNANCE → Report of the Supervisory Board
REPORT OF THE SUPERVISORY BOARD
162
The Research and Development Committee is convened as and
when necessary, but holds meetings at least twice a year. Meetings
of the Research and Development Committee are attended by
members of the Executive Board of Merck KGaA upon request of
the Committee. These meetings regularly include the Chairman of
the Executive Board as well as the members of the Executive
Board responsible for Pharmaceuticals and Chemicals. The Chair-
person of the Research and Development Committee is responsible,
among other things, for reviewing and discussing the research
activities of Pharmaceuticals and Chemicals. The Chairperson of
the Committee reports to the Board of Partners on the insights
gained from the meetings held.
Up until January 26, 2014, the Research and Development Com-
mittee had three members: Rolf Krebs (Chairman), Hans-Jürgen
Leuchs and Frank Stangenberg-Haverkamp. Since January 26,
2014, the Research and Development Committee has consisted of
four people, namely Helga Rübsamen-Schaeff (Chairperson),
Johannes Baillou, Siegfried Karjetta, and Gregor Schulz.
Research and Development Committee
At its fifth meeting on November 11, 2014, the Supervisory
Board elected a new Nomination Committee. Furthermore, the
Supervisory Board dealt with the report of the Executive Board on
the third quarter of 2014. The 2014 status reports of Internal
Auditing as well as on compliance and data protection were addi-
tional topics of focus. The report of the Research and Development
Committee, Chemicals was also discussed. Furthermore, Merck's
strategic direction was reported on and discussed.
Initial situation
Annual financial statements
CORPORATE GOVERNANCE → Report of the Supervisory Board
CORPORATE GOVERNANCE → Objectives of the Supervisory Board with respect to its composition
164
Wolfgang Büchele
Chairman
The Supervisory Board of Merck KGaA
Darmstadt, February 27, 2015
With the exception of Crocifissa Attardo and Edeltraud Glänzer,
who were absent from the meeting on November 11, 2014, all the
Supervisory Board members attended all the ordinary Supervisory
Board meetings. The following changes in the composition of the
Supervisory Board took place in 2014: Wolfgang Büchele, Michaela
Freifrau von Glenck, Albrecht Merck, Helga Rübsamen-Schaeff,
Gregor Schulz and Theo Siegert were elected as shareholder repre-
sentatives to the Supervisory Board by the Annual General Meeting
on May 9, 2014. In addition, Siegfried Karjetta and Tobias Thelen
were appointed to the Supervisory Board. Moreover, on April 1,
2014 the delegates' assembly elected Crocifissa Attardo, Mechthild
Auge, Gabriele Eismann, Michael Fletterich, Edeltraud Glänzer,
Dietmar Oeter, Alexander Putz, and Karl-Heinz Scheider as
employee representatives with effect from the conclusion of the
Annual General Meeting on May 9, 2014.
Personnel matters
Apart from the Nomination Committee, the Supervisory Board of
Merck KGaA currently has no further committees on account of the
special features that apply to the Supervisory Board of a corpora-
tion with general partners (KGaA) under German company law
and because a corresponding need for this has not emerged to
date. The members of the Nomination Committee held a meeting
on February 6, 2014. In order to prepare for the election of the
shareholder representative members of the Supervisory Board by
the Annual General Meeting on May 9, 2014, they spoke with one
another about the professional and personal qualifications of suit-
able candidates for the Supervisory Board. The Supervisory Board
elected a new Nomination Committee on November 11, 2014. No
report is given on the work of further committees.
Committees
Corporate governance and Statement of Compliance
Corporate governance is a topic of high priority for the Super-
visory Board. In its own estimation, the Supervisory Board has an
adequate number of independent members. There were no con-
flicts of interest, as defined by the German Corporate Governance
Code, involving Supervisory Board members during 2014. After
addressing corporate governance topics in detail, the Executive
Board and Supervisory Board resolved to adopt and issue the up-
dated Statement of Compliance on February 18, 2015 (Executive
Board) and on February 27, 2015 (Supervisory Board) and jointly
issued it on February 27, 2015 in accordance with section 161 of
the German Stock Corporation Act. The statement is permanently
available on the website of Merck KGaA (www.merckgroup.com
Investors → Corporate Governance). More information about cor-
porate governance at Merck KGaA, including the compensation of
the Executive Board and Supervisory Board, is given in the State-
ment of Compliance on pages 145 et seq. of the Annual Report.
The Supervisory Board took note of and approved the results
of the audit. On completion of its examination, the Supervisory
Board raised no objections and thus approved the annual financial
statements and management report for Merck KGaA, the consoli-
dated financial statements of the Merck Group and the manage-
ment report for the Merck Group prepared by the Executive Board,
as well as the report presented by the auditors in accordance with
Article 27 (2) of the Articles of Association. Following its own
examination of the situation, the Supervisory Board gave its con-
sent to the proposal of the Executive Board for the appropriation
of net retained profit.
The discussion of the relevant agenda item at the Supervisory
Board's meeting on February 27, 2015 to approve the financial
statements was also attended by the auditors who sign the audit
opinion on the annual financial statements of Merck KGaA and
the consolidated financial statements of the Merck Group. These
auditors furthermore reported on their audit at this meeting.
In accordance with Art. 14 (2) of the Articles of Association, the
Supervisory Board also examined the annual financial statements
of Merck KGaA and the management report for Merck KGaA, the
proposal for the appropriation of net retained profit and the
auditor's report presented in accordance with Article 27 (2) of the
Articles of Association. It also examined the consolidated financial
statements of the Merck Group as well as the management report
for the Merck Group, and took note of the auditor's report of
KPMG AG Wirtschaftsprüfungsgesellschaft, Berlin.
of the Merck Group, the management reports for Merck KGaA and
the Merck Group, and the proposal by the Executive Board for
the appropriation of the net retained profit were presented and
distributed to the Supervisory Board, together with the auditor's
reports.
163
The annual financial statements of Merck KGaA, the consolidated
financial statements of the Merck Group, and the management
reports for Merck KGaA and the Merck Group including the
accounts, were audited by KPMG AG Wirtschaftsprüfungsgesell-
schaft, Berlin. The auditors issued an unqualified audit opinion on
the annual financial statements and management report for Merck
KGaA in accordance with German Auditing Standards. For the
consolidated financial statements prepared in accordance with
International Financial Reporting Standards, the auditors issued
the auditor's report, reproduced in the Annual Report of the Merck
Group. In addition, the auditors audited the calculation of Merck
KGaA's participation in the profits of E. Merck KG in accordance
with Art. 27 (2) of the Articles of Association. The annual financial
statements of Merck KGaA, the consolidated financial statements
- Merck KGaA, Darmstadt
Hans-Jürgen Leuchs
Zurich, Teacher
no board positions
Landbell AG für Rückhol-Systeme, Mainz (Chairman)
(b) E. Merck KG, Darmstadt' (until Jan. 26, 2014)
(Chairman)
(a)
(b) E. Merck KG, Darmstadt¹
no board positions
no board positions
Michelstadt, Full-time member of the Works Council of Merck Darmstadt
Seeheim-Jugenheim, Head of Corporate Quality Assurance
Dietmar Oeter (since May 9, 2014)
Schriesheim, Commercial Director of the Castel Peter Winery, Bad Dürkheim
Albrecht Merck
Hans-Jürgen Leuchs (until May 9, 2014)
Ingelheim, Graduate chemist
Mainz, Physician, Chairman (until May 9, 2014)
Alexander Putz (since May 9, 2014)
Rolf Krebs (until May 9, 2014)
(a) B. Braun Melsungen AG, Melsungen
-Solvay Deutschland GmbH, Hannover
(Vice Chairman)
(b) - E. Merck KG, Darmstadt'
CORPORATE GOVERNANCE → Statement on Corporate Governance
158
157
no board positions
no board positions
(b) E. Merck KG, Darmstadt¹
no board positions
- Zeton International Inc., Burlington, ONT, Canada
(b) - E. Merck KG, Darmstadt' (until Jan. 26, 2014)
(b) E. Merck KG, Darmstadt¹ (until Jan. 26, 2014)
- Merz Pharmaceuticals GmbH, Frankfurt/Main (until June 30, 2014)
- Merz GmbH & Co. KGaA, Frankfurt/Main (until June 30, 2014)
-
(a) Ganymed Pharmaceuticals AG, Mainz (Chairman)
- Zeton B. V., Enschede, Netherlands
Darmstadt, Physician
Siegfried Karjetta² (since May 9, 2014)
Michaela Freifrau von Glenck
Gernsheim, Full-time member of the Works Council of Merck Darmstadt/
Gernsheim, Vice Chairman (since May 9, 2014)
Michael Fletterich
- Kemira Oyj, Helsinki, Finland
Römerberg, Chairman of the Executive Board of Linde AG, Munich, Chairman
(since May 9, 2014)
(b) - E. Merck KG, Darmstadt¹
(b) comparable German and foreign supervisory bodies of corporations
no board positions
(a) other statutory supervisory boards and
Wolfgang Büchele
Member
Supervisory Board
The Executive Board passes its resolutions in meetings that are
normally held twice a month.
CORPORATE GOVERNANCE → Statement on Corporate Governance
(a)
Memberships of
Crocifissa Attardo
Darmstadt, Full-time member of the Works Council of Merck Darmstadt/
Gernsheim
(b)
Bingen, Regional Director of the IG BCE Darmstadt
Jürgen Glaser (until May 9, 2014)
Hannover, Vice Chairman of the Managing Board of the IG BCE
Edeltraud Glänzer
Rossdorf, Full-time member of the Works Council of Merck Darmstadt/
Gernsheim
Jens Frank (until May 9, 2014)
Seeheim-Jugenheim, Senior Product Manager
Gabriele Eismann (since May 9, 2014)
Zurich, Chief Executive Officer of Lloyd Yachts SAM, Monaco
Frank Binder (until May 9, 2014)
Vienna, Managing Partner of Bondi Immobilien-Consulting GmbH, Vienna,
Austria
Johannes Baillou (until May 9, 2014)
Wehrheim, Full-time member of the Works Council of Merck Darmstadt
Mechthild Auge
- BKK Merck
Member
Helga Rübsamen-Schaeff (since May 9, 2014)
(b) - BKK Merck
Karl-Heinz Scheider
and General Partner of E. Merck KG
Munich, Chairman of the Executive Board
Jon Baumhauer
Bondi Immobilien-Consulting GmbH, Vienna, Austria
Vienna, Austria, Managing Partner of
and General Partner of E. Merck KG, Chairman
Johannes Baillou
Langenburg, Managing Director of AiCuris GmbH & Co. KG, Wuppertal
Darmstadt, Vice Chairman of the Executive Board
Member
The Board of Partners has nine members. Up until January 26,
2014, the Board of Partners was composed as follows:
Some of the responsibilities that lie with the supervisory board of
a German stock corporation are fulfilled at Merck by E. Merck KG.
This applies primarily to the Board of Partners of E. Merck KG.
Therefore, the Board of Partners and the composition and proce-
dures of its committees are described in the following.
Board of Partners of E. Merck KG
sional expertise in accounting or auditing. Theo Siegert satisfies
these requirements and is furthermore the Chairman of the
Finance Committee of the Board of Partners of E. Merck KG.
The German Stock Corporation Act prescribes that the Super-
visory Board of a publicly listed company must have at least one
independent member on its Supervisory Board who has profes-
Frank Stangenberg-Haverkamp
Monaco, Managing Director of Lloyd Yachts SAM, Monaco
Wolfgang Büchele
Römerberg, Chief Executive Officer of Kemira Oyj, Helsinki, Finland
(a) - Merck KGaA, Darmstadt
- Landbell AG für Rückhol-Systeme, Mainz (Chairman)
(a) - Merck KGaA, Darmstadt
no board positions
(a) - Merck KGaA, Darmstadt
- Travel Asset Group Ltd., London, United Kingdom (Chairman)
-
(b) Oras Invest Ltd, Helsinki, Finland
-
(a) Fortas AG, Rösrath (Chairman)
(b) comparable German and foreign supervisory bodies of corporations
(a) other statutory supervisory boards and
Memberships of
Mainz, Physician
Rolf Krebs
shareholder representatives. Its members are Albrecht Merck,
Wolfgang Büchele and Theo Siegert. The Nomination Committee
is responsible for proposing to the Supervisory Board suitable
candidates for its proposal to the Annual General Meeting. Apart
from legal requirements and the recommendations of the German
Corporate Governance Code, the “Objectives of the Supervisory
Board with respect to its composition" are to be taken into consid-
eration as well. Owing to the aforementioned limited authority, and
since a corresponding need has not yet arisen, the Supervisory
Board currently has no further committees.
159
Frank Binder
(a) other statutory supervisory boards and
no board positions
(b) E. Merck KG, Darmstadt¹
(a) - 4SC AG, Martinsried (since Jan. 2, 2015)
(b) comparable German and foreign supervisory bodies of corporations
Memberships of
Reinheim, Chairman of the Works Council of the Darmstadt site,
Senior Manager Industrial Relations, Vice Chairman (until May 9, 2014)
- Biotest US Corporation, Boca Raton FL, USA (until Dec. 31, 2014)
Munich, Managing Partner of Altmann Analytik GmbH & Co. KG, Munich
Heiner Wilhelm (until May 9, 2014)
Düsseldorf, Managing Partner of de Haen Carstanjen & Söhne,
Düsseldorf
Theo Siegert
Umkirch, Pediatrician
Gregor Schulz (since May 9, 2014)
CORPORATE GOVERNANCE → Statement on Corporate Governance
Gross-Zimmern, Specialist Merck Millipore Operations Strategy
Tobias Thelen2 (since May 9, 2014)
- Biotest Pharmaceuticals Corporation, Boca Raton FL, USA
(b) - E. Merck KG, Darmstadt'
'Internal board position.
The Supervisory Board examines the annual financial state-
ments and management report of Merck KGaA as well as the
Group financial statements and the Group management report,
taking into account in each case the reports of the auditor. More-
over, the Supervisory Board discusses the quarterly reports and the
half-year financial report, taking into account in the latter case the
report of the auditor on the audit review of the abridged financial
statements and the interim management report of the Group. The
adoption of the annual financial statements is not the responsi-
bility of the Supervisory Board, but of the General Meeting. The
Supervisory Board normally meets four times a year. Further
meetings may be convened if requested by a member of either the
Supervisory Board or the Executive Board. As a rule, resolutions of
the Supervisory Board are passed at meetings. At the instruction of
the chairman, in exceptional cases a resolution may be passed by
other means, details of which are given in the rules of procedure.
by means of consultation with the Executive Board, it creates the
basis for supervision of the management of the company by the
Supervisory Board according to section 111 (1) of the German
Stock Corporation Act (AktG).
The Supervisory Board performs a monitoring function. It super-
vises the management of the company by the Executive Board. In
comparison with the supervisory board of a German stock corpo-
ration, the role of the supervisory board of a corporation with
general partners (KGaA) is limited. This is due to the fact that the
members of the Executive Board are personally liable partners and
therefore are themselves responsible for the management of the
company. In particular, the Supervisory Board is not responsible for
appointing and dismissing general partners or for regulating the
terms and conditions of their contracts. This is the responsibility of
E. Merck KG. Nor does the Supervisory Board have the authority
to issue rules of procedure for the Executive Board or a catalogue
of business transactions requiring approval. This authority like-
wise belongs to E. Merck KG (Article 13 (3) sentence 1 and (4)
sentence 1 of the Articles of Association). However, the fact that
the Supervisory Board has no possibilities to directly influence the
Executive Board restricts neither its information rights nor audit
duties. The Supervisory Board must monitor the Executive Board
in terms of legality, regularity, usefulness, and economic efficiency.
In particular, the Supervisory Board has the duty to examine the
reports provided by the Executive Board. This includes regular
reports on the intended business policy, as well as other funda-
mental issues pertaining to corporate planning, especially financial,
investment and HR planning; the profitability of the Merck Group;
the progress of business; the risk situation; risk management (in-
cluding compliance); and the internal auditing system. In addition,
2Members appointed according to Article 6 (5) of the Articles of Association.
(until Dec. 31, 2014)
no board positions
(b) E. Merck KG, Darmstadt¹
DKSH Holding Ltd., Zurich, Switzerland
The rules of procedure prescribe that the Supervisory Board
may form committees as and when necessary. The Supervisory
Board has formed a Nomination Committee comprising three
(b) E. Merck KG, Darmstadt'
- Henkel AG & Co KGaA, Düsseldorf
(a) E.ON SE, Düsseldorf
- Biotest Seralc NV, Evere, Belgium (until Dec. 31, 2014)
Biotest (UK) Ltd., Solihull, United Kingdom (until Dec. 31, 2014)
The members of the Board of Partners of E. Merck KG and of
the Supervisory Board may be convened to a joint meeting if so
agreed by the chairmen of the two boards.
44.2
1,068.5
1,157.3
49.2
11,069.2
1.0
11,020.0
11,069.2
-161.9
11,020.0
1,068.5
44.2
1.0
-383.0
-0.3
7.5
2.8
49.2
1,164.8
-435.0
348.5
-3.1
-189.4
-435.0
-125.9
-3.1
-122.8
1,482.4
13.3
1,469.1
317.6
5.8
311.8
676.4
676.4
348.5
-1.1
-1.1
-383.0
Changes in trade accounts payable
-3.7
1.2
Total equity
interests
Non-controlling
Equity attributable
to Merck KGaA
shareholders
difference
instruments
-29.5
financial assets
Gains/losses recognized in equity
CONSOLIDATED FINANCIAL STATEMENTS → Consolidated Statement of Changes in Net Equity
-1,274.7
-0.3
6,499.9
3,813.7
168.0
-351.3
Available-for-sale Derivative financial Currency translation
-113.6
1,272.2
1,202.2
-109.9
1,151.3
-3.3
1,154.6
-203.7
73.7
-0.2
10,361.4
-57.8
-47.6
-203.7
73.7
-0.2
1,209.1
10,414.8
53.4
6.9
-10.2
-0.1
Acquired
shareholding (in %)
1,744.9
Acquisition of AZ Electronic Materials S.A.
Obtainment of control following the public offer
Within the scope of a public takeover offer, on May 2, 2014 Merck
had received valid acceptances of the offer in respect of 81.3% of
the share capital and thus obtained control of the publicly listed
company AZ Electronic Materials S.A., Luxembourg (AZ). The
payments for the obtainment of control were as follows:
(4) ACQUISITIONS AND DIVESTMENTS AS
WELL AS ASSETS HELD FOR SALE AND
DISPOSAL GROUPS
financial assets and presented under non-current financial assets.
The list of shareholdings presents all of the companies included in
the consolidated financial statements as well as all of the share-
holdings of Merck KGaA (see Note [70]).
Due to secondary importance, 28 (2013: 22) subsidiaries were
not consolidated. Overall, the impact of these subsidiaries on sales,
profit after tax, assets and equity was less than 1% relative to the
entire Merck Group. The interests in subsidiaries not consolidated
due to secondary importance were classified as available-for-sale
Including the parent company Merck KGaA, Darmstadt, 218 (2013:
191) companies were fully consolidated in the annual financial
statements of the Merck Group. 189 (2013: 165) are located abroad.
No companies were consolidated using the equity method as of the
balance sheet date. Four newly established companies, 27 compa-
nies of the acquired AZ Electronic Materials S.A. Group, as well as
four further companies, which were previously not consolidated
due to immateriality, were included in the consolidated financial
statements for the first time. A total of eight companies were
deconsolidated as a result of liquidation, mergers or disposals.
CONSOLIDATION
(3) CHANGES IN THE SCOPE OF
175
SCOPE OF CONSOLIDATION
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
→ Annual Improvements to IFRSS 2012-2014 Cycle
The impact of IFRS 15, which will become effective as of 2017 at
the earliest, and of IFRS 9, which will become effective as of 2018
at the earliest, on the consolidated financial statements is currently
being examined. From today's perspective, the other new rules
will not have any material effects on the consolidated financial
statements.
→
→ Amendment to IFRS 12 "Disclosure of Interests in Other Entities"
Annual Improvements to IFRSS 2010-2012 Cycle
"
→ Amendments to IFRS 10 "Consolidated Financial Statements"
→ Amendment to IFRS 11 "Joint Arrangements
Purchase price for the obtainment of control
Acquired cash and cash equivalents
Payments for the obtainment of control less acquired cash and cash equivalents
Acquired
shareholding (in %)
351.3
18.7
1,523.4
81.3
€ million
397.2
Purchase price/Payments for the acquisition of further shares after obtainment of control
Total purchase price before the deduction of acquired cash and cash equivalents
→ Amendment to IAS 41 "Agriculture"
Purchase price for the obtainment of control
By June 27, 2014, Merck's shareholding in AZ had increased to
99.8% and was then able to initiate a squeeze-out, which was
completed on July 2, 2014 with the acquisition of the remaining
shareholding of 0.2%. The acquisition of non-controlling interests
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
176
1,523.4
-104.1
1,419.3
81.3
81.3
€ million
after May 2, 2014 was recognized in equity as a transaction
without a change of control. Above and beyond the purchase price
to obtain control, the following purchase price was paid in order
to increase the shareholding:
392.7
→ Amendment to IAS 38 “Intangible Assets"
→ Amendment to IAS 27 “Separate Financial Statements”
→ IFRS 10 "Consolidated Financial Statements"
The following rules take effect as of fiscal 2014:
The consolidated financial statements of the Merck Group have
been prepared in accordance with consistent accounting policies
and in euros, the reporting currency. Pursuant to section 315a of
the German Commercial Code (HGB), the International Financial
Reporting Standards in force on the reporting date and adopted by
the European Union as issued by the International Accounting
Standards Board and the IFRS Interpretations Committee (IFRS
and IAS, as well as IFRIC and SIC) have been applied. The figures
reported in the consolidated financial statements have been
rounded, which may lead to individual values not adding up to the
totals presented.
(2) REPORTING PRINCIPLES
The accompanying consolidated financial statements as at
December 31, 2014 have been prepared with Merck KGaA,
Frankfurter Strasse 250, 64293 Darmstadt, which manages the
operations of the Merck Group, as parent company. In accordance
with the provisions of the German financial reporting disclosure
law (Publizitätsgesetz), consolidated financial statements are also
prepared for E. Merck KG, the ultimate parent company and
general partner of Merck KGaA with an equity interest of 70.27%
as of December 31, 2014. These consolidated financial statements
include Merck KGaA and its subsidiaries. The authoritative
German versions of these financial statements are filed with the
German Federal Gazette (Bundesanzeiger) and can be accessed at
www.bundesanzeiger.de.
(1) COMPANY INFORMATION
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
NOTES TO THE GROUP ACCOUNTS
GENERAL
174
173
11,801.0
59.4
161.6
161.9
-0.3
11,741.6
→>
IFRS 11 "Joint Arrangements"
→
IFRS 12 "Disclosure of Interests in Other Entities"
→ Amendment to IAS 1 "Presentation of Financial Statements"
→ Amendments to IAS 16 "Property, Plant and Equipment"
→ Amendment to IAS 19 “Employee Benefits"
IFRS 15 "Revenue from Contracts with Customers"
->
→ IFRS 14 "Regulatory Deferral Accounts"
→ IFRS 9 "Financial Instruments"
As of the balance sheet date, the following standards were
published by the International Accounting Standards Board and
the IFRS Interpretations Committee, but not yet adopted by the
European Union:
Merck currently does not expect the new rules to have any material
effects on the consolidated financial statements.
→ Amendments to IAS 28 "Investments in Associates and Joint
Ventures"
The following standards take effect as of fiscal 2015:
→ Annual Improvements to IFRSS 2011-2013 Cycle
→> IFRIC 21 "Levies"
Merck applied the amendment to IAS 36 “Impairment of Assets"
in advance in 2013.
→> Amendments to IFRS 12 "Disclosure of Interests in Other Entities"
→ Amendments to IFRS 10 "Consolidated Financial Statements"
→ Amendment to IFRS 11 "Joint Arrangements"
→ Amendment to IAS 39 “Financial Instruments: Recognition
and Measurement"
→ Amendment to IAS 32 "Financial Instruments: Presentation"
→> Amendment to IAS 36 “Impairment of Assets"
→ Amendment to IAS 28 "Investments in Associates and Joint
Ventures"
→ Amendments to IAS 27 “Separate Financial Statements”
None of the other new standards had a material effect on the
consolidated financial statements. In particular, the rules con-
tained in IFRS 10 to IFRS 12 did not lead to any changes based on
the current equity holding structures. In regard to the strategic
alliance with Pfizer Inc., USA, to develop and commercialize
active ingredients in immuno-oncology as well as other alliances,
more information can be found in Note [5].
-189.4
278.3
-122.8
Dividend payments to E. Merck KG
-3.7
-109.9
-122.8
-3.1
Dividend payments to non-controlling interests
Dividend payments to Merck KGaA shareholders
-874.5
-1,641.2
→ 54
372.1
3,508.6
20.9
Payments from the divestment of the Discovery and Development Solutions business field
Net cash flows from investing activities
Payments from the disposal of other financial assets'
-15.1
-1,419.3
- 382.7
-304.5
Payments from new borrowings of financial liabilities from E. Merck KG
139.4
760.5
Net cash flows from financing activities
-97.7
-324.5
Repayments of other current and non-current financial debt liabilities
64.6
322.6
Payments for other acquisitions
Payments from new borrowings of other current and non-current financial liabilities
Payments from the issuance of bonds
-750.0
Repayment of bonds
-0.3
-351.3
Payments from transactions with no change of control
128.8
1,482.9
Payments for the obtainment of control over AZ Electronic Materials S.A. less acquired
cash and cash equivalents
Payments for investments in financial assets'
260.0
-975.2
20.9
1,209.1
1,458.4
1,360.9
1,164.8
2013
2014
Note
- 58.4
171
Payments for investments in property, plant and equipment
Payments from the disposal of intangible assets'
Payments for investments in intangible assets
Net cash flows from operating activities
Other non-cash income and expenses
Neutralization of gains/losses on disposal of assets
Changes in other assets and liabilities
Payments from the disposal of property, plant and equipment'
-1,072.7
-33.0
52.8
-3,143.3
14.0
-407.0
-109.6
0.3
-143.3
2.1
-480.9
24.1
2,225.5
2,705.5
-45.0
53
-27.5
-9.3
-260.4
471.3
-203.0
- 341.6
128.2
18.7
-435.0
Changes in cash and cash equivalents
Cash and cash equivalents as of January 1
-645.3
5,383.9
1,202.2
3,813.7
168.0
397.2
Retained earnings/
Net retained profit
Merck KGaA
(share premium)
Subscribed capital
Merck KGaA
General partner's
equity Merck KGaA
Capital reserves
of defined
benefit plans
Remeasurement
Retained earnings
Equity capital
82.6
1,202.2
82.6
-109.9
-712.0
1,157.3
-712.0
1,157.3
-562.7
6,090.1
3,813.7
Balance as of December 31, 2014
168.0
-562.7
6,090.1
3,813.7
168.0
397.2
-3.1
- 383.0
397.2
Changes in scope of consolidation/Other
Transactions with no change of control
including changes in reserves
172
980.8
2,878.5
→ 35
980.8
2,878.5
729.7
CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statement of Changes in Net Equity
980.8
72.9
100.0
1,824.8
'Previous year's figures have been adjusted, see "Notes to the consolidated cash flow statement".
Cash and cash equivalents as of December 31 (consolidated balance sheet)
Plus cash and cash equivalents included in assets held for sale
Cash and cash equivalents as of December 31
-27.2
Changes in cash and cash equivalents due to currency translation
CONSOLIDATED STATEMENT OF CHANGES IN NET EQUITY
€ million
Profit transfer to/from E. Merck KG
Dividend payments
Comprehensive income
Other comprehensive income
Profit after tax
Balance as of January 1, 2014
Balance as of December 31, 2013
For details see Note [50]
Changes in scope of consolidation/Other
including changes in reserves
Profit transfer to/from E. Merck KG
Dividend payments
Comprehensive income
Other comprehensive income
Profit after tax
Balance as of January 1, 2013
Transactions with no change of control
1,874.7
26,010.1
AZ is a leading global producer of specialty chemical materials that
generated sales of US$ 730.3 million (2012: US$ 793.9 million) and
profit after tax of US$ 57.3 million (2012: US$ 83.3 million) in
2013. Around 67.5% of sales were attributable to the IC Materials
division, which supplies process chemicals used to manufacture
integrated circuits in the highly differentiated premium segment.
The Optronics division accounted for approximately 32.5% of
sales in 2013. This division's portfolio includes light-sensitive pro-
cessing materials, or photoresists, for the manufacture of flat panel
displays, as well as silicon-chemistry-based products for opto-
electronics. As of the end of 2013, AZ had a total of 1,131 employees.
Remeasurement of the net defined benefit liability
Changes in remeasurement
Tax effect
Changes recognized in equity
Items of other comprehensive income that may be reclassified to profit or loss
in subsequent periods:
Available-for-sale financial assets
Fair value adjustments
Reclassification to profit or loss
Tax effect
Changes recognized in equity
Derivative financial instruments
Fair value adjustments
Reclassification to profit or loss
Reclassification to assets
Items of other comprehensive income that will not be reclassified to profit or loss in
subsequent periods:
Profit after tax
€ million
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
-392.2
-179.5
1,164.8
1,209.1
1,157.3
1,202.2
→ 33
Tax effect
7.5
→ 34
2.66
2.77
2.66
2.77
The disclosure of amortization of intangible assets (excluding software) has been changed. See Note "Accounting and measurement principles".
2 Taking into account the share split; previous year's figures have been adjusted accordingly. See Note "Earnings per share".
CONSOLIDATED FINANCIAL STATEMENTS → Consolidated Statement of Comprehensive Income
6.9
→ 32
169
2014
-0.2
411.7
125.5
-43.0
-26.5
→ 32
-20.2
- 25.3
Changes recognized in equity
348.5
73.7
Exchange differences on translating foreign operations
Changes taken directly to equity
682.4
-204.9
-1.1
-0.4
0.4
→ 32
2013
1,164.8
1,209.1
→ 49
→ 32
-861.5
98.8
149.2
Note
-16.3
82.5
-712.3
82.5
-1.4
1.8
-0.1
-1.6
-712.3
1,388.6
1,557.0
-222.2
2013
→ 23
→ 24
11,291.5
209.3
10,700.1
395.0
11,500.8
11,095.1
Cost of sales¹
(of which: amortization of intangible assets)'
Gross profit'
Marketing and selling expenses¹
(of which: amortization of intangible assets)'
25
-3,526.4
-3,041.7
(-94.0)
2014
Note
Total revenues
Royalty, license and commission income
168 Consolidated Income Statement
169
Consolidated Statement of Comprehensive Income
170 Consolidated Balance Sheet
171 Consolidated Cash Flow Statement
Consolidated Statement of Changes in Net Equity
172
(-49.2)
174
CONSOLIDATED FINANCIAL
STATEMENTS
168
CONSOLIDATED FINANCIAL STATEMENTS → Consolidated Income Statement
CONSOLIDATED INCOME STATEMENT
€ million
Sales
Notes to the Group accounts
7,974.4
8,053.4
→ 26
-257.7
-718.1
Operating result (EBIT)
1,762.0
1,610.8
Financial result
Profit before income tax
→ 30
Income tax
of which attributable to Merck KGaA shareholders (net income)
of which attributable to non-controlling interests
Earnings per share (in €)
basic²
diluted²
→ 31
-205.0
Profit after tax
Reclassification to profit or loss
Other operating expenses and income
(-3.8)
- 3,104.9
(-719.0)
-3,088.5
(-762.0)
Royalty, license and commission expenses
→ 27
- 537.5
-567.0
(-2.3)
Administration expenses
-608.6
-562.4
Research and development costs'
→ 29
-1,703.7
-1,506.6
(of which: amortization of intangible assets)'
→ 28
Business activities as well as sales and earnings contribution
of AZ
0.1
Changes recognized in equity
494.7
6,601.4
3,898.8
Non-current liabilities
Non-current financial liabilities
→ 44
Other non-current liabilities
46
3,561.1
782.0
3,257.5
5.6
Non-current provisions
→ 48
626.1
1,011.1
561.7
48
465.1
849.8
Trade accounts payable
Other current liabilities
Income tax liabilities
Current provisions
Liabilities directly related to assets held for sale
20,818.6
44
Provisions for pensions and other post-employment benefits
Deferred tax liabilities
2,075.9
→ 45
1,539.4
1,364.1
→ 46
1,574.6
1,134.5
→ 47
440.4
Current financial liabilities
→ 49
910.9
Total liabilities and equity
26,010.1
20,818.6
CONSOLIDATED FINANCIAL STATEMENTS Consolidated Cash Flow Statement
CONSOLIDATED CASH FLOW STATEMENT
€ million
Profit after tax
Depreciation/amortization/impairment losses/reversals of impairments
Changes in inventories
Changes in trade accounts receivable
The acquired assets and liabilities were recognized at the follow-
ing fair values on the date of the first-time consolidation. The
possibility of measuring non-controlling interests at fair values on
the acquisition date (full goodwill method) was not applied. The
purchase price allocation was completed as of the reporting date.
Purchase price allocation
Assuming the first-time consolidation of AZ had already taken
place as of January 1, 2014, sales of the Merck Group for the period
from January 1 to December 31, 2014 would have amounted to
€ 11,471.3 million (compared with reported sales of € 11,291.5
million) and net income after taxes would have been € 1,155.5
million (compared with reported net income of € 1,164.8 million).
The determination of these figures assumed that the adjustments
of the book values as a result of the purchase price allocation
would have been identical.
The impact of the consolidation of AZ on sales as well as net
income after taxes between May 2, 2014 and December 31, 2014
amounted to € 374.7 million and € -52.5 million, respectively.
This result takes into account higher cost of sales owing to the
step-up of the acquired inventories to fair values.
After May 2, 2014, Merck began to integrate AZ into the
Performance Materials division. The aim of the acquisition was to
further strengthen Merck's materials and specialty chemicals
business by joining forces with one of the leading suppliers of
high-tech materials for the electronics industry.
11,069.2
11,801.0
49.2
59.4
→ 32
818.4
7,607.7
665.5
5,850.6
Equity
→ 50
Equity capital
Reserves
1,820.1
565.2
Gains/losses recognized immediately in equity
Equity attributable to Merck KGaA shareholders
9,038.9
2,137.5
11,741.6
9,341.1
1,113.7
11,020.0
Non-controlling interests
565.2
- 8.9
Current liabilities
13,434.1
Cash and cash equivalents
Current financial assets
Trade accounts receivable
Inventories
Other current assets
Income tax receivables
Assets held for sale
Non-current assets
CONSOLIDATED FINANCIAL STATEMENTS → Consolidated Balance Sheet
Note
Dec. 31, 2014
Dec. 31, 2013
→ 35
2,878.5
980.8
Current assets
€ million
CONSOLIDATED BALANCE SHEET
170
682.5
-213.8
1,029.9
-140.3
Other comprehensive income
Comprehensive income
317.6
-57.8
→ 36
1,482.4
of which attributable to Merck KGaA shareholders
1,469.1
1,154.6
of which attributable to non-controlling interests
→ 33
13.3
-3.3
1,151.3
Total assets
2,199.4
→ 37
→ 42
2,990.4
2,647.2
Non-current financial assets
→ 43
94.4
77.8
Property, plant and equipment
Other non-current assets
56.5
105.5
Deferred tax assets
→ 32
992.9
736.4
15,529.7
→ 39
2,410.5
9,867.2
→ 41
2,235.6
2,021.4
→ 38
1,659.7
1,474.2
→ 39
1,210.2
11,395.5
360.7
297.0
109.8
→ 4
27.1
10,480.4
7,384.5
Intangible assets
→ 40
Changes in provisions
When additional shares in a non-controlling interest are
acquired, the purchase price amount that exceeds the carrying
amount of this interest is recognized immediately in equity.
IFRS 11, which has been applicable since 2014, is applied for joint
arrangements. A joint arrangement exists when, on the basis of
a contractual arrangement, Merck and third parties jointly control
business activities. Joint control means that decisions about the
relevant activities require unanimous consent. Joint arrangements
are either joint operations or joint ventures. Revenues and expenses
as well as assets and liabilities from joint operations are included
in the consolidated financial statements on a pro rata basis in
accordance with Merck's rights and obligations. By contrast,
interests in joint ventures as well as in material associates over
which Merck has significant influence are included in accordance
with IAS 28 using the equity method of accounting.
Intragroup sales, expenses and income, as well as all receiv-
ables and payables between the consolidated companies, were
eliminated. The effects of intragroup deliveries reported under
non-current assets and inventories were adjusted by eliminating
any intragroup profits. In accordance with IAS 12, deferred taxes
are applied to these consolidation measures.
Planned acquisition of the Sigma-Aldrich Corporation
Merck and the Sigma-Aldrich Corporation, a life science and
high-tech enterprise headquartered in St. Louis, (USA) (Sigma-
Aldrich), announced on September 22, 2014 that they had entered
2013
reported
adjustment
adjusted
10,700.1
395.0
11,095.1
Cost of sales
10,700.1
-2,992.5
-49.2
8,102.6
-49.2
-3,041.7
8,053.4
Gross margin
Marketing and selling expenses
395.0
11,095.1
Total revenues
Royalty, license and commission income
Sales
Agreement with Threshold Pharmaceuticals Inc., USA, to
co-develop and commercialize evofosfamide
In February 2012, Merck Serono entered into a global agreement
with Threshold Pharmaceuticals, Inc., USA, (Threshold) to co-
develop and commercialize evofosfamide (also known as TH-302),
a chemical molecule for use in oncology. Evofosfamide is current-
ly being investigated in two Phase III clinical trials in patients
with advanced unresectable or metastatic soft issue sarcoma and
advanced pancreatic cancer.
Under the terms of the agreement, Merck received co-
development rights as well as exclusive global commercialization
rights. Threshold has an option to co-commercialize the com-
pound in the United States. In fiscal 2012, Merck made an upfront
payment in the amount of € 18.7 million and since then has made
additional milestone payments for development activities in the
amount of € 64.0 million. Merck bears 70% of worldwide devel-
opment costs for evofosfamide. The assets, liabilities, income and
expenses in connection with the agreement are recognized by
Merck in accordance with the relevant IFRSS.
180
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
Agreement with Eli Lilly and Company, USA, and Bristol-
Myers Squibb Company, USA, on the co-commercialization
of Erbitux® in Japan
In October 2007, Merck Serono entered into an agreement with
ImClone Systems Inc., USA (which has now merged into Eli Lilly
and Company, USA) and Bristol-Myers Squibb Company, USA
(BMS) on the co-development and co-commercialization of
Erbitux® (cetuximab), a drug indicated for the treatment of meta-
static colorectal cancer, as well as for other cancers, in Japan.
Pursuant to the agreement, Merck Serono distributes the product
and books the sales for the collaboration. Merck receives 50% of
the profit or loss from sales of Erbitux® in Japan, while Eli Lilly
and BMS each receive 25%. In addition, Eli Lilly receives a royalty
equal to 4.75% of total net sales of Erbitux® in Japan from Merck.
Merck records the assets, liabilities, revenues and expenses related
to the agreement in accordance with the respectively valid IFRS.
In 2014, Merck received sales of € 113.2 million from the
commercialization of Erbitux® in Japan (2013: € 115.1 million).
On February 13, 2015, Merck announced that full promotional
responsibiltiy for Erbitux® in Japan will be transferred to Merck as
of May 1, 2015.
Agreement with Bristol-Myers Squibb Company, USA, for
the co-commercialization of Glucophage® in China
In March 2013, Merck Serono entered into an agreement with
Bristol-Myers Squibb, USA, on the co-commercialization of the
antidiabetic agent Glucophage® (active ingredient: metformin
hydrochloride) for the treatment of type 2 diabetes in China. Merck
records the assets, liabilities, revenues and expenses related to the
agreement in accordance with the respectively valid IFRS. In
2014, Merck received commission income of € 58.4 million for the
co-commercialization of Glucophage® (2013: € 12.8 million).
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
181
(6) ACCOUNTING AND MEASUREMENT
PRINCIPLES
With the exception of the two changes described in the following,
the accounting and measurement principles have remained
unchanged in comparison with the previous year.
Effective January 1, 2014, two product groups, NeurobionⓇ
(a vitamin B-based analgesic) and Floratil® (a probiotic anti-
diarrheal), were transferred from the Merck Serono division to the
Consumer Health division. A detailed presentation of the asso-
ciated disclosure changes in Segment Reporting can be found in
Note [52].
Amortization of intangible assets (excluding software), which was
previously disclosed in a separate line in the income statement,
was allocated to the corresponding functional costs in 2014. This
has been done in particular to ensure improved comparability of
the income statement of the Merck Group with other companies.
The amortization relates mainly to intangible assets recognized
within the scope of the purchase price allocations for the acqui-
sitions of Serono SA, the Millipore Corporation as well as AZ
Electronic Materials S.A. Amortization of software was already
allocated to the functional costs in the past. The accounting policy
change has led to an increase in marketing and selling expenses,
cost of sales as well as research and development costs. The previ-
ous year's figures have been adjusted accordingly and are presented
in the following table:
€ million
-2,326.5
Apart from the aforementioned accounting impact, the agree-
ment had no material effect on the net assets, financial position
and results of operations in the reporting period.
- 762.0
Royalty, license and commission expenses
Balance sheet items
CONSOLIDATED FINANCIAL STATEMENTS →
Notes to the Group accounts
Measurement principle
ASSETS
Cash and cash equivalents
Financial assets (current/non-current)
sheet are measured as follows:
Held to maturity investments
Loans and receivables
Assets from derivatives (financial transactions)
Trade accounts receivable
Inventories
Other assets (current/non-current)
Assets from derivatives (operating business)
Receivables from non-income-related taxes
Other receivables
Available-for-sale financial assets
The main assets and liabilities disclosed in the consolidated balance
182
1,610.8
-567.0
-567.0
Administration expenses
-562.4
-562.4
Research and development costs
-1,504.3
-2.3
-1,506.6
Other operating expenses and income
-718.1
-718.1
Amortization of intangible assets
Operating result (EBIT)
-813.5
813.5
1,610.8
-3,088.5
Nominal value
On the date of the closing of the collaboration agreement,
both the upfront payment received and the value of the right
to co-promote XalkoriⓇ were recognized in the balance sheet as
deferred income within other liabilities. Both amounts will be
recognized as income over the expected period in which Merck is
to meet certain obligations during the development phase and will
be disclosed under royalty, license and commission income. More
information on the exercise of management judgments and esti-
mation uncertainties can be found in Note [7].
Under the terms of the agreement, Pfizer made an upfront
cash payment of US$ 850 million (€ 678.3 million) to Merck after
the closing. Pfizer also committed to make development and com-
mercial milestone payments of up to US$ 2 billion to Merck. Based
on the collaboration agreement, Merck and Pfizer will also co-
Non-controlling interests on the acquisition date (18.7%)
Net assets acquired
Purchase price for the acquisition of shares (81.3%)
Positive difference (goodwill)
The positive difference of € 818.4 million was recognized as
goodwill. This results in particular from intangible assets that are
not recognizable, for example the ability of AZ to develop new
solutions and products in its technologically innovative industry
as well as from anticipated synergy effects expected from the
integration of AZ into the Merck Group.
177
Fair values on the
acquisition date
Net assets
104.1
130.3
7.1
361.0
1,051.1
185.7
65.4
1,302.2
1,663.2
119.5
Liabilities
Deferred tax liabilities
Other non-current liabilities and provisions
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
€ million
Current assets
Cash and cash equivalents
Inventories
Receivables
Other current assets
Non-current assets
Intangible assets (excluding goodwill)
Property, plant and equipment
Other non-current assets
Assets
Current liabilities
Current financial liabilities
Other current liabilities and provisions
Non-current liabilities
Non-current financial liabilities
144.1
promote Xalkori® (crizotinib), a drug for the treatment of non
small cell lung cancer in the United States and certain other major
markets, over a multi-year period. During co-promotion of the
product, Merck will receive from Pfizer cost reimbursements and a
share of the profits. The fair value of the right was determined by
an independent external appraiser by applying the multi-period
excess earnings method (MEEM) and amounts to US$ 369 million
(€ 294.4 million). The entitlement to the right was capitalized on
the date it was granted and will be amortized over the term of the
agreement.
184.5
122.7
Within the scope of the acquisition, no contingent consideration
was agreed upon which Merck would possibly have to pay in the
future. The selling shareholders did not contractually indemnify
Merck for the outcome of a contingency or uncertainty related to
the acquired assets or liabilities. Costs of € 7.7 million directly
related to the acquisition of the company were recorded under
other operating expenses in 2014.
The most significant impact of the purchase price allocation
resulted from the remeasurement of intangible assets, property,
plant and equipment, as well as work in progress and finished
goods included in inventories at fair value. Since work in progress
and finished goods were sold within 2014, this led to additional
cost of sales offset by the sales achieved. As a result, the sale of
these inventories did not generate any additional income. The
intangible assets identified during the purchase price allocation
and recognized on the date of first-time consolidation were to the
largest extent attributable to technology-related intangible assets
and brand rights. The multi-period excess earnings method was
used for the valuation of technology-related intangible assets. The
relief from royalty method was used for the valuation of the brand
rights.
No contingent liabilities were identified in the course of the
purchase price allocation. The gross amounts of the acquired
receivables on the acquisition date were € 130.3 million. The best
possible estimate of the irrecoverable receivables amounted to less
than € 0.1 million.
into a merger agreement under which Merck will acquire Sigma-
Aldrich for a total purchase price of approximately US$ 17.0
billion or approximately € 13.1 billion (based on the exchange
rate on September 22, 2014). Sigma-Aldrich shareholders approved
the acquisition at an extraordinary shareholders' meeting on
December 5, 2014.
Merck received antitrust clearance of the planned acquisition
from the U.S. Federal Trade Commission (FTC) on December 23,
2014. U.S. antitrust clearance satisfies a condition to closing the
transaction, which remains subject to certain other closing condi-
tions, including regulatory approval in other jurisdictions. Merck
expects the transaction to close by mid-2015.
The purchase price will be financed through a combination of
cash on Merck's balance sheet, bank loans and bonds. The vast
majority of the currency risk stemming from the payment of the
purchase price in U.S. dollars has been hedged using standard
derivatives (forward exchange transactions and currency options)
in line with the requirements for cash flow hedge accounting.
Divestment of the Discovery and Development Solutions
business field
930.0
Effective March 31, 2014, the Discovery and Development Solutions
business field of the Merck Millipore division was sold to Eurofins
Scientific S.A., Luxembourg. The assets sold were reported as
a disposal group in the consolidated financial statements as of
December 31, 2013 and included property, plant and equipment,
inventories, and goodwill allocated to the business field. The selling
price was € 22.6 million. In accordance with the contractual
agreement, € 20.9 million of this amount was received as of the
end of the reporting period.
179
(5) JOINT ARRANGEMENTS
OF MATERIAL SIGNIFICANCE
Strategic alliance with Pfizer Inc., USA, to co-develop and
co-commercialize active ingredients in immuno-oncology
On November 17, 2014 Merck announced that it had entered into
a global strategic alliance with Pfizer Inc., USA, (Pfizer) to develop
and commercialize the anti-PD-L1 antibody avelumab (also
known as MSB0010718C). This antibody is currently in clinical
development by Merck Serono in a Phase I trial as a potential
treatment for various tumor types. A Phase II study in patients
with Merkel cell carcinoma was initiated in July 2014. The com-
pound will be developed as a single agent as well as in various
combinations with Pfizer's and Merck's broad portfolio of
approved and investigational pipeline candidates. As part of the
strategic alliance, the two companies will also combine resources
and expertise to advance Pfizer's anti-PD-1 antibody into Phase I
trials with the potential to co-develop and co-commercialize this
asset in the future. The overriding objective of the strategic
alliance is to share the risks of development and to accelerate the
two companies' presence in immuno-oncology.
According to the collaboration agreement, during the develop-
ment period the two partners will equally share the development
expenses. In a potentially later commercialization phase, Merck
will recognize the vast majority of sales from the anti-PD-L1
antibody while the net result of the sales and certain defined
expense components will be shared equally among Pfizer and
Merck.
The implementation of the collaboration agreement will not
be structured through a separate vehicle. This means that the
assets, and obligations for the liabilities attributable to the contrac-
tual arrangement are owned by the two contracting companies.
Decisions about the relevant activities require unanimous consent
in accordance with the collaboration agreement. Therefore, the
accounting rules governing joint operations pursuant to IFRS 11
are applied and Merck records the assets, liabilities, revenues and
expenses attributable to the collaboration in accordance with the
respectively valid IFRS.
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
111.6
818.4
Development
of goodwill
24.0
321.0
467.7
796.3
866.9
-161.9
705.0
1,523.4
818.4
178
The development of goodwill during the period from first-time
recognition and December 31, 2014 was as follows:
€ million
Goodwill on May 2, 2014
Exchange rate effects
Goodwill on December 31, 2014
CONSOLIDATED FINANCIAL STATEMENTS →
Notes to the Group accounts
328.6
Amortized cost
ACCOUNTING POLICIES
Amortized cost
Weighted average
cost of capital
after tax
Weighted average
cost of capital
before tax
1,680.0
0.0
6.5
8.1
Long-term
growth rate
164.1
7.2
8.8
2,730.9
2.8
7.6
8.8
8.2
2.5
Dec. 31, 2013
Goodwill as of
7.8
cost of capital
before tax
1,601.5
0.0
7.2
9.3
243.1
2.0
6.9
8.4
2,911.1
2.0
6.8
7.8
938.2
1.0
6.3
1.0
Weighted average
6.4
The amount of the value in use is primarily affected by the terminal
value, which is particularly sensitive to changes in the long-
term growth rate and the discount rate. Even if the actual future
cash flows were one percentage point lower than the expected
cash flows, there would be no need to record impairment losses for
goodwill. Likewise, there would be no need to record impairment
losses if future cash flows were discounted by a weighted average
cost of capital after tax that was one percentage point higher.
Income taxes
The calculation of the reported assets and liabilities from deferred
and current income taxes requires extensive discretionary judg-
ments, assumptions and estimates. Income tax liabilities were
€ 849.8 million as of December 31, 2014 (2013: € 465.1 million).
The carrying amounts of deferred tax assets and liabilities amount-
ed to € 992.9 million and € 818.4 million, respectively, as of the
reporting date (2013: € 736.4 million and € 665.5 million, respec-
tively).
The recognized income tax liabilities and provisions are
partially based on estimates and interpretations of tax laws and
ordinances in different jurisdictions.
With regard to deferred tax items, there is a high degree of
uncertainty concerning the date on which an asset is realized or a
liability settled and concerning the tax rate applicable on this date.
This particularly relates to deferred tax liabilities recognized in the
context of the acquisitions of Serono SA, the Millipore Corporation
and AZ Electronic Materials S.A. The recognition of deferred tax
assets from loss carryforwards requires an estimate of the prob-
ability of the future realizability of loss carryforwards. Factors
considered in this estimate are results history, results planning and
any tax planning strategy of the respective Group company.
Fair value
Merck makes other judgments, assumptions and estimates in the
following areas:
→ Classification of financial assets and financial liabilities
Detailed information on the existing pension obligations and
a sensitivity analysis of the parameters named above are provided
in Notes [22] and [49]. As of the reporting date, the amount
recorded on the balance sheet for provisions for pensions and other
post-employment benefits was € 1,820.1 million (2013: € 910.9
million). The present value of the defined benefit pension obligation
was € 3,812.7 million as of December 31, 2014 (2013: € 2,736.8
million).
→>
Hedge accounting for cash flows from highly probable forecast
transactions and firm purchase commitments
Determination of the fair value of financial instruments classified
as available-for-sale and of derivative financial instruments
→ Determination of the fair value of the liability for share-based
compensation
→ Determination of the fair value of plan assets
(8) CONSOLIDATION METHODS
The consolidated financial statements are based on the single-
entity financial statements of the consolidated companies as of
the balance sheet date, which were prepared applying consistent
accounting policies in accordance with IFRS.
Acquisitions are accounted for using the purchase method in
accordance with IFRS 3. Subsidiaries acquired and consolidated for
the first time were measured at the carrying values at the time of
acquisition on the basis of financial statements prepared for this
purpose. Differences resulting in this connection are recognized
as assets and liabilities to the extent that their fair values differ
from the values actually carried in the financial statements. Any
remaining – and usually positive - difference is recognized as
goodwill within intangible assets, and is subjected to an impairment
test if there are indications of impairment, or at least once a year.
In cases where a company was not acquired in full, non-con-
trolling interests are measured using the fair value of the propor-
tionate share of net assets. The option to measure non-controlling
interests at fair value (full goodwill method) was not utilized.
->
Provisions for pensions and other post-employment benefits
Merck maintains several defined benefit pension plans, particularly
in Germany, Switzerland and the United Kingdom. The determi-
nation of the present value of the obligation from these defined
benefit pension plans primarily requires estimates of the discount
rate, future salary increases, future pension increases and future
cost increases for medical care.
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
186
Determination of the level of amortization of intangible
assets with finite useful lives
In addition to goodwill and other intangible assets with indefinite
useful lives, Merck has a significant amount of intangible assets
with finite useful lives (carrying amount as of December 31, 2014:
€ 5,496.1 million/2013: € 5,026.8 million). Substantial assump-
tions and estimates are required to determine the appropriate level
of amortization of these intangible assets. This relates in particular
to the determination of the underlying remaining useful life. The
parameter is reviewed by Merck and adjusted if necessary at least
at the end of every fiscal year. In these estimates, Merck considers
factors including the typical product life cycles for each asset and
publicly available information about the estimated useful lives of
similar assets. Despite these analyses, the assumed useful lives can
prove false at a later date because of the high degree of uncertainty.
If the amortization of intangible assets from market authoriza-
tions, patents, licenses and similar rights, capitalized brand names
and trademarks had been 10% higher, for example due to short-
ened remaining useful lives, profit before income tax would have
been € 84.2 million lower in fiscal 2014 (2013: reduction of € 81.4
million). In fiscal 2014, a reduction of the useful lives of the intan-
gible assets reported in connection with the drug Rebif® by one
year would have lowered profit before income tax by € 73.6 million
(2013: € 61.4 million).
Research and development collaborations as well as
in- and out-licensing of intangible assets
Merck is regularly a partner of research and development collab-
orations with research institutions, biotechnology companies and
other contract partners. These collaborations are aimed at devel-
oping marketable products. Merck also enters into in-licensing
agreements regarding intellectual property of contract partners.
Such agreements typically involve making upfront payments and
payments for the achievement of certain milestones related to
development and marketing progress. In this context, Merck has
to judge to what extent up-front or milestone payments represent
remuneration for services provided (ongoing research and devel-
opment expense) or whether such payments result in an in-licensing
of an intangible asset that has to be capitalized. This assessment is
normally subject to judgment.
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
185
Merck also receives upfront and milestone payments as part of
research and development collaborations or out-licensing agree-
ments. In this context, income may only be recognized if Merck
has transferred any material risks and rewards of an intangible
asset to the acquirer, has no interest in the remaining business
activities and has no other continuing commitment. If these criteria
are not deemed to be met, the received payments are deferred and
recognized over the period in which Merck is expected to fulfill
its performance obligations. Both the assessment of the revenue
recognition criteria and the determination of the appropriate peri-
od during which revenue is recognized are subject to judgment. If
the upfront payment, which was agreed as part of the strategic
alliance with Pfizer Inc., USA, entered into during the reporting
period and which was received in cash and deferred as a liability,
had been deferred and recognized in the income statement over
a shorter period reduced by one year, profit before income tax for
fiscal year 2014 would have increased by € 2.7 million.
Identification of impairment of non-financial assets
Judgments are required in the identification of existing indications
of impairment of intangible assets and property, plant and equip-
ment. As of December 31, 2014, the carrying amounts of these
assets amounted to € 14,385.9 million (2013: € 12,514.4 million).
Merck uses external and internal information to identify indica-
tions of impairment. For example, the approval of a competing
product in the Merck Serono division or the closure of a location
can be an indicator of impairment. Nevertheless, Merck's analysis
of indications of impairment can prove too optimistic, too pessi-
mistic or incorrect in hindsight due to the high degree of uncer-
tainty. This would result in impairment tests being carried out too
late, too early or erroneously not carried out at all.
Impairment of financial assets
On every reporting date, Merck reviews whether there is any ob-
jective evidence that a financial asset is impaired and, if this is the
case, carries out the impairment to the extent estimated as neces-
sary. Particularly important in this context are impairment losses
on trade receivables whose carrying amount was € 2,235.6 million
in 2014 (2013: € 2,021.4).
Significant indicators for the identification of impaired receiv-
ables and the subsequent impairment tests are in particular
payment default or delay in the payment of interest or principal,
negative changes in economic or regional economic framework
conditions as well as considerable financial difficulties of a debtor.
These estimates are discretionary and can later prove to be incorrect.
Other provisions
As a global company for high-tech products in the pharmaceutical
and chemical industries, Merck is exposed to a multitude of litiga-
tion risks. In particular, these include risks from product liability,
competition and antitrust law, pharmaceutical law, patent law, tax
law and environmental protection. Merck is engaged in legal
proceedings and official investigations, the outcomes of which are
uncertain. A detailed description of the most important legal
matters as of the balance sheet date can be found in Note [48]. The
provisions recognized for legal disputes mainly relate to the Merck
Serono division and amounted to € 393.1 million as of the report-
ing date (2013: € 772.3 million). To assess the existence of a report-
ing obligation and to quantify pending outflows of resources,
Merck draws on the knowledge of the legal department as well as
any other outside counsel.
In spite of this, both the assessment of the existence of a present
obligation and the estimate of the probability of a future outflow
of resources are highly subject to uncertainty. Equally, the evalu-
ation of a possible payment obligation is to be considered a major
source of estimation uncertainty.
To a certain extent, Merck is obliged to take measures to pro-
tect the environment and reported provisions for environmental
protection of € 123.7 million as of December 31, 2014 (2013:
€ 111.2 million). The underlying obligations were located mainly
in Germany and the United States. Provisions were recognized
primarily for obligations from soil remediation and groundwater
protection in connection with the discontinued crop protection
business.
The calculation of the present value of the future settlement
amount requires, among other things, estimates of the future settle-
ment date, the actual severity of the identified contamination, the
applicable remediation methods and the associated future costs.
The measurement is carried out regularly in consultation with inde-
pendent experts. In spite of this, the determination of the future
settlement amount of the provisions for environmental protection
measures is subject to a considerable degree of uncertainty.
In the event of the discontinuation of clinical development
projects, Merck is regularly required to bear unavoidable subse-
quent costs for a certain future period of time. The measurement
of these provisions requires estimates regarding the length of time
and the amount of the subsequent costs.
8.3
Weighted average
cost of capital
after tax
Other judgments, assumptions and sources of estimation
uncertainty
Goodwill as of
Dec. 31, 2014
Bonds
Liabilities to related parties
Bank loans and overdrafts
Liabilities from derivatives (financial transactions)
Finance lease liabilities
Trade accounts payable
Other liabilities (current/non-current)
Liabilities from derivatives (operating business)
Liabilities from non-income-related taxes
Other liabilities
Income tax liabilities
Liabilities in connection with assets held for sale
Provisions (current/non-current)
Provisions for pensions and other post-employment benefits
Deferred tax liabilities
Amortized cost
Amortized cost
Amortized cost
Financial liabilities (current/non-current)
Fair value
EQUITY AND LIABILITIES
Property, plant and equipment
Long-term
growth rate
Fair value
Amortized cost
Lower of cost and net realizable value
Fair value
Amortized cost
Amortized cost
Expected tax refunds based on tax rates that have been enacted or
substantively enacted by the end of the reporting period
Lower of carrying amount and fair value less costs to sell
Amortized cost
Amortized cost (subsequent measurement impairment-only approach)
Amortized cost
Undiscounted measurement based on tax rates that are expected to apply
to the period when the asset is realized or the liability is settled
Income tax receivables
Intangible assets
With finite useful lives
With indefinite useful lives
Deferred tax assets
Amortized cost
Amortized cost
Assets held for sale
Settlement amount
When testing for potential impairments, Merck determines the
recoverable amount by discounting expected cash flows and
therefore uses the value-in-use method. Reference is made to the
latest forecasts approved by the company management that cover
a period of five years. Cash flows for periods in excess of this are
included using an individualized long-term growth rate for the
specific cash-generating unit.
-
The impairment tests include assumptions and estimates of
the amount of future cash flows and the discount rate. Among
other things, market observations, and - if available – market
data, target-actual deviations, detailed plans as well as past expe-
rience form the basis for the estimates of future cash flows. As-
sumptions and estimates relate in particular to future customers,
saleable quantities, achievable prices, corresponding cost develop-
ments, the long-term growth rate and the weighted average cost
of capital (WACC) used for discounting. All of these assumptions
are considered a source of estimation uncertainty due to their
inherent uncertainty. The following long-term growth rates and
discount rates were used to conduct the goodwill impairment tests
of the cash-generating units:
184
€ million/%
2014
Merck Serono
Consumer Health
Goodwill and intangible assets with indefinite useful lives that
do not generate any independent cash flows are allocated to
cash-generating units within the scope of the impairment test. A
cash-generating unit is a division as presented in the Segment
Reporting.
Performance Materials
2013
Merck Serono
Consumer Health
Merck Millipore
Performance Materials
Fair value
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
€ million/%
The goodwill (carrying amount as of December 31, 2014: € 5,693.9
million/2013: € 4,583.2 million) and other intangible assets with
indefinite useful lives (carrying amount as of December 31, 2014:
€ 168.7 million/2013: € 214.9 million) reported in the consolidated
financial statements are tested for impairment when a triggering
event arises or at least once a year. Impairment losses for goodwill
were not required to be recognized in the year under review. In
contrast, impairment losses of other intangible assets with indefinite
useful lives were recorded in the amount of € 84.8 million (2013:
€ 1.3 million); these were mainly attributable to the termination of
development projects.
Merck Millipore
Insofar as sales deductions were not already made on payments
received, Merck determines the level of sales deductions on the
basis of current experience and recognizes them as a liability. The
sales deductions reduce gross sales revenues. Adjustments of lia-
bilities can lead to increases or reductions of sales in later periods.
Expected tax payments based on tax rates that have been enacted or
substantively enacted by the end of the reporting period
Impairment tests of goodwill and other intangible assets
with indefinite useful lives
Fair value less costs to sell
Present value of the expenditures expected to be required to settle the
obligation
Projected unit credit method
Undiscounted measurement based on tax rates that are expected to apply
to the period when the asset is realized or the liability is settled
183
(7) MANAGEMENT JUDGMENTS AND
SOURCES OF ESTIMATION UNCERTAINTY
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
The preparation of the consolidated financial statements requires
management to make judgments and assumptions as well as esti-
mates to a certain extent. This affects the amount of assets and
liabilities, disclosures on contingent assets and liabilities, as well
as reported income and expenses. Actual values may differ from
the estimates made and assumptions and judgments may subse-
quently prove inaccurate. This is of fundamental importance for
the understanding of these consolidated financial statements and
the assessment of the underlying risks. The relevant assumptions
and estimates for the preparation of the consolidated financial
statements are reviewed on an ongoing basis. Changes in esti-
mates are considered in the period of the change and in subse-
quent periods if the change relates to both the reporting period
and also future periods. Judgments, forward-looking assumptions
and sources of estimation uncertainty with the greatest potential
effects on these consolidated financial statements are presented
below.
Recognition and measurement of assets, liabilities and
contingent liabilities acquired in the context of business
combinations
The most significant portion of these deductions from sales is
attributable to the Merck Serono division. The most complex and
most substantial rebates in this division relate to government rebate
programs in North America such as the U.S. Federal Medicare
Program and the U.S. Medicaid Drug Rebate Program. Other signi-
ficant sales deductions in the division result from compulsory
government rebate programs in certain European countries.
The measurement of assets, liabilities and contingent liabilities at
fair value as part of purchase price allocations is subject to esti-
mates which are prepared using the services of external valuation
experts. The fair values of the assets and liabilities recognized as
part of the purchase price allocation of AZ Electronic Materials
S.A. and further information on this acquisition, which closed in
the reporting period, can be found in Note [4].
Settlement amount
Sales deductions
Merck grants its customers various kinds of rebates and discounts.
In addition, expected product returns, state compulsory charges
and rebates from health plans and programs are also deducted
from sales.
Roughly one in seven couples in Germany
is unable to bear children due to fertility
disorders. The yearning to have a baby of
their own can quickly become a tale of
woe. But many couples are able to fulfill
their desire for a child through artificial
insemination. The per-cycle success rate
SILKE AND JENS →
"BY THE AGE OF 30, A WOMAN'S
PROBABILITY OF A SUCCESSFUL
PREGNANCY BEGINS TO DECLINE,
AND AT 40 THE ODDS BECOME
VERY LOW."
MAGAZINE Younger for Longer
for in vitro fertilization is about 70%.
Hormone therapy is of decisive importance
in treating infertility. As the world leader in
the fertility drug industry, Merck supplies
hormones for each phase of the reproduc-
tive cycle from developing the egg cell to
the early stage of pregnancy. The company
has also developed a wealth of products in
this area, including a computerized test
that improves the prospects of a successful
pregnancy by identifying viable embryos.
As a result of the intensive research and
development efforts, around two million
children have now been born thanks to
products from Merck.
-
What Silke and Jens went through is cer-
tainly no isolated case.
FULFILLING THE DESIRE FOR
CHILDREN THROUGH FERTILITY
TREATMENT
ASSISTED REPRODUCTIVE TECHNOLOGY HELPED SILKE AND JENS
TO HAVE THEIR CHILDREN LOVIS (RIGHT) AND HENRI.
"There are many causes of fertility disor-
ders. Half of cases are due to women, the
other half to men. However, in many cases
advanced age is the reason," says Professor
Dr. Heribert Kentenich from the Fertility
Center Berlin. Particularly in modern in-
dustrial nations, career plans or individual
fulfillment come first and many couples
delay family planning sometimes for
too long. "By the age of 30, a woman's
probability of a successful pregnancy be-
gins to decline, and at 40 the odds become
very low," Professor Kentenich explains.
Despite this, the trend is clear: Fewer and
fewer women are having their first child
before the age of 30. Naturally, the topic
of infertility is not confined to western
PROF. DR. HERIBERT KENTENICH
FERTILITY CENTER BERLIN
IN DARMSTADT, GERMANY.
10
10
FILLING OF READY-TO-USE SYRINGES
->
UNDER CLEANROOM CONDITIONS AT A MERCK
PHARMACEUTICAL PRODUCTION PLANT
MAGAZINE →
Younger for Longer
sons.
MAGAZINE Younger for Longer
LUCIANO ROSSETTI ->
EXECUTIVE VICE PRESIDENT,
9
"Congratulations, you're pregnant!" The
elation over the birth of Lovis in February
2008 was followed by another shock. The
baby had cerebral hemorrhaging. “After a
difficult period, Lovis is a happy, normal
boy today," the parents report with relief.
And he now has a younger brother to play
with. Henri was born in summer 2011. This
time, Silke became pregnant immediately
after the first attempt. “Maybe it was
because I was much more relaxed," Silke
says today. Silke and Jens experienced
an "emotional rollercoaster" during their
efforts to become parents. Artificial in-
semination was ultimately successful,
however twice in fact. "We wanted these
children so very much," the couple says
with conviction, gazing with pride at their
2030
On average, women are bearing fewer and fewer children.
In Asia, the fertility rate is likely to decline significantly.
Yet according to a forecast of the global distribution of births in 2030,
in absolute terms the majority of children will be born in Asia.
Northern
America
3.6%
GLOBAL HEAD OF RESEARCH &
DEVELOPMENT MERCK SERONO
Oceania
Europe
5.4%
Younger for Longer
Latin America
and the Caribbean
7.6%
MAGAZINE →
Africa
32.2%
50.7%
Asia
Source: United Nations, World Fertility Patterns 2013
1970
"Catch me if you can!" yells Lovis as he
races across the playground. Little Henri
runs behind his older brother, shouting.
The two boys keep their parents on their
toes. But for Silke (41) and Jens (44),
achieving this happy family was a long
and difficult process. "At around the age
of 30, I felt ready to start a family. At
the time, Jens was still in awe of the
responsibility of having a family, but I
was able to convince him. Then, however,
I couldn't get pregnant,” Silke explains.
There was a medical reason for this. When
she was 17 Silke suffered from pelvic
inflammatory disease, which blocked her
fallopian tubes. “Although I had suspected
this, it still came as a shock," Silke recalls.
After numerous discussions, the couple
decided to try artificial insemination. One
frequently used method is in vitro fertiliza-
tion (IVF), a procedure in which the egg is
fertilized outside the body. After ovulation
is induced, the egg cells are removed
through the vagina and placed in a test
tube with the sperm and then transferred
back afterwards. "The treatment took three
years; it was not an easy time for us," says
Jens. Silke agrees, "I put myself under
tremendous pressure and suffered from
mood swings. And the negative test results
made me very sad." Not until the seventh
attempt did they suddenly hear the words,
1.0-
3.4-
2030
Birth
distribution
worldwide
4.6-
5.8
7.0-
Fertility rate
Worldwide by region
BIRTH RATES AND DISTRIBUTION
FERTILITY
8
0.5%
2.2-
11
15
LONGER LIFE EXPECTANCY
THANKS TO MEDICAL ADVANCES
Birth rates continue to decline worldwide,
especially in highly developed societies and
in the emerging markets of Asia and Latin
America. At the same time, life expectancy
is increasing (see text on right) with grow-
ing numbers of people who are getting
older and older. This development is giving
rise to new challenges. This relates not
only to typical age-related diseases such as
neurodegenerative disorders that the med-
ical world is aiming to fight. Therapies to
treat chronic diseases can also help younger
patients to remain active members of the
workforce and society for longer. One of
Merck's goals is to help people with neuro-
degenerative disorders such as multiple
sclerosis by offering therapies that sub-
stantially help to improve their quality of
life. The same applies to cancer therapy.
Thanks to highly specialized biopharma-
ceuticals, many tumors can now be cured
through early detection and treatment. And
the company continues to drive progress
in cancer research with new approaches
that focus primarily on harnessing the
immune system to fight cancer. "In the
field of immuno-oncology, we are testing
treatment possibilities for our anti-PD-L1
antibody in several different pivotal clini-
cal studies across multiple types of cancer,
including non-small cell lung cancer and
ovarian cancer, as well as Merkel cell
carcinoma, a rare form of skin cancer,"
said Luciano Rossetti, Head of Global
Research and Development at Merck
Serono. Through the broad range of inno-
vative materials, reagents, test kits and
16
In 2030, well over two-thirds of the
middle class will reside in Asian countries.
industrialized nations. However, in many
countries it is a taboo topic. For this reason,
in 2014 Merck launched a widespread
educational campaign in India in order to
overcome the culturally driven obstacle of
silence.
MAGAZINE Markets in motion
Among other areas, Merck is investing in
biosimilars, which are subsequent versions
of innovator biopharmaceuticals made
by a different company following patent
expiration of the innovative product. An-
other important step is Merck's strategic
alliance with Pfizer, which was announced
in November 2014 and will allow the two
companies to jointly strengthen and accel-
erate the development of immuno-oncology
assets.
The consumer health care market is also
experiencing extremely dynamic growth
in emerging markets such as China, India,
Russia, and Latin America, along with
markets in the Middle East and Africa.
This growth is being driven by increasing
health awareness among the emerging
middle class, as well as the desire to feel
young and healthy until as late an age as
possible. Market research on the expand-
ing middle class segment in Africa shows
that health has become synonymous with
prosperity. "Health is the key to realizing
a higher standard of living. Good health
enables better performance, success and
recognition in one's professional as well as
private life," I says Erich Nobis, Vice Presi-
dent, Intercontinental at Merck Consumer
Health, particularly with a view to emerg-
ing markets. This business encompasses
products tailored to the markets and target
groups, such as food supplements for pre-
ventive health care, along with informa-
tional material for consumers and training
for personnel. "In order to accomplish this,
we have to be close to consumers, which
means we have to build and expand our
organizations in the core markets. Here,
qualified employees with a cultural back-
ground in the respective market are espe-
cially important," notes Nobis.
LEVERAGING GLOBAL
OPPORTUNITIES
Merck Millipore is also on a growth course
and is leveraging the opportunities offered
by both mature and emerging markets.
Every year, Merck develops new reliable
products for the life science industry, “Sci-
entists are everywhere and science happens
across the globe. Traditional sources of
MIDDLE CLASS →
GLOBAL DISTRIBUTION
in 2030
Sub-Saharan Africa
Growth is being driven by the need for
effective medicines, which is predicted to
rise further. With the increase in prosperity,
the birth rate is dropping, families are
being started later in life, and average life
expectancy is on the rise (see page 11). The
prevalence of diseases of civilization such
as diabetes and cardiovascular disorders is
predicted to increase even further. And
Merck offers health solutions to address
these issues. “Emerging markets have
accounted for almost two-thirds of Merck
Serono's organic growth over the last sev-
eral years," says Meeta Gulyani, Executive
Vice President, Head of Strategy & Global
Franchises at Merck Serono. "We are
uniquely positioned to further our great
potential in emerging markets by driving
growth of our specialty care portfolio,” she
explains.
2.2
4.8
Central and South America
6.4
North America
6.6
Europe
13.9
Source: United Nations Human Development Report 2013
scientific funding in North America and
Europe are still leading, but stagnating as
government funding is constrained and
pharmaceutical research is consolidating,"
says Daniel Stamm, Head of Global Phar-
ma Processing at Merck Millipore. Many
emerging markets are investing heavily to
develop biosimilar production capabilities.
Backed by favorable demographics as well
as improving education standards, Africa
and the Middle East have the potential
to foster a new generation of scientists.
"On the technology front, we are seeing
increasing volumes of biologic drug pro-
duction, of both currently off-patent drugs
as well as a burgeoning pipeline of new
biological entities. Cellular analysis is
becoming more relevant, as is the purity of
lab water and chemicals,” says Stamm.
%
Asia-Pacific
66.1
The middle class is growing worldwide,
and this growth is especially strong in Asia.
North Africa & Middle East
HEALTH AS A KEY FACTOR
For the Performance Materials business,
Merck's key goal is to underpin its global
leadership position in liquid crystals and
functional pigments, as well as to expand
this position through investments in new
technologies. Effect pigments from Merck
make coatings, plastics, print products,
and cosmetics shine. In its business
with effect pigments, which are used in
automotive coatings, Merck is thus also
benefiting from the boom the automotive
industry is experiencing in emerging
markets. "Today it is more important than
ever before to think outside the box, and to
meld the familiar with the unfamiliar in
order to develop truly innovative content,
products and applications," summarizes
Walter Galinat, who heads the Performance
Materials business at Merck. With this
philosophy, Merck is laying the ideal foun-
dation for success in dynamic markets.
A WELL-HONED STRATEGY
The new world economic order is signifi-
cantly impacting the strategic direction of
global players such as Merck. It is giving
rise not only to incredible opportunities,
but to risks as well. After all, the competi-
tion is not slumbering; in many sectors,
new competitors are springing up every-
where. Now more than ever, it is therefore
necessary for companies to be in the right
place at the right time, with the right
products. And to equip themselves for the
future. Success tomorrow will only come to
those who invest in innovative technolo-
gies today, make meaningful acquisitions,
forge strategic alliances and expand local
capacities; to those who optimize their pro-
cesses as well as attract and retain a quali-
fied workforce. Merck recognized the signs
of the times early on and is acting accord-
ingly. The company does not view emerg-
ing markets merely as sales markets with
enormous potential, but also as key tech-
nology and production hubs. This is why
Merck is significantly expanding its pres-
ence in these markets, whether that means
OTC products for consumer health, liquid
crystals for consumer electronics, labora-
tory products for the life science sector, or
medical care. In addition to this, the com-
pany is creating more efficient structures
and processes through its "Fit for 2018"
transformation and growth program. "We
have significantly increased our efficiency
in the last few years and will continue
on this successful course. We are already
well-positioned in global growth markets.
We are making targeted investments in our
businesses in order to further expand our
strong position in Healthcare, Life Sciences
EXECUTIVE VICE PRESIDENT, HEAD OF STRATEGY &
GLOBAL FRANCHISES MERCK SERONO
MEETA GULYANI →
MAGAZINE Markets in motion
14
The world is converging - with amazing
dynamism. Economic boundaries are
blurring, and global competition is heat-
ing up at an accelerating rate. Merck
is strengthening its presence in emerging
markets and preparing itself for a suc-
cessful future.
MARKETS IN
MOTION
MIDDLE CLASS
"WE ARE UNIQUELY POSITIONED TO FURTHER OUR GREAT POTENTIAL
TREND/2 →
GROWING
Life expectancy and world population
are rising
In the early 1960s, the worldwide fertility
rate averaged 4.9 children per woman. In
2012, the rate had fallen to 2.6 children over-
all, and in industrialized countries to 1.6.
Women in Germany currently give birth to an
average of just 1.4 children. When the birth
rate falls below the replacement-level fertility
rate of 2.1 children per woman, population
numbers shrink. In a global comparison, the
African continent has the highest fertility
rate of 4.4 children per woman.
Declining birth rates
HIGH QUALITY OF LIFE IN OLD AGE
Growing older does not necessarily mean
becoming more ill. The vast majority of
"new" senior citizens feel fitter for longer.
They are active, like to travel and con-
sume, and they take care of themselves.
Merck is responding to the increasingly
health-conscious older population with
over-the-counter products for the self-
treatment of minor complaints. In pharma-
cies around the globe, consumers can find
products tailored to the varying require-
ments of older men and women - for exam-
ple the Seven Seas Perfect7® range, a com-
bination made from sources of natural fish
oil rich in omega-3 fatty acids, with im-
portant vitamins and minerals. Products
like these are helping a growing number of
people enjoy a high quality of life in old
age. In order to maintain their appearance,
they can rely on cosmetic active ingredients
from Merck, for example substances that
offer protection from UV radiation, combat
aging of the skin and regulate the skin's
moisture balance. If wrinkles persist, they
can be covered with a skin-colored silicate
powder.
cell biology instruments, products used in
oncology and neurology, in molecular bio-
logy and stem cell research, or for infec-
tious diseases and metabolic disorders.
from filtration, sample preparation and
equipment from its Merck Millipore Life
Science business, Merck is also supporting
medical progress. Diverse products from
Merck make the development and manu-
facture of new medicines much easier -
Recent UN studies show that the world pop-
ulation will grow from the current 7 billion
to 11 billion people by the year 2100. Africa's
population will show a particularly dynamic
development. It is likely to increase between
now and then from 1 billion to 4 billion peo-
ple. Increasing life expectancy is the main
driver of population growth worldwide. In
1900, life expectancy in Germany was ap-
proximately 45 years; today a girl born in
Germany can expect to live to the age of 83,
and a boy to the age of 78. Researchers
believe life expectancies around the world
will continue to increase at varying rates,
depending on the region.
IN EMERGING MARKETS BY DRIVING GROWTH OF OUR SPECIALTY
CARE PORTFOLIO."
MAGAZINE → Markets in motion
DANIEL STAMM
HEAD OF GLOBAL PHARMA PROCESSING
AT MERCK MILLIPORE
Not long ago, there was still a clear world
order, one that was founded above all on
differences political, ideological and
economic. Yet since the fall of the Iron
Curtain, these differences have been in-
creasingly disappearing, eliminated by the
march of globalization. New free trade
agreements have resulted in enormous
economic areas - the markets are in motion.
The once profound differences between
developing, emerging and industrialized
countries are crumbling, primarily due to
a growing level of prosperity. According to
estimates, the middle class will represent
around 60% of the world's population by
the year 2030, with the Asia-Pacific region
accounting for two-thirds of that figure.
This "emerging middle class" is still a long
way off from attaining the income level
of central Europe. Yet in the past several
decades, many millions of people have
risen out of poverty in emerging markets
such as China, India and Brazil. Urbani-
zation is the key to this economic growth.
People from rural areas are finding jobs in
the megacities, where they are earning
rising incomes and spending heavily on
everything from their first flat-screen TV
to their first car. Multinational corporate
groups, which are increasingly building
production facilities in Asia, are driving
this dynamic development. More and
more, the expanding middle class is lead-
ing to a profound sociocultural trans-
formation, including a higher level of
education, greater political interest and
growing health awareness. Optimists view
this transformation as a long-term upward
spiral of prosperity.
OF BIOLOGIC DRUG PRO-
DUCTION."
"ON THE TECHNOLOGY
FRONT, WE ARE SEEING
INCREASING VOLUMES
and Performance Materials," says Karl-
Ludwig Kley, Chairman of the Executive
Board.
-136.9
-17.2
-163.7
-55.2
-13.0
-54.2
-4.3
-205.0
-222.2
The financial result improved year-on-year mainly as a result of
lower interest expenses and a reduced interest component from
currency hedging transactions. The higher interest expenses in
2013 included expenses for a bond that was repaid in September
2013.
These lower interest expenses were partially offset by financing
costs in connection with the proposed acquisition of the Sigma-
Aldrich Corporation, USA. The interest component from currency
hedging transactions compared to the previous year was mainly
due to savings resulting from the establishment of a U.S. dollar
in-house bank as this led to a significant decline in the nominal
value of existing currency hedging transactions.
Currency differences from financial investments were mainly
the result of expenses for premiums on options entered into to
hedge intragroup transactions in foreign currency.
-5.1
0.1
Interest component of the additions to pension provisions and other non-current provisions
Currency differences from financing activities
Result from financial investments
-54.3
-35.5
-47.1
-41.9
- 55.2
- 130.5
-83.9
- 49.0
-87.2
-225.6
-205.2
-95.5
-100.2
2013
2014
195
-176.6
Income from investments
30.6
-162.4
1.5
7.5
3.7
25.1
26.4
42.1
41.8
26.0
53.3
50.4
260.3
1.5
-912.8
-131.0
-125.2
-6.5
-4.4
- 2.3
- 8.8
-23.9
-21.8
-24.5
-37.4
1 Previous year's figures have been adjusted, see explanations below.
-684.1
30.1
39.4
426.4
2013
2014
Interest result
Interest component from currency hedging transactions
Interest expenses and similar expenses
Interest income and similar income
€ million
(31) FINANCIAL RESULT
The breakdown of other operating expenses and income by
division is presented in the Segment Reporting (see Note [51]).
Income from the release of provisions for litigation in fiscal
2014 amounted to € 260.3 million (2013: € 50.4 million) and was
mainly attributable to the settlement of the legal dispute with
Israel Bio-Engineering Project Limited Partnership (IBEP).
Other operating expenses also include special environmental
protection costs as well as personnel expenses not allocable to the
functional areas, for example costs of the works council.
42.1
Acquisition costs amounting to € 24.5 million (2013: € 0.0 mil-
lion) were incurred for the acquisition of AZ Electronic Materials
S.A., Luxembourg, as well as for the proposed acquisition of the
Sigma-Aldrich Corporation, USA.
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
196
The restructuring charges incurred in fiscal 2014 amounting to
€ 83.9 million (2013: € 130.5 million) arose in connection with the
"Fit for 2018" transformation and growth program in the amount
of € 79.5 million (2013: € 130.5 million). As in the previous year,
these charges largely related to personnel measures, for instance
Integration and IT costs of € 87.2 million (2013: € 49.0 million)
were incurred primarily for the global harmonization of the IT
landscape and in connection with the integration of acquired
and existing businesses.
which were classified to the category "available-for-sale”. In 2013,
impairments were recorded in the amount of € 17.3 million for
capitalized goodwill in connection with the sale of the Discovery
and Development Solutions business field of the Merck Millipore
division. Further information on impairments can be found under
Intangible Assets (see Note [41]).
The impairments totaled € 100.2 million (2013: € 225.6 million)
and related in the amount of € 84.9 million (2013: € 10.5 million)
to assets which were assigned to research and development, in the
amount of € 5.1 million (2013: € 12.6 million) to production
plants, in the amount of € 0.1 million (2013: € 156.2 million) to
sales-related assets, and in the amount of € 5.7 million (2013:
€ 23.5 million) to administration. In addition, impairments were
recognized in the amount of € 4.4 million (2013: € 5.5 million) for
non-consolidated investments and other financial instruments
The net expenses previously disclosed under one-time items
were reclassified to other operating income and expenses based on
their nature.
In fiscal 2014, income from the release of provisions for litigation
was disclosed separately and not offset against litigation expenses.
The previous year's figure has been correspondingly adjusted.
-718.1
-257.7
194.7
the elimination of positions in order to create a leaner and more
efficient organization. Of the recognized asset impairments, an
amount of € 4.5 million (2013: € 35.7 million) was attributable to
the program, which resulted in total expenses of € 84.0 million
(2013: € 166.2 million) for the "Fit for 2018" program.
Total other operating expenses and income
Acquired intangible assets are recognized at cost and are classified
as assets with finite and indefinite useful lives. Self-developed
intangible assets are only capitalized if the requirements specified
by IAS 38 have been met. Intangible assets acquired in the course
of business combinations are recognized at fair value on the
acquisition date.
Other operating income¹
Since the products are not manufactured within the scope of
long-term production processes, the manufacturing cost does not
include any borrowing cost.
Inventories are written down if the net realizable value is lower
than the acquisition or manufacturing cost carried in the balance
sheet.
Inventories are carried at the lower of cost or net realizable value.
When determining cost, the “first-in, first-out" (FIFO) and weighted
average cost formulas are used. In addition to directly attributable
unit costs, manufacturing costs also include overheads attribut-
able to the production process, which are determined on the basis
of normal capacity utilization of the production facilities.
Total other operating income¹
Other non-financial assets are carried at amortized cost. Allow-
ances are recognized for any credit risks. Long-term non-interest-
bearing and low-interest receivables are carried at their present
value. Other non-financial liabilities are carried at the amount to
be repaid.
(15) OTHER NON-FINANCIAL ASSETS AND
LIABILITIES
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
190
Other liabilities are non-derivative financial liabilities that are
subsequently measured at amortized cost. Differences between the
amount received and the amount to be repaid are amortized to
profit or loss over the maturity of the instrument. Merck primarily
assigns financial liabilities, trade payables, and miscellaneous
other non-derivative current and non-current liabilities to this
category.
Other liabilities
At Merck, cash flow hedges normally relate to highly probable
forecast transactions in foreign currency and to future interest
payments. In cash flow hedges, the effective portion of the gains
and losses on the hedging instrument is recognized in equity until
the hedged expected cash flows affect profit or loss. This is also
the case if the hedging instrument expires, is sold, or is terminated
before the hedged transaction occurs and the occurrence of the
hedged item remains likely. The ineffective portion of a cash flow
hedge is recognized directly in profit or loss.
Inventory prepayments are recorded under other current assets.
As a rule, the purpose of a fair value hedge is to offset the
exposure to changes in the fair value of recognized hedged items
(financial assets or financial liabilities) through offsetting changes
in the fair value of a hedging instrument. Gains and losses on the
hedging instrument resulting from changes in fair value are
recognized in profit or loss, net of deferred taxes. Offsetting gains
and losses on the hedged item that are attributable to the hedged
risk are also recognized in profit or loss, irrespective of the item's
allocation to a measurement category.
Merck uses derivatives solely to economically hedge recognized
assets or liabilities and forecast transactions. The hedge accounting
rules in accordance with IFRS are applied to some of these hedges.
A distinction is made between fair value hedge accounting and
cash flow hedge accounting. Designation of a hedging relation-
ship requires a hedged item and a hedging instrument. At Merck,
all hedges relate to recognized or highly probable hedged items.
Merck currently only uses derivatives as hedging instruments.
(14) FINANCIAL INSTRUMENTS:
DERIVATIVES AND HEDGE
ACCOUNTING
"Available-for-sale financial assets" are those non-derivative
financial assets that are not assigned to the measurement categories
“financial assets and financial liabilities at fair value through
profit or loss”, “held-to-maturity investments” or “loans and
receivables". Financial assets in this category are subsequently
measured at fair value. Changes in fair value are recognized imme-
diately in equity and are only transferred to the income statement
when the financial asset is derecognized. If there is objective
evidence that such an asset is impaired, an impairment loss is
recognized immediately in the income statement, including any
amounts already recognized in equity. Reversals of impairment
losses on previously impaired equity instruments are recognized
immediately in equity. Reversals of impairment losses on previ-
ously impaired debt instruments are recognized in profit or loss up
to the amount of the impairment loss. Any amount in excess of
this is recognized directly in equity. At Merck, this measurement
category is used in particular for securities and financial assets, as
well as interests in subsidiaries that are not consolidated due to
secondary importance (affiliates). Financial assets in this category
for which no fair value is available or fair value cannot be reliably
determined are measured at cost less any cumulative impairment
losses. Impairment losses on financial assets carried at cost may
not be reversed.
Available-for-sale financial assets
"Loans and receivables" are non-derivative financial assets with
fixed or determinable payments that are not quoted in an active
market. They are subsequently measured at amortized cost. If there
is objective evidence that such assets are impaired, an impairment
loss is recognized in profit or loss. Subsequent reversals of impair-
ment losses are also recognized in profit or loss up to the amount
of the original cost of the asset. Long-term non-interest-bearing
and low-interest receivables are measured at their present value.
Merck primarily assigns trade receivables, loans, and miscella-
neous other current and non-current receivables to this measure-
ment category. Merck always uses a separate allowance account
for impairment losses on trade and other receivables. Amounts
from the allowance account are recognized in the carrying amount
of the corresponding receivable as soon as this is settled or
derecognized due to irrecoverability.
Loans and receivables
189
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
"Held to maturity investments" are non-derivative financial assets
with fixed or determinable payments and a fixed maturity that are
quoted in an active market. To be able to assign a financial asset
to this measurement category, the entity must have the positive
intention and ability to hold it to maturity. These investments are
subsequently measured at amortized cost. If there is objective
evidence that such an asset is impaired, an impairment loss is
recognized in profit or loss. Subsequent reversals of impairment
losses are also recognized in profit or loss up to the amount of the
original cost of the asset. At Merck, this measurement category is
used for current and non-current financial assets.
Held to maturity investments
“Financial assets and financial liabilities at fair value through
profit or loss" can be both non-derivative and derivative financial
instruments. Financial instruments in this category are sub-
sequently measured at fair value. Gains and losses on financial
instruments in this measurement category are recognized directly
in the income statement. This measurement category includes an
option to designate non-derivative financial instruments as “at
fair value through profit or loss" on initial recognition (fair value
option) or as "financial instruments held for trading". The fair
value option was not applied during the fiscal year. Merck only
assigns derivatives to the "held for trading" measurement category.
Special accounting rules apply to derivatives that are designated
as hedging instruments in a hedging relationship.
The hedging relationship must be effective at all times, i.e. the
change in fair value of the hedging instrument fully offsets changes
in the fair value of the hedged item. Merck uses the dollar offset
method as well as regression analyses to measure hedge effective-
ness. Derivatives that do not or no longer meet the documentation
or effectiveness requirements for hedge accounting, whose hedged
item no longer exists, or for which hedge accounting rules are not
applied are reported as "financial assets and liabilities at fair value
through profit or loss". Changes in fair value are then recognized
in profit or loss.
(17) INTANGIBLE ASSETS
Intangible assets with indefinite useful lives
Intangible assets with indefinite useful lives are not amortized;
however they are tested for impairment when a triggering event
arises or at least once a year. Here, the respective carrying amounts
are compared with the recoverable amount of the cash-generating
unit and impairments are recognized as required. Impairment
losses recognized on indefinite-life intangible assets other than
goodwill are reversed if the original reasons for impairment no
longer apply.
Goodwill is allocated to cash-generating units and tested for
impairment either annually or if there are indications of impair-
ment. A cash-generating unit is a division as presented in the
Segment Reporting. The carrying amounts of the cash-generating
units are compared with their recoverable amounts and impair-
ment losses are recognized where the recoverable amount is lower
than the carrying amount. The recoverable amount of a cash-
generating unit is determined as the higher of fair value less costs
to sell and value in use estimated using the discounted cash flow
method. When testing for potential goodwill impairments, Merck
determines the recoverable amount by discounting expected cash
flows and therefore uses the value-in-use method.
Provisions are recognized in the balance sheet if it is more likely
than not that a cash outflow will be required to settle the obliga-
tion and the amount of the obligation can be measured reliably.
The carrying amount of provisions takes into account the amounts
required to cover future payment obligations, recognizable risks
and uncertain obligations of the Merck Group to third parties.
(21) PROVISIONS
Deferred tax assets and liabilities are only offset on the balance
sheet date if they meet the requirements of IAS 12.
Deferred tax assets and liabilities result from temporary differences
between the carrying amount of an asset or liability in the IFRS
and tax balance sheets of consolidated companies as well as from
consolidation activities, insofar as the reversal of these differences
will occur in the future. In addition, deferred tax assets are record-
ed in particular for tax loss carryforwards if and insofar as their
utilization is probable in the foreseeable future. In accordance
with the liability method, the tax rates enacted and published as
of the balance sheet date are used.
(20) DEFERRED TAXES
Where non-current assets are leased and economic ownership lies
with Merck (finance lease), the asset is recognized at the present
value of the minimum lease payments or the lower fair value in
accordance with IAS 17 and depreciated over their useful life. The
corresponding payment obligations from future lease payments
are recorded as liabilities. If an operating lease is concerned, the
associated expenses are recognized in the period in which they are
incurred.
(19) LEASING
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
192
3 to 10 years
6 to 25 years
maximum of 33 years
maximum of 40 years
Useful life
The useful lives of the assets are reviewed regularly and adjusted
if necessary. If indications of a decline in value exist, an impairment
test is performed. The determination of the possible need to recog-
nize impairments proceeds in the same way as for intangible assets.
If the reasons for an impairment loss no longer exist, a reversal of
the impairment loss recognized in prior periods is recorded.
Operating and office equipment; other facilities
Plant and machinery
Administration buildings
Production buildings
USEFUL LIFE OF PROPERTY, PLANT AND EQUIPMENT
time, the directly attributable borrowing costs incurred up until
completion are capitalized as part of the costs. In accordance with
IAS 20, costs are reduced by the amount of government grants in
those cases where government grants or subsidies have been paid
for the acquisition or manufacture of assets (grants related to
assets). Grants related to expenses which no longer offset future
expenses are recognized in profit or loss. Property, plant and
equipment is depreciated by the straight-line method over the
useful life of the asset concerned. Depreciation of property, plant
and equipment is based on the following useful lives:
Property, plant and equipment is measured at cost less depreciation
and impairments plus reversals of impairments. The component
approach is applied here in accordance with IAS 16. Subsequent
costs are only capitalized if it is probable that future economic
benefits will arise for the Group and the cost of the asset can be
measured reliably. The cost of self-constructed property, plant and
equipment is calculated on the basis of the directly attributable
unit costs and an appropriate share of overheads. If the construc-
tion of property, plant and equipment takes a substantial period of
(18) PROPERTY, PLANT AND EQUIPMENT
191
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
Intangible assets with finite useful lives
Intangible assets with a finite useful life are amortized using the
straight-line method. The useful lives of marketing authorizations,
acquired patents, licenses and similar rights, brand names, trade-
marks and software are between 3 and 19 years. Amortization of
intangible assets and software is allocated to the functional costs
in the income statement. An impairment test is performed if there
are indications of impairment. Impairment losses are determined
using the same methodology as for indefinite-life intangible
assets. Impairment losses are reversed if the original reasons for
impairment no longer apply.
Financial assets and financial liabilities at fair value
through profit or loss
Financial assets and liabilities are classified into the following
IAS 39 measurement categories and IFRS 7 classes. The classes
required to be disclosed in accordance with IFRS 7 consist of the
measurement categories set out here. Additionally, cash and cash
equivalents with an original maturity of up to 90 days, finance
lease liabilities, and derivatives designated as hedging instruments
are also classes in accordance with IFRS 7. There were no reclas-
sifications between the aforementioned measurement categories
during the fiscal year.
CATEGORIES AND CLASSES OF
FINANCIAL INSTRUMENTS
(13) FINANCIAL INSTRUMENTS:
140.594
0.834
8.345
0.781
7.534
8.178
8.167
0.848
0.805
Dec. 31, 2013
Dec. 31, 2014
2013
2014
Closing rate
Average annual rate
U.S. dollar (USD)
Taiwan dollar (TWD)
Swiss franc (CHF)
Japanese yen (JPY)
British pound (GBP)
Chinese renminbi (CNY)
€1=
rates:
When the financial statements of consolidated companies are pre-
pared, business transactions that are conducted in currencies oth-
er than the functional currency are recorded using the current
exchange rate on the date of the transaction. Foreign currency
monetary items (cash and cash equivalents, receivables and pay-
ables) in the year-end financial statements of the consolidated
companies prepared in the functional currency are translated at
the respective closing rates. Exchange differences from the trans-
lation of monetary items are recognized in the income statement
with the exception of net investments in a foreign operation.
Hedged items are likewise carried at the closing rate. The resulting
gains or losses are eliminated in the income statement against
offsetting amounts from the fair value measurement of derivatives.
Currency translation was based on the following key exchange
The functional currency concept applies to the translation of finan-
cial statements of consolidated companies prepared in foreign
currencies. The subsidiaries of the Merck Group generally conduct
their operations independently. The functional currency of these
companies is normally the respective local currency. Assets and
liabilities are measured at the closing rate, and income and ex-
penses are measured at weighted average annual rates in euros,
the reporting currency. Any currency translation differences aris-
ing during consolidation of Group companies are taken directly to
equity. If Group companies are deconsolidated, existing currency
differences are reversed and reclassified to profit or loss. The local
currency is not the functional currency at only a few subsidiaries.
(9) CURRENCY TRANSLATION
187
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
129.016
Measurement is based on the settlement amount with the
highest probability or, if the probabilities are equivalent and a high
number of similar cases exist, it is based on the expected value of
the settlement amounts. Long-term provisions are discounted and
carried at their present value as of the balance sheet date. To the
extent that reimbursement claims exist as defined in IAS 37, they
are recognized separately as an asset if their realization is virtually
certain and the asset recognition criteria has been met.
145.392
1.214
40.172
expired or if control and substantially all the risks and rewards of
ownership of the financial asset have been transferred to a third
party. Financial liabilities are derecognized if the contractual
obligations have been discharged, cancelled, or expired. Cash and
cash equivalents are carried at nominal value.
Financial assets are derecognized in part or in full if the
contractual rights to the cash flows from the financial asset have
Financial assets and financial liabilities are generally measured
at fair value on initial recognition, if necessary including trans-
action costs.
As a rule, Merck accounts for regular way purchases or sales
of financial instruments at the settlement date and of derivatives
at the trade date.
Derivatives can be embedded in other financial instruments or
in non-financial instruments. Under IFRS, an embedded deriva-
tive must be separated from the host contract and accounted for
separately at fair value if the economic characteristics of the
embedded derivative are not closely related to the economic char-
acteristics of the host contract. Issued compound financial instru-
ments with both an equity and a liability component must be
recognized separately depending on their characteristics. Merck
was not a party to hybrid or compound financial instruments
during the fiscal year.
A financial instrument is any contract that gives rise to both
a financial asset of one entity and a financial liability or equity
instrument of another entity. A distinction is made between non-
derivative and derivative financial instruments.
(12) FINANCIAL INSTRUMENTS:
PRINCIPLES
Reimbursements for R&D are offset against research and devel-
opment costs.
Research and development costs comprise the costs of research
departments and process development, the expenses incurred as a
result of research and development collaborations as well as the
costs of clinical trials (both before and after approval is granted).
The costs of research cannot be capitalized and are expensed
in full in the period in which they are incurred. As internally gen-
erated intangible assets, it is necessary to capitalize development
expenses if the cost of the internally generated intangible asset can
be reliably determined and the asset can be expected to lead to
future economic benefits. The condition for this is that the necessary
resources are available for the development of the asset, technical
feasibility of the asset is given, its completion and use are intended,
and marketability is given. Owing to the high risks up to the time
that pharmaceutical products are approved, these criteria are not
met in the pharmaceutical business. Costs incurred after regulatory
approval are usually insignificant and are therefore not recognized
as intangible assets. Owing to the risks existing up until market
launch, development expenses in the Performance Materials and
Merck Millipore divisions can likewise not be capitalized.
(11) RESEARCH AND DEVELOPMENT COSTS
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
188
Dividend income is recognized when the shareholders' right to
receive the dividend is established. This is normally the date of the
dividend resolution. Interest income is recognized in the period in
which it is earned.
Depending on the substance of the relevant agreements,
royalty, license and commission income is recognized either
immediately or is recognized when the contractual obligation is
fulfilled.
In addition to revenue from the sale of goods, sales also include
revenue from services, but the volume involved is insignificant.
Long-term, customer-specific manufacturing contracts do not exist.
Sales are recognized net of sales-related taxes as well as sales
deductions. They are recognized once the goods have been deliv-
ered or the services have been rendered, the significant risks and
rewards of ownership have been transferred to the purchaser, the
amount of revenue can be measured reliably, and it is probable
that the economic benefits will flow to the entity. When sales are
recognized, estimated amounts are taken into account for expected
sales deductions, for example rebates, discounts and returns.
(10) RECOGNITION OF SALES AND
REVENUES
1.379
41.128
38.448
1.215
1.330
1.325
1.227
1.203
1.228
39.471
144.729
(22) PROVISIONS FOR PENSIONS AND
(16) INVENTORIES
Provisions for pensions and other post-employment benefits are
recorded in the balance sheet in accordance with IAS 19. The obli-
gations under defined benefit plans are measured using the project-
ed unit credit method. Under the projected unit credit method,
dynamic parameters are taken into account in calculating the ex-
pected benefit payments after an insured event occurs; these pay-
ments are spread over the entire period of service of the participat-
ing employees. Annual actuarial opinions are prepared for this
purpose. The actuarial assumptions for discount rates, salary and
pension trends, staff turnover as well as health care cost increases,
which were used to calculate the benefit obligation, were deter-
mined on a country-by-country basis in line with the economic
conditions prevailing in each country; the latest country-specific
actuarial mortality table was used in each case. The respective
discount rates are generally determined on the basis of the returns
on high-quality corporate bonds issued with adequate maturities
and currencies. For euro-denominated obligations, bonds with
ratings of at least "AA" from one of the three major rating agen-
cies (Standard & Poor's, Moody's or Fitch), and a euro swap rate of
adequate duration served as the basis for the data. Actuarial gains
and losses resulting from changes in actuarial assumptions and/or
experience adjustments (the effects of differences between the
previous actuarial assumptions and what has actually occurred)
are recognized immediately in equity as soon as they are incurred,
taking deferred taxes into account. Consequently, the balance
sheet discloses - after deduction of the plan assets - the full scope
of the obligations while avoiding the fluctuations in expenses that
can result especially when the calculation parameters change. The
actuarial gains and losses recorded in the respective reporting
period are presented separately in the Statement of Comprehensive
Income.
The breakdown of research and development costs by division
and region is presented in the Segment Reporting (see Note [51]).
Reimbursements for research and development amounting to
€ 18.4 million (2013: € 15.0 million) were offset against research
and development costs. This figure also included government
subsidies of € 5.9 million (2013: € 8.9 million).
Research and development costs increased in 2014 to € 1,703.7
million (2013: € 1,506.6 million). Amortization of intangible
assets (excluding software) that had been attributable to research
and development costs was allocated to this functional area for
the first time in 2014.
(29) RESEARCH AND DEVELOPMENT COSTS
The breakdown of royalty, license and commission expenses
by division is presented in the Segment Reporting (see Note [51]).
Co-marketing agreements lead to sales-dependent commission
payments that are expensed in the period in which they are
incurred. The commission expenses incurred related mainly to the
marketing of Rebif® in the United States, for which expenses of
€ 314.6 million were incurred in 2014 (2013: € 302.4 million).
These also represented exclusively selling expenses.
The sales-dependent royalty payments represented selling
expenses and were expensed in the period in which they were
incurred. Of significance here are the marketing rights to Erbitux®
outside the United States and Canada, for which expenses totaling
€ 84.7 million (2013: € 80.9 million) were incurred in 2014.
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
In 2014, royalty and license expenses amounted to € 160.5 million
(2013: € 212.8 million) and commission expenses totaled € 377.0
million (2013: € 354.2 million).
Premiums, fees and contributions
Personnel costs and material expenses of management and
administrative functions were recorded under this item unless
charged to other functional costs as internal services.
(28) ADMINISTRATION EXPENSES
The breakdown of marketing and selling expenses by division
is presented in the Segment Reporting (see Note [51]).
Amortization of intangible assets was attributable to marketing
approvals, patents, licenses and similar rights, brands, trademarks
and other, which could be functionally allocated to Marketing and
Selling.
- 88.9
-3,088.5
-3,104.9
(27) ROYALTY, LICENSE AND COMMISSION
EXPENSES
(30) OTHER OPERATING EXPENSES AND
INCOME
Other operating expenses and income were as follows:
€ million
Allowances for receivables
Non-income related taxes
OTHER POST-EMPLOYMENT BENEFITS
Acquisition costs
Expenses for miscellaneous services
Losses on the divestment of businesses
Project costs
Other operating expenses'
Total other operating expenses¹
Gains from the release of provisions for litigation
Exchange rate differences from operating activities
Release of allowances for receivables
Income from miscellaneous services
Gains on disposal of assets
Integration costs/IT costs
Litigation¹
Impairment losses¹
-81.0
- 762.0
The breakdown of administration expenses by division is
presented in the Segment Reporting (see Note [51]).
-390.7
Marketing and selling expenses comprised the following:
(26) MARKETING AND SELLING EXPENSES
-719.0
194
The breakdown of cost of sales by division is presented in the
Segment Reporting (Note [51]).
Cost of sales primarily included the cost of manufactured products
sold as well as merchandise sold. Cost comprises overheads and, if
necessary, inventory write-downs, in addition to directly attribut-
able costs, such as the cost of materials, personnel and energy, as
well as depreciation / amortization.
(25) COST OF SALES
In 2014, royalty and license income totaled € 138.0 million (2013:
€ 359.8 million) and mainly included royalty and license income
from the products Humira® (AbbVie Inc.), Viibryd® (Actavis,
formerly Forest Laboratories Inc.) and Puregon® (Merck & Co. Inc.)
as well as income from the active pharmaceutical ingredients
bisoprolol and metformin. The change compared to 2013 resulted
primarily from the expiration of the patents for Avonex® (Biogen
Idec Inc.) and Enbrel® (Amgen Inc.). An out-of-court settlement was
reached with AbbVie Inc. for patent disputes regarding Humira®.
Based on this settlement, Merck recorded no further license income
for this product as of the second half of 2014.
(24) ROYALTY, LICENSE AND COMMISSION
INCOME
The breakdown of royalty, license and commission income by
division is presented in the Segment Reporting (see Note [51]).
In 2014, commission income totaled € 71.3 million (2013:
€ 35.2 million). This primarily consisted of proceeds from coopera-
tion and distribution agreements.
Revenue from the strategic alliance with Pfizer Inc., USA, in
immuno-oncology was recognized for the first time in 2014. More
details on the agreement can be found in Note [5].
Sales were generated primarily from the sale of goods and to
a limited degree also included revenues from services rendered.
Merck Group sales totaled € 11,291.5 million in 2014 (2013:
€ 10,700.1 million), which represented an increase of 5.5%
compared to 2013 (decrease of -0.4% in 2013). Sales are presented
by division and region in the Segment Reporting (see Note [51]).
(23) SALES
193
NOTES TO THE CONSOLIDATED INCOME STATEMENT
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
€ million
CONSOLIDATED FINANCIAL STATEMENTS →
Restructuring costs
Sales force
Other marketing and selling expenses
Marketing and selling expenses¹
1 The disclosure of amortization of intangible assets (excluding software) has been changed. See Note "Accounting and measurement principles".
2014
2013
-809.3
Notes to the Group accounts
-789.8
-598.7
Logistics
-469.4
- 458.4
-412.6
Sales promotion
Internal sales services
-613.6
Amortization of intangible assets¹
4,695.7
-11.2
- 30.1
-1.5
-13.5
Disposals
109.6
36.3
1.8
64.5
7.0
Additions
16,684.2
35.4
288.1
-0.1
Changes in scope of consolidation
938.2
Transfers
243.1
594.1
2,911.1
5,693.9
4,583.2
Information on impairment tests of intangible assets with
indefinite useful lives
Since goodwill and other intangible assets with indefinite useful
lives are not amortized, these are subjected to an impairment test
if there are indications of impairment, or at least once a year.
In 2014, goodwill was not impaired. The assumptions used in
the goodwill impairment test are presented in Note [7].
For intangible assets with indefinite useful lives there was an
impairment loss in 2014 in the amount of € 84.8 million (2013:
€ 1.3 million). An impairment of € 37.5 million related to the asset
from the licensing agreement with Symphogen A/S, Denmark. The
discontinuation of the Phase III development program for
tecemotide, an investigational antigen-specific cancer immuno-
therapy, led to an impairment loss of the relevant intangible asset
amounting to € 18.5 million.
A further amount of € 14.0 million was due to the discontinuation
of the development activities for ceralifimod (ONO-4641) for the
treatment of multiple sclerosis. All items were disclosed in the
income statement of Serono as impairment losses under other
operating expenses.
In fiscal 2014, software impairments of € 5.1 million (2013:
€ 4.3 million) were recognized in the income statement under
other operating expenses.
In 2014, no intangible assets were pledged as security for lia-
bilities.
10,932.7
December 31, 2013
-56.4
-163.1
-10.7
-65.9
-0.3
-86.1
Currency translation
-63.1
-16.5
-46.6
Classification as held for sale or transfer to a disposal group
7.3
-29.2
36.3
-0.8
1.0
-0.1
11,070.9
466.2
Total
Neither past due nor impaired
Past due, but not impaired
up to 3 months
up to 6 months
up to 12 months
up to 24 months
over 2 years
Impaired
Carrying amount
In 2014, allowances for other receivables from third parties
amounting to € 0.4 million (2013: € 0.6 million) were necessary.
There were no reversals of allowances in this connection in 2014
or in 2013.
(40) TAX RECEIVABLES
Tax receivables amounted to € 297.0 million (2013: € 109.8 million)
and resulted from tax prepayments that exceeded the actual
amount of tax payable for 2014 and prior fiscal years, and from
refund claims for prior years as well as withholding tax credits.
203
Dec. 31, 2014
Dec. 31, 2013
149.1
109.8
2.2
3.3
0.3
0.7
0.9
1,601.5
€ million
Cost at January 1, 2013
Other receivables from third parties past due were as follows:
(2013: € 30.6 million). In addition, other prepayments were reported
under this item. Other assets comprise the entitlement to the joint
marketing right for Xalkori® (crizotinib) with Pfizer Inc., USA, in
the amount of € 294.4 million (see Note [5]).
Advance
payments
Software
Goodwill
Notes to the Group accounts
Indefinite
useful life
Finite
useful life
Marketing authorizations,
patents, licenses and
similar rights, brands,
trademarks and other
CONSOLIDATED FINANCIAL STATEMENTS →
€ million
(41) INTANGIBLE ASSETS
204
115.4
152.4
0.4
0.2
0.2
0.7
174.2
50.0
224.2
360.7
105.5
Other receivables included current receivables from related parties
amounting to € 76.5 million (2013: € 32.5 million) as well as cur-
rent receivables from affiliates amounting to € 0.9 million (2013:
€ 0.6 million). Interest receivables amounted to € 12.5 million
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
214.9
Deferred taxes (income statement)
1.9
47.0
0.2
Transfers
- 78.4
-0.2
-11.9
143.3
40.4
2.2
38.6
-61.5
-4.8
Disposals
62.1
Additions
1,869.5
1.6
818.4
1,049.5
Changes in scope of consolidation
16,518.5
42.3
304.3
4,583.2
-45.5
656.0
1.7
Currency translation
- 84.8
-877.2
-35.6
-841.6
Disposals
Impairment losses
Amortization
Changes in scope of consolidation
-6,651.3
-217.6
-441.1
- 5,992.6
Accumulated amortization and impairment losses January 1, 2014
19,043.6
37.0
354.0
589.0
10.8
292.3
5,693.9
0.6
633.7
12,325.0
285.3
December 31, 2014
Classification as held for sale or transfer to a disposal group
10,932.7
Cost at January 1, 2014
9,867.2
13.4
-178.4
-4.3
-17.3
-1.3
-155.5
- 856.0
-42.5
-813.5
Transfers
Disposals
Impairment losses
Amortization
Changes in scope of consolidation
- 5,739.7
-189.1
-437.5
-5,113.1
Accumulated amortization and impairment losses January 1, 2013
16,518.5
42.3
304.3
642.9
1,266.7
1.5
17.3
11.2
43.4
42.3
86.7
4,583.2
214.9
4,940.1
Net carrying amount as of December 31, 2013
-6,651.3
40.0
41.0
-217.6
8.8
-5.1
-441.1
0.3
30.9
41.0
December 31, 2013
Currency translation
Classification as held for sale or transfer to a disposal group
Reversals of impairment losses
-1.6
-1.7
-4.1
4.2
- 5,992.6
-0.2
- 90.1
4.7
152.8
0.5-18.3
Technologies
11.5
PuregonⓇ
19.1
HumiraⓇ
184.4
153.7
153.7
5.0
SaizenⓇ
474.7
379.8
379.8
4.0
Gonal-fⓇ
2,209.0
1,841.0
1,841.0
5.0
Rebif®
4,940.1
0.1
1,054.3
408.4
1,615.6
166.8
Goodwill
Indefinite useful life
42.1
4.6
37.5
3.0-19.3
Other
1,166.5
1,097.0
1,095.2
5,398.9
0.2
0.6
0.5-12.5
Customer relationships
255.5
269.7
248.9
12.0
8.8
0.5-9.5
Brands
619.4
1.0
168.7
1,752.5
9.9
205
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
11,395.5
36.8
97.2
5,693.9
168.7
5,398.9
Net carrying amount as of December 31, 2014
-105.8
-7,648.1
-0.2
-8.6
-256.8
-0.6
-465.0
- 6,926.1
December 31, 2014
-96.6
Currency translation
Classification as held for sale or transfer to a disposal group
Reversals of impairment losses
Transfers
76.3
10.1
61.5
Marketing authorizations, patents, licenses and similar
rights, brands, trademarks and other
The changes in the scope of consolidation comprise additions
to intangible assets resulting from the acquisition of AZ Electronic
Materials S.A., Luxembourg. A detailed presentation of this acqui-
sition can be found in Note [4].
The net carrying amount of "Marketing authorizations, patents,
licenses and similar rights, brands, trademarks and other" with
finite useful lives amounting to € 5,398.9 million (2013: € 4,940.1
million) mainly included the identified and capitalized assets from
the purchase price allocations for the acquisition of AZ Electronic
Materials S.A., the Millipore Corporation and Serono SA. The vast
majority was attributable to marketing authorizations of active
pharmaceutical ingredients and technologies. The remaining useful
lives of these assets ranged between 0.5 and 19.3 years.
The additions to intangible assets with finite useful lives
amounted to € 62.1 million in 2014 (2013: € 7.0 million). The Merck
Serono division accounted for € 59.0 million of this figure. Most of
this amount was attributable to the license agreement with Auxogyn
regarding the Eeva test, to a cooperation agreement with Sutro
Biopharma, USA, to develop antibody active ingredient conju-
gates in oncology, and to marketing rights for Glucophage and
Euthyrox® in Russia, for Rovatitan® in Korea and for CetrotideⓇ in
Japan.
2,565.4
Finite useful life
Dec. 31, 2013
Dec. 31, 2014
Total
Total
Merck
Millipore
Performance
Materials
Consumer
Health
Merck Serono
years
1,071.1
Remaining
useful life in
CONSOLIDATED FINANCIAL STATEMENTS →
Marketing authorizations, patents, licenses and
similar rights, brands, trademarks and other
€ million
The carrying amounts of “Marketing authorizations, patents,
licenses and similar rights, brands, trademarks and other" as well
as goodwill were attributable to the divisions as follows:
206
In connection with the sale of the Discovery and Development
Solutions business field of the Merck Millipore division to Euro-
fins Scientific S.A., Luxembourg, in 2013 goodwill allocated to the
business field in the amount of € 16.5 million was reclassified to
"assets held for sale" and disposed of after the closing in the first
quarter of 2014.
Goodwill was incurred mainly in connection with the acquisition
of AZ Electronic Materials S.A., the Millipore Corporation and
Serono SA. The changes in goodwill caused by foreign exchange
rates resulted almost exclusively from translating the goodwill of
AZ Electronic Materials S.A. and the Millipore Corporation, part of
which is carried in U.S. dollars, into the reporting currency.
Goodwill
In 2014, additions to intangible assets with indefinite useful
lives amounted to € 38.6 million (2013: € 64.5 million) and were
exclusively attributable to the Merck Serono division. The amounts
related to further milestone payments to Symphogen A/S, Denmark,
for the acquisition of a license to an oncological compound.
Additionally, Merck entered into two new licensing agreements
with Mersana Therapeutics Inc., USA, and Sutro Biopharma, USA,
in oncology.
the extent to which these projects will ultimately lead to market-
able products, the period for which the resulting capitalized assets
would generate an economic benefit for the company could not
yet be determined. Amortization will only begin once the products
receive marketing approval and is carried out on a straight-line
basis over the shorter period of the patent or contract term or the
expected useful life.
The item “Marketing authorizations, patents, licenses and
similar rights, brand names, trademarks and other" with indefinite
useful lives primarily related to rights that Merck had acquired for
active ingredients, products or technologies that were still in the
research and development stage. Owing to the uncertainty as to
Notes to the Group accounts
56.5
656.0
48.2
0.8
106.5
107.3
0.4
77.5
77.9
The increase in non-German tax loss carryforwards and the higher
deferred tax assets compared to 2013 was mainly the result of the
acquisition of AZ Electronic Materials S.A., Luxembourg.
Deferred tax assets are recognized for tax loss and interest
carryforwards only if for tax loss carryforwards of less than € 5.0
million realization of the related tax benefits is probable within
one year, and for tax loss carryforwards of more than € 5.0 million
realization of the related tax benefits is probable within the next
three years.
The vast majority of the tax loss carryforwards either has no
expiry date or can be carried forward for up to 20 years.
The tax loss carryforwards accumulated in Germany for corpora-
tion and trade tax amounted to € 8.0 million (2013: € 3.4 million).
The additional theoretically possible deferred tax assets
amounted to € 107.3 million (2013: € 77.9 million).
In 2014, the income tax expense was reduced by € 18.5 million
(2013: € 0.4 million) due to the utilization of tax loss carryfor-
wards from prior years for which no deferred tax asset had been
recognized in prior periods.
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
Deferred tax assets and liabilities correspond to the following bal-
ance sheet items:
€ million
199
Dec. 31, 2014
Assets
Dec. 31, 2013
Liabilities
Theoretical deferred tax asset
337.5
334.9
2.6
thereof:
Including deferred tax asset
3.1
292.5
295.6
0.8
102.5
103.3
Deferred tax asset
Assets
0.5
72.0
0.2
20.6
20.8
thereof:
Excluding deferred tax asset
4.9
655.9
660.8
71.5
Liabilities
Intangible assets
Property, plant and equipment
338.0
47.2
149.6
47.2
Current and non-current other provisions
308.1
72.5
311.8
69.0
Provisions for pensions and other post-employment benefits
Current and non-current liabilities
36.0
41.6
4.9
Tax loss carryforwards
Tax refund claims/Other
Offset deferred tax assets and liabilities
Deferred taxes (balance sheet)
72.0
20.8
120.0
Tax loss carryforwards
23.4
7.4
72.2
1,047.5
39.5
801.2
16.1
69.8
14.8
58.3
Current and non-current financial assets
39.1
0.1
0.1
3.9
Inventories
507.6
10.2
442.1
1,210.2
Current and non-current receivables/Other assets
57.5
3.6
18.7
440.8
3.4
Tax rate
30.7%
30.7%
Theoretical tax expense
-478.0
-426.3
Tax rate differences
100.8
109.7
Tax effect of companies with a negative contribution to consolidated profit
-15.8
-14.6
Tax for other periods
-21.9
-41.6
Tax credits
23.2
225.8
Tax effect on tax loss carryforwards
1,388.6
1,557.0
2013
2014
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
(32) INCOME TAX
€ million
Current taxes in the period
Taxes for previous periods
Deferred taxes in the period
The following table presents the tax reconciliation from theoretical
tax expense to tax expense according to the income statement.
The theoretical tax expense is determined by applying the statutory
tax rate of 30.7% of a corporation headquartered in Darmstadt.
€ million
Profit before income tax
18.5
197
2013
-592.4
-496.9
-21.9
-41.6
222.1
359.0
-392.2
-179.5
2014
0.4
Tax effect of non-deductible expenses/tax-free income/Other tax effects
-19.0
42.0
Changes in scope of consolidation/currency translation/other changes
295.9
0.7
4,583.2
222.1
359.0
Tax loss carryforwards were structured as follows:
€ million
-177.4
Dec. 31, 2013
Germany
Abroad
Total
Germany
Abroad
Total
8.0
948.4
956.4
Dec. 31, 2014
437.4
Deferred taxes credited/debited to equity
-152.9
-32.9
Tax expense according to income statement
-392.2
-179.5
Tax ratio according to income statement
25.2%
12.9%
The tax expense consisted of corporation and trade taxes for the
companies domiciled in Germany as well as comparable income
taxes for foreign companies.
In 2013 the higher tax credits in 2013 arose primarily in the
United States due to the consideration of dividend income from
high-tax countries.
526.5
198
€ million
CONSOLIDATED FINANCIAL STATEMENTS →
Notes to the Group accounts
2014
2013
Change in deferred tax assets (balance sheet)
256.5
-210.2
Change in deferred tax liabilities (balance sheet)
The reconciliation between deferred taxes in the balance sheet and
deferred taxes in the income statement is presented in the following
table:
41.6
4.6
18.2
Dec. 31, 2013
377.3
42.2
496.6
523.0
726.9
580.2
58.9
76.1
1,659.7
1,474.2
current
non-current
Dec. 31, 2014
current
non-current
Dec. 31, 2013
Other receivables
147.0
Dec. 31, 2014
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
€ million
Other assets comprised:
41.8
42.1
9.7
20.1
0.6
2.3
-126.2
-136.8
Due to the broad range of products of the Merck Group, trade ac-
counts receivable exist vis-à-vis a large number of customers. This
diversification helps to reduce risk with respect to potential de-
faults on receivables. In addition, established credit management
processes that take individual customer risks into account are used
to assess the recoverability of receivables. If there are indications
that individual trade accounts receivable are partly or fully impaired,
corresponding allowances are recognized.
5.4
In the period from January 1 to December 31, 2014 trade receiv-
ables in Italy with a nominal value of € 104.9 million were sold for
€ 102.0 million. Previous impairments in this context amounting
to € 5.2 million were reversed and disclosed under other operating
income. The sold receivables do not involve any further rights of
recovery against Merck.
(38) INVENTORIES
This item comprised:
€ million
Raw materials and supplies
Work in progress
Finished goods
Goods for resale
Write-downs of inventories in 2014 amounted to € 99.5 million
(2013: € 94.1 million). In 2014, reversals of inventory write-downs
of € 45.3 million were recorded (2013: € 24.4 million). As of the
balance sheet date, no inventories were pledged as security for
liabilities.
(39) OTHER ASSETS
202
152.4
113.8
1.6
53.8
17.1
70.9
34.9
12.2
47.1
Assets from defined benefit plans
1.8
1.8
Prepaid expenses
3.8
Other assets
339.3
6.6
345.9
36.5
7.4
43.9
Non-financial items
594.7
3.8
-46.5
129.4
99.0
115.4
Derivative assets (operative)
468.5
2.9
471.4
72.7
53.9
126.6
Financial items
30.4
615.5
623.8
186.5
55.5
242.0
Receivables from non-income
related taxes
199.8
24.5
224.3
8.3
-41.5
294.9
-136.8
Cash, bank balances and cheques
Short-term cash investments (up to 3 months)
Changes in cash and cash equivalents as defined by IAS 7 are
presented in the cash flow statement.
The maximum default risk is equivalent to the carrying value
of the cash and cash equivalents.
(36) CURRENT FINANCIAL ASSETS
€ million
Held to maturity investments
Available-for-sale financial assets
Loans and receivables
€ million
Derivative assets (financial transactions)
Dec. 31, 2013
546.7
332.0
2,331.8
648.8
2,878.5
980.8
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2014
21.7
2,135.0
2.9
39.8
2,199.4
This item comprised:
NOTES TO THE CONSOLIDATED BALANCE SHEET
-517.4
-517.4
-365.2
-365.2
992.9
818.4
736.4
665.5
In addition to deferred tax assets on tax loss carryforwards
amounting to € 72.0 million (2013: € 20.8 million), deferred tax
assets of € 920.9 million were recognized for temporary differences
(2013: € 715.6 million).
(35) CASH AND CASH EQUIVALENTS
As of the balance sheet date, deferred tax liabilities for tempo-
rary differences for interests in subsidiaries as regards planned
dividend payments amounted to € 31.0 million (2013: € 12.9 mil-
lion). No deferred tax liabilities were recognized for other tempo-
rary differences relating to interests in subsidiaries since the rever-
sal of these differences was not foreseeable. Temporary differences
relating to the retained earnings of subsidiaries amounted to
€ 5,194.3 million (2013: € 4,894.6 million).
Non-controlling interests in net profit were primarily composed of
the minority interests in the listed companies Merck Ltd., India,
and P.T. Merck Tbk., Indonesia, as well as in the companies Merck
(Pvt.) Ltd., Pakistan, and Merck Ltd., Thailand.
(34) EARNINGS PER SHARE
Basic earnings per share are calculated by dividing the profit after
tax attributable to the shareholders of Merck KGaA by the weighted
average number of theoretical shares outstanding. The use of
a theoretical number of shares takes into account the fact that the
general partner's capital is not represented by shares.
Following the resolution by the Annual General Meeting of
Merck KGaA on May 9, 2014 to conduct a 1:2 share split, the
no-par value shares with a pro rata amount of the share capital of
€ 2.60 a piece were each divided into two shares with a pro rata
amount of the share capital of € 1.30 a piece. The share capital of
€ 168.0 million was newly divided into 129,242,252 shares.
Accordingly, the general partner's capital of € 397.2 million was
divided into 305,535,626 theoretical shares. Overall, the total
capital thus amounted to € 565.2 million or 434,777,878 theoretical
shares outstanding. Taking into account the share split, the
weighted average number of shares in 2014 was likewise
434,777,878 in 2014.
As of December 31, 2014 there were no potentially dilutive
shares. Diluted earnings per share were equivalent to basic
earnings per share.
The calculation of basic and diluted earnings per share was
adjusted for all the reporting periods presented owing to the share
split that took effect on June 30, 2014.
-154.8
CONSOLIDATED FINANCIAL STATEMENTS →
Notes to the Group accounts
(33) NON-CONTROLLING INTERESTS
53.4
2,312.1
200
17.7
Dec. 31, 2014
Dec. 31, 2013
1,808.8
1,542.1
143.3
127.5
13.5
6.5
5.8
201
2.8
0.5
0.4
258.6
338.7
2,235.6
2,021.4
2014
2013
27.3
5.1
Currency translation and other changes
December 31
3.4
Reversals
2,410.5
Utilizations
The development of current financial assets resulted mainly from
the decrease in available-for-sale financial assets to € 2,135.0
million (2013: € 2,312.1 million). As of December 31, 2014, this
item mainly included bonds amounting to € 1,178.6 million (2013:
€ 1,251.7 million) as well as commercial paper amounting to
€ 956.4 million (2013: € 915.7 million).
Moreover, fair value adjustments of € -2.0 million, which were
recognized in equity, were made on available-for-sale financial
assets (2013: € 0.6 million). The loans and receivables contained
in current financial assets are neither past due nor impaired.
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
Trade accounts receivable amounting to € 2,235.6 million (2013:
2,021.4 million) exclusively existed vis-à-vis third parties.
Trade accounts receivable past due were as follows:
€ million
Neither past due nor impaired
Past due, but not impaired
up to 3 months
(37) TRADE ACCOUNTS RECEIVABLE
up to 12 months
up to 24 months
over 2 years
Impaired
Carrying amount
The corresponding allowances developed as follows:
€ million
up to 6 months
January 1
Additions
MSUS granted to employees of the
Environmental protection
With respect to provisions for defined-benefit pensions and
other post-employment benefits, see Note [49].
Provisions for employee benefits also include obligations for
the partial retirement program and other severance pay that were
not set up in connection with the "Fit for 2018" transformation
and growth program as well as obligations in connection with
long-term working hour accounts and anniversary bonuses.
The Executive Board members have their own Long-Term
Incentive Plan, the conditions of which largely correspond to the
Long-Term Incentive Plan described here. A description of the
plan for the Executive Board can be found in the compensation
report, which is part of the Statement on Corporate Governance.
The fair value of the obligations is recalculated on each balance
sheet date using a Monte Carlo simulation based on the previously
described KPIs. The expected volatilities are based on the implicit
volatility of Merck shares and the DAX® in accordance with
the remaining term of the LTIP tranche. The dividend payments
incorporated into the valuation model orient towards medium-
term dividend expectations. The value of the provision for the
vesting period already completed was € 144.8 million as of
December 31, 2014 (2013: € 63.5 million). The net expense for
fiscal 2014 was € 81.3 million (2013: € 45.7 million).
22,865
339,541
437,234
AZ Electronic Materials Group on May 2, 2014
Status on Dec. 31, 2014
Provisions for environmental protection mainly existed in Germany
and the United States and were set up particularly for obligations
from soil remediation and groundwater protection in connection
with the discontinued crop protection business.
356,782
Other provisions
€ million
In 2014, the clinical development program for tecemotide, an
investigational antigen-specific cancer immunotherapy for the
treatment of non-small cell lung cancer, and the development of
plovamer acetate, an active ingredient for the treatment of multiple
sclerosis, terminated. In addition, the license rights to the active
ingredient ceraliflimod were returned to Ono Pharmaceutical Co.,
Ltd., Japan, since the compound does not meet the criteria for
further investment. Furthermore, Merck Serono decided to return
the rights to the compound Sym004 to Symphogen A/S Denmark.
Provisions for subsequent costs that are likely to be incurred
for the aforementioned and other discontinued research projects
were recognized during the reporting period.
216
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
(49) PROVISIONS FOR PENSIONS AND
OTHER POST-EMPLOYMENT BENEFITS
Depending on the legal, economic and fiscal circumstances pre-
vailing in each country, different retirement benefit systems are
provided for the employees of the Merck Group. Generally these
systems are based on the years of service and salaries of the
employees. Pension obligations of the Merck Group include both
defined benefit and defined contribution plans and comprise both
obligations from current pensions and accrued benefits for pen-
sions payable in the future. In the Merck Group, defined benefit
plans are funded and unfunded. Provisions also contain other
post-employment benefits, such as accrued future health care
costs for retirees in the United States.
In order to limit the risks of changing capital market condi-
tions and demographic developments, for many years now Merck
has been offering only defined contribution plans to newly hired
employees.
The value recognized in the balance sheet for pensions and
other post-employment benefits was derived as follows:
Present value of all defined benefit obligations
Fair value of the plan assets
Funded status
21,247
Other provisions mainly include provisions for purchase commit-
ments, subsequent contract costs stemming from discontinued re-
search projects, other guarantees, and provisions for uncertain
commitments from contributions, duties and fees.
38,179
100.11
Expired
215
2014 tranche
Jan. 1, 2012 to Dec. 31, 2014 Jan. 1, 2013 to Dec. 31, 2015 Jan. 1, 2014 to Dec. 31, 2016
3 years
3 years
69.57
3 years
122.84
5,883.35
7,350.64
9,065.08
Potential number of MSUS
42,215
Potential number offered for the first time in 2012
Expired
30,685
Status on Dec. 31, 2012
507,550
Potential number offered for the first time in 2013
Expired
28,101
Status on Dec. 31, 2013
479,449
389,658
11,938
377,720
Potential number offered for the first time in 2014
355,164
538,235
123.7
-4.4
2012 tranche
Liabilities to related parties
42.2
42.2
Liabilities to banks
3,142.7
1,412.1
361.9
1,730.6
Total
> 5 years
1-5 years
< 1 year
December 31, 2013
€ million
Loans and commercial paper
361.9
Loans from third parties and other financial liabilities
24.0
1,805.7
440.4
7.7
0.4
5.0
2.3
Finance lease liabilities
59.4
35.3
14.1
10.0
Liabilities from derivatives (financial transactions)
84.0
4.0
56.0
5,637.0
1,451.8
2,928.4
2,075.9
67.4
Liabilities to banks
4,624.2
2,827.0
347.5
1,449.7
200.0
Loans and commercial paper
< 1 year
> 5 years
Total
209
December 31, 2014
€ million
1-5 years
267.4
Liabilities to related parties
501.4
6.5
3.7
2.8
Finance lease liabilities
153.0
97.1
19.9
36.0
Liabilities from derivatives (financial transactions)
84.5
4.3
61.6
18.6
Loans from third parties and other financial liabilities
501.4
632.7
3,697.9
The liabilities of the Merck Group to banks were denominated in
the following currencies:
in %
Merck Financial Services GmbH, Germany
Merck Financial Services GmbH, Germany
Merck Financial Services GmbH, Germany
Merck Financial Services GmbH, Germany
Merck Financial Services GmbH, Germany
EMD Millipore Corporation, USA
Nominal value
Issuer
The following bonds issued by the Merck Group are currently out-
standing:
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
Merck KGaA, Germany
In December 2014, Merck issued a subordinate hybrid bond
with a two-tranche structure. This issuance is part of the financing
of the proposed acquisition of Sigma-Aldrich. Both tranches have
a maturity of 60 years. The first tranche with a nominal volume of
€ 1.0 billion pays a coupon of 2.625% and contains an early bond
redemption option for Merck after 6.5 years. The second tranche,
with a nominal volume of € 500 million and carrying coupon of
3.375%, includes an early redemption right for Merck after ten
years. The two rating agencies Standard & Poor's and Moody's
have given equity credit treatment to half of the issuance, thus
making the issuance more favorable to Merck's credit rating than
a classic bond issue. The bond is recognized in full as a financial
liability in the balance sheet.
Furthermore, Merck KGaA had access to a commercial paper pro-
gram with a volume of € 2 billion to meet short-term capital
requirements, which had not been utilized as of the reporting date.
On September 22, 2014 Merck arranged credit lines amounting
to US$ 15.6 billion with a banking consortium to secure the
expected purchase price payment for the planned acquisition of
the Sigma-Aldrich Corporation, USA (Sigma-Aldrich). As of the
balance sheet date, the nominal volume of these credit lines was
US$ 13.1 billion since a portion of the original nominal amount
had already been replaced by other financial resources. A signifi-
cant portion of the credit line is to be replaced by other capital
market instruments by the time the acquisition closes. As of
December 31, 2014, the described credit lines for financing the
planned acquisition represent the vast majority of the existing
bank lines amounting to € 11,544.8 million (2013: € 245.0 million).
Merck has a € 2 billion multi-currency revolving credit facility,
which was renewed in fiscal 2014 ("Syndicated Loan 2013"). The
credit line was underwritten by an international group of banks
and has a remaining term until March 2019, with an extension
option of one year that Merck can exercise at its own discretion.
This credit line had not been utilized as of the reporting date.
>2 years
2019
2015
In October 2014, Merck renewed its debt issuance program
with a volume of € 15 billion. The debt issuance program forms
a flexible contractual basis for issuing bonds.
€1,350 million
€ 100 million
€250 million
Merck KGaA, Germany
99.611
5.875%
June 2006 June 2016
November 2009 - November 2016
December 2009 - December 2019
€ 70 million
€1,350 million
€ 60 million
100.000
3.615%¹
99.769
3.375%
March 2010 March 2015
December 2009 - December 2015
Issue price
Nominal
interest rate
Maturity
211
1 Fixed by interest rate swaps.
2019
variable
fixed/variable
variable
fixed/variable
3.2
200.0
64.2
267.4
200.0
11,544.8
13,748.0
39.2
2.4
20.5
3.9
6.9
4.5
14.4
88.1
Dec. 31, 2013
Dec. 31, 2014
Other currencies
Argentine peso
Chinese renminbi
Turkish lira
Euro
1.1
(44) FINANCIAL LIABILITIES
19.0
100.0
0.0
2,000.0
3.2
Maturity
Interest
Utilization as of
December 31, 2014
from banks
Financing
commitments
Notes to the Group accounts
CONSOLIDATED FINANCIAL STATEMENTS →
Bilateral credit agreement with banks
Bilateral credit agreement with banks
Various bank credit lines
Syndicated loan 2013
€ million
the Merck Group were as follows:
On the balance sheet date, the bank financing commitments vis-à-vis
210
100.0
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
Moreover, fair value adjustments of € 0.6 million (2013: € 1.2
million) were made on available-for-sale non-current financial
assets and recognized in equity.
In 2014, impairment losses were recognized for unconsolidated
investments and for other available-for-sale non-current financial
assets in a total amount of € 4.4 million (2013: € 5.5 million).
These were recorded in the income statement under other operating
expenses.
-90.4
-384.5
-0.4
-4.7
-0.6
- 5.7
-189.8
10.7
44.9
0.1
101.8
- 4.1
-0.1
0.1
46.1
-104.3
Reversals of impairment losses
Transfers
2,635.4
42.4
3,409.7
16.5
1,017.5
8.6
430.5
124.8
7,493.1
Accumulated depreciation and impairment losses January 1, 2014
-1,069.8
-2,374.5
-709.4
-0.9
-4,154.6
Changes in the scope of consolidation
Depreciation
Impairment losses
Disposals
-4.1
0.1
0.4
0.2
208
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
Changes in the scope of consolidation included the additions to
property, plant and equipment from the acquisition of AZ Electronic
Materials S.A., Luxembourg. A detailed presentation of the AZ
acquisition can be found in Note [4].
Material additions to construction in progress are attributable
to the expansion of global headquarters and the construction of
two new energy stations at the Darmstadt site. Transfers relating
to construction in progress mainly include a new liquid crystal
mixing plant in Shanghai, China, which was completed and com-
missioned in the first quarter of 2014.
In fiscal 2014, impairment losses in the amount of € 5.7 million
(2013: € 41.7 million) were recognized, of which a major part
related to the Performance Materials division.
The total amount of property, plant and equipment used to secure
financial liabilities was immaterial. Total government grants and
subsidies in connection with investments in property, plant and
equipment during the fiscal year amounted to €3.7 million (2013:
€2.9 million).
Directly allocable borrowing costs on qualified assets in the
amount of € 3.2 million (2013: € 0.4 million) were capitalized.
Property, plant and equipment also included assets that were
leased. The total value of capitalized leased assets amounted to
€ 9.4 million (2013: € 9.3 million) and the corresponding obliga-
tions amounted to € 6.5 million (2013: € 7.7 million), (see Note [60]).
The carrying amounts of assets classified as finance leases
were as follows:
€ million
Land and buildings
Vehicles
Other property, plant and equipment
(43) NON-CURRENT FINANCIAL ASSETS
€ million
Investments
2,990.4
57.3
429.6
861.5
0.7
Classification as held for sale or transfer to a disposal group
Currency translation
December 31, 2014
-19.0
- 25.6
-11.6
-0.1
-1,186.8
-2,548.2
-766.8
-0.9
-56.3
-4,502.7
Net carrying amount as of December 31, 2014
1,448.6
250.7
4.000%
December 31, 2014
Classification as held for sale or transfer to a disposal group
1.1
7.1
6.8
Dec. 31, 2013
0.4
5.1
1.4
0.4
1.9
4.1
20.7
33.0
15.5
69.2
1.8
1.5
0.8
9.4
Unconsolidated investments and the investments in associates and
other companies were classified as “available-for-sale”. Thereof
investments with a carrying amount of € 66.9 million (2013:
€ 52.3 million) were subsequently measured at cost since their
market value could not be determined. The increase in invest-
ments in associates and other companies resulted mainly from the
investment in InfraServ GmbH & Co. Wiesbaden KG, amounting
to € 10.8 million, which were acquired in the course of the acqui-
sition of AZ Electronic Materials S.A.
77.8
94.4
15.8
13.7
4.7
3.8
1.3
34.3
57.9
19.2
21.5
Dec. 31, 2013
Dec. 31, 2014
9.3
- 1,069.8
-2,374.5
-709.4
-0.9
Additions
20.5
23.9
30.9
Disposals
-14.3
-49.2
-46.8
410.9
-2.9
Transfers
69.6
132.9
58.4
- 253.2
486.2
-113.2
7.7
185.8
Currency translation
3.6
58.9
-4,154.6
Net carrying amount as of December 31, 2013
1,342.7
826.3
215.6
262.6
2,647.2
Cost at January 1, 2014
2,412.5
3,200.8
925.0
263.5
6,801.8
Changes in the scope of consolidation
89.8
33.5
2013 tranche
100.000
97.788
-0.8
Effects of asset ceilings
-2.7
-7.9
Currency translation
- 56.9
Classification as held for sale or transfer to a disposal group
-43.8
-3.6
- 124.7
December 31, 2013
2,412.5
3,200.8
925.0
-20.4
-9.2
-512.1
63.0
429.1
7,031.7
8.0
15.1
25.0
360.4
Disposals
-376.2
-63.5
-46.6
- 10.3
408.5
-496.6
Transfers
186.9
253.0
263.5
906.7
6,801.8
- 1,051.6
-0.8
-0.4
-41.7
148.6
62.1
44.7
-11.0
9.7
-54.2
- 108.4
-0.4
166.6
3.6
4.7
265.1
-29.5
-381.9
-85.2
-2,164.6
-685.1
-176.8
-4,078.1
Changes in the scope of consolidation
Depreciation
Impairment losses
Disposals
Transfers
Reversals of impairment losses
Classification as held for sale or transfer to a disposal group
Currency translation
December 31, 2013
- 108.9
- 187.8
Accumulated depreciation and impairment losses January 1, 2013
Total
207
to vendors and
contractors
214
ments.
RaptivaⓇ: In December 2011, the Brazilian federal state of São Pau-
lo sued Merck for damages because of alleged collusion between
various pharmaceutical companies and an association of patients
suffering from psoriasis and vitiligo. The collusion is alleged to
have aimed at an increase in the sales of the involved companies'
drugs to the detriment of patients and state coffers. Moreover, in
connection with the product RaptivaⓇ, patients have filed suit to
receive compensatory damages. Merck has taken appropriate
accounting measures for these legal disputes in the financial state-
Antitrust proceedings
In the Performance Materials division, Merck is in negotiations
with a competitor regarding potential patent infringements. Merck
maintains that the competitor's patent infringement assertion is
invalid owing to relevant prior art. The competitor has threatened
to file patent infringement lawsuits. Merck has taken appropriate
accounting measures for this issue.
the patent was invalid and not infringed on by Merck's actions.
A Markman hearing was held in January 2012; a decision has not
yet been announced. The parties are currently engaged in court-
ordered mediation proceedings that have not yet officially ended.
It is currently not clear when a first-instance decision will be
made. Merck has taken appropriate accounting measures.
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
Rebif®: Merck is involved in a patent dispute with Biogen Idec Inc.,
USA, (Biogen) in the United States. Biogen claims that the sale of
Rebif® in the United States infringes on a Biogen patent. The dis-
puted patent was granted to Biogen in 2009 in the United States.
Subsequently, Biogen sued Merck and other pharmaceutical com-
panies for infringement of this patent. Merck defended itself
against all allegations and brought a countersuit claiming that
Product-related and patent disputes
As of December 31, 2014, the provisions for legal disputes amounted
to € 393.1 million (2013: € 772.3 million). Many of the legal
disputes and official proceedings currently pending relate to the
Merck Serono division. The legal matters described below represent
the most significant legal risks.
Litigation
626.1
561.7
224.4
43.3
The litigation risk with Israel Bio-Engineering Project Limited
Partnership (IBEP) was eliminated as of the end of 2014. IBEP
asserted claims for property rights and the payment of license fees
for the past and the future. These legal disputes were connected to
the financing of medical research projects in the early 1980s.
Merck had taken appropriate accounting measures for these legal
disputes in the past. As of year-end, Merck achieved a written
settlement with IBEP according to which the legal disputes were
settled in exchange for a sum of money. The provision recognized
in previous years was partly used and the remainder was released.
Drug pricing by the divested Generics Group
Paroxetine: In connection with the divested generics business, the
Group is subject to antitrust investigations by the British Com-
petition and Market Authority ("CMA") in the United Kingdom. In
March 2013, the CMA informed Merck of the assumption that a
settlement agreement entered into in 2002 between Generics (UK)
Ltd. and several GlaxoSmithKline companies in connection with
the antidepressant drug paroxetine violates British and European
competition law. As the owner of Generics (UK) Ltd. at the time,
Merck was allegedly involved in the settlement negotiations and is
therefore liable. The investigations into Generics (UK) Ltd. started in
2011, without Merck being aware of this. It is considered probable
that the CMA will impose a fine on Merck. Merck has recognized
appropriate provisions in this connection.
Foreign exchange transfer restrictions
(60-day average of the DAX® prior to the start of the
performance cycle)
DAX® value
(60-day average Merck share price prior to the start of the
performance cycle)
Reference price of Merck shares in €
Term
Performance cycle
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
Based on the MSUs granted, the eligible participants receive
a cash payment at a specified point in time in the year after the
three-year performance cycle has ended. The value of a granted
MSU, which is relevant for payment, corresponds to the average
closing price of Merck shares in Xetra trading during the last 60
trading days prior to January 1 after the performance cycle. The
payment amount is limited to three times the reference price.
Provisions for employee benefits/Share-based payment
Provisions for employee benefits include obligations from long-
term variable compensation programs. Payments from the long-
term variable compensation plan in place until 2011 were made
for the last time in 2014. The long-term variable compensation
plan valid since 2012 is aligned not only with target achievement
based on key performance indicators, but above all with the long-
term performance of Merck shares. Certain executives and em-
ployees could be eligible to receive a certain number of virtual
shares - Merck Share Units (MSUs) - at the end of a three-year
performance cycle. The number of MSUS that could be received
depends on the total value defined for the respective person and
the average closing price of Merck shares in Xetra® trading during
the last 60 trading days prior to January 1 of the respective fiscal
year (reference price). In order for members of top management to
receive payment, they must personally own an investment in
Merck shares dependent on their respective fixed annual compen-
sation. When the three-year performance cycle ends, the number
of MSUs to then be granted is determined based on the develop-
ment of two key performance indicators (KPIs). These are on the
one hand the performance of the Merck share price compared to
the performance of the DAX® with a weighting of 70% and on the
other hand the development of the EBITDA pre margin during the
performance cycle as a proportion of a defined target value with
a weighting of 30%. Depending on the development of the KPIs,
at the end of the respective performance cycle the eligible partic-
ipants are granted between 0% and 150% of the MSUs they could
be eligible to receive.
ments arising from site closures. The payments made in 2014 in
the amount of € 104.3 million are primarily due to severance
payments to employees. Cash flows owing to provisions for
restructuring are for the most part expected within a period of up
to 2019.
In 2012, the "Fit for 2018" transformation and growth program
was established. The aim of this program is to secure the competi-
tiveness and the growth of the Merck Group over the long term.
The non-current provisions of € 71.0 million (2013: € 74.7 million)
recorded in this connection mainly consist of commitments to em-
ployees from partial and early retirement arrangements. In addi-
tion, current provisions of € 65.5 million (2013: € 128.1 million)
reflect future commitments for severance payments and commit-
Provisions for restructuring mainly include commitments to em-
ployees in connection with restructuring projects and provisions
for onerous contracts. These were recognized once detailed
restructuring plans had been prepared and communicated.
Restructuring
In addition to provisions for the mentioned litigation, provi-
sions existed as of the balance sheet date for various smaller
pending legal disputes.
In one jurisdiction, Merck and other companies are subject to
a government investigation regarding compliance with foreign
exchange transfer restrictions. In this connection, the responsible
authorities are investigating whether import prices led to imper-
missibly high foreign exchange transfers. Appropriate accounting
measures have been taken for repayments and fines that are esti-
mated to be probable due to the uncertain legal situation in the
affected country. The provision recognized in 2013 under other
provisions was reclassified to provisions for litigation.
112.4
146.8
71.0
252.6
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
(42) PROPERTY, PLANT AND EQUIPMENT
€ million
Cost at January 1, 2013
Changes in the scope of consolidation
Additions
Land, land rights
and buildings,
including buildings
on third-party land
Other facilities,
Plant and
machinery
operating and
office equipment
2,651.5
3,044.4
Construction in
progress and
advance payments
Changes in scope of
44.1
consolidation/Other
1.3
thereof non-current
11.3
120.0
65.5
140.5
thereof current
1,187.8
267.7
Investments in associates and other companies
Securities Available-for-sale financial assets
Assets from derivatives (financial transactions)
Loans and other non-current financial assets
266.8
136.5
393.1
December 31, 2014
1.6
-60.5
60.8
4.5
0.8
14.2
721.9
Financial items
2.1
0.6
1.5
35.4
9.6
6.4
(operational)
Liabilities from derivatives
581.1
2.2
578.9
696.1
29.0
731.5
580.4
2.8
customers
Advance payments received from
33.9
2.3
31.6
989.5
768.6
220.9
Deferred income
439.9
439.9
474.3
474.3
Accruals for personnel expenses
583.2
3.2
692.9
Other financial liabilities
Dec. 31, 2013
€ million
Trade accounts payable consisted of the following:
(45) TRADE ACCOUNTS PAYABLE
Finance lease liabilities represented the present value of future
payments arising from finance leases. This item primarily related
to liabilities from finance leases for land and buildings.
Information on liabilities to related parties can be found in
Note [66].
The financial liabilities of the Merck Group are not secured by
liens or similar forms of collateral. The loan agreements do not
contain any financial covenants. The Merck Group's average
borrowing cost as of the balance sheet date was 3.3% (2013: 3.9%).
2 Merck has the right to prematurely repay this tranche of the hybrid bond issued in December 2014 for the first time in June 2021. The nominal interest rate is fixed until that date.
3 Merck has the right to prematurely repay this tranche of the hybrid bond issued in December 2014 for the first time in December 2024. The nominal interest rate is fixed until that date.
100.000
3.375%3
99.274
2.625%²
99.582
4.500%
March 2010 March 2020
December 2014 - December 20742
December 2014 - December 20743
€ 500 million
€ 1,000 million
Liabilities to third parties
15.0
Liabilities to investments
Dec. 31, 2014
non-current
current
Dec. 31, 2014
non-current
current
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
€ million
This item comprised:
(46) OTHER LIABILITIES
212
1,364.1
1,539.4
1,363.9
0.2
1,539.3
0.1
Dec. 31, 2013
Trade accounts payable included accrued amounts of € 831.0 million
(2013: € 778.0 million) for outstanding invoices and reductions in
sales revenues.
4.250%
15.0
16.0
-104.2
- 332.3
477.2
167.3
9.9
130.8
-58.2
44.1
1,505.8
217.9
111.2
201.6
202.8
772.3
125.1
-12.1
-36.4
-543.2
2.1
22.5
Currency translation
23.8
17.3
1.5
5.0
Interest portion
-321.5
-25.1
-3.4
-24.4
-8.3
-260.3
Release
Utilizations
Additions
January 1, 2014
Total
2.8
554.1
1,625.1
2,356.6
782.0
772.4
852.7
1,574.6
67.1
0.5
66.6
146.3
3.8
142.5
Non-financial items
related taxes
Liabilities from non-income
556.9
16.0
1,134.5
1,140.1
Other
protection
Personnel
Restructuring
Litigation
Environmental
213
€ million
Provisions developed as follows:
(48) PROVISIONS
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
Tax liabilities and provisions for tax liabilities resulted in total
income tax liabilities of € 849.8 million as of December 31, 2014
(2013: € 465.1 million). The increase in tax liabilities is primarily
due to higher income tax expenses in fiscal 2014 (see Note [32]) as
well as provisions for potential tax obligations.
(47) TAX LIABILITIES
The increase in deferred income results from the collaboration
agreement with Pfizer Inc., USA (see Note [5]).
As of December 31, 2014, other financial liabilities included
liabilities to related companies amounting to € 425.6 million
(2013: € 373.1 million). These are mainly profit entitlements of
E. Merck KG. Moreover, this item contained liabilities to invest-
ments amounting to € 3.1 million (2013: € 1.6 million), interest
accruals of € 85.9 million (2013: € 83.3 million) as well as payroll
liabilities of € 65.9 million (2013: € 63.6 million). The remaining
amount of € 115.6 million (2013: € 59.5 million) recorded under
other financial liabilities included among other things liabilities
to insurers as well as contractually agreed payment obligations
vis-à-vis other companies.
5.6
Net defined benefit liability recognized in the balance sheet
Dec. 31, 2014
Provisions for pensions and other post-employment benefits
2014
2013
2.00
3.75
1.00
2.30
3.66
4.57
4.16
4.76
2.52
2.51
1.96
1.73
2.10
3.89
4.53
4.03
1.75
1.75
0.01
3.06
1.58
2.34
5.10
5.10
Assets from defined benefit plans
2013
2014
3.38
2014
The calculation of the defined benefit obligations as well as the
relevant plan assets was based on the following actuarial para-
2013
meters:
in %
Future salary increases
Future pension increases
Future cost increases for health care benefits
These are average values weighted by the present value of the
respective benefit obligation.
Dec. 31, 2014
Dec. 31, 2013
3,812.7
2,736.8
Discount rate
-1,840.2
896.6
-1,994.4
1,818.3
2013
Other countries
Switzerland
Germany
United Kingdom
1,820.1
1.8
907.1
1,818.3
10.5
3.8
910.9
2014
74.9
74.9
79.1
Insurance contracts
136.7
136.7
371.3
371.3
Investment funds
0.5
84.7
84.7
Direct investments in real estate
589.7
589.2
662.5
662.5
Debt instruments
434.7
71.4
0.9
79.1
71.4
(50) EQUITY
88.2
433.8
Result of ordinary activities of Merck KGaA
Result of E. Merck KG
€ million
The reciprocal net profit/loss transfer between E. Merck KG and
Merck KGaA as stipulated by the Articles of Association was as
follows:
222
The allocation of net profit/loss is based on the net income of
E. Merck KG determined in accordance with the provisions of the
German Commercial Code as well as the income/loss from ordi-
nary activities and the extraordinary result of Merck KGaA. These
results are adjusted for trade tax and create the basis for the
allocation of net profit/loss.
E. Merck KG and Merck KGaA engage in reciprocal net profit
transfers. This makes it possible for E. Merck KG, the general part-
ner of Merck KGaA, and the shareholders to participate in the net
profit/loss of Merck KGaA in accordance with the ratio of the
general partner's equity interest and the share capital (70.274% or
29.726% of the total capital).
E. Merck KG's share of net profit
The amount resulting from the issue of shares by Merck KGaA
exceeding the nominal amount was recognized in the capital
reserves. The equity interest held by the general partner amounted
to € 397.2 million.
The total capital of the company consists of the share capital com-
posed of shares and the equity interest held by the general partner
E. Merck KG. As of the balance sheet date, the company's share
capital amounting to € 168.0 million was divided into 129,242,251
no-par value bearer shares plus one registered share and is dis-
closed as subscribed capital. The number of shares doubled com-
pared to the previous year, after the Annual General Meeting of
Merck KGaA resolved a 1:2 stock split, which was implemented as
of June 30, 2014.
Equity capital
The cost of ongoing contributions for defined contribution
plans that are financed exclusively by external funds and for
which the companies of the Merck Group are only obliged to pay
the contributions amounted to € 38.7 million (2013: € 19.3 million).
In addition, employer contributions amounting to € 57.2 million
(2013: € 55.5 million) were transferred to the German statutory
pension insurance system and € 28.5 million (2013: € 29.7 million)
to statutory pension insurance systems abroad.
Employer contributions to plan assets and direct payments to
beneficiaries will probably amount to around € 93.3 million in
2015. The weighted duration amounted to 20 years.
1,840.2
152.0
1,688.2
5.7
5.7
89.1
1,994.4
0.9
160.5
1,833.9
Fair value of the plan assets
Other
544.9
Plan assets for funded defined benefit obligations primarily
comprised fixed-income securities, stocks, and investment funds.
They did not include financial instruments issued by Merck Group
companies or real estate used by Group companies.
Equity instruments
Extraordinary result
-694.8
-1,568.4
-10.5
10.8
49.0
50.7
Cumulative actuarial gains (+)/losses (-) recognized in equity on December 31
Reclassification within retained earnings
Actuarial gains (+)/losses (-)
The plan assets serve exclusively to meet the defined benefit
obligations. Covering the benefit obligations with financial assets
represents a means of providing for future cash outflows, which
occur in some countries (e.g. Switzerland and the United Kingdom)
on the basis of legal requirements and in other countries (e.g.
Germany) on a voluntary basis.
Effects of the asset ceilings
Remeasurements of plan assets
-27.2
-26.9
Actuarial gains (+)/losses (-) arising from experience adjustments
88.6
-915.2
Actuarial gains (+)/losses (-) arising from changes in financial assumptions
−1.1
19.1
Actuarial gains (+)/losses (-) arising from changes in demographic assumptions
Actuarial gains (+)/losses (-) arising from experience adjustments
544.9
The ratio of the fair value of the plan assets to the present
value of the defined benefit obligations is referred to as the degree
of pension plan funding. If the benefit obligations exceed the plan
assets, this represents underfunding of the pension fund.
In order to minimize such fluctuations, in managing its plan
assets, the Merck Group also pays attention to potential fluctua-
tions in liabilities. In the ideal case, assets and liabilities develop
in opposite directions when exposed to exogenous factors, creating
a natural defense against these factors. In order to achieve this
effect, the corresponding use of financial instruments is considered
in respect of individual pension plans.
522.9
0.1
522.8
167.0
167.0
Cash and cash equivalents
Total
active market
active market
Total
It should be noted, however, that both the benefit obligations as
well as the plan assets fluctuate over time. This could lead to an
increase in underfunding. Depending on the statutory regulations,
it could become necessary in some countries for the Merck Group
to reduce underfunding through additions of liquid assets. The
reasons for such fluctuations could include changes in market
interest rates and thus the discount rate as well as adjustments to
other actuarial assumptions (e.g. life expectancy, inflation rates).
market price in an
Quoted
market price in an
No quoted
market price in an
active market
active market
market price in an
Quoted
221
Dec. 31, 2013
€ million
The fair value of the plan assets can be allocated to the following
categories:
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
No quoted
Adjustment for trade tax in accordance with Art. 27 (1)
Articles of Association of Merck KGaA
Profit transfer from E. Merck KG
Notes to the Group accounts
71.9
-318.8
-362.3
134.0
134.0
345.1
159.6
11.2
26.3
148.4
-129.2
30.4
Merck KGaA
Merck KGaA
2013
223
407.9
E. Merck KG
2014
Profit carried forward
Dividend proposal
Withdrawal by E. Merck KG
Retained earnings Merck KGaA
E. Merck KG
26.3
-122.8
11.2
For 2013, a dividend of € 1.90 per share was distributed. The div-
idend proposal for fiscal 2014 will be € 1.00 per share, taking into
account the doubling of the number of shares since June 2014.
The proposed payment to shareholders amounts to € 129.2 million
(2013: € 122.8 million). The amount withdrawn by E. Merck KG
would amount to € 362.3 million (2013: € 318.8 million).
766.1
5,688.4
5,783.3
Sales
2013
2014
2013
Consumer Health¹
Merck Serono¹
2014
Notes to the Group accounts
CONSOLIDATED FINANCIAL STATEMENTS →
€ million
INFORMATION BY DIVISION
AND REGION
(51) INFORMATION BY DIVISION/COUNTRY
SEGMENT REPORTING
224
For an interim period, non-controlling interests of € 161.9
million existed in the course of the acquisition of AZ Electronic
Materials S.A. The acquisition of these interests after May 2, 2014
was recognized in equity as a transaction without a change of
control. This lowered retained earnings by € 189.4 million, corre-
sponding to the difference between the purchase price of € 351.3
million paid for the remaining shares and the disposal of non-
controlling interests in the amount of € 161.9 million.
The net equity attributable to non-controlling interests mainly
related to the minority interests in the publicly traded companies
Merck Ltd., India, and P.T. Merck Tbk, Indonesia, as well as Merck
Ltd. Thailand, and Merck (Pvt.) Ltd., Pakistan.
The disclosure of non-controlling interests was based on the stat-
ed equity of the subsidiaries concerned after any adjustment
required to ensure compliance with the accounting policies of the
Merck Group, as well as pro rata consolidation entries.
Non-controlling interests
For 2014 the profit transfer to E. Merck KG including changes in
reserves amounted to € 435.0 million. This consists of the profit
transfer to E. Merck KG (€ - 419.5 million), the result transfer from
E. Merck KG to Merck KGaA (€ -6.3 million), the change in the
profit carried forward of E. Merck KG (€ 45.6 million) as well as the
profit transfer from Merck & Cie to E. Merck KG (€ - 54.8 million).
Merck & Cie is a partnership under Swiss law that is controlled by
Merck KGaA, but distributes its operating result directly to
E. Merck KG. This distribution is a payment to shareholders, which
is why it is likewise presented under changes in equity.
Changes in reserves
Transfer to revenue reserves
CONSOLIDATED FINANCIAL STATEMENTS →
Withdrawal from revenue reserves
Net income
Ratio of general partner's capital to total capital
Profit transfer to E. Merck KG
500.3
-9.2
597.0
-21.0
(100%)
Basis for appropriation of profits
-34.6
-54.2
(70.274%)
Trade tax in accordance with Art. 30 (1) Articles of
Association of Merck KGaA
-9.2
-3.1
651.2
-17.9
Merck KGaA
E. Merck KG
Merck KGaA
E. Merck KG
2013
2014
534.9
419.5
-419.5
351.6
€ million
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
The profit distribution to be resolved upon by shareholders also
defines the amount of that portion of net profit/loss freely avail-
able to E. Merck KG. If the shareholders resolve to carry forward
or to allocate to retained earnings a portion of Merck KGaA's net
retained profit to which they are entitled, then E. Merck KG is
obligated to allocate to the profit brought forward/retained earnings
of Merck KGaA a comparable sum determined in accordance with
the ratio of share capital to general partner's capital. This ensures
that the retained earnings and the profit carried forward of
Merck KGaA correspond to the ownership ratios of the shareholders
on the one hand and E. Merck KG on the other hand. Consequent-
ly, for distributions to E. Merck KG, only the amount is available
that results after netting the profit transfer of Merck KGaA with
the amount either allocated or withdrawn by E. Merck KG from
retained earnings/profit carried forward. This amount corresponds
to the amount that is paid as a dividend to the shareholders, and
reflects their pro rata shareholding in the company.
Appropriation of profits
The result of E. Merck KG on which the appropriation of profits
adjusted for trade tax is based amounted to € - 21.0 million (2013:
€ 9.2 million). This led to a result transfer to Merck KGaA of
€ -6.3 million (2013: € -2.7 million). Merck KGaA's result from
ordinary activities adjusted for trade tax and extraordinary result,
on which the appropriation of its profit is based, amounted to
€ 597.0 million (2013: € 500.3 million). Merck KGaA transferred
€ 419.5 million of its profit to E. Merck KG (2013: € 351.6 million).
In addition, an expense from corporation tax charges amounting
to € 22.8 million resulted (2013: expense of € 12.0 million). Cor-
poration tax is only calculated on the income received by share-
holders. Its equivalent is the income tax applicable to E. Merck KG.
However, this must be paid by the partners of E. Merck KG direct-
ly and is not disclosed in the annual financial statements.
134.0
345.1
148.4
407.9
-12.0
-22.8
3.1
-2.7
2.7
-6.3
6.3
(29.726%)
Net income
Corporation tax
Trade tax
Ratio of share capital to total capital
Remeasurements of defined benefit obligations
-351.6
Profit carried forward from previous year
2.0
Pension payments from plan assets
-795.6
Past service cost
82.7
10.2
72.5
83.5
10.5
73.0
Current service cost
- 30.7
-3.5
-2.0
-27.2
3.1
39.2
Currency translation differences
2,830.1
214.4
2,615.7
2,736.8
203.8
2,533.0
obligations on January 1
42.3
2013
-0.5
2.6
- 60.3
-10.8
-49.5
923.0
73.8
849.2
Actuarial gains (-)/losses (+)
92.9
7.5
85.4
-2.5
101.6
92.6
Interest expense
- 2.8
-0.6
-2.2
- 4.3
-1.1
-3.2
Gains (-) or losses (+) on settlement
2.6
9.0
funded
by provisions
Funded benefit
obligations
2014
Interest expense
Other effects recognized in income
Gains (-) or losses (+) on settlement
Past service cost
Current service cost
€ million
In the reporting period, the following items were recognized in
income:
218
The Merck Pension Scheme in the United Kingdom accounted
for € 376.5 million (2013: € 320.1 million) of the defined benefit
obligations and € 343.6 million (2013: € 293.1 million) of the plan
assets. These obligations result from a benefit plan which is based
on years of service and final salary and was closed to newly hired
employees in 2006. The agreed benefits comprise old-age, disabil-
ity and surviving dependent benefits. The employer and the
employees make contributions to the plan. Statutory minimum
funding obligations also exist in the United Kingdom.
The Merck Serono pension fund in Switzerland accounted for
€ 402.6 million (2013: € 314.8 million) of the defined benefit
obligations and € 363.5 million (2013: € 324.9 million) of the plan
assets. Of this amount, € 10.5 million could not be recognized in
2013 due to effects of the asset ceiling according to IAS 19.64.
These obligations are based on the granting of old-age, disability
and surviving dependents benefits, which include the legally re-
quired benefits. Both employer and employee contributions are paid
into the pension fund. Statutory minimum funding obligations
exist.
Interest income
Merck KGaA and AB Allgemeine Pensions GmbH & Co. KG
accounted for € 2,434.0 million (2013: € 1,670.6 million) of the
defined benefit obligations and € 1,098.1 million (2013: € 1,052.6
and surviving dependent pensions. On the one hand, these
obligations are based on benefit rules comprising benefit commit-
ments dependent upon years of service and final salary from
which newly hired employees have been excluded. On the other
hand, the benefit rules applicable to employees newly hired since
January 1, 2005 comprise a direct commitment in the form of a
defined contribution pension plan. The benefit entitlement results
from the cumulative total of annually determined pension compo-
nents that are calculated on the basis of a defined benefit expense
and an age-dependent annuity table. Statutory minimum funding
obligations do not exist.
3,812.7
1,120.2
2,692.5
12.7
12.7
47.2
40.1
7.1
648.8
506.9
The main benefit rules are as follows:
Total amount recognized in income
CONSOLIDATED FINANCIAL STATEMENTS →
Notes to the Group accounts
Benefit
obligations
Benefit
obligations
funded
by provisions
Funded benefit
obligations
Present value of the defined benefit
€ million
During the reporting period, the present value of the defined pen-
sion obligations changed as follows:
With the exception of the net balance of interest expense on the
defined benefit obligations and interest income from the plan
assets, which is recorded under the financial result, the relevant
expenses for defined benefit and defined contribution pension
systems are allocated to the individual functional areas.
124.3
113.2
-52.1
-67.2
92.9
101.9
1.0
1.8
-2.8
-4.3
2.6
-2.5
82.7
83.5
2013
2014
Contributions by plan participants
7.2
7.2
7.0
7.0
7.2
Employee contributions
39.9
27.2
Employer contributions
200.0
Funding CTA Merck KGaA
49.0
50.7
742.1
Actuarial gains (+)/losses (-) arising from experience adjustments
67.2
Interest income from plan assets
-22.1
33.7
Currency translation differences
1,633.6
1,840.2
Fair value of the plan assets on January 1
2013
2014
52.1
-32.8
-119.1
Changes in the scope of consolidation
- 694.8
Cumulative actuarial gains (+)/losses (-) recognized in equity on January 1
Currency translation differences
2013
2014
Notes to the Group accounts
CONSOLIDATED FINANCIAL STATEMENTS →
€ million
The development of cumulative actuarial gains (+) and losses (-)
was as follows:
220
The actual return on plan assets amounted to € 117.9 million in
2014 (2013: income of € 101.1 million). Changes in the effects of
the asset ceilings in accordance with IAS 19.64 were recognized in
the amount of € 10.8 million as actuarial gains (2013: € 10.5 million
in actuarial losses) and € 0.3 million as interest expenses (2013:
€ 0.0 million). The effects of the asset ceilings as of the balance
sheet date amounted to € 0.0 million (2013: € 10.5 million).
1,840.2
1,994.4
Fair value of the plan assets on December 31
1.6
-0.3
Other changes
-0.1
0.2
Other effects recognized in income
-1.7
-1.9
Plan administration costs paid from the plan assets recognized in income
3.0
3,811.8
-12.1
3,813.7
4,028.0
7.5
-0.8
-1.1
0.3
-0.8
-0.5
-0.3
0.1
0.1
Other effects recognized in income
Other changes
-5.6
25.7
8.3
Changes in the scope of consolidation
-185.8
-7.3
-178.5
- 99.9
-5.9
-94.0
Pension payments
7.0
17.4
1.9
Fair value of the plan assets on
December 31
3,503.6
3,690.7
3,947.7
4,218.1
3,463.7
Dec. 31, 2014
€ million
The fair value of the plan assets changed in the reporting period
as follows:
the medical cost trend rate is 50 basis points lower
the expected rate of future pension increases is 50 basis points lower
the medical cost trend rate is 50 basis points higher
the expected rate of future salary increases is 50 basis points higher
the expected rate of future salary increases is 50 basis points lower
the expected rate of future pension increases is 50 basis points higher
the discount rate is 50 basis points lower
the discount rate is 50 basis points higher
Present value of all defined benefit obligations if
€ million
keeping the measurement assumptions otherwise constant. Insofar
as its development of social security is comparable to salary trends,
the amounts for social security vary together with the salary trend.
The following overview shows how the present value of all de-
fined benefit obligations would have been influenced by changes
to definitive actuarial assumptions. To determine the sensitivities,
in principle each of the observed parameters was varied while
219
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
2,736.8
203.8
2,533.0
3,812.7
309.1
3,633.7
Royalty, license and commission income
(-552.8)
372.0
5,987.1
24.5
24.6
6,196.3
47.5
1,044.7
43.4
3,348.6
47.3
-196.7
-166.0
642.8
658.6
779.7
126.1
894.8
53.0
59.7
13.9
91.2
3,069.2
3,122.9
-244.0
-226.0
589.8
598.9
60.0
765.8
- 355.4
-434.6
828.4
900.4
6.5
6.7
7.5
407.0
480.9
72.9
33.6
112.6
-155.9
130.6
91.5
-2,045.1
-3,354.4
30.4
14,294.0
3,253.3
184.1
264.8
3,387.7
30.0
15,712.0
36.0
-64.8
- 56.5
-391.9
66.5
803.6
-5.1
-0.9
653.3
611.5
-718.1
-257.7
-46.6
-41.7
-120.7
-105.9
-47.9
- 60.2
289.2
(-2.3)
(-)
(-)
(-)
(-2.3)
(-2.8)
-1,506.6
-1,703.7
-1.6
- 4.5
-159.8
(-3.8)
262.0
-245.1
-259.7
-0.1
-0.3
-0.2
-4.5
-0.6
225.6
100.2
0.8
5.1
18.8
1.6
9.3
2.7
1,237.9
1,261.6
15.0
14.3
309.2
308.1
107.7
190.0
1,610.8
1,762.0
580.0
699.6
787.8
419.0
508.0
498.2
183.6
205.4
997.5
1,032.8
2,075.2
2,163.1
equipment
Property, plant and
Research and development
4,692.3
278.0
269.2
398.0
448.9
7,572.4
7,966.3
Intangible assets
364.5
247.5
812.5
4,151.4
costs'
-1,550.7
-1,359.7
Neither in 2014 nor in 2013 did any single customer account
for more than 10% of Group sales.
The Emerging Markets region comprises Latin America and
Asia with the exception of Japan. The Rest of World region
comprises Japan, Africa and Australia/Oceania.
Transfer prices for intragroup sales are determined on an
arm's-length basis.
Apart from sales, the success of a segment is mainly determined
by EBITDA pre one-time items (segment result) and business free
cash flow. EBITDA pre one-time items and business free cash flow
are performance indicators not defined by International Financial
Reporting Standards. However, they represent important variables
used to steer the Merck Group. To permit a better understanding of
operational performance, EBITDA pre one-time items excludes
depreciation and amortization in addition to specific income and
expenses of a one-time nature presented in the following. Among
other things, business free cash flow is also used for internal target
agreements and individual incentive plans.
Corporate and Other includes assets and liabilities as well as
income and expenses that are largely allocable to Group functions
and thus cannot be directly allocated to the reportable segments
presented; it serves the reconciliation to the Group numbers. The
cash flows attributable to the financial result and income taxes are
also presented under Corporate and Other.
Within the Merck Serono division, Merck focuses on specialist
therapeutic areas and markets innovative prescription drugs of
chemical and biotechnological origin. The Consumer Health
division comprises Merck's business with high-quality over-the-
counter products for preventive health care and self-treatment
of minor ailments. The Performance Materials division consists of
the Liquid Crystals, Pigments & Cosmetics and Advanced Technol-
ogies business units as well as the businesses of the AZ Electronic
Materials Group, which were added in 2014. The Merck Millipore
division offers solutions to research and analytical laboratories in
the pharmaceutical/biotechnology industry or in academic insti-
tutions, and customers manufacturing large- and small-molecule
drugs. The fields of activity of the individual divisions are
described in detail in the sections about the divisions in the Group
management report.
Segmentation was performed in accordance with the organiza-
tional and reporting structure of the Merck Group that applied
during 2014.
REPORTING
(52) INFORMATION ON SEGMENT
'The disclosure of amortization of intangible assets (excluding software) has been changed. See Note "Accounting and measurement principles".
-411.4
1,232
-604.8
1,347
2,946
2,943
10,868
11,191
20,013
20,537
Number of employees
-56.4
-56.9
-851.3
-816.0
840.1
-162.6
1,596.8
4,686.6
2014
thereof Switzerland
thereof France
thereof Germany
Europe
Notes to the Group accounts
CONSOLIDATED FINANCIAL STATEMENTS →
€ million
INFORMATION BY COUNTRY AND REGION
226
2013
2,960.0
-281.2
2,225.5
2,705.5
-1,046.4
-1,062.2
-214.7
109.6
143.3
11.6
15.2
10.3
557.5
493.8
2,605.1
2014
2013
2014
4,674.1
Total revenues
188.6
182.5
790.8
779.1
1,570.8
1,592.0
4,457.5
4,520.1
Sales by company location
159.0
149.3
677.0
648.3
825.4
845.2
3,984.6
4,014.6
Sales by customer location
2013
2014
2013
1,618.0
-562.4
-608.6
-206.0
1,786.0
EBITDA
-0.3
Reversals of impairment losses
0.3
0.5
196.4
90.3
Impairment losses
8.6
1,786.6
10.0
739.2
162.1
149.9
793.1
956.5
Depreciation and amortization
Operating result (EBIT)
-1.5
-13.0
- 501.4
797.4
160.4
171.0
One-time items
-74.5
-113.5
-1,358.0
-2,394.4
Segment liabilities
414.3
417.4
6,811.9
5,623.6
Net operating assets
23.2
22.1
32.6
31.7
EBITDA margin pre one-time items (in % of sales)
172.4
169.4
1.4
9.0
68.5
1,855.1
1,830.9
EBITDA pre one-time items (segment result)
44.9
-36.9
Investments in property, plant and equipment³
Other operating expenses and income
(-)
Marketing and selling expenses²
502.0
(-)
(-)
518.1
5,036.0
4,855.3
Gross profit²
(-)
(-)
(of which: amortization of intangible assets)²
-1,780.2
-243.0
-1,024.4
-1,119.7
Cost of sales²
745.0
768.8
6,060.4
5,975.0
Total revenues
2.9
2.7
- 250.7
-1,813.6
- 303.1
-287.2
(-)
(-1.0)
(of which: amortization of intangible assets)²
-21.8
-22.3
-1,178.1
-1,343.7
Research and development costs²
-26.9
-27.2
-202.5
-219.7
Administration expenses
-2.4
-2.6
-547.3
-518.3
Royalty, license and commission expenses
(-2.4)
(-2.7)
(-596.7)
141.9
(of which: amortization of intangible assets)²
(-)
191.7
215.0
10.2
-151.6
-177.8
8,053.4
7,974.4
- 4.9
-4.1
1,493.0
1,527.8
1,027.3
1,077.3
-844.1
(-49.2)
(-)
(-)
(-48.0)
(-47.6)
(-1.2)
(-46.4)
-3,041.7
-3,526.4
-4.9
-4.1
(-94.0)
-835.2
0.3
-1.0
-195.2
-567.0
-537.5
0.1
0.1
-16.1
-99.2
-110.4
-27.8
-145.4
-170.6
- 56.1
-15.6
-1.3
-1.1
(-762.0)
(-719.0)
(-)
(-)
(-151.9)
(-151.8)
(-11.1)
(-11.7)
-3,088.5
-3,104.9
-1,152.3
151.3
-1,168.7
-983.2
2014
Performance Materials
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
3 According to the consolidated cash flow statement.
2 The disclosure of amortization of intangible assets (excluding software) has been changed. See Note "Accounting and measurement principles".
¹Previous year's figures have been adjusted, see Note "Information on Segment Reporting".
172.5
124.0
1,787.1
1,577.2
225
Business free cash flow
167.0
1,739.8
2,120.3
Net cash flows from operating activities
0.4
2.6
80.6
111.5
Investments in intangible assets³
3.7
146.2
Merck Millipore
Corporate and Other
Group
11,095.1
11,500.8
2,645.3
2,696.5
1,644.4
2,060.5
395.0
10,700.1
11,291.5
209.3
17.8
14.0
2.3
2,627.5
2,682.5
1,642.1
2,059.6
0.9
2013
2014
2013
2014
2013
2014
2013
-617.1
1.2
Dec. 31, 2014
98.0
1.2
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
Present value of defined benefit obligations in € million
Benefit based on final salary
Annuity
Lump sum
Installments
Benefit not based on final salary
Annuity
Lump sum
The defined benefit obligations of the Merck Group were based on
the following types of benefits provided by the respective plan:
217
Germany
Other countries
Merck Group
Dec. 31, 2014
Dec. 31, 2014
Dec. 31, 2014
2,542.3
462.5
98.0
Medical plan
3,004.8
-1,106.1
(of which: amortization of intangible assets)'
5,219.7
Gross profit¹
Cost of sales¹
(-)
6,325.8
Sales
5,953.6
372.2
Total revenues
Royalty, license and commission income
2013 adjusted
Disclosure change¹
2013 reported transfer adjustments
Product group
-0.2
-265.4
-265.2
81.7
-1,288.7
-183.7
Royalty, license and commission expenses
(-596.7)
(-596.7)
(-)
(of which: amortization of intangible assets)'
-1,813.6
- 596.7
(-)
71.8
Marketing and selling expenses¹
5,036.0
(-)
-1,024.4
6,060.4
372.0
5,688.4
Merck Serono
€ million
-1,364.1
CONSOLIDATED FINANCIAL STATEMENTS →
26,010.1
Assets
Dec. 31, 2013
Dec. 31, 2014
229
€ million
The reconciliation of operating assets presented in the Segment
Reporting to the total assets of the Merck Group was as follows:
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
2,960.0
2,605.1
144.6
Adjustment first-time consolidation of AZ Electronic Materials S.A.
Business free cash flow
93.2
-214.2
Changes in trade accounts receivable as reported in the balance sheet
59.7
-185.5
20,818.6
Notes to the Group accounts
Monetary assets (cash and cash equivalents, current financial assets, loans and securities)
Non-operating receivables, income tax receivables, deferred taxes and net defined benefit assets
Assets held for sale
-3,539.3
230
As of January 1, 2014, the two product groups NeurobionⓇ
(vitamin B-based analgesic) and Floratil® (a probiotic antidiarrheal)
were transferred from the Merck Serono division to the Consumer
Health division. This involved a transfer of goodwill in the amount
of € 78.8 million, which had been allocated previously to the
Merck Serono division. The transfer of the product groups resulted
in the following adjustments of prior-year figures, taking into
account the adjusted disclosure of amortization of intangible assets:
The operating assets (gross) of the Merck Group are determined by
adjusting all assets totaling € 26,010.1 million (2013: € 20,818.6
million) for monetary assets totaling € 5,563.1 million (2013:
€ 3,539.3 million) as well as all other non-operating assets total-
ing € 1,380.6 million (2013: € 913.1 million). Furthermore, in 2013
assets held for sale of € 27.1 million were not included in operat-
ing assets. After deducting the reported segment liabilities which
represented the operating liabilities totaling € 3,354.3 million
(2013: € 2,045.1 million), the operating assets (net) of the Merck
Group amounted to € 15,712.0 million (2013: € 14,294.0 million).
-2,045.1
14,294.0
- 3,354.4
15,712.0
-681.0
-1,815.0
Other operating liabilities
Segment liabilities
Operating assets (net)
-547.7
-1,539.4
Trade accounts payable
16,339.1
19,066.4
Operating assets (gross)
-27.1
-913.1
-1,380.6
-5,563.1
0.4
(-)
-211.3
1,739.8
-79.1
1,818.9
Net cash flows from operating activities
80.6
80.6
Investments in intangible assets²
Business free cash flow
32.6
-1,358.0
6,811.9
1,855.1
-0.2
151.3
Investments in property, plant and equipment²
-1,358.0
151.3
1,875.7
-88.6
1,787.1
0.2
265.4
479.6
742.1
265.2
476.9
2.7
Total revenues
Royalty, license and commission income
Sales
2013 adjusted
Disclosure change¹
2013 reported transfer adjustments
Product group
Consumer Health
231
€ million
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
'The disclosure of amortization of intangible assets (excluding software) has been changed. See Note "Accounting and measurement principles".
2 According to the consolidated cash flow statement.
Segment liabilities
-156.1
6,968.0
Net operating assets
793.1
-99.9
893.0
Operating result (EBIT)
- 501.4
-2.0
-499.4
Other operating expenses and income
Changes in inventories as reported in the balance sheet
(-)
(-)
(of which: amortization of intangible assets)'
-547.3
-202.5
-1,178.1
4.7
-1,182.8
Research and development costs'
8.8
Depreciation and amortization
Administration expenses
797.4
Impairment losses
32.8
EBITDA margin pre one-time items (% of sales)
-99.9
1,955.0
EBITDA pre one-time items (Segment result)
68.5
68.5
One-time items
1,786.6
- 99.9
1,886.5
EBITDA
-0.3
-0.3
Reversals of impairment losses
196.4
196.4
797.4
-446.2
4.5
advance payments for intangible assets
2,214.5
2,522.3
2,214.8
2,522.5
11,095.1
11,500.8
709.1
745.7
726.8
3,957.0
1,937.5
2,022.9
2,077.1
2,142.9
10,700.1
11,291.5
3,622.3
46.5
161.0
33.5
-47.2
-94.7
-88.7
-92.5
-90.4
2,647.2
2,990.4
61.1
115.7
169.3
295.4
340.4
415.1
341.6
416.2
9,867.2
11,395.5
702.8
-36.6
719.2
3,909.9
2014
2013
Group
Rest of World
Emerging Markets
thereof USA
227
2013
2014
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
The shares in publicly listed companies amounting to € 1.3 million
(2013: € 5.0 million) are generally exposed to a market value risk.
A 10% change in the value of the stock market would impact
equity by € 0.1 million (2013: € 0.5 million). This change in value
would be recognized in profit or loss at the time of disposal.
Liquidity risks
The liquidity risk, meaning the risk that Merck cannot meet its
payment obligations resulting from financial liabilities, is limited
by establishing the required financial flexibility and by effective
cash management. Apart from cash and cash equivalents of
€ 5,077.9 million (2013 € 3,391.3 million), Merck had at its dispos-
al a multi-currency revolving credit facility of € 2 billion with a
term running until 2019 and one extension option of one year as
well as bilateral credit facilities and various bank credit lines of
€ 11,748.0 million (2013: € 267.2 million), mainly intended for the
expected purchase price payment for the proposed acquisition of
the Sigma-Aldrich Corporation, USA. There were no indications
that the availability of credit facilities already extended was
restricted. Moreover, a commercial paper program with a volume
of € 2 billion and a debt issuance program with a volume of € 15
billion were available. Information on bonds issued by the Merck
Group can be found in Note [44].
Liquidity risks are monitored and reported to management on
a regular basis. No liens or similar forms of collateral are provided
for financial liabilities of the Merck Group. The loan agreements
do not contain any financial covenants.
Trade payables amounting to € 1,539.4 million (2013:
€ 1,364.1 million) had a remaining term of less than one year.
With respect to liabilities from operating derivatives amounting to
€ 35.4 million (2013: € 2.1 million), € 29.0 million (2013: € 1.5
million) was short-term. Out of other financial liabilities amount-
ing to € 696.1 million (2013: € 581.1 million), € 692.9 million
(2013: € 578.9 million) was due within one year.
North America
2014
2013
2014
1,933.1
2,022.3
2,072.7
2,142.3
10,700.1
11,291.5
841.9
874.5
3,795.6
4,250.2
1,916.8
2,009.9
2,078.0
2,152.2
2013
2014
2013
3,467.1
-15.4
-17.8
-1,703.7
2013
2014
Notes to the Group accounts
CONSOLIDATED FINANCIAL STATEMENTS →
€ million
Business free cash flow was determined as follows:
Additionally, this figure included acquisition costs of € 24.5
million for the acquisition of AZ and the planned acquisition of
the Sigma-Aldrich Corporation, USA.
- 87.2
Of the acquisition-related one-time items of € 85.0 million (2013:
€0.0 million), € 60.5 million related to the step-up of the acquired
inventories of AZ Electronic Materials S.A. (AZ).
Reversals of impairments
Impairment losses
One-time items
Other one-time items
Gains/losses on the divestment of businesses
Restructuring costs
Acquisition-related one-time items
One-time items (total)
-49.0
-85.0
-83.9
Less investments in property, plant and equipment, software as well as
3,253.3
3,387.7
EBITDA pre one-time items
2013
2014
-386.8
-274.6
2.9
-207.2
-184.1
-264.8
-9.8
-2.3
-10.6
-2.3
1.9
-130.5
Integration costs/IT costs
€ million
One-time items comprised the following:
228
3,450.0
3,553.7
2013
2014
€ million
The following table presents the reconciliation of EBITDA pre
one-time items of all operating businesses to the profit before
income tax of the Merck Group:
38,154
39,639
1,542
1,834
11,688
12,176
4,754
4,939
4,911
5,092
-1,506.6
-166.0
-527.5
-196.7
3,387.7
EBITDA pre one-time items of all operating businesses totaled
€ 3,553.7 million (2013: € 3,450.0 million). Taking into account
the expenses and income of € -166.0 million (2013: € -196.7
million) not allocable to the operating businesses which were
reported under Corporate and Other, EBITDA pre one-time items
of the Merck Group amounted to € 3,387.7 million (2013: € 3,253.3
million). This figure did not include depreciation, amortization,
impairments and reversals of impairments or one-time items (ex-
cluding impairments and reversals of impairments). Consequently,
the total operating result (EBIT) of the Merck Group amounted to
€ 1,762.0 million (2013: € 1,610.8 million).
1,388.6
1,557.0
Profit before income tax
-222.2
-205.0
Financial result
1,610.8
1,762.0
Operating result (EBIT)
-184.1
-264.8
One-time items
-1,458.4
-1,360.9
Depreciation and amortization/impairment losses/reversals of impairments
3,253.3
EBITDA pre one-time items of the Merck Group
745.0
Total EBITDA pre one-time items of the operating businesses
Corporate and Other
-161.3
431.2
465.2
920.8
3,219.9
10,233.5
Dec. 31, 2013
Dec. 31, 2014
GBP
TWD
CHF
JPY
USD
Nominal volume € million
Intragroup financing in non-functional currency as well as
→ Receivables and liabilities in non-functional currency
Exchange rate fluctuations of mainly the following currencies
against the euro were hedged:
Currency hedging serves to economically protect the company from
the foreign exchange risks of the following types of transaction:
→ Forecast transactions in non-functional currency, the expected
probability of which within the next 36 months is very high,
→ Off-balance sheet firm purchase commitments of the next 36
months in non-functional currency,
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
234
6,116.0
2,055.6
4,060.4
13,724.4
650.0
5,008.1
457.9
1,244.9
160.7
650.0
603.4
383.6
347.3
255.5
355.8
-246.6
USD
TWD
JPY
CNY
CHF
235
Net exposure Dec. 31, 2013
Net exposure Dec. 31, 2014
€ million
3,763.2
297.2
The following table presents the net exposure of the Merck Group
in relation to exchange rate fluctuations of the major currencies
against the euro:
Owing to its international business focus, Merck is exposed to
foreign exchange-related transaction risks within the scope of
both ordinary business and financing activities. Different strate-
gies are used to limit or eliminate these risks. Foreign exchange
risks from recognized transactions are eliminated as far as possible
through the use of forward exchange contracts. Foreign exchange
risks arising from forecast transactions are analyzed regularly
and reduced if necessary through forward exchange contracts or
currency options by applying the hedge accounting rules.
Foreign exchange risks
Market fluctuations with respect to foreign exchange and interest
rates represent significant profit and cash flow risks for Merck.
Merck aggregates these Group-wide risks and steers them centrally
also by using derivatives. Merck uses scenario analyses to estimate
existing risks of foreign exchange and interest rate fluctuations.
Merck is not subject to any material risk concentration from
financial transactions. The Report on Risks and Opportunities
included in the Group Management Report provides further infor-
mation on the management of financial risks.
(56) MANAGEMENT OF FINANCIAL RISKS
Overall, income of € 411.7 million (2013: € 125.5 million) from the
fair value measurement of derivatives designated as cash flow
hedges was recognized in equity in 2014. € 43.0 million was
transferred from equity and recognized as income (2013: € 26.5
million recognized as income). In 2014, no ineffectiveness resulted
from hedge accounting.
The planned refinancing was hedged to fix the interest rate
level using forward started payer interest rate swaps with a nominal
volume of € 550.0 million and interest payments from 2015 to
2022. The existing variable interest private placement was hedged
using a payer interest rate swap with a nominal volume of € 100.0
million and interest payments until 2015. All interest hedging
relationships represented cash flow hedges.
Interest hedges serve to economically protect the company
from the interest rate risks from the forecast and highly probable
refinancing of a bond maturing in 2015 as well as from an exist-
ing variable interest private placement.
Intragroup financing as well as receivables and payables in
non-functional currency are hedged exclusively and fully using
forward exchange contracts. Overall, balance sheet items amount-
ing to € 4,029.8 million (2013: € 4,147.9 million) were hedged. In
this context, the hedging transactions are largely purely economic
hedges for which hedge accounting is not applied.
All hedging transactions for forecast transactions and firm
purchase commitments in non-functional currency represent cash
flow hedges.
Forecast transactions and firm purchase commitments in non-
functional currency are hedged using forward exchange trans-
actions and currency options which are due within the next 36
months. Overall, forecast transactions and firm purchase commit-
ments in non-functional currency were hedged in the amount of
€ 9,044.6 million (2013: € 1,318.2 million). One of the major
components is the hedge entered into in 2014 in relation to the
expected U.S. dollar-denominated purchase price payment for the
proposed acquisition of the Sigma-Aldrich Corporation, USA.
215.3
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
12,376.5
697.9
650.0
433.9
44.8
550.0
1,028.7
12,695.7
82.2
-39.9
- 99.9
650.0
313.4
4,073.5
10,041.8
650.0
Dec. 31, 2013
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2014
Fair value
9,391.8
Nominal volume
Interest
No hedge accounting
Currency
Interest
Fair value hedge
Share price risks
Currency
Interest
Cash flow hedge
€ million
The following derivatives were held as of the balance sheet date:
Currency
121.6
3,423.5
122.1
11,942.6
653.1
100.0
Total
Dec. 31, 2013
Remaining maturity
more than 1 year
Remaining maturity
less than 1 year
Dec. 31, 2014
Total
Remaining maturity
more than 1 year
Remaining maturity
less than 1 year
Interest rate swaps
Currency options
Foreign exchange contracts
413.3
€ million
The nominal volume corresponds to the total of all nominal values
of currency hedges (translated at the closing rate into euros) as
well as all the nominal values of interest rate hedges. The fair
value results from the actuarial valuation of the derivatives on the
basis of quoted prices or current market data as of the balance
sheet date provided by a recognized information service and the
87.5
322.8
5.3
9.4
2,042.5
6,116.0
3,682.6
13,724.4
5.3
9.4
2,042.5
3,682.6
application of a discount for own credit risk or counterparty credit
risk. Any offsetting effects from hedged items are not taken into
account in the derivatives' fair value. The maturities of the deriv-
atives (nominal volume) were as follows as of the balance sheet
date:
from forecast transactions and transactions already recognized in
the balance sheet is set by a Merck Group risk committee, which
meets on a regular basis. Extensive guidelines regulate the use of
derivatives. There is a ban on speculation. Derivative transactions
are subject to continuous risk management procedures. Trading,
settlement and control functions are strictly separated. Derivatives
are only entered into with banks that have a good credit rating.
Related default risks are continuously monitored.
260.0
-233.0
Interest rate risks
236
In addition to the previously described transaction risks, the Merck
Group is also exposed to currency translation risks since many
Merck companies are located outside the eurozone. The financial
statements of these companies are translated into euros. Exchange
rate differences in the assets and liabilities of these companies
resulting from currency translation are recognized directly in
Group equity.
69.8
6.7
19.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
88
statement
Consolidated income
-94.4
-9.8
-26.3
0.0
0.0
0.0
0.0
The Merck Group's exposure to interest rate changes comprises the
following:
€ million
Short-term or variable interest rate monetary deposits
Short-term or variable interest rate monetary borrowings
Net interest rate exposure
CONSOLIDATED FINANCIAL STATEMENTS →
The scenario calculations assumed that the interest rate cannot
fall below 0%.
-38.9
-2.4
11.6
33.4
-100 basis points
+100 basis points
Cost of sales¹
-100 basis points
-1.3
-22.9
21.3
40.5
+100 basis points
2013
0.0
2014
thereof in the consolidated income statement
Change in market interest rate
€ million
sale securities as well as all derivatives with a hedging relation-
ship are presented in the following table:
The effects of a parallel shift in the yield curve by +100 or -100
basis points on the income statement as well as on equity relative
to all variable interest rate balance sheet items, all available-for-
- 403.3
2,833.0
3,236.3
5,131.9
-2,169.0
2,962.9
2013
2014
Notes to the Group accounts
thereof recognized in equity
0.0
0.0
88
Total equity
0.1
0.0
0.0
Consolidated income
statement
USD
TWD
JPY
CNY
CHF
Dec. 31, 2013
0.0
€ million
Exchange rate +10%
(Appreciation vs. EUR)
Dec. 31, 2014
€ million
→ derivatives used to hedge the abovementioned balance sheet
items and forecast cash flows for the next twelve months.
The following table presents the effect of exchange rate fluctuations
in the key currencies versus the euro on net income and Group
equity:
→
Net exposure per currency consists of the following components:
Balance sheet items in the respective currency, unless such
currency corresponds to the functional currency of a company;
forecast cash flows for the next twelve months in the respective
currency; and
→
690.4
169.0
107.9
251.4
Exchange rate -10%
(Depreciation vs. EUR)
753.0
0.0
0.0
-10.8
Total equity
statement
Total equity
Exchange rate-10%
(Depreciation vs. EUR)
Exchange rate +10%
(Appreciation vs. EUR)
Consolidated income
USD
TWD
JPY
CNY
CHF
-14.2
0.0
-681.7
9.2
0.0
0.0
Total equity
0.0
32.1
0.0
0.0
statement
Consolidated income
0.0
844.1
9.1
Merck uses derivative financial instruments (hereinafter “deriva-
tives") exclusively to hedge and reduce risks from currency and
interest rate positions. Merck uses marketable forward exchange
contracts, options and interest rate swaps as hedging instruments.
Depending on the nature of the hedged item, changes in the fair
values of derivatives are recorded in the income statement either
in the operating result or in the financial result. The strategy to
hedge interest rate and foreign exchange rate fluctuations arising
171.0
233
(-)
(-)
(-)
-4.7
-21.8
(of which: amortization of intangible assets)'
(-)
(-)
(-)
Other operating expenses and income
-3.5
2.0
-1.5
Operating result (EBIT)
62.2
(55) DERIVATIVE FINANCIAL INSTRUMENTS
162.1
Depreciation and amortization
8.6
8.6
Impairment losses
0.3
0.3
(of which: amortization of intangible assets)'
-243.0
-81.7
-17.1
Gross profit¹
318.3
183.7
502.0
Marketing and selling expenses'
-213.0
-71.8
-2.4
-287.2
(of which: amortization of intangible assets)'
(-)
Reversals of impairment losses
(-)
(-2.4)
Royalty, license and commission expenses
-2.0
-0.4
-2.4
Administration expenses
-18.1
- 8.8
-26.9
(-)
Research and development costs'
(-2.4)
EBITDA
99.9
99.9
79.1
71.1
Business free cash flow
83.9
88.6
172.5
'The disclosure of amortization of intangible assets (excluding software) has been changed. See Note "Accounting and measurement principles".
2 According to the consolidated cash flow statement.
232
CONSOLIDATED FINANCIAL STATEMENTS →
Notes to the Group accounts
NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT
67.1
The cash flow statement has been prepared in accordance with
IAS 7 "Statement of Cash Flows". It presents the changes in cash
and cash equivalents as a result of cash inflows and outflows in
the year under review. Further information on cash flows can be
found in the explanation of cash and cash equivalents (see Note
[35]). The amount of undrawn borrowing facilities that could be
tapped for future operating activities and to meet obligations is
disclosed in Note [44].
Within the cash flows from investing activities reclassifica-
tions were made with the aim of a clearer and more understandable
presentation. The 2013 figures were correspondingly adjusted.
(53) NET CASH FLOWS FROM OPERATING
ACTIVITIES
In 2014, tax payments totaled € 667.8 million (2013: € 491.4
million). Tax refunds totaled € 54.9 million (2013: €85.9 million).
Interest paid totaled € 191.1 million (2013: € 248.3 million). Interest
received amounted to € 89.4 million (2013: € 89.5 million). With-
in the scope of a Contractual Trust Arrangement in Germany,
€ 200.0 million was transferred to Merck Pensionstreuhand e. V.,
Darmstadt (trustee) in 2013. This led to a corresponding decline in
pension provisions and to a decrease in cash flows from operating
activities. No transfers were made in 2014.
The changes in provisions during the reporting period were
affected by the written settlement reached with Israel Bio-Engi-
neering Limited Partnership (IBEP). The changes in other assets
and liabilities included the upfront payment in the amount of
US$ 850 million (€ 678.3 million) paid in cash by Pfizer Inc., USA,
after the agreement had been entered into (see Note [5]).
Net cash flows from operating activities broken down by the
segments of the Merck Group are disclosed in Note [51].
(54) NET CASH FLOWS FROM INVESTING
ACTIVITIES
A total of € 4,562.6 million was used for acquisitions and invest-
ments in financial assets (2013: € 990.3 million). Of this amount,
€ 1,419.3 million was attributable to the acquisition of AZ Elec-
tronic Materials S.A., Luxembourg. Net cash outflows from invest-
ments in current and non-current assets amounting to € 3,143.3
million (2013: € 975.2 million) mainly resulted from the purchase
of current financial assets.
In 2014, cash inflows from disposals of other current financial
assets amounted to € 3,508.6 (2013: € 372.1 million). In 2013,
cash inflows of € 251.1 million were attributable to the sale of the
Merck Serono site in Geneva, Switzerland.
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
OTHER DISCLOSURES
The cash flows reported by Group companies in non-func-
tional currencies are translated at average exchange rates. Cash
and cash equivalents are translated at the closing rates. The impact
of foreign exchange rate changes is disclosed separately under
changes in cash and cash equivalents.
Net cash flows from operating activities
146.2
0.4
One-time items
1.4
1.4
EBITDA pre one-time items (Segment result)
72.5
99.9
172.4
0.4
15.2
8.0
23.2
Net operating assets
258.2
156.1
EBITDA margin pre one-time items (% of sales)
Segment liabilities
414.3
3.7
3.7
Investments in intangible assets²
Investments in property, plant and equipment²
-74.5
-74.5
Gains (+)/losses (-) recognized in other comprehensive income
Sales
€ million
Gains (+)/losses (-) recognized in profit or loss
Fair value changes
Transfers into Level 3 out of Level 1/Level 2
Additions due to the acquisition of AZ Electronic Materials S.A.
Net book value as of January 1
Transfers out of Level 3 into Level 1/Level 2
Net book value as of December 31
The changes of financial assets allocated to Level 3 and measured
at fair value were as follows:
thereof derivatives with a hedging relationship
Fair value determined using inputs unobservable in the market (Level 3)
502.3
thereof derivatives without a hedging relationship
9.7
4.4
thereof other liabilities
57.1
139.3
242
CONSOLIDATED FINANCIAL STATEMENTS →
collateral
2014
Potential netting volume
Gross presentation
Netting
Net presentation
Due to master netting
agreements
Due to financial
Potential net
920.6
amount
149.0
-61.5
440.7
-117.9
149.0
- 61.5
-45.9
103.1
-15.6
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
243
(58) CAPITAL MANAGEMENT
The objective of capital management is to secure the financial
flexibility in order to maintain long-term business operations and
to realize strategic options. Maintaining a stable investment grade
rating, ensuring liquidity, limiting financial risks as well as opti-
mizing the costs of capital are the objectives of our financial
policy and set important framework conditions for capital manage-
ment. Traditionally, the capital market represents a major source
of financing for Merck, for instance via bond issues. In addition,
Merck has both a commercial paper program for short-term
financing on the capital market as well as a multi-currency working
capital credit facility of € 2 billion with a term running until 2019
and one extension option for one year.
The responsible committees decide on the capital structure of
the balance sheet, the appropriation of net retained profit and the
dividend level. In this context, net financial debt is one of the
leading capital management indicators. It was as follows:
45.9
Notes to the Group accounts
70.5
-70.5
511.2
-188.4
2013
10.8
0.5
11.3
Gains and losses from Level 3 assets are reported in other compre-
hensive income in the consolidated statement of comprehensive
income under the item “fair value adjustments" related to avail-
able-for-sale financial assets. If the discount factor used for fair
value determination was higher by one percentage point, other
comprehensive income would decrease by € 2.1 million.
Balance sheet netting is not possible at Merck. From an economic
perspective, netting is only possible with derivatives. This possibility
results from the framework agreements on derivatives trading
which Merck enters into with commercial banks. Merck does not
offset financial assets and financial liabilities in its balance sheet.
The following table presents the potential netting volume of
the reported derivative financial assets and liabilities:
€ million
as of Dec. 31, 2014
Derivative financial assets
Derivative financial liabilities
511.2
-188.4
€ million
Derivative financial assets
Derivative financial liabilities
Potential netting volume
Gross presentation
Netting
Net presentation
Due to master netting
agreements
Due to financial
collateral
Potential net
amount
as of Dec. 31, 2013
thereof available-for-sale
thereof other liabilities
1,069.6
18.2
10.0
-41.9
-4.4
41.8
-141.4
-90.8
0.2
Net gains or losses
Reversals of
1.4
Fair value
Impairments
impairment
adjustments Disposal gains/losses
2.5
10.3
15.1
-163.3
-47.2
-4.1
42.1
131.7
Interest
adjustments Disposal gains/losses
Fair value
Reversals of
impairment
ments, except for dividends and interest in the category "held for
trading". At Merck, the category “held for trading” only includes
derivatives not in a hedging relationship.
The net gains and losses on financial instruments by category
on the reporting date were as follows:
€ million
2014
Financial instrument of the category
Held for trading
Held to maturity
Loans and receivables
Available-for-sale
Other liabilities
€ million
2013
Financial instrument of the category
Held for trading
Held to maturity
Loans and receivables
Available-for-sale
Other liabilities
Net gains or losses
Interest
Impairments
1.6
In 2014, foreign exchange gains of € 53.3 million resulting from
receivables and payables in operating business, their economic
hedging, as well as hedging of forecast transactions in operating
business were recorded (2013: gains of € 26.0 million). Foreign
exchange losses of € -13.0 million resulting from financial
balance sheet items, their economic hedging as well as fair value
fluctuations of option contracts to hedge forecast transactions
were recorded (2013: losses of € - 4.3 million).
The fair value of financial assets and liabilities is based on the
official market prices and market values quoted on the balance
sheet date (Level 1 assets and liabilities) as well as mathematical
calculation models with inputs observable in the market on the
balance sheet date (Level 2 assets and liabilities). Level 1 assets
comprise stocks and bonds and are classified as "available-for-
sale", Level 1 liabilities comprise issued bonds and are classified as
"other liabilities". Level 2 assets and liabilities are primarily liabil-
ities to banks classified as “other liabilities", interest-bearing secu-
rities classified as "available-for-sale" as well as derivatives with
and without hedging relationships. The fair value of interest-
bearing securities is determined by discounting future cash flows
using market interest rates. The fair value measurement of forward
exchange contracts and currency options uses spot and forward
rates as well as foreign exchange volatilities applying recognized
mathematical principles. The fair value of interest rate swaps is
determined with standard market valuation models using interest
rate curves available in the market.
157.3
thereof derivatives without a hedging relationship
40.5
31.1
thereof other liabilities
865.4
Fair value determined using inputs unobservable in the market (Level 3)
thereof available-for-sale
11.3
11.3
€ million
as of Dec. 31, 2013
Assets
Liabilities
Fair value determined by official prices and quoted market values (Level 1)
1,396.5
3,414.3
thereof available-for-sale
1,396.5
thereof other liabilities
3,414.3
Fair value determined using inputs observable in the market (Level 2)
470.7
563.8
thereof derivatives with a hedging relationship
thereof available-for-sale
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
241
Level 3 assets comprise investments in equity instruments classi-
fied as available-for-sale. These include interests in InfraServ
GmbH & Co. Wiesbaden KG, Germany, which were acquired in the
context of the acquisition of AZ Electronics Materials S.A. The fair
values of these interests were determined using a discounted cash
flow method where expected future cash flows from dividends are
taken into account.
Counterparty credit risk is taken into consideration for all
valuations. In the case of non-derivative financial instruments, such
as other liabilities or interest-bearing securities, this is reflected
using risk-adequate premiums on the discount rate, while discounts
on market value (so-called credit valuation adjustments and debit
valuation adjustments) are used for derivatives.
The fair value of available-for-sale investments in equity instru-
ments with a carrying amount of € 66.9 million (2013: € 52.3 mil-
lion) could not be reliably determined. They were measured at cost.
There is no intention to sell these financial instruments.
The fair values of the financial instruments disclosed in the
balance sheet and the fair values deviating substantially from the
carrying amount were determined as follows:
€ million
as of Dec. 31, 2014
Assets
Liabilities
Fair value determined by official prices and quoted market values (Level 1)
thereof available-for-sale
€ million
1,178.6
4,970.2
1,178.6
4,970.2
Fair value determined using inputs observable in the market (Level 2)
1,470.1
1,053.8
958.9
Financial liabilities
13,975.0
Cash and cash equivalents
more than 5 years
Total
2.3
5.0
0.4
7.7
0.4
0.1
1-5 years
0.1
2.7
5.1
0.5
8.3
64.9
103.0
4.1
172.0
0.6
within 1 year
199.7
7.3
Future finance lease payments
Future operating lease payments
Operating lease agreements related mainly to customary leasing
arrangements to lease operating and office equipment. The pay-
ments resulting from operating lease agreements amounted to
€ 91.8 million (2013: € 104.0 million) and were recorded as an
expense in the reporting period.
245
within 1 year
1-5 years
more than 5 years
Total
2.8
3.7
0.2
0.2
3.0
3.9
6.5
0.4
6.9
83.7
108.7
246
(61) PERSONNEL EXPENSES/HEADCOUNT
Personnel expenses comprised the following:
€ million
In 2013 and 2014, Merck substantially increased transparency by
assigning all positions to a standardized job profile. In this way,
positions that were previously not assigned to specific functional
areas were assigned according to function.
(62) MATERIAL COSTS
Material costs in 2014 amounted to € 1,516.8 million (2013:
€ 1,473.2 million) and were reported under cost of sales.
2014
2013
10,176
9,985
2,207
1,779
12,113
12,214
6,342
5,106
4,738
4,433
3,354
4,765
38,930
38,282
Infrastructure and Other
Interest component of finance leases
Research and Development
Marketing and Sales
CONSOLIDATED FINANCIAL STATEMENTS →
Notes to the Group accounts
2014
2013
Wages and salaries
2,630.9
2,611.8
Compulsory social security contributions and special financial assistance
Pension expenses
376.6
368.0
157.4
146.6
3,164.9
3,126.4
As of December 31, 2014, the Merck Group had 39,639 employees
(2013: 38,154). The average number of employees during the year
was 38,930 (2013: 38,282).
The breakdown of personnel by function was as follows:
Average number of employees
Production
Logistics
Administration
less:
Present value of future payments from finance leases
€ million
Dec. 31, 2014
thereof affiliates
Dec. 31, 2013
thereof affiliates
17.1
0.5
54.3
2.5
0.9
252.5
32.9
(60) OTHER FINANCIAL OBLIGATIONS
Other financial obligations comprised the following:
€ million
Obligation to purchase the entire share capital of
Sigma-Aldrich Corporation
Obligation to purchase the entire share capital of
AZ Electronic Materials S.A.
Obligations to acquire intangible assets
Obligations to acquire property, plant and equipment
244
306.6
559.1
-211.1
Current financial assets
Net financial debt
(59) CONTINGENT LIABILITIES
€ million
Guarantees
Warranties
Other contingent liabilities
Other contingent liabilities included, among other things, potential
obligations from legal disputes, for which the probability of an
outflow of resources did not suffice to recognize a provision as of
the balance sheet date.
Dec. 31, 2014
Dec. 31, 2013
Change
5,637.0
3,697.9
1,939.1
2,878.5
980.8
1,897.7
2,199.4
2,410.5
Future operating lease payments
Long-term purchase commitments
Other financial obligations
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
Dec. 31, 2014
thereof affiliates
more than 5 years
Other financial obligations were recognized at nominal value.
Dec. 31, 2014
Dec. 31, 2013
61.2
390.2
56.8
508.4
1,043.4
1,435.0
1,494.8
2,000.2
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
The maturities of liabilities from lease agreements were as follows:
€ million
Dec. 31, 2014
Present value of future payments from finance leases
Interest component of finance leases
Future finance lease payments
Future operating lease payments
in 1-5 years
Dec. 31, 2013
within one year
€ million
Dec. 31, 2013
thereof affiliates
Net gains and losses on financial instruments mainly include
measurement results from currency translation, fair value adjust-
ments, impairments and reversals of impairments as well as the
recognition of premiums and discounts. Dividends and interest are
not recognized in the net gains and losses on financial instru-
1,876.5
1,494.8
2,000.2
55.3
44.7
199.7
172.0
138.4
151.5
30.8
15,894.0
29.0
4,273.9
In connection with the offer to acquire Sigma-Aldrich Corpora-
tion, USA, which was announced by Merck on September 22,
2014, there is a contingent financial obligation in the amount of
€ 13,975.0 million (US$ 16,985.2 million; €/US$ exchange rate on
December 31, 2014: 1.2154) to acquire the entire share capital of
Sigma-Aldrich for a cash consideration.
If the merger agreement with Sigma-Aldrich is terminated,
Merck will be obligated to pay Sigma-Aldrich a termination fee of
€ 768.8 million (US$ 934.4. million, €/US$ exchange rate on
December 31, 2014: 1.2154).
Obligations to acquire intangible assets existed in particular within
the scope of research and development collaborations. Here Merck
has obligations to make milestone payments when its partner
achieves certain objectives.
In the unlikely event that all contract partners achieve all
milestones, Merck would be obligated to pay up to € 1,494.8 million
(2013: € 2,000.2 million) for the acquisition of intangible assets.
Our expectations regarding the potential maturities of these
obligations were as follows:
Obligations to acquire intangible assets
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
13.7
556.9
471.4
186.1
5,637.0
3.7
0.2
2.8
0.2
6.5
152.4
Financing leasing liabilities
17.3
63.7
36.0
2.5
153.0
Liabilities from derivatives (financial transactions)
4.3
61.6
40.7
11.8
1,266.7
2,235.6
Derivatives not in a hedging relationship
39.8
39.8
Held to maturity
21.7
21.7
Loans and receivables
2.9
Current and non-current other assets
2.9
2,135.0
2,135.0
Derivatives in a hedging relationship
Trade receivables
2,235.6
2,235.6
Loans and receivables
2,235.6
Available-for-sale
Held for trading (non-derivatives)
18.6
84.5
Interest
Repayment
1-5 years
Cash flows
Repayment
Cash flows
> 5 years
237
Interest
Repayment
Carrying
amount
Cash flows
as of Dec. 31, 2014
€ million
The following tables present the contractual cash flows such as
repayments and interest on financial liabilities and derivative
financial instruments with a negative fair value:
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
642.9
Derivatives not in a hedging relationship
0.7
< one year
5.8
Interest
4,624.2
other financial liabilities
Loans from third parties and
501.4
1.6
501.4
Liabilities to related parties
200.0
2.8
Bonds and commercial paper
67.4
267.4
Liabilities to banks
2,850.0
197.6
342.1
442.3
1,450.0
170.9
5.1
2,174.8
2,878.5
24.6
2,878.5
2,199.4
3,142.7
127.8
333.8
1,722.1
124.5
1,420.0
Liabilities to banks
42.2
Bonds and commercial paper
4.7
Liabilities to related parties
361.9
0.2
361.9
Loans from third parties and
other financial liabilities
84.0
6.0
42.2
24.0
Repayment
Repayment
2,076.2
520.8
624.7
238.3
2,854.3
€ million
as of Dec. 31, 2013
Cash flows
Interest
Cash flows
< one year
1-5 years
>5 years
Carrying
amount
Interest
Repayment
Interest
Cash flows
11.1
56.0
4.0
The credit risk with customers is continuously monitored by
analyzing the age structure of trade accounts receivable. Merck
continuously reviews and monitors open positions vis-à-vis
all trading partners in the affected countries and takes risk-
mitigating measures and accounts for impairments as necessary.
On the reporting date, the theoretically maximum default risk
corresponded to the carrying amounts.
238
CONSOLIDATED FINANCIAL STATEMENTS →
Notes to the Group accounts
(57) OTHER DISCLOSURES ON FINANCIAL INSTRUMENTS
The following table presents the reconciliation of the balance
sheet items to categories of financial instruments pursuant to the
disclosures required by IFRS 7 and provides information on the
measurement of fair value:
€ million
Subsequent measurement according to IAS 39
account in the fair value determination by means of a discount
(so-called credit valuation adjustments and debit valuation
adjustments).
Carrying
amount
At cost
Fair value
Carrying
amount
according to
IAS 17
Non-financial
items
Assets
Cash and cash equivalents
Current financial assets
Dec. 31, 2014 Amortized cost
Merck is only subject to a relatively low credit risk, meaning the
unexpected loss of payment funds or income. On the one hand,
financial contracts are only entered into with banks and industri-
al companies with good credit ratings and on the other hand, due
to the broad-based business structure of the Merck Group, there is
no particularly high concentration of credit risks with respect to
either customers or individual countries. The credit risk from
financial contracts is monitored daily on the basis of rating infor-
mation as well as market information on credit default swap rates.
In the case of derivative transactions, credit risk is taken into
Credit risks
1,424.4
Liabilities from derivatives (financial transactions)
Financing leasing liabilities
59.4
2.4
10.0
27.6
9.5
14.7
7.7
0.4
2.3
0.1
5.0
0.4
3,697.9
141.5
440.4
372.6
1,792.6
139.2
0.7
240
Loans and receivables
152.4
115.4
115.4
470.7
123.7
123.7
115.4
123.7
224.2
224.2
152.4
77.8
52.3
9.7
15.8
15.8
15.8
80.7
57.3
52.3
15.8
5.0
2.9
2.9
2,135.0
2,312.1
2,312.1
2,312.1
10.9
10.9
10.9
2,021.4
2.9
2,021.4
2,021.4
2,021.4
2,021.4
466.2
115.4
126.6
224.2
0.7
2,235.6
57.3
4.7
4.7
1,140.1
581.1
2.1
1,364.1
556.9
5.7
0.4
0.4
1,364.1
0.4
581.1
581.1
581.1
29.7
1.7
1.7
1.7
556.9
696.1
1,364.1
1,539.4
1,364.1
4.7
3,697.9
3,630.8
59.4
7.7
25.4
5,835.6
4.0
4.0
4.0
3,630.8
3,630.8
3,916.6
127.6
6.5
55.4
55.4
7.7
7.7
55.4
7.7
1,364.1
27.3
152.4
27.3
2.9
Derivatives not in a hedging relationship
Other liabilities
Derivatives in a hedging relationship
Finance lease liabilities
5,637.0
25.4
5,477.5
127.6
6.5
5,477.5
153.0
6.5
Current and non-current financial liabilities
25.4
127.6
6.5
Trade payables
1,539.4
1,539.4
Other liabilities
1,539.4
1,539.4
5,477.5
Other current and non-current liabilities
Liabilities
66.9
Derivatives in a hedging relationship
470.7
470.7
Non-financial items
642.9
642.9
Non-current financial assets
94.4
Derivatives in a hedging relationship
13.7
13.8
Derivatives not in a hedging relationship
Held to maturity
Loans and receivables
13.7
13.7
Available-for-sale
80.7
66.9
27.3
2,356.6
35.4
Non-financial
Fair value
items
Dec. 31, 2013
2,878.5
980.8
2,410.5
980.8
80.7
Carrying
amount
according to
IAS 17
2,329.8
39.8
6.8
6.8
6.8
21.7
53.4
53.4
53.4
980.8
696.1
Fair value
Dec. 31, 2013 Amortized cost
1,625.1
Derivatives not in a hedging relationship
5.7
5.7
Other liabilities
696.1
696.1
Derivatives in a hedging relationship
At cost
29.7
Non-financial items
1,625.1
1,625.1
239
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
Subsequent measurement according to IAS 39
Carrying
Fair value,
Dec. 31, 2014
amount
29.7
13.8
100.00
Chéserex
100.00
Millipore China Ltd.
Hong Kong
100.00
China
Suzhou Taizhu Technology Development Co., Ltd.
Taicang
100.00
Colombia
Merck S.A.
Bogotá
100.00
Ecuador
Guatemala
Merck C.A.
Quito
100.00
Merck, S.A.
Guatemala City
India
Country
India
253
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
51.80
China
Mumbai
India
100.00
Sanpada New Mumbai
Chemtreat Composites India Pvt. Ltd.
India
100.00
Merck Ltd.
100.00
Shanghai
Millipore (Shanghai) Trading Co., Ltd.
Hong Kong
100.00
Hong Kong
100.00
Hong Kong
100.00
100.00
Shanghai
China
China
China
China
100.00
Hong Kong
Merck Millipore Lab Equipment (Shanghai) Co., Ltd.
Merck Performance Materials Hong Kong Ltd.
Merck Performance Materials Hong Kong Services Ltd.
Merck Pharmaceutical (HK) Ltd.
Company
China
Nantong
China
100.00
Beijing
Merck Serono Co., Ltd.
China
100.00
Merck Pharmaceutical Manufacturing (Jiangsu) Co., Ltd.
Beijing
China
100.00
Beijing
Merck Serono (Beijing) Pharmaceutical Distribution Co., Ltd.
China
100.00
Merck Serono (Beijing) Pharmaceutical R&D Co., Ltd.
Merck Specialities Pvt. Ltd.
Millipore India Pvt. Ltd.
thereof
Registered office
Karachi
Merck Specialities (Pvt.) Ltd.
Pakistan
75.00
Karachi
Merck Pharmaceuticals (Pvt.) Ltd.
100.00
Pakistan
75.00
Karachi
Merck (Pvt.) Ltd.
Pakistan
100.00
Mexico City
26.00
Merck, S.A. de C.V.
Panama
Panama City
Singapore
100.00
Makati City
Merck Pte. Ltd.
AZ Electronic Materials (Singapore) Pte. Ltd.
Merck Inc.
Mesofarma Corporation
Singapore
Philippines
100.00
Lima
Merck Peruana S.A.
Peru
100.00
Singapore
Merck Ltd.
Mexico
Petaling Jaya
86.65
Jakarta
P.T. Merck Tbk.
Indonesia
100.00
100.00
Israel
100.00
Bangalore
Mumbai
P.T. Merck Chemicals and Life Sciences
Indonesia
Merck KGaA (%)
Equity interest (%)
Jakarta
100.00
Inter-Lab Ltd.
100.00
Merck Sdn Bhd
Malaysia
100.00
Herzliya Pituach
Merck Serono Ltd.
Israel
Yavne
100.00
InterPharm Laboratories Ltd.
Israel
100.00
Yavne
InterPharm Industries Ltd.
Israel
Yavne
China
100.00
Shanghai
Merck Chemicals GmbH, Schwalbach
Merck Consumer Health Holding GmbH, Darmstadt
Merck Export GmbH, Darmstadt
Merck Selbstmedikation GmbH, Darmstadt
Merck Serono GmbH, Darmstadt
Merck Versicherungsvermittlung GmbH, Darmstadt
Merck Accounting Solutions & Services Europe GmbH, Darmstadt
247
2013
Merck Group
thereof KPMG
Germany
Merck Group
thereof KPMG
Germany
5.4
2014
1.6
Litec-LLL GmbH, Greifswald
Chemitra GmbH, Darmstadt
Audits of financial statements
Other audit-related services
Tax consultancy services
Other services
(64) CORPORATE GOVERNANCE
The Statement of Compliance in accordance with section 161 of the
German Stock Corporation Act (Aktiengesetz) was published in the
corporate governance section of our website www.merckgroup.
com/investors/corporate governance in March 2014 and thus made
heipha Dr. Müller GmbH, Eppelheim
permanently available.
The following companies, which have been consolidated in these
financial statements, have opted for exemption:
Allergopharma GmbH & Co. KG, Reinbek
Allergopharma Verwaltungs GmbH, Darmstadt
Biochrom GmbH, Berlin
Chemische Fabrik Lehrte Dr. Andreas Kossel GmbH, Lehrte
(65) COMPANIES OPTING FOR EXEMPTION
UNDER SECTION 264 (3) HGB OR
SECTION 264 HGB
€ million
5.2
0.6
Related parties in respect of the Merck Group are E. Merck KG as
well as Emanuel-Merck-Vermögens-KG and E. Merck Beteiligun-
gen KG. In principle, direct or indirect subsidiaries of Merck KGaA,
associates of the Merck Group, jointly controlled companies where
the Merck Group is involved, as well as pension funds that are
classified as funded defined benefit plans in accordance with
IAS 19 are also related parties within the meaning of IAS 24.
Members of the Executive Board and the Supervisory Board of
Merck KGaA, the Executive Board and the Board of Partners of
E. Merck KG as well as close members of their families are also
related parties.
As of December 31, 2014, there were liabilities by Merck
Financial Services GmbH, Merck KGaA, and Merck & Cie, Altdorf,
Switzerland, to E. Merck KG in the amount of € 926.9 million
(2013: € 734.7 million) as well as by Merck Financial Services
GmbH to Merck Capital Asset Management, Malta, and Merck
Capital Asset Management Holding, Malta, amounting to € 0.1
million (2013: € 0.2 million) and € 0.0 million (2013: € 0.1 mil-
lion), respectively. In addition, as of December 31, 2014,
Merck KGaA had receivables from E. Merck Beteiligungen KG in
the amount of € 76.5 million (2013: € 32.5 million). The balances
result mainly from the profit transfers by Merck & Cie to
E. Merck KG as well as the reciprocal profit transfers between
Merck KGaA and E. Merck KG. They included financial payables
of € 501.4 million (2013: € 361.9 million) which were subject to
standard market interest rates. Neither collateral nor guarantees
existed for any of the balances either in favor or to the disadvan
tage of Merck.
From January to December 2014, Merck KGaA performed ser-
vices for E. Merck KG with a value of € 1.2 million (2013: € 1.2
million), for Emanuel-Merck-Vermögens-KG with a value of € 0.3
million (2013: € 0.4 million) and for E. Merck Beteiligungen KG
with a value of € 0.3 million (2013: € 0.3 million). During the
same period, E. Merck KG performed services for Merck KGaA
with a value of € 0.5 million (2013: € 0.5 million).
Business transactions with major subsidiaries were eliminated
during consolidation. Information on pension funds that are clas-
sified as funded defined benefit plans in accordance with IAS 19
can be found under Note [49]. There were no further material
transactions with these pension funds.
From January to December 2014, there were no transactions
between companies of the Merck Group and associates, as was the
case in 2013. As in the previous year, companies of the Merck
Group had no receivables or liabilities vis-à-vis associates as of
December 31, 2014.
(66) RELATED-PARTY DISCLOSURES
There were no material transactions such as, for example, the
provision of services or the granting of loans, between companies
of the Merck Group and members of the Executive Board or the
Supervisory Board of Merck KGaA, the Executive Board or the
Board of Partners of E. Merck KG or members of their immediate
families.
The compensation of the Executive Board of Merck KGaA is paid
by the general partner, E. Merck KG, and recorded as an expense
in its income statement. For the period from January to December
2014 fixed salaries of € 5.3 million (2013: € 4.9 million), variable
compensation of € 18.3 million (2013: € 17.6 million), and addi-
tional benefits of € 0.2 million (2013: € 0.2 million) were recorded
for members of the Executive Board of Merck KGaA. Furthermore,
additions to the provisions of E. Merck KG for the Long-Term
Incentive Plan totaled € 12.7 million (2013: € 8.0 million), and
additions to the pension provisions of E. Merck KG include current
service costs of € 2.1 million (2013: € 2.5 million) for members of
the Executive Board of Merck KGaA.
The compensation of the Supervisory Board amounting to
€ 882.1 thousand (2013: € 847.4 thousand) consisted of a fixed
portion of € 823.6 thousand (2013: € 599.5 thousand), meeting
attendance compensation of € 58.5 thousand (2013: € 45.7 thou-
sand), as well as a variable portion of € 0.0 thousand (2013:
€ 202.2 thousand).
Further individualized information and details can be found in
the Compensation Report on pages 147 et seq.
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
249
(68) INFORMATION ON PREPARATION AND
APPROVAL
(67) EXECUTIVE BOARD AND
SUPERVISORY BOARD
COMPENSATION
1.5
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
2.7
0.5
0.4
0.2
0.6
0.3
0.8
248
0.7
0.2
0.4
0.3
6.9
2.6
6.8
0.3
100.00
The costs of the auditors (KPMG) of the financial statements of the
Merck Group consisted of the following:
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
Feltham
Merck Serono Ltd.
Millipore (U.K.) Ltd.
United Kingdom
United Kingdom
United Kingdom
United Kingdom
100.00
London
Merck Serono Europe Ltd.
100.00
United Kingdom
Hull
Merck Pension Trustees Ltd.
United Kingdom
100.00
Hull
Merck Ltd.
100.00
United Kingdom
Feltham
Millipore UK Holdings LLP
Seven Seas Limited
Merck Holding (China) Co., Ltd.
North America
Company
Country
Merck KGaA (%)
Equity interest (%)
100.00
Registered office
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
252
100.00
Hull
100.00
London
thereof
(63) AUDITORS' FEES
100.00
Merck Investments Ltd.
Tunbridge Wells
Lamberts Healthcare Ltd.
United Kingdom
100.00
Stockley Park
AZ Electronic Materials Services Ltd.
100.00
United Kingdom
Stockley Park
AZ Electronic Materials (UK) Ltd.
United Kingdom
100.00
Istanbul
100.00
100.00
Hull
United Kingdom
Nottingham
United Kingdom
100.00
Feltham
Merck Holding Ltd.
United Kingdom
100.00
Merck Chemicals Ltd.
Hull
United Kingdom
100.00
Hull
Merck Consumer Health Care Ltd.
United Kingdom
100.00
Merck Cross Border Trustees Ltd.
Singapore
100.00
South Korea
100.00
Johannesburg
100.00
III. Associates not included at equity due to secondary importance
Other European countries
Switzerland
Lagos
Vaximm AG
Basel
Emerging Markets
Israel
Neviah Genomics Ltd.
Yavne
69.00
24.66
7.75
Merck Pharmaceutical and Life Sciences Ltd.
Serono South Africa Ltd.
Nigeria
65.78
Emerging Markets
Dominican Republic
Merck Dominicana, S.R.L.
Santo Domingo
100.00
Rest of the World
South Africa
Australia
Bayswater
100.00
Morocco
Merck Maroc S.A.R.L.
Casablanca
100.00
Biochrom Australia Pty. Ltd.
Groton
Israel
Jerusalem
Darmstadt, February 18, 2015
4.1.my
KARL-LUDWIG KLEY
Behmmm
KAI BECKMANN
BELÉN GARIJO LOPEZ
To the best of our knowledge, and in accordance with the applicable reporting principles, the consolidated financial statements of the
Merck Group give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group, and the Group manage-
ment report includes a fair review of the development and performance of the business and the position of the Group, together with
a description of the material opportunities and risks associated with the expected development of the Group.
Mosus beukent
S. Ama
STEFAN OSCHMANN
B. Read
BERND RECKMANN
Germany
100.00
MARCUS KUHNERT
QLight Nanotech Ltd.
RESPONSIBILITY STATEMENT
256
47.73
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
255
Darmstadt, February 18, 2015
4.1.my
KARL-LUDWIG KLEY
RESPONSIBILITY STATEMENT
Mos us beukerst
KAI BECKMANN
BELÉN GARIJO LOPEZ
S.
STEFAN OSCHMANN
B. Rech
BERND RECKMANN
MARCUS KUHNERT
100.00
100.00
100.00
Grundstücksverwaltungsgesellschaft mbH
Darmstadt
100.00
100.00
Other European countries
Switzerland
Germany
Switzerland
United Kingdom
Laquifa Laboratorios S.A.
Calypso Biotech SA
Prexton Therapeutics SA
France
Gonnon S.A.S.
Switzerland
Netherlands
Merck Wohnungs- und
Darmstadt
100.00
100.00
Germany
Merck 20. Allgemeine Beteiligungs-GmbH
Darmstadt
100.00
100.00
100.00
Merck 21. Allgemeine Beteiligungs-GmbH
Darmstadt
100.00
100.00
Germany
Merck Patent GmbH
Germany
Wilmington
Merck Finance B.V.
Merck Holding Netherlands B.V.
80.00
Plan-les-Ouates
75.00
Plan-les-Ouates
55.00
Nature's Best Health Products Ltd.
100.00
Tunbridge Wells
North America
United States
EMD Finance LLC
United States
United States
Mario II Finance Corp.
TocopheRx, Inc.
Wilmington
100.00
Netherlands
Lausanne
Asceneuron SA
Netherlands
Peer+ B.V.
Portugal
Lyon
100.00
Schiphol-Rijk
Algés
100.00
Schiphol-Rijk
100.00
100.00
Eindhoven
100.00
100.00
100.00
The Executive Board of Merck KGaA prepared the consolidated
financial statements on February 18, 2015 and approved them for
forwarding to the Supervisory Board. The Supervisory Board has
the responsibility to examine the consolidated financial state-
ments and to declare whether it approves them.
Darmstadt
Germany
Vietnam
Venezuela
100.00
Caracas
Merck S.A.
Venezuela
Representaciones MEPRO S.A.
Merck Vietnam Ltd.
100.00
ARES Trading Uruguay S.A.
Uruguay
100.00
Dubai
Merck Serono Middle East FZ-LLC
United Arab Emirates
Montevideo
45.11
Caracas
Ho Chi Minh City
100.00
Cairo
Merck Ltd.
Egypt
100.00
Sydney
100.00
Merck Serono Australia Pty. Ltd.
100.00
Bayswater
Merck Pty. Ltd.
Australia
Rest of the World
100.00
Australia
Japan
Bangkok
Thailand
Seoul
Merck Ltd.
South Korea
100.00
Pyeongtaek-si
Merck Advanced Technologies Ltd.
100.00
South Korea
Seoul
AZ Electronic Materials (Korea) Ltd.
South Korea
100.00
Seoul
AZ Chem Korea Ltd.
100.00
Merck Ltd.
Taiwan
Taipei
100.00
Taipei
Merck Ltd.
Taiwan
100.00
Taipei
AZ Electronic Materials Taiwan Co. Ltd.
Merck Display Technologies Ltd.
100.00
Taipei
AZ EM Taiwan Holding Co. Ltd.
Taiwan
100.00
100.00
Taiwan
Merck 18. Allgemeine Beteiligungs-GmbH
AZ Electronic Materials IP (Japan) KK
100.00
II. Companies not consolidated due to secondary importance
thereof
Merck KGaA (%)
Equity interest (%)
Registered office
Company
Country
Germany
Notes to the Group accounts
254
100.00
Tunis
Merck SARL
Tunisia
100.00
CONSOLIDATED FINANCIAL STATEMENTS →
Tunis
Germany
Zossen
100.00
100.00
Darmstadt
100.00
100.00
Darmstadt
AB Pensionsverwaltung GmbH
100.00
Merck 14. Allgemeine Beteiligungs-GmbH
Merck 16. Allgemeine Beteiligungs-GmbH
Merck 17. Allgemeine Beteiligungs-GmbH
Germany
Germany
Germany
100.00
100.00
Darmstadt
Tokyo
Merck Promotion SARL
100.00
Japan
100.00
Tokyo
Merck Performance Materials G.K.
Japan
15.89
Merck Serono Co., Ltd.
100.00
Merck Ltd.
Japan
100.00
Tokyo
AZ Electronic Materials Manufacturing (Japan) KK
Japan
Tokyo
Tunisia
Tokyo
Mauritius
Wadeville
Merck Pharmaceutical Manufacturing (Pty) Ltd.
South Africa
100.00
Halfway House
Merck (Pty) Ltd.
100.00
South Africa
Palmerston North
Merck Ltd.
New Zealand
100.00
CyberCity
Millipore Mauritius Ltd.
100.00
(70) LIST OF SHAREHOLDINGS
The shareholdings of Merck KGaA as of December 31, 2014 are
presented in the following table.
(69) SUBSEQUENT EVENTS
Millipore Cork
Carrigtwohill
100.00
Ireland
Millipore Dublin International Finance Company
Dublin
Ireland
100.00
Italy
Allergopharma S.p.A.
Istituto di Ricerche Biomediche Antoine Marxer RBM S.p.A. Colleretto Giacosa
Rome
100.00
100.00
Italy
Italy
100.00
Merck Serono (Ireland) Ltd.
Ireland
Millipore S.A.S.
Merck A.E.
Molsheim
100.00
Maroussi, Athens
Dublin
100.00
Budapest
100.00
Merck Millipore Ltd.
Carrigtwohill
100.00
Ireland
Merck Kft.
Hungary
Merck S.p.A.
100.00
Luxembourg
100.00
Luxembourg
AZ Electronic Materials S.A.
Luxembourg
100.00
AZ Electronic Materials Group S.a.r.l.
Luxembourg
Luxembourg
100.00
Luxembourg
Luxembourg
Merck Chemicals Holding S.a.r.l.
Merck Finance S.a.r.l.
AZ Electronic Materials TopCo S.a.r.l.
Vimodrone
Luxembourg
Luxembourg
Italy
Merck Serono S.p.A.
Rome
99.74
Latvia
Merck Serono SIA
100.00
Riga
Lithuania
Merck Serono, UAB
Vilnius
100.00
Luxembourg
AZ Electronic Materials (Luxembourg) S.a.r.l.
100.00
Luxembourg
Greece
100.00
Hellerup
100.00
Merck Life Science A/S
Hellerup
100.00
Survac ApS
Merck A/S
Frederiksberg
100.00
Merck Serono OÜ
Tallinn
100.00
Merck OY
Espoo
100.00
100.00
Estonia
Finland
Denmark
100.00
Bulgaria
Merck Bulgaria EAD
Sofia
100.00
Croatia
Denmark
Merck d.o.o.
100.00
Czech Republic
Merck spol.s.r.o.
Prague
100.00
Denmark
Zagreb
France
Finland
Espoo
Merck Médication Familiale S.A.S.
Lyon
100.00
France
Merck S.A.
Lyon
France
99.83
Merck Santé S.A.S.
Lyon
100.00
France
Merck Serono S.A.S.
Lyon
France
Millipore OY
100.00
Merck Chimie S.A.S.
100.00
France
AZ Electronic Materials France S.A.S.
Trosly-Breuil
100.00
France
Fontenay s/Bois
Laboratoire Médiflor S.A.S.
100.00
France
Merck Biodevelopment S.A.S.
Lyon
100.00
France
Lyon
Overijse
100.00
100.00
Madrid
100.00
Spain
Merck, S.L.
Madrid
100.00
Merck Chemicals and Life Science S.A.
Sweden
Solna
100.00
Sweden
Merck Chemicals and Life Science AB
Solna
100.00
Merck AB
Switzerland
Spain
Belgrade
Algés
100.00
Bucharest
Moscow
100.00
Slovakia
Slovenia
100.00
Merck spol.s.r.o.
100.00
Merck d.o.o.
Ljubljana
100.00
Serbia
Merck d.o.o. Beograd
Bratislava
100.00
Allergopharma AG
100.00
Merck Biosciences AG
Läufelfingen
100.00
Switzerland
Merck Serono SA
Coinsins
Switzerland
100.00
Switzerland
Turkey
Millipore AG
SeroMer Holding SA
Merck llac Ecza ve Kimya Ticaret AS
Canada
Zug
Switzerland
Therwil
100.00
Merck (Schweiz) AG
Switzerland
Ares Trading SA
Aubonne
100.00
Switzerland
AZ Electronic Materials (Schweiz) AG
Zug
Zurich
Switzerland
Merck & Cie
Altdorf
51.63
51.63
Switzerland
100.00
Luxembourg
Warsaw
Oslo
Registered office
Equity interest (%)
Merck KGaA (%)
Luxembourg
Luxembourg
Millilux S.a.r.l.
Luxembourg
Company
100.00
Luxembourg
100.00
Luxembourg
Millipore International Holdings, S.a.r.l.
Luxembourg
100.00
Millipart S.a.r.l.
Luxembourg
Country
251
Luxembourg
Merck Holding S.a.r.l.
Luxembourg
100.00
Luxembourg
Merck Re S.A.
thereof
Luxembourg
Luxembourg
Merck-Finanz AG
Luxembourg
100.00
100.00
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
100.00
100.00
Ridgefield Acquisition S.a.r.l.
100.00
Portugal
Romania
Merck B.V.
Merck Chemicals B.V.
Serono Tri Holdings B.V.
Merck Life Science AS
Merck Sp.z o.o.
Merck, S.A.
Russia
Merck Romania S.R.L.
Schiphol-Rijk
100.00
Amsterdam Zuidoost
100.00
Schiphol-Rijk
100.00
Merck LLC
Luxembourg
Poland
Netherlands
Luxembourg
Ridgefield Holdco S.a.r.l.
Luxembourg
100.00
Malta
Merck Capital Holding Ltd.
Norway
Pietà
Malta
Merck Capital Ltd.
Pietà
100.00
Netherlands
Netherlands
100.00
Darmstadt
Merck N.V.-S.A.
100.00
100.00
100.00
Germany
Merck Export GmbH
Darmstadt
100.00
Darmstadt
100.00
Merck Financial Services GmbH
Darmstadt
100.00
100.00
Germany
Merck Financial Trading GmbH
Germany
Gernsheim
Merck Consumer Health Holding GmbH
100.00
Darmstadt
100.00
Germany
Merck Accounting Solutions & Services Europe GmbH
Darmstadt
100.00
Germany
100.00
Merck Chemicals GmbH
Schwalbach
100.00
Germany
Merck China Chemicals Holding GmbH
Darmstadt
Germany
Merck 15. Allgemeine Beteiligungs-GmbH
100.00
Germany
Germany
Merck Selbstmedikation GmbH
Darmstadt
100.00
Germany
Merck Serono GmbH
100.00
Darmstadt
100.00
Germany
Merck Versicherungsvermittlung GmbH
Darmstadt
China
100.00
100.00
100.00
100.00
Merck Schuchardt OHG
Merck Holding GmbH
Gernsheim
100.00
100.00
Germany
Merck International GmbH
Hohenbrunn
Darmstadt
100.00
Germany
Merck Internationale Beteiligungen GmbH
Darmstadt
100.00
Germany
100.00
Shanghai
Germany
Darmstadt
Reinbek
100.00
Germany
Allergopharma Verwaltungs GmbH
Darmstadt
100.00
Allergopharma GmbH & Co. KG
100.00
AZ Electronic Materials (Germany) GmbH
Wiesbaden
100.00
Germany
Biochrom GmbH
Berlin
Germany
100.00
Germany
100.00
Subsequent to the balance sheet date, no events of special impor-
tance occurred that could have a material impact on the financial
position and results of operations of the Merck Group.
Country
Company
I. Fully consolidated companies
Registered office
Equity interest (%)
100.00
thereof
Merck KGaA (%)
Germany
Merck KGaA
Germany
AB Allgemeine Pensions GmbH & Co. KG
Darmstadt
Zossen
Parent company
Germany
100.00
Germany
Lehrte
Frankfurt/Main
100.00
Germany
Litec-LLL GmbH
Greifswald
100.00
IHS Intelligent Healthcare Solutions GmbH
100.00
Merck 12. Allgemeine Beteiligungs-GmbH
Darmstadt
100.00
100.00
Germany
Merck 13. Allgemeine Beteiligungs-GmbH
Germany
Chemische Fabrik Lehrte Dr. Andreas Kossel GmbH
Germany
100.00
100.00
100.00
Germany
Chemitra GmbH
Darmstadt
100.00
100.00
100.00
Emedia Export Company mbH
Gernsheim
100.00
Germany
heipha Dr. Müller GmbH
Eppelheim
Germany
Belgium
Merck Display Materials (Shanghai) Co., Ltd.
100.00
Canada
100.00
Mississauga
EMD Inc.
Canada
100.00
Millipore (Canada) Ltd.
Toronto
Canada
100.00
Toronto
EMD Chemicals Canada Inc.
100.00
100.00
EMD Crop BioScience Canada Inc.
Germany
Toronto
United States
Quincy
EMD Accounting Solutions & Services America, Inc.
United States
100.00
Wilmington
AZ Electronic Materials USA Corp.
100.00
United States
Wilmington
AZ Electronic Materials Holdings U.S. Inc.
United States
100.00
Seattle
Amnis Corp.
100.00
100.00
Merck Vierte Allgemeine Beteiligungsgesellschaft mbH
100.00
Vienna
100.00
Austria
Merck KGaA & Co. Werk Spittal
Spittal
100.00
Merck Gesellschaft mbH
99.00
Merck Chemicals N.V./S.A.
Overijse
100.00
Belgium
Merck Consumer Healthcare N.V.-S.A.
Overijse
Belgium
Gernsheim
Austria
Vienna
250
CONSOLIDATED FINANCIAL STATEMENTS → Notes to the Group accounts
Country
Company
Registered office
Equity interest (%)
100.00
thereof
Merck KGaA (%)
Austria
Allergopharma Vertriebsgesellschaft m.b.H.
Vienna
100.00
Austria
Merck Chemicals and Life Science GesmbH
Other European countries
China
United States
Rockland
Chile
100.00
Rio de Janeiro
Merck S.A.
Brazil
100.00
China
Buenos Aires
Argentina
Emerging Markets
100.00
Rockland
Serono Laboratories Inc.
United States
Merck Quimica Argentina S.A.I.C.
100.00
China
AZ Electronic Materials (Hong Kong) Finance Ltd.
Shanghai
Merck Chemicals (Shanghai) Co., Ltd.
China
100.00
Beijing
Beijing Skywing Technology Co., Ltd.
Merck S.A.
China
Suzhou
100.00
Hong Kong
100.00
Santiago de Chile
AZ Electronic Materials (Suzhou) Ltd.
100.00
EMD Holding Corp.
Wilmington
United States
United States
100.00
Billerica
EMD Serono Research & Development Institute, Inc.
United States
100.00
EMD Serono, Inc.
Rockland
United States
100.00
Billerica
EMD Millipore Corporation
United States
100.00
EMD Serono Holding Inc.
Millipore UK Holdings II, LLC
Rockland
United States
100.00
Wilmington
Millipore UK Holdings I, LLC
United States
100.00
Wilmington
100.00
Millipore Pacific Ltd.
100.00
Wilmington
100.00
Wilmington
Mario Finance Corp.
Millipore Asia Ltd.
United States
United States
Merck 19. Allgemeine Beteiligungs-GmbH
2,115
AUDITOR'S REPORT
6,626
7,385
10,480
41.9
944
938
730
981
2,879
193.5
2,296
2,328
2,021
2,236
10.6
1,674
1,691
440
1,091
1,394
356
52.4
5,637
6,399
3,698
5,539
5,484
12.6
1,660
1,474
1,534
4,454
5,664
13.0
2,990
20,819
21,643
22,122
22,388
- 4.0
2.66
26,010
2.77
1.39
1.45
-3.7
1,165
1,209
579
1.30
2,076
24.9
15,723
2,647
2,954
3,113
3,241
15.5
11,396
16,724
9,867
11,764
12,484
15.6
15,530
13,434
15,017
10,945
5,127
4,145
3,362
38,847
40,676
40,562
1.70
1.50
1.25
1.90
38,154
13.1
1,507
1,511
1,514
1,397
45.4
53.2
1,704
48.1
1.004
3.9
www.merckgroup.com
THURSDAY, NOVEMBER 12, 2015
REPORT ON THE THIRD QUARTER
NOVEMBER →
REPORT ON THE FIRST QUARTER
TUESDAY, MAY 19, 2015
MAY →
39,639
ANNUAL GENERAL MEETING
APRIL →
THURSDAY, AUGUST 6, 2015
REPORT ON THE SECOND QUARTER
AUGUST →
TUESDAY, MARCH 3, 2015
ANNUAL PRESS CONFERENCE
MARCH →
FINANCIAL CALENDAR FOR 2015
FRIDAY, APRIL 17, 2015
618
47.4
82.3
143
110
144
80
104
6.6
30.8
11,801
10,415
10,494
10,372
9.3
3,561
3,257
11,069
46.3
396
329
559
307
1,926
3,484
4,484
-12.0
366
2,605
2,969
2,262
1,275
18.1
481
407
AUDITOR'S REPORT
642
2,960
1,557
Profit after tax
Profit before income tax
Margin (% of sales)
EBITDA pre one-time items
One-time items
Margin (% of sales)
Earnings per share (in €)1
EBITDA
Sales
Total revenues
Earnings performance
€ million
This overview may include historically adjusted values in order to ensure comparability with 2014.
BUSINESS DEVELOPMENT 2010 - 2014
Margin (% of sales)
个
Assets and liabilities
Non-current assets
Business free cash flow
Capital expenditure on property, plant and equipment²
Capital expenditure on intangible assets²
Liquidity
Net equity
- thereof non-current
Total assets
- thereof current
- thereof inventories
- thereof trade accounts receivable
- thereof cash and cash equivalents
Current assets
- thereof property, plant and equipment
- thereof intangible assets (incl. goodwill)
Financial liabilities
Net financial debt
MERCK GROUP
INFORMATION AND SERVICE
258
257
MANFRED JENAL
Wirtschaftsprüfer
Wirtschaftsprüfer
KARL BRAUN
Original German version signed by
INFORMATION AND SERVICE
Wirtschaftsprüfungsgesellschaft
Frankfurt/Main, February 19, 2015
In our opinion, based on the findings of our audit, the consolidated financial statements comply with IFRSS, as adopted by the EU,
the additional requirements of German commercial law pursuant to § 315a (1) HGB and supplementary provisions of the articles of
association and give a true and fair view of the net assets, financial position and results of operations of the Group in accordance
with these requirements. The Group Management Report is consistent with the consolidated financial statements and as a whole
provides a suitable view of the Group's position and suitably presents the opportunities and risks of future development.
Our audit has not led to any reservations.
We conducted our audit of the consolidated financial statements in accordance with § 317 HGB [Handelsgesetzbuch “German
Commercial Code”] and German generally accepted standards for the audit of financial statements promulgated by the Institut der
Wirtschaftsprüfer [Institute of Public Auditors in Germany] (IDW). Those standards require that we plan and perform the audit such
that misstatements materially affecting the presentation of the net assets, financial position and results of operations in the consol-
idated financial statements in accordance with the applicable financial reporting framework and in the Group Management Report
are detected with reasonable assurance. Knowledge of the business activities and the economic and legal environment of the Group
and expectations as to possible misstatements are taken into account in the determination of audit procedures. The effectiveness of
the accounting-related internal control system and the evidence supporting the disclosures in the consolidated financial statements
and the Group Management Report are examined primarily on a test basis within the framework of the audit. The audit includes
assessing the annual financial statements of those entities included in consolidation, the determination of entities to be included in
consolidation, the accounting and consolidation principles used and significant estimates made by management, as well as evalu-
ating the overall presentation of the consolidated financial statements and Group Management Report. We believe that our audit
provides a reasonable basis for our opinion.
We have audited the consolidated financial statements prepared by Merck Kommanditgesellschaft auf Aktien, Darmstadt, comprising
the Consolidated Income Statement, the Consolidated Statement of Comprehensive Income, the Consolidated Balance Sheet, the
Consolidated Cash Flow Statement, the Consolidated Statement of Changes in Net Equity, and the Notes to the Group accounts, to-
gether with the Group Management Report for the business year from January 1 to December 31, 2014. The preparation of the
consolidated financial statements and the Group Management Report in accordance with IFRSS, as adopted by the EU, and the
additional requirements of German commercial law pursuant to § 315a (1) HGB [Handelsgesetzbuch “German Commercial Code"]
and supplementary provisions of the articles of association are the responsibility of the parent company's management. Our respon-
sibility is to express an opinion on the consolidated financial statements and on the Group Management Report based on our audit.
12.1
KPMG AG
Business development 2010 - 2014
The Annual Report for 2014 was published in German and
English. A fully navigable online version of the report along
with the consolidated financial statements is available on the
Web at ar2014.merckgroup.com. It has been optimized for
mobile devices.
You can order all publications from Group Communications,
Merck KGaA, 64271 Darmstadt, comms@merckgroup.com.
w840582
Paper
Druckfein
gutenberg beuys feindruckerei gmbh
Printing
Shutterstock (cover, page 14-17)
Merck
Stefan Freund (page 22)
More information about Merck can be found on the Web at
www.merckgroup.com and in the brochures "Merck from 1668
until today - Exploring new horizons" and "The Merck Way",
which you may read or order at www.merckgroup.com/publi-
cations.
Matthias Haslauer (page 21)
Photos
www.3st.de
3st kommunikation GmbH, Mainz
Concept and design
Fax: +49 6151 72-5577
E-Mail: comms@merckgroup.com
Website: www.merckgroup.com
Merck KGaA, Group Communications
Frankfurter Strasse 250,
64293 Darmstadt, Germany
Telephone: +49 6151 72-0
Getty (page 6-7, 12-13, 18-19, 26-27)
Other key data
Operating result (EBIT)
Research and development³
-605
7
-88
27.7
28.7
22.0
-184
27.6
1.7
3,123
3,069
2,360
2,731
2,457
27.5
15.6
-265
2,545
1,389
709
839
861
30.0
30.4
43.9
Equity ratio (in %)
28.5
4.1
3,388
3,253
2,965
2,724
27.5
15.1
27.6
11.4
11,173
10,276
9,291
in %
Change
2014
11,095
2013
2011
2010
2 According to the Consolidated Cash Flow Statement.
Taking into account the share split; previous year's figures have been adjusted accordingly.
Employees (number as of December 31)
9.0
2012
11,501
3 Fiscal 2013 has been adjusted, see "Accounting and measurement principles" in the Notes to the Consolidated Financial Statements.
*The proposal on the appropriation of profits for 2014 takes into account the share split.
8,929
12.5
3.7
9.4
1,762
1,611
964
1,132
Dividend per share (in €)
1,113
5.5
11,291
10,700
10,741
9,906
A crystal clear future
MARK VERRALL
MICROSCOPE SLIDE →
IN A LIQUID CRYSTALS RESEARCH
LABORATORY IN ATSUGI, JAPAN
EVER BIGGER, EVER SHARPER
But back to liquid crystals. In the fast-
moving electronics industry, manufactur-
ers are focused on reducing their devices'
appetite for energy while extending battery
life. Merck's new Ultra Bright FFS tech-
nology allows the liquid crystal layer to
transmit 15% more background light,
which can then be used for image render-
ing. This reduces the power consumption
of the device by 30%. The consumer elec-
tronics industry is characterized by a con-
stant flow of innovations. In particular,
TV screens are becoming larger and larger
with increasingly sharp definition. For
instance, the full HD standard has been
succeeded by ultra HD, where the lines of
pixels have increased from the previous
1,080 to 2,160. Thus, the number of pixels
has quadrupled from around two million
to eight million. Curved screens and com-
puter monitors are likewise providing
improved image quality. How do they do
this? In a conventional flat screen, the
pixels at the edges are farther away from
the viewer than those in the middle, which
can slightly distort the viewer's perspec-
tive. By contrast, the new curved technol-
ogy provides a more three-dimensional
cinematic experience.
global technology and market leader. In
addition, strategic acquisitions are being
made to secure a successful future, such as
the takeover of AZ Electronic Materials.
"This company supplies specialty chemi-
cals for other display components, which
makes them a perfect fit for our portfolio,"
Verrall says. The acquisition of AZ has led
to the creation of the new Integrated Cir-
cuit Materials business unit, headed by
Rico Wiedenbruch. "Our customers are con-
stantly demanding new materials in order
to further miniaturize semiconductors and
boost their capacity. We create added value
for them through new products for semi-
conductors with unprecedented levels of
efficiency," says Wiedenbruch, who is con-
vinced of the business unit's potential.
"Such products can be highly profitable
and achieve a strong market position with-
in a few years,” he notes.
MAGAZINE →
NEW APPLICATIONS READY
FOR LAUNCH
"These are all innovations to which Merck's
advanced material developments have
contributed, and the market continues to
evolve at an increasing rate," says Mark
Verrall, who proceeds to name even more
examples. For instance, Verrall notes the
great potential of organic light-emitting
diodes (OLEDs), the development of which
Merck is also driving. OLEDs are already
being used in the display of many mobile
phones, and they are gaining ground
for use in TV screens as well. Organic
light-emitting diodes are self-illuminating,
which means they require no additional
light source. OLED screens provide more
even lighting and high contrast, among
other benefits. According to Verrall, flexi-
ble OLED displays that can be bent, folded
or rolled up will lead to completely new
possibilities. “The prototypes are very thin
and lightweight, and yet are still robust.
They also possess a particularly high lumi-
nance," says Verrall. He adds that it might
soon be possible to open up a smartphone
and turn it into a tablet PC. Furthermore,
flexible displays are paving the way for
many other applications from wrist-
watches and display panels, to decorative
home elements. Soon, buildings fitted with
windows based on LC technology could
be given a futuristic look. These windows
consist of two panes of glass that are glued
together at a distance of a few micro-
meters. The application of a low-voltage
electric current controls how much light the
window transmits, enabling continuously
variable switching in just seconds from
light to dark and vice versa. If light and
temperature are optimally managed, this
technology can significantly boost energy
efficiency. It will be possible to integrate
these high-tech windows into convention-
al windows with very little effort.
Just when Verrall is about to launch into the
next example, his smartphone vibrates
it's time for his next appointment. Being
constantly available is both a blessing
and a curse of the digital age. No doubt
Verrall could continue to name many
more examples of emerging technologies
from Merck, impressive evidence of the
quantum leaps being made by the company.
-
"THESE ARE ALL INNOVA-
TIONS TO WHICH MERCK'S
ADVANCED MATERIAL
DEVELOPMENTS HAVE
CONTRIBUTED, AND THE
MARKET CONTINUES TO
EVOLVE AT AN INCREASING
RATE."
CIRCUIT MATERIALS
880
RICO WIEDENBRUCH →
HEAD OF INTEGRATED
the technological development of LCDs.
Decades of experience have resulted in
Merck liquid crystals that generate brilliant,
high-contrast, razor-sharp images and that
enable rapid frame rates for movies and
animation. They are found in ultra-thin,
large-screen TVs, as well as in mobile
phones, electronic games and digital
cameras. Through partnerships with pri-
marily Asian display and device manufac-
turers, Merck has established itself as the
IN A LABORATORY OF EMD
PERFORMANCE MATERIALS
IN BRANCHBURG, NJ (USA)
RESEARCH →
LEVELS OF EFFICIENCY."
WITH UNPRECEDENTED
THROUGH NEW PRODUCTS
"WE CREATE ADDED VALUE
PYPD 100ml
MAGAZINE A crystal clear future
22
-
22
FOR SEMICONDUCTORS
understanding of how human user interfaces and
23
Merck drove
An American writer and urbanist, Greenfield is the
founder and managing director of Urbanscale, an urban
systems design practice based in New York.
"ONCE MEDIA ELEMENTS STOP BEING
SEEN AS EXCEPTIONAL SPOTS COINED
BY HIGH INTENSITY IN EVERY POSSI-
BLE WAY COLOR, SPEED, RESOLUTION,
CONTENT, NARRATION, COST, ENERGY -
WE EXPECT THAT MEDIA ELEMENTS WILL
MERGE INTO ARCHITECTURE AT A
MUCH LOWER LEVEL OF INTENSITY AND
ON A MUCH LARGER PHYSICAL SCALE."
ADAM GREENFIELD, URBANSCALE
In 2000, the brothers Tim Edler and Jan Edler founded
realities:united, a studio for art, architecture and
technology. They develop and support architectural
solutions, usually incorporating new media and infor-
mation technologies.
TIM EDLER, REALITIES: UNITED →>>
"WE ENGINEER TOOLS TO SERVE
A GIVEN END, WE DEPLOY
THEM INTO THE WORLD, AND THE
WORLD MOLDS ITSELF AROUND
THEIR PRESENCE, CREATING NEW
DESIRES, NEW DEMANDS, NEW
RISKS AND NEW OPPORTUNITIES."
25
25
MAGAZINE → A crystal clear future
"OUR CHALLENGE AS ARCHITECTS IS
TO DESIGN USING MATERIALS THAT ARE
SUSTAINABLE, ENERGY-EFFICIENT,
AND REPRESENTATIVE, YET AT THE SAME
TIME INEXPENSIVE. THUS, WE ARE
CONSTANTLY LOOKING FOR NEW PROD-
UCTS THAT CAN HELP US REACH THESE
GOALS."
NODE (Nansha Original Design or NO DEsign) was
established in early 2004. This small and high-quality
design firm in the Pearl River Delta currently employs
ten architects and designers. Doreen Heng Liu is its
principal architect.
DOREEN HENG LIU, NODE →
interaction languages need to evolve in both software
and hardware.
A design producer at Microsoft, Patel focuses on the
AMISH PATEL, MICROSOFT →
CLO SOULS
AITSM
ITECTURE
沙原创
נננננננננגן
SHEN ZITET
"THE FUTURE OF COMMUNICATION
BETWEEN THE DIGITAL AND HUMAN
WORLDS WILL BE FACILITATED BY THE
USE OF DISPLAYS, SMALL AND LARGE."
"What influence do innovative display solutions have
on architecture and on the lives of people in urban
environments?" This question was discussed by experts
at a symposium entitled "Building Innovation - Dis-
playing Architecture", which Merck held in Shanghai
in November 2014. The speakers included Adam
Greenfield, Doreen Heng Lui, Amish Patel and Tim
Edler, who are quoted here and on the next page. The
symposium was part of the "Displaying Futures" series,
which Merck launched in 2011. "Displaying Futures"
creates space for interaction, interdisciplinary ex-
change and mutual inspiration for display and materi-
al producers, designers, architects, artists, scientists
and experts from other fields. The aim is to develop
scenarios beyond pure technical approaches that show
how constantly changing human needs with respect
to communication and mobility are impacting the
properties of displays and how display and material
producers can already adapt to these today. In 2015,
the symposium will be held in the United States and
thus outside Asia for the first time.
DISPLAYING FUTURES 2014 →
PARTICIPANT IMPRESSIONS
MAGAZINE A crystal clear future
24
23
-
Markets in motion
For many years, people failed to recognize
the potential of liquid crystals, which were
discovered in 1888 and would later become
an astounding success. While by the end of
the 1960s Merck scientists had come up
with the idea of the flat-screen display, it
would take some time for this dream to be-
come a reality. Initially, liquid crystals were
used in the LC displays of pocket calcula-
tors and digital watches. In close coopera-
tion with customers -
electronics compa-
A CRYSTAL CLEAR
TREND/3 →
DIGITIZATION
TO REALIZING A HIGHER
STANDARD OF LIVING."
"HEALTH IS THE KEY
CONSUMER HEALTH
VICE PRESIDENT, INTERCONTINENTAL
ERICH NOBIS →
FUTURE
17
2030
2020
2009
Asia-Pacific
1,740 million
525 million
nies, particularly in Japan
MAGAZINE →
The digital revolution is impacting our lives
in a variety of ways - especially as users
of communication media. Whether for smart-
phones, laptops or flat-screen televisions,
Merck, the global liquid crystals market and
technology leader, is driving the develop-
ment of cutting-edge displays.
3,228 million
PRODUCTION OF LIQUID CRYSTALS
IN ATSUGI, JAPAN
SUCCESS THANKS TO CLOSE
PARTNERSHIPS
20
When people swipe their fingers across
the user interface, they are most likely
setting Merck liquid crystal molecules in
motion - the Darmstadt-based company
serves around 60% of the global market.
The unique thing about this technology is
that liquid crystals have a state of matter
somewhere between a liquid, whose mole-
cules flow around one another freely, and a
crystal, which consists of strictly oriented
molecules. In the liquid crystal mixture,
the rod-shaped molecules align like a school
of fish and control the electromagnetic
waves of light. When an electrical current
is applied, the liquid crystals change their
alignment, thereby transmitting more or
less light.
IN ATSUGI, JAPAN
IN AN R&D CLEANROOM
MARK VERRALL →
HEAD OF DISPLAY MATERIALS R&D
TABLET COMPUTERS INTO
A MASS PHENOMENON."
"INTUITIVE TOUCHSCREEN
CONTROL IS WHAT TURNED
SMARTPHONES AND
WAVELENGTH-DISPERSIVE X-RAY SPECTROMETRY →
21
MAGAZINE → A crystal clear future
INTUITIVE DISPLAY CONTROL
The situation is no different for Mark Verrall.
He demonstratively swipes his index finger
over his display, smiles and says, “We have
already accomplished a great deal and will
go on to accomplish much more." Verrall,
who holds a PhD in Chemistry, was recently
appointed Head of Display Materials R&D
at Merck. He has been working for the
company for 25 years and has contributed
to the unique success story of liquid crystal
displays (LCDs) - a tale in which the "swipe"
represents a particularly exciting chapter.
"Intuitive touchscreen control is what turned
smartphones and tablet computers into a
mass phenomenon," says Verrall.
The information explosion unleashed by
the Web is viewed by social scientists as
the basis of a modern understanding of
democracy, and by economists as a growth
driver. Online marketing along with the
real-time analysis of relevant customer
and market data using digital technologies
have become key competitive factors for
companies. Smartphones and tablet com-
puters have long been making the Internet
mobile. This represents a rapid shift; mobile
phones were once only affordable to
wealthy customers, who could also use the
devices to tone their muscles. In today's
world, it would be a real challenge for the
average user to get through a single day
without a smartphone. These networked
fonts of information have gone mainstream
and, in the digital age, are now the constant
companion of people everywhere.
Technology is not merely moving for-
ward – it is making quantum leaps. In the
age of digitization, our world is undergoing
a breathtaking transformation. The global
volume of electronic data is doubling every
two years, and computing power is contin-
uously reaching new heights, breaking one
record after another. Cloud computing, big
data and the Internet of Things are the
buzzwords of the digital debates. As a global
communication and information medium,
the Internet is profoundly changing people's
day-to-day lives - from consumer behavior
and the exchange of ideas and experiences,
to the transmission of knowledge.
221
IR-I
Inertization
Filtration
MAGAZINE A crystal clear future
MERCK IS ELIMINATING
The numerous Merck projects based on
the Access to Health strategy are bearing
fruit around the world, with a clear focus
on the rural regions of developing coun-
tries. For instance, Merck has developed
a rural pharmacy, a pharmacy specifi-
cally designed for Africa that is being
piloted in Ghana. The pharmacy is inside
a 30 m² container that can be transported
by truck to remote communities, pre-
equipped and with minimal assembly
required. "We are providing rural popu-
lations with direct and safe access to
medicines and professional advice," says
Ronke Ampiah, Head of the Rural Phar-
macy project at Merck. Safe provision
also means that the medicines are neither
substandard nor counterfeit. That's because
these could be lethal if, for instance,
patients take entirely ineffective medica-
tions for malaria. The packaging is largely
identical; the international police organiza-
tion Interpol estimates that up to 30% of
all medicines in developing countries
are either counterfeit or substandard.
The Global Pharma Health Fund (GPHF),
a non-profit initiative funded by Merck, is
dedicated to fighting counterfeit medi-
cines. The most effective tool is a mobile,
compact laboratory that can be used to
identify counterfeit medicines quickly
and easily. Reference samples are used to
test the identity and concentration of 75
active ingredients in total, ranging from
anti-malarial drugs and antibiotics to
analgesics and antipyretics. This is another
initiative through which Merck is helping
to improve access to health in developing
countries.
→ More information can be found
online in "M-The Explorer
Magazine"
www.merckgroup.com/
praziquantel
31
Health for everyone
ACCESS TO MEDICINE
ENSURING ACCESS TO SAFE
MEDICINES
MAGAZINE →
"The repeated improvement in our ranking
proves that our diverse activities have
become an integral part of how we conduct
business. Patients are at the core of all our
efforts. We will do everything we can
to better help them while working to
further lower the barriers to access," says
Stefan Oschmann. Apart from Merck's
commitment to the fight against schis-
tosomiasis, the foundation praised a new
business model in India. The Suswastha
pilot program is aimed at increasing access
to health care products at an affordable
price in rural India.
PUTTING PATIENTS FIRST
WE CAN TO BETTER HELP
THEM WHILE WORKING
"PATIENTS ARE AT THE CORE
OF ALL OUR EFFORTS. WE
WILL DO EVERYTHING
->
VICE CHAIRMAN OF
THE EXECUTIVE BOARD
STEFAN OSCHMANN
The Access to Medicine Foundation has
recognized Merck's strategic approach in
its Access to Medicine Index. Every two
years, the index compiled by the non-profit
international foundation assesses the
initiatives by the world's leading pharma-
ceutical companies to promote access to
medicine in developing countries. In 2014,
Merck ranked sixth, moving up two places
compared with 2012 (see page 60).
and the quality of diabetes treatment in
Africa and India. Accessibility aims at
strengthening supply chains in order to
deliver and reach out efficiently at the
point of care.
Program (CAP) seeks to improve access to
ample, the Merck Capacity Advancement
BARRIERS TO ACCESS
TO FURTHER LOWER THE
BARRIERS TO ACCESS."
PRIMARILY IN RURAL AREAS
->
COUNTERFEIT MEDICINES
Merck has completed another good year. We again achieved profitable growth. The “Fit for 2018” trans-
formation program, with which we are shaping the future of Merck, is showing its effect. With the acquisition
of AZ Electronic Materials (AZ), the offer to acquire Sigma-Aldrich and our alliance with Pfizer in immuno-
oncology, we have laid the foundations for future growth.
of Nerch,
Dear Shareholders and friends
TO OUR SHAREHOLDERS Letter from Karl-Ludwig Kley
KARL-LUDWIG KLEY
Chairman of the Executive Board
Letter from Karl-Ludwig Kley
ering people to make informed decisions
through education and training. For ex-
TO OUR SHAREHOLDERS
34
Merck Shares
A MOBILE MINILAB →
040
038
Letter from Karl-Ludwig Kley
034
Pages 32-41
TO OUR
SHAREHOLDERS
01
GPHF
for rapid drug quality ve
and counterfeit medicin
GPHF-Mini
CAN BE DETECTED QUICKLY AND EASILY
The Executive Board
unable to pay for the health solutions
they need; awareness focuses on empow-
"WE WANT TO WORK WITH
MULTIPLE CONSTITUENCIES
IN A STRONG ALLIANCE TO
HELP FIGHT SCHISTOSOMIA-
SIS WORLDWIDE."
The Merck Praziquantel Donation Program
is one of the many activities within the
scope of the Access to Health initiative.
Merck leverages core competencies across
the company to provide health solutions
to underserved populations and patients
in developing countries. Improving access
to health involves a complex and broad
range of tasks, e. g. researching, develop-
ing and refining health solutions, creating
efficient health systems and distribution
channels, offering products at affordable
prices, as well as educating health workers
and patients. Merck's strategy focuses on
four areas, the so-called "4As": Availability,
Affordability, Awareness, and Accessibility.
Availability includes refining health solu-
tions that address unmet needs and are
In 2014, our sales rose by 5.5% to € 11.3 billion. EBITDA pre one-time items, our most important earnings
indicator, increased by 4.1% to € 3.4 billion. Through solid organic growth and acquisition-releated in-
creases, we were able to make up for negative foreign exchange effects. Profit after tax declined slightly by
3.7% to € 1.2 billion.
The capital market has recognized Merck's positive development. The Merck share price soared by 20.4% in
2014 - the largest increase in the DAX. On November 27, our shares even hit a new all-time high of € 80.40.
We are pleased by this even though Merck doesn't think just in quarters, but also in generations.
We want our shareholders to partake in the successful development of the company. Therefore, we will pro-
pose to the Annual General Meeting an increase in the dividend by € 0.05 to € 1.00 per share. The dividend
payment takes into account the 1:2 share split in 2014 and also takes into consideration the capital resources
required for Merck's further transformation steps.
Please allow me to address the key strategic steps taken in 2014:
The measures to improve our efficiency were successfully completed. Consequently, in 2014 we embarked
on the next phase of "Fit for 2018", sharpening our focus on growth.
→ The acquisition and integration of AZ Electronic Materials, a leading premium supplier of high-tech
materials, were also completed. The portfolio includes process chemicals for the manufacture of inte-
grated circuits, such as those used in smartphones, as well as photoresists used to manufacture flat-screen
televisions. Our liquid crystals remain the gold standard in display technology. With AZ, they are com-
plemented by specialty chemicals for the technology behind displays.
→ We will be working closely with the U.S. pharmaceutical company Pfizer on the development and global
commercialization of our immuno-oncology anti-PD-L1 antibody. With this groundbreaking alliance, we
are entering a highly promising growth market with a compound from our own pipeline.
→ In September, we announced our intention to acquire the U.S. life science company Sigma-Aldrich. This
would be the largest acquisition in Merck's almost 350-year history. Once we receive antitrust clearance
of this acquisition, we will be able to offer our customers a much broader product portfolio as well as the
industry's leading e-commerce platform. At the same time, the acquisition would strengthen our global
presence in the life science market, above all in North America and in the fast-growing markets of Asia.
35
36
TO OUR SHAREHOLDERS → Letter from Karl-Ludwig Kley
These developments are the result of our long-term transformation and growth strategy. I have been report-
ing to you since 2007 on our progress: With the acquisitions of Serono, Millipore and AZ and the divestment
of our Generics business, we have extensively rebuilt our portfolio. We have globalized our organization and
filled key positions with the right people. We have modernized our processes and implemented extensive
efficiency measures. Merck is thus well-placed to take the next growth steps from a position of strategic and
financial strength.
Now that more and more pieces of the mosaic are coming together, the big picture is becoming visible. Merck
is transforming into a highly specialized technology company with the goal of improving the lives of patients
and customers.
The world is changing rapidly, and Merck is changing too. In 2014, the growth markets of Asia and Latin
America for the first time accounted for the largest proportion of Group sales. Their contribution increased
by 2 percentage points to 38%. In order to further capture the potential of these markets for Merck, we need
to be close to local customers. For instance in China, we opened our Liquid Crystals Center in Shanghai and
laid the cornerstone for a major pharmaceutical manufacturing facility in Nantong.
Merck offers technologies and solutions that make a positive contribution to our rapidly changing times.
Aging populations are a global challenge, as are the issue of broad access to health for everyone, and the
digitization of our society. We are resolutely focusing on innovation in order to continue to offer good solu-
tions to these challenges. The most visible sign is the Innovation Center, which is currently being built at the
heart of our global headquarters in Darmstadt. It is to become a hub of creativity at Merck.
But as we develop the company further, we will not lose focus. We will continue to concentrate on fields in
which we have the competencies and resources to make meaningful contributions. In the future, we will
group them into three business sectors in our financial reporting:
→ Healthcare comprises the Merck Serono, Consumer Health, Allergopharma and Biosimilars businesses.
Life Science includes the Merck Millipore business and offers room for the planned acquisition of
Sigma-Aldrich.
→>>
→>
Performance Materials consists of liquid crystals, the AZ Electronic Materials business, pigments and new
materials.
Customers and patients remain at the center of all our efforts. Innovation, efficiency, and a global presence
are not an end in itself. The only way for us to achieve our own objectives is by meeting the needs of
customers and patients with innovative products and the highest quality standards. We are aiming for long-
term, sustainable growth in line with our six corporate values, namely courage, achievement, responsibility,
respect, integrity, and transparency.
TREND/4→
tailored to local environments; afford-
ability is about helping patients who are
ACCESS TO HEALTH
An estimated 1.3 billion people have no
access to effective and affordable health
care. With its Group-wide Access to
Health initiative, Merck is pursuing multiple
approaches in order to overcome access
barriers, for instance through a program to
fight schistosomiasis.
ACCESS TO HEALTH: A FOUR-
PILLAR STRATEGY
Health for everyone
MAGAZINE →
30
LIVE IN STAGNANT BODIES OF WATER.
WORMS OF THE GENUS SCHISTOSOMA,
THE CAUSE OF SCHISTOSOMIASIS,
...and then grow into cercaria. The cercaria
penetrate human skin, primarily attacking the
bladder and colon via the blood and lymphatic
systems.
as an intermediate host...
Once in the water, miracidia hatch from
the eggs and use the freshwater snail
People infected with worm eggs
contaminate freshwater with their
excreta.
20
29
Praziquantel is well tolerated, and the
only active ingredient with which all
forms of schistosomiasis can be treated.
Schistosoma eggs
pass from the body
into the water.
TRANSMISSION OF SCHISTOSOMIASIS →
VIA PEOPLE AND INTERMEDIATE HOSTS
MAGAZINE → Health for everyone
FRANK GOTTHARDT →
HEAD OF PUBLIC AFFAIRS &
CORPORATE RESPONSIBILITY
With its broad-based Praziquantel Dona-
tion Program, Merck has been actively
supporting the World Health Organization
(WHO) in the fight against the dangerous
disease in Africa since 2007. To date, Merck
has donated around 200 million tablets to
WHO. Altogether, more than 54 million
patients, primarily children, have been
treated. "However, millions of children
worldwide still suffer from schistosomiasis.
The disease prevents them from learning
and weakens development potential in
the affected countries. We want to give
children new opportunities while at the
same time promoting economic growth
and making a brighter future possible,"
says Stefan Oschmann, Vice Chairman
of the Executive Board, whose responsi-
bilities include the topic of Corporate
Responsibility. Meeting this ambitious goal
calls for sophisticated logistics. Merck
produces the medicine in Mexico and
transports it in coordination with WHO
and the respective health ministries to the
affected countries thousands of kilome-
ters away. "We want to work with multi-
ple constituencies in a strong alliance to
help fight schistosomiasis worldwide,"
explains Frank Gotthardt, Head of Public
Affairs & Corporate Responsibility, who is
responsible for the program. The infection
rate is especially high among children
and the symptoms that result are partic-
ularly serious; schistosomiasis stunts
growth, causes learning disabilities and
leads to anemia. The problem is that in its
current form, the medication is not suit-
able for children under the age of six.
"Together with international partners, we
are therefore developing a new pediatric
formulation of praziquantel for young
children, which is now being investigated
in initial clinical trials," says Jutta Rein-
hard-Rupp, Head of the Global Health
Translational Innovation Platform at Merck.
The hazard lurks in water in which people
swim, fish or wash clothes. In stagnant
freshwater, the larvae of the schistoma
worm penetrate the skin and enter the
blood vessels of their victims, infecting
them. This infectious tropical disease
affects no fewer than 240 million people
worldwide, mainly in Africa but also in
parts of South America and Asia. The
acute symptoms range from a rash to
life-threatening fever. The long-term con-
sequences include chronic inflammation
of various organs, which can also lead to
death. Up to 200,000 of those infected die
each year from the effects of the disease. It
is a vicious cycle. The female's eggs infest
inner organs such as the colon, spleen
or liver, where the larvae develop into
worms, the eggs of which are then excret-
ed via the urine or feces of those infected.
Freshwater snails then act as a host in
which the eggs develop into larvae, which
in turn penetrate the human body. This
cycle can be broken by the active ingredi-
ent praziquantel, which Merck developed
as part of a research collaboration in the
1970s. It was a milestone in the treatment
of the worm disease that has made it
possible to cure schistosomiasis in many
millions of people.
Health for everyone
MAGAZINE →
28
HEALTH FOR
EVERYONE
Business free cash flow decreased to € 2.6 billion, which was 12.0% below the very high level of 2013. At
the beginning of 2014, we completely eliminated our net financial debt. As a result of the acquisition of AZ
Electronic Materials in May 2014, it had temporarily increased to € 2.2 billion as of June 30, 2014. Yet by
year-end, we had already lowered it to below € 0.6 billion.
TO OUR SHAREHOLDERS Letter from Karl-Ludwig Kley
All this is made possible by our 39,000 employees around the world. Each and every day, they work on
high-quality products, improved solutions for customers as well as on innovative approaches for a healthier
as well as more comfortable and pleasant life. And through their work, they continue to write the Merck
success story. I owe my thanks to every single one of our employees.
99.9
Merck is a global corporate group headquartered in Darmstadt,
Germany. With a history dating back nearly 350 years, it is the
world's oldest pharmaceutical and chemical company. Merck
holds the global rights to the Merck name and brand. The only
exceptions are Canada and the United States, where Merck op-
erates as EMD Serono, EMD Millipore und EMD Performance
Materials.
THE MERCK GROUP
FUNDAMENTAL INFORMATION ABOUT THE GROUP
The Merck Group
GROUP MANAGEMENT REPORT -> FUNDAMENTAL INFORMATION ABOUT THE GROUP →
44
Corporate and Other
Merck's product portfolio ranges from innovative pharma-
ceuticals and biopharmaceutical products, to specialty chemicals,
high-tech materials and life science tools. Until December 31,
2014, in other words the period covered by this Annual Report,
Merck used a reporting structure consisting of four divisions:
Merck Serono, Consumer Health, Performance Materials and
Merck Millipore. The following presentation also reflects this
121
Performance Materials
Consumer Health
115
109
104
Merck Serono
097
Merck Millipore
structure.
In line with its strategic direction effective January 1, 2015,
Merck is organized into three business sectors: Healthcare,
Performance Materials and Life Science, which comprise the
Group's six businesses. This structure will be used in the finan-
cial reports of the Merck Group as of January 1, 2015 and will
be reflected for the first time in the report on the first quarter
of 2015.
multiple sclerosis. With its expertise in discovery and early
development, as well as approximately 25 projects in clinical
development, Merck Serono is focused on delivering differentiated
new therapies to patients with unmet medical needs.
Merck Serono is advancing its research and development (R&D)
portfolio across the areas of oncology, immuno-oncology and
immunology, and continues to invest in developing programs in
Merck Serono is continuously working to improve ways to
administer medicines and active ingredients. For several years,
Merck Serono has been developing novel injection devices, which
make injections more user-friendly and at the same time more
reliable for patients than conventional or prefilled syringes. In
addition, these products make it easier for health care practitioners
and patients to ensure adherence and thus to reach their treatment
goals. Examples are the easypod™ electromechanical injection
devices for the delivery of Saizen® (somatropin) and RebiSmart™
for Rebif® (interferon beta-1a). Additionally, both easypod™ and
RebiSmart™ are able to wirelessly transfer data such as injection
times, dates and doses to the Web-based software systems
easypod™ connect and MSdialog.
demand for cardiometabolic therapies. This is due to both increas-
ing life expectancy and in part also to growing prosperity in this
region, along with the resulting changes in lifestyle and dietary
habits. Beyond developing life cycle management products to
capitalize on Merck Serono's strong brand equity, Merck entered
into a long-term strategic partnership with Lupin Ltd. of India to
broaden the General Medicine portfolio in emerging markets with
affordable, high-quality medicines.
The Merck Group
45
GROUP MANAGEMENT REPORT FUNDAMENTAL INFORMATION ABOUT THE GROUP →
The General Medicine franchise mainly includes brands to treat
cardiometabolic diseases. Although no longer patent-protected,
the excellent brand equity built over decades makes the flagship
products cornerstones for the treatment of chronic cardiovascular
or metabolic diseases. This applies, for example, to Glucophage®
containing the active ingredient metformin, the drug of choice
for first-line treatment of type 2 diabetes, as well as to ConcorⓇ
containing bisoprolol, the leading beta-blocker for chronic cardio-
vascular diseases such as hypertension, as well as EuthyroxⓇ
(levothyroxine) as the leading treatment for hypothyroidism.
Particularly in emerging markets, there is a continuous rise in
Merck Serono also offers products that help couples to conceive
a child and is the only company to offer the most complete and
clinically proven portfolio of fertility drugs for every stage of the
reproductive cycle, including recombinant versions of the three
hormones needed to treat infertility. As a leader and innovator,
Merck Serono supports the improvement of success in Assisted
Reproductive Technology not only with drugs, but also innovative
technologies, for example to assess embryo viability. The products
in the Fertility franchise are an important growth driver for Merck
Serono. This is due to different factors, such as the increasing
demand in emerging markets and the trend of couples postponing
childbearing until later in life when natural fertility declines.
On November 17, 2014, Merck Serono entered into a global
strategic alliance with Pfizer Inc. to develop and commercialize
MSB0010718C, an investigational anti-PD-L1 antibody currently
in development by Merck Serono as a potential treatment for mul-
tiple tumor types, thereby accelerating the two companies' presence
in immuno-oncology. The two companies have also agreed to com-
bine resources and expertise to advance Pfizer's preclinical-stage
anti-PD-1 antibody into Phase I trials. As part of the strategic alli-
ance, Merck Serono will co-promote Pfizer's XalkoriⓇ, a medicine
to treat non-small cell lung cancer in the United States and several
other key markets.
Erbitux® is the second best-selling drug in Merck Serono's
product portfolio and its flagship product in Oncology. The product
is a standard of care in multiple lines of metastatic colorectal cancer
(mCRC) therapy as well as of both recurrent/metastatic and locally
advanced squamous cell carcinoma of the head & neck (SCCHN).
Rebif®, Merck Serono's top-selling product, is used to treat
relapsing forms of multiple sclerosis, which is one of the most
common neurological diseases among young adults.
expanded its presence in the Emerging Markets region, which
accounted for 29% of the division's sales in 2014.
The regions of Europe and North America contributed 64% of
divisional sales in 2014. In recent years, Merck Serono has steadily
Merck Serono commercializes its products worldwide and has
a strong presence in established markets. Merck Serono's products
are available in various countries and regions of the world under
different brand names.
Merck Serono discovers, develops, manufactures and markets in-
novative pharmaceutical and biological prescription drugs to treat
cancer, multiple sclerosis (MS), infertility and growth disorders, as
well as certain cardiovascular and metabolic diseases. As the com-
pany's largest division, in 2014 Merck Serono generated 51% of
Group sales and 51% of EBITDA pre one-time items (excluding
Corporate and Other). The present Merck Serono division was
formed in 2007 with the acquisition of the Swiss biopharmaceutical
company Serono SA, which was integrated stepwise into the pre-
scription drugs business. With headquarters in Darmstadt, Germany,
Merck Serono offers leading brands in specialty medicine indica-
tions.
MERCK SERONO
Merck Group
084
Course of business and economic position
084
055
Objectives and strategies of the Merck Group
050
REPORT ON EXPECTED DEVELOPMENTS
134
The Merck Group
044
ABOUT THE GROUP
122 REPORT ON RISKS AND OPPORTUNITIES
FUNDAMENTAL INFORMATION
044
Pages 42-141
->
REPORT
GROUP MANAGEMENT
02
Value
Internal management system
In addition, Merck has two further pharmaceutical business
units that operate as independent businesses within the Healthcare
business sector since the new organizational structure took effect
on January 1, 2015. Allergopharma is specialized in developing
high-dose hypoallergenic products for specific immunotherapy
and diagnosis of type 1 allergies (such as hay fever or allergic
asthma). Biosimilars is developing biological medicines that are
similar to an existing registered biological medicine (the “refer-
ence medicine"). Merck is moving ahead with the development of
a portfolio of biosimilar compounds applicable to various disease
areas including oncology and autoimmune diseases. The focus is on
developing molecules through in-house research and development
as well as through partnerships.
140
of the Merck Group
Review of forecast against actual business
developments
082
environment
Macroeconomic and sector-specific
080
REPORT ON ECONOMIC POSITION
080
SUBSEQUENT EVENTS
141
Employees
077
Research and Development at Merck
067
GERMAN COMMERCIAL CODE (HGB)
Corporate Responsibility
059
SECTION 315 (4) OF THE
REPORT IN ACCORDANCE WITH
24
As of January 1, 2014, two product groups were transferred
from Merck Serono to Consumer Health. These are Neurobion®,
a vitamin B-based analgesic, and Floratil®, a leading brand in the
probiotic antidiarrheal segment in Brazil. Sales of the two prod-
ucts totaled € 265 million in 2013. The effects of the product
group transfers on Merck Serono's figures for 2013 are presented
in the following table.
€ million
265.4
745.0
265.2
742.1
99.9
162.1
21.8
83.9
171.0
Margin (% of sales)
Operating result (EBIT)
Total revenues
Sales
€ million
CONSUMER HEALTH
ADJUSTED
On January 1, 2014, two product groups from Merck Serono
were transferred to Consumer Health. These are Neurobion®, a
leading global brand in the vitamin B segment, and Floratil®, a
leading brand in the probiotic antidiarrheal segment in Brazil. The
transfer of the two strong brands makes better use of the potential
of the consumer-oriented business model of Consumer Health.
Furthermore, Consumer Health has considerably strengthened its
presence in the Emerging Markets region. This is a step in the
journey towards having at least three leading brands and achiev-
ing a market share of at least 3% in each of its key markets. The
share of Consumer Health sales accounted for by Emerging
Markets increased from 28% (unadjusted year-earlier figure) to
50% in 2014 as a result of the product transfer. The effects of the
product group transfers on Consumer Health's figures for 2013 are
shown in the following table.
23.0
15.2
72.5
14.9
EBITDA
Margin (% of sales)
EBITDA pre one-time items
Margin (% of sales)
Business free cash flow
-
Effective May 15, 2014, Uta Kemmerich-Keil took over the leader-
ship of Consumer Health, thus succeeding Udit Batra as President
and Chief Executive Officer. Kemmerich-Keil was previously CEO
of Allergopharma, the global Allergy business unit.
reported
479.6
476.9
62.2
13.0
2013
adjustment
adjusted
111
71.1
their own physical well-being. Preventive health care and as little
invasive medication as possible are becoming increasingly im-
portant in both established and emerging markets, characterized
by a growing middle class with specific needs.
Global megatrends favor the future growth of Consumer Health.
People are becoming more health-conscious and concerned with
Consumer Health manufactures and markets over-the-counter
pharmaceuticals. Consumer Health focuses on a number of well-
known strategic brands such as NeurobionⓇ, Bion®, Seven Seas®,
Nasivin®, Femibion®, and Dolo-Neurobion®, as well as FloratilⓇ,
Sangobion®, Vigantoletten®, Apaisyl®, and Kytta®. In 2014,
Consumer Health contributed 7% to Group sales and 5% to
EBITDA pre one-time items (excluding Corporate and Other).
Consumer Health has a high market penetration in Europe, Latin
America and Southeast Asia, and is generating particularly strong
growth in emerging markets, especially in India, Indonesia and
Brazil, which have firmly established themselves among the
top-ten markets in terms of sales. The key new product launch
of Seven Seas® Perfect7Ⓡ was chosen by the customers of the
British health and beauty retailer Boots as the winner of the "2014
Favourite Newcomer" award.
CONSUMER HEALTH
15.0
Margin (% of sales)
793.1
- 99.9
893.0
5,688.4
-265.2
6,060.4
-265.4
6,325.8
Operating result (EBIT)
Total revenues
Sales
adjusted
adjustment
reported
2013
13.9
MERCK SERONO
ADJUSTED
EBITDA
- 99.9
GROUP MANAGEMENT REPORT -> FUNDAMENTAL INFORMATION ABOUT THE GROUP → The Merck Group
64
46
1,787.1
-88.6
1,875.7
Business free cash flow
32.6
32.8
Margin (% of sales)
1,855.1
- 99.9
1,955.0
EBITDA pre one-time items
1,786.6
31.4
31.7
Margin (% of sales)
1,886.5
GARP (Growth at reasonable price)
5,953.6
%
MERCK SHARES
TO OUR SHAREHOLDERS → Merck Shares
40
40
39
39
Management Executive Board
AT A GLANCE
->
Short biographies
Site Operations
Group Procurement; Inhouse Consulting;
Group Human Resources; Group Information Services;
Responsibility for Group functions:
Member of the Executive Board
KAI BECKMANN
More information can be found at www.merckgroup.com
In 2014, the Merck share price rose by 20%, thus outperforming
the DAX® by 18 percentage points. Merck shares were around
7 percentage points stronger than the relevant pharmaceutical in-
dustry index and also outperformed the relevant chemical indus-
try index by nearly 17 percentage points. They reached an annual
high of € 80.40 at the end of November 2014, also marking a new
all-time high. On December 30, 2014, they closed only marginally
lower at € 78.42.
After a period of weakness in the first half of 2014, in which
the Merck share price sank by 3% in absolute terms and showed a
weaker development than the relevant comparative indices, a no-
ticeable improvement could be seen at the beginning of the second
half of the year. Continuously good business figures that met or
even exceeded the expectations of market participants, a successful
Merck Serono Investor & Analyst Day on September 18, 2014, and
the announcements of the acquisition of Sigma-Aldrich on Sep-
tember 22 and of the collaboration with Pfizer in immuno-oncology
on November 17 were welcomed by analysts and investors, leading
to a new all-time share price high at the end of November.
0
5
110
10
15
20
20
25
25
30
MERCK SHARES
MSCI European Pharma Index
• Dow Jones European Chemical Index
• Merck
• DAX Index
in %
SHARE PRICE DEVELOPMENT FROM JANUARY 1, 2014 TO DECEMBER 31, 2014
On June 30, 2014, the 1:2 share split became effective. The
price and number of Merck shares were adjusted accordingly. On
May 9, 2014, the Annual General Meeting resolved to redivide the
share capital of Merck KGaA so that one existing company no-par-
value share with a pro rata amount of the share capital of € 2.60 is
to be divided into two no-par value shares with a pro rata amount
of the share capital of € 1.30 each (share split).
The average daily trading volume increased noticeably by 36%,
from about 469,000 in 2013 to a good 639,000 shares. The North
America region continued to dominate and its share increased in
comparison with the previous year to around 47% (2013: 43%).
By investor type, GARP (growth at reasonable price) and value
investors dominated, as in the previous year. At the end of 2014,
the top five investors held around 39% of the free float (2013:
36%).
CEO Healthcare
Member of the Executive Board
BELÉN GARIJO
Public Affairs & Corporate Responsibility
from left to right
BERND RECKMANN, MARCUS KUHNERT, KARL-LUDWIG KLEY,
STEFAN OSCHMANN, BELÉN GARIJO, KAI BECKMANN
THE EXECUTIVE BOARD OF THE MERCK GROUP →
38
37
31
ну
Chairman of the Executive Board
KARL-LUDWIG KLEY
kaul-molly key
Merck is superbly positioned to shape its future further. I thank you for your trust and support. Please continue
to accompany us into an exciting, successful and sustainable future.
172.4
23.2
88.6
172.5
99.9
35
TO OUR SHAREHOLDERS → The Executive Board
-5
TO OUR SHAREHOLDERS →
BERND RECKMANN
Group Strategy; Patents & Scientific Services;
Responsibility for Group functions:
STEFAN OSCHMANN
Group Communications
Group Legal & Compliance; Group Internal Auditing;
Responsibility for Group functions:
Chairman of the Executive Board
KARL-LUDWIG KLEY
Group Tax; Investor Relations
Group Accounting & Subsidiaries;
Group Controlling & Risk Management;
Corporate Finance; Mergers & Acquisitions;
Responsibility for Group functions:
Chief Financial Officer
Member of the Executive Board
MARCUS KUHNERT
Environment, Health, Safety, Security, Quality
CEO Life Science and Performance Materials
Responsibility for Group functions:
Member of the Executive Board
The Executive Board
-10
Vice Chairman of the Executive Board
→ € 80.40
4
Source: Orient Capital
in %
IDENTIFIED INVESTORS BY REGION AS OF DECEMBER 2014
MERCK SHARES →
6Based on the number of shares in free float (129.2 million).
5 Based on the theoretical number of shares (434.8 million).
4 Based on the floor trading systems of all German exchanges and the regulated market on
XETRAⓇ.
8,417
10,135
€ million
28,315
34,095
€ million
468,616
639,067
units
Rest of World
65.13
Rest of Europe 17
MERCK SHARES →
14
Share price high 11/27/2014
Growth
7
Hedge
Other
Total number of shares outstanding: 129.2 million
United Kingdom
16
%
United States
47
13
Index
Source: Orient Capital
in %
IDENTIFIED INVESTORS BY TYPE AS OF DECEMBER 2014
German Retail/ Undisclosed 6
78.42
Germany 10
48.53
41
SHARE DATA 1,2
MERCK SHARES →
TO OUR SHAREHOLDERS Merck Shares
Source: Bloomberg (closing rates)
-15
DEC.→
NOV. →
OCT. →
SEPT.→
AUG. →
JULY→
MARCH APR. → MAY→ JUNE→
JAN. → FEB.→
€
Share price low 4/15/2014 → € 56.55
-20
2013
Dividend³
2014
1.00
€
0.95
Share price high
€
44
Source: Bloomberg, Thomson Reuters
€
3 2014 subject to approval by the Annual General Meeting.
1 Share-price relevant figures have been adapted to the 1:2 share split as of June 30, 2014.
2Share-price relevant figures relate to the closing price in XETRAⓇ trading on the Frankfurt
Stock Exchange.
Market value of authorized shares (at year-end)
Market capitalization (at year-end)
Daily average number of Merck shares traded4
Year-end share price
56.55
Share price low
80.40
65.25
The first pillar of Merck Serono's strategy is to deliver innova-
tion globally. The portfolio decision-making process has been
improved and a rigorous project prioritization implemented with
shorter timelines to phase transitions. Efficiency in R&D has been
strengthened with the development of biomarkers to improve
patient outcomes, with a focus on selected core therapeutic areas
and with the creation of Translational Innovation Platforms.
Merck Serono has three priority development programs: atacicept
in immunology, evofosfamide (TH-302) in oncology and avelumab
in immuno-oncology, an anti-PD-L1 antibody that Merck Serono
will develop and commercialize with Pfizer as a potential treatment
for multiple tumor types.
GROUP MANAGEMENT REPORT FUNDAMENTAL INFORMATION ABOUT THE GROUP → Objectives and strategies of the Merck Group
This is to be expanded by another, as yet undisclosed in-
licensing agreement for a late-stage biosimilar.
The third pillar of the Merck Serono strategy is to expand further
in Emerging Markets. With a growing middle class, extended health
care coverage, a shift towards chronic diseases, and rising demand
for biologics, Emerging Markets are a key driver for Merck Serono,
accounting for over 60% of organic growth between 2011 and
2013. In Emerging Markets, Merck Serono is implementing strategic
growth initiatives in its General Medicine and specialty medicine
franchises to address specific needs. Merck Serono is leveraging
capabilities and local channels, for example by extending the
breadth and depth of promotion in China, expanding its portfolio
via regional and local licensing, and supporting market develop-
ments in Fertility. Merck Serono is also investing selectively and
growing its flagship brands with new formulations (Euthyrox® or
Glucophage®), fixed-dose combinations (ConcorⓇ) and devices
(Saizen®). Merck Serono is repatriating business, taking back the
promotion of Merck products from industry partners where attrac-
tive. And it is expanding the focus of its portfolio with growth
initiatives in biologics.
Biosimilars
The Biosimilars business is committed to providing access to high-
quality biologics to more patients all over the globe. The unit
is developing a biosimilars portfolio focused on oncology and
inflammatory disorders, through both in-house research and
development expertise in biologics, and partnerships with other
biosimilar players. The initiation of Phase III trials is planned for
2015/2016 onwards. Biosimilars is an attractive market in which
Merck is well-positioned as it can build on existing strengths
and capabilities across the biosimilars value chain. This includes
the ability to leverage internal assets or source capabilities from
suppliers to ensure compliance with regulatory requirements,
secure market access across key markets such as the Emerging
Markets region, leverage commercial manufacturing capabilities
and flexibility, as well as adopt a tailored go-to-market approach.
Merck has also established strategic alliances with Dr. Reddy's
in India to co-develop several oncology compounds and with
Bionovis in Brazil to supply the Brazilian market with biological
products under the Product Development Partnership (PDP) policy
of the Brazilian Ministry of Health.
Merck Serono aims to become a preferred global biopharmaceutical
partner through its enduring commitment to transforming patients'
lives with innovative specialty medicines, leading brands and
high-value solutions. Global megatrends such as world population
growth and a general increase in life expectancy are bolstering
the demand for Merck Serono's products. Merck Serono is well-
positioned for sustainable growth.
The second pillar of Merck Serono's strategy is to maximize the
existing portfolio in developed markets. In the Multiple Sclerosis
franchise, the vision is to remain a leader by providing innovative
solutions that include drugs, devices and services to help people
living with multiple sclerosis. Merck Serono plans to fully exploit
the potential of Rebif®, its top-selling product, in an increasingly
competitive multiple sclerosis market and to position it as the best
interferon-based therapeutic option for patients who suffer from
the relapsing form of the disease, driving differentiation via smart
injection devices and the first multiple sclerosis e-Health platform.
In Fertility, the focus is on expanding market leadership and on
providing innovative services and technologies beyond drugs. In
Oncology, Merck Serono promotes the value of Erbitux® to per-
sonalized treatments, especially in Europe and Japan, and empha-
sizes the importance of offering patients complete testing for RAS
status in order to ensure optimum treatment. Merck Serono will
also ensure launch readiness in these innovation-driven markets.
Through the co-promotion of Xalkori® with Pfizer, Merck Serono
is entering the U.S. oncology market and preparing for the future
launch of its anti-PD-L1 antibody.
Healthcare business sector
Merck Serono
Merck wants to use its expertise in developing, manufacturing and
commercializing high-quality biotechnological medicines in order
to create a competitive biosimilars portfolio. The focus is on de-
veloping molecules through in-house research and development
as well as through partnerships.
GROUP MANAGEMENT REPORT → FUNDAMENTAL INFORMATION ABOUT THE GROUP → Objectives and strategies of the Merck Group
52
52
Performance Materials aims to further expand its global leader-
ship position in display materials. Merck expects OLED technology
to increase in importance in the future. Performance Materials is
therefore investing in developing a comprehensive OLED portfolio.
By 2018, Merck aims to be a leading supplier of OLED materials.
OLEDS
Merck Serono introduced a more entrepreneurial model to elevate
the performance dynamics of its research and development. Based
on Translational Innovation Platforms (TIPS), Merck Serono wants
to foster long-term planning and an entrepreneurial mindset,
validated by an independent advisory board of external experts
(see below).
Research & Development at Merck Serono
53
Biosimilars
Furthermore, Merck has set up a range of business initiatives in
order to expand the existing portfolio as well as to capture new
business opportunities. The following initiatives are of major
significance:
BUSINESS STRATEGIES
Allergopharma
Within its Pigments & Functional Materials business unit,
Merck continues to focus on high-quality brands that add value for
customers as well as on market segments with growth potential.
These include effect pigments, e.g. for automotive coatings, and
functional materials, e.g. for laser marking.
Consumer Health
In the context of the ongoing Group-wide efficiency program,
in the past years cash was reserved with high priority to fund
restructuring measures across all divisions and regions. In 2014,
liquid funds were then used in particular for the acquisition of AZ
Electronic Materials (Performance Materials).
Business initiatives
One-time expenses in connection with restructuring measures
as well as costs related to the integration of acquired businesses
have also been assumed for 2015. With the planned acquisition of
Sigma-Aldrich (Life Science) - subject to the successful closing of
the transaction in 2015 liquid funds would likewise again be
used for inorganic growth. Accordingly, in the coming years, the
repayment of the financial liabilities taken up in connection with
this acquisition would be at the fore, along with the associated
ongoing interest payments. In this case, initial one-time expenses
for the integration could already be incurred then. However,
smaller, so-called bolt-on acquisitions are still not ruled out. In
addition, Merck will also invest in organic growth initiatives as
part of its "Fit for 2018" transformation and growth program.
For reasons of sustainability, Merck generally follows a conser-
vative financial policy. Apart from a solid balance sheet with
transparent and healthy structures, this policy is reflected by the
selection of financing sources, liquidity management, key finan-
cial indicators, the dividend policy, and risk management. Merck
generates high business free cash flow and its return on capital
employed has been sustainably maintained at a high level.
AND DIVIDEND POLICY
STRATEGIC FINANCIAL
The acquisition of AZ Electronic Materials has sustainably
strengthened the portfolio and the market position of Performance
Materials. All integration measures were successfully implemented
in 2014, adding a further premium business to the existing profit-
able businesses. AZ is a manufacturer of ultrapure, innovative
specialty chemicals and materials for use in integrated circuits
(semiconductors) and equipment, in flat-panel displays, and for
photolithographic printing. Both Performance Materials and AZ
have very similar and attractive business models based on inno-
vation, customer proximity, high market share and profitability in
the growth areas of displays, semiconductors, organic electronics,
and lighting.
Merck's OLED business, which is part of the Advanced Tech-
nologies business unit, posted strong, above-average growth in
2014. Performance Materials wants to further position itself in the
OLED market and play a leading role in this market segment in the
medium to long term. Lower production costs for OLED displays
are a precondition for this. External partnerships will also be used
in the future to ensure the required exchange of technology and
expertise.
Since the typical life cycle of LC mixtures is less than three
years, innovation will remain the key success factor. The liquid
crystals pipeline of Performance Materials is well-stocked with
new technologies such as self-aligned vertical alignment (SA-VA),
advanced fringe field switching (FFS), as well as projects with
applications beyond displays.
The market for causal allergy therapies is a global growth market.
On the one hand, the global market growth expected by market
researchers will be generated by an increasing number of people
with allergies, and on the other hand it is based on the growing
use of specific immunotherapy (SIT) in many emerging markets.
Allergopharma is a manufacturer of diagnostics and prescription
drugs for allergen immunotherapy (AIT). AIT (hyposensitization,
desensitization, allergy immunization) is the only causal therapy
for treating allergies to unavoidable allergens. AIT is primarily
carried out by physicians who specialize in allergies, such as ENT
doctors, dermatologists, pediatricians and pulmonologists. With
its own research department and in cooperation with research
institutes and other partners, Merck is helping develop a better
understanding of the immunological mechanism that underlies
the development of allergies and is actively working on the next
generation of drugs for allergen immunotherapy. Plans to expand
production in Reinbek near Hamburg in 2016, thus expanding
capacity, will advance global expansion and will also help to meet
the increasingly high manufacturing standards. As was previously
the case, products to diagnose and treat type 1 allergies such as
hay fever or allergic asthma will be manufactured here under
ultrapure, sterile conditions.
The demand for high-tech products in general and for innovative
display solutions in particular has seen high global growth in
recent years. This trend is not expected to weaken in the coming
years. Instead, Merck assumes that increasing demand for these
types of consumer goods will come from a growing middle class
in emerging markets. Therefore Performance Materials will defend
its position as the market and technology leader for liquid crystals
and further expand it as far as possible.
Performance Materials business sector
GROUP MANAGEMENT REPORT → FUNDAMENTAL INFORMATION ABOUT THE GROUP → Objectives and strategies of the Merck Group
54
The planned acquisition of Sigma-Aldrich would establish one
of the leading players in the life science industry, fostering key
capabilities fully in line with Merck Millipore's strategy.
Merck Millipore will focus on expanding its presence across
laboratories in emerging geographies as well as gaining share of
wallet in North America. Merck Millipore aims to continue to grow
above market by accelerating growth in the process solutions and
key laboratory businesses. This includes maintaining above-market
R&D investments to remain on the innovation forefront, solving
customer needs and delivering sustainable, profitable growth.
Merck Millipore is one of the leading players in the attractive
global life science tools industry. The business has a global presence
across the laboratory and process markets - two broad customer
sub-segments with differing needs. The strategy in laboratory
markets is based on three success factors: a broad and attractive
portfolio, a simple customer interface and an organization able to
deal with complexity, for example more than 70,000 products
serving over 1 million customers. The three key success factors for
the process markets strategy are a deeply technical field force,
product depth in developed markets as well as portfolio breadth in
emerging markets.
Life Science business sector
Merck Millipore
An important milestone within the framework of this strategy was
the transfer of the NeurobionⓇ and Floratil® brands from Merck
Serono to Consumer Health in 2014. Neurobion® is a leading global
brand in the vitamin B segment and Floratil® is a leading brand in
the probiotic antidiarrheal segment in Brazil. Following their
transfer to Consumer Health in 2014, both brands clearly demon-
strated potential to focus more closely on consumer wishes and
needs in core markets. For instance, the growth of Floratil® in the
key market of Brazil increased more than tenfold. Further important
components of implementing the “3 x 3" strategy are geographic
expansion of existing brands into new markets, such as the recent
market launch of the Bion® brand in Brazil, as well as possible
inorganic growth through tactical takeovers and product acquisi-
tions, as long as these are in line with the strategic direction.
In 2012 and 2013, Consumer Health undertook steps to strategi-
cally realign the internal organization while sharpening its focus
on core brands and particularly attractive key markets. In 2014,
Consumer Health forged ahead with its growth agenda, particularly
in the emerging markets of Latin America and Southeast Asia. As
a result, Consumer Health achieved organic sales growth of 5.4%,
clearly exceeding general market growth. To this end, the company
is pursuing a clear strategy: The aim is for Consumer Health to
achieve a market share of at least 3% by 2021 in each of its top
20 markets (including France, Mexico, Brazil, Germany, Indonesia,
India, and the United Kingdom), with at least three brands in lead-
ing positions.
Performance Materials
The importance of Merck's global headquarters in Darmstadt
is to increase along the lines of ONE Global Headquarters. Merck
in Darmstadt is to become a vibrant home for creativity, scientific
exchange and innovation. By laying the cornerstone for a modular
Innovation Center in 2014, Merck created the basis for cross-
functional and Group-wide cooperation on projects.
GROUP MANAGEMENT REPORT → FUNDAMENTAL INFORMATION ABOUT THE GROUP → Objectives and strategies of the Merck Group
As part of this initiative, Merck will focus on establishing a con-
sistent and integrated talent and performance management pro-
cess and improving the talent portfolio by proactively identifying
and sourcing talent as well as ensuring workforce diversity.
With the announcement of the planned acquisition of Sigma-
Aldrich in September, the foundation was laid for enhancing
Merck's position in the attractive life science industry. The aim
of the planned merger is to offer customers a broader range
of products and services as well as the industry's leading
e-commerce platform.
Through the acquisition of AZ Electronic Materials, which was
completed in May, the product base and new customer offerings
were expanded by new technologies.
→>
→
Moreover, Merck is aiming to expand its business model systema-
tically and continuously to include new technologies and partner-
ships. In 2014, three important milestones were achieved in the
implementation of the Group strategy:
→ Focus on specialty businesses
→ Customer proximity (to offer tailored solutions)
→> Innovative strength
→ Closeness to existing businesses
→ With the November announcement of the agreement with
Pfizer on a strategic alliance for anti-PD-L1, Merck wants to
accelerate its presence in immuno-oncology by combining the
strengths and capabilities of the two companies in the highly
competitive anti-PD-1/anti-PD-L1 space. Up to 20 immuno-
oncology clinical development programs are planned for
commencement in 2015, including up to six pivotal registra-
tion studies. The alliance also has the potential to accelerate
Merck's entry into the U.S. oncology market through the
co-promotion of Xalkori®.
This process started with the large-scale acquisitions of Serono SA
in 2007 and the Millipore Corporation in 2010. In 2011, Merck
embarked on the "Fit for 2018" transformation and growth pro-
gram with a new executive management team. In the first phase,
the company created the foundation for profitable growth by in-
troducing a new leadership organization and a comprehensive,
Group-wide efficiency program. The second phase, which started
in 2014, is aimed at successively implementing the growth options
identified by establishing three strong platforms for sustainable
profitable growth. Merck is building on its core competencies:
OBJECTIVES AND STRATEGIES OF THE MERCK GROUP
50
On September 22, 2014, Merck and Sigma-Aldrich announced
that they had entered into a definitive agreement under which Merck
will acquire Sigma-Aldrich for US$ 17.0 billion (€ 13.1 billion),
establishing one of the leading players in the global life science
industry. The closing of the transaction is expected in mid-2015,
subject to regulatory approvals and other customary closing con-
ditions.
On August 20, 2014, Merck Millipore and Samsung BioLogics
announced the signing of a Memorandum of Understanding for a
strategic alliance in the biopharmaceutical business. The proposed
alliance is intended to encompass a long-term supply agreement in
which Merck Millipore will provide raw materials for biopharma-
ceutical manufacturing.
On May 15, 2014, Udit Batra, who formerly headed Consumer
Health, took over the leadership of Merck Millipore, succeeding
Robert Yates as President and Chief Executive Officer.
On March 17, 2014, Merck Millipore announced a clinical research,
licensing and joint development agreement with Sysmex Corpora-
tion of Japan. This collaboration will use Merck Millipore's flow
cytometry technology as a platform to accelerate the creation of
new, more powerful diagnostic tools for research in blood dis-
orders. If successful, Sysmex and Merck Millipore will collaborate
on developing the imaging flow technology platform for future
commercialization in hematology.
49
Merck is pursuing a sustainable dividend policy. Provided that
the economic environment develops in a stable manner, the cur-
rent dividend represents the minimum level for future dividend
proposals. The dividend policy follows the business development
and earnings increase of the coming years. However, dividend
growth could deviate, e.g. within the scope of restructuring or in
the event of significant global economic developments. Merck
also aims for a target corridor of 20-25% of EPS pre one-time
items.
49
In 2007, Merck launched a transformation process aimed at
securing its future through profitable growth in highly special-
ized niche markets within today's Healthcare, Life Science and
Performance Materials business sectors.
The goal of the third capability initiative ONE Process Har-
monization, Standardization and Excellence is to better coordi-
nate processes and apply them consistently. This is particularly the
case with software applications. Continuous improvement will take
place through benchmarking. Ultimately, this will allow Merck to
adapt rapidly to business changes as well as to integrate future
acquisitions both seamlessly and efficiently.
In line with its strategic agenda and focus on three growth plat-
forms, effective January 1, 2015 Merck organizationally reposi-
tioned itself. The previous four divisions have been replaced by
three business sectors:
→ Life Science consists of the Merck Millipore business.
→ Performance Materials corresponds to the business of the
The framework for talent development, compensation and
performance management is to be harmonized globally (ONE
Talent Development, Rewards and Performance Management).
The capability initiative ONE Merck Brand aims to strengthen
the value of the Merck brand, to increase the company's global
visibility and reputation and to become more attractive to custom-
ers, partners and talent globally.
As Merck continues to grow in size and the business becomes
increasingly global, Merck is to be seen as ONE company. ONE
Merck stands not only for a strong brand, but also for a performance-
oriented global company with a strong sense of "we". Merck is
more than the sum of its parts. Therefore, Merck has launched four
capability initiatives.
Capability initiatives
STRATEGIC INITIATIVES
Merck focuses on innovative and top-quality high-tech products
in the Healthcare, Life Science and Performance Materials business
sectors. The company's goal is sustainable and profitable growth.
Merck intends to achieve this by growing organically and by fur-
ther developing its competencies, as well as by making targeted
acquisitions that complement and expand existing strengths in
meaningful ways. Building on leading products in all its businesses,
Merck aims to generate income that is largely independent of the
prevailing economic cycles. Moreover, the aim is to further expand
the strong market position in emerging markets in the medium to
long term. In 2014, the Emerging Markets region contributed 38%
to Group sales.
Group strategy
For Merck, the principle of sustainability applies not only to
economic aspects. Instead, it also encompasses responsibility for
society and environmental preservation. With its current and future
product portfolio, Merck wants to help solve global challenges
and shape a sustainable future. That is also why innovation is the
basis of the company's business activities; it is the prerequisite
for future growth. Merck is continually working on innovative
products and services for patients and customers and relies on a
continual process of internal innovation throughout all areas of
the company.
always be balanced so that it reflects an optimum mix of entrepre-
neurial opportunities and risks. Merck achieves this through diver-
sification in the Healthcare, Life Science and Performance Materials
business sectors, as well as through its geographic breadth with
respect to growth sources.
→ Healthcare comprises the Merck Serono, Consumer Health,
Allergopharma and Biosimilars businesses.
51
The structure of Merck KGaA with members of the Merck family
as personally liable partners requires the Merck Executive Board,
whose members are also personally liable partners, to pay special
attention to the long-term development of value. Therefore, sus-
tainability plays a special role at Merck. The objective is to align
the long-term development of the company with the legitimate
interests of shareholders, whose engagement in Merck is normally
of a shorter duration. That is why Merck's business portfolio must
In its business endeavors, Merck orients towards general principles.
They help those responsible within the company to shape strategic
plans and to make decisions.
General principles
The year 2018 will mark the 350th anniversary of Merck. The
general principles of the "Fit for 2018" transformation and
growth program and the Group strategy are to serve as a com-
pass beyond 2018 as well.
GENERAL PRINCIPLES
AND GROUP STRATEGY
and life science tools make up around 80% of sales in the Life
Science and Performance Materials business sectors. In 2006, the
share was around 30%.
a wide range of value-adding products. Today, high-tech materials
The strategic transformation into a specialist for innovative
high-tech solutions in Healthcare, Life Science and Performance
Materials is reflected by the composition of sales. Within the
Healthcare business sector, Merck Serono today generates more
than 65-70% of its sales with biopharmaceuticals. In 2006, there
was only one such product, ErbituxⓇ, which accounted for less
than 10% of sales. The classic Chemicals business has increasingly
become a premium materials business that offers Merck customers
same name.
GROUP MANAGEMENT REPORT FUNDAMENTAL INFORMATION ABOUT THE GROUP → Objectives and strategies of the Merck Group
GROUP MANAGEMENT REPORT → FUNDAMENTAL INFORMATION ABOUT THE GROUP Internal management system of the Merck Group
2.3
INTERNAL MANAGEMENT SYSTEM OF THE MERCK GROUP
1.7
3,069.2
3,122.9
EBITDA
- 55.0
220.5
1.9
1,237.9
9.4
Restructuring costs
1,610.8
Impairment losses/Reversals of impairment losses
Depreciation and amortization
Operating result (EBIT)
Change
2013
2014
€ million/change in %
RECONCILIATION EBIT TO EBITDA PRE ONE-TIME ITEMS
MERCK GROUP
1,762.0
1,261.6
99.3
on the divestment of businesses, acquisition costs, and other one-
time items. The classification of specific income and expenses as
one-time items follows clear definitions and underlies strict gover-
nance at Group level. Within the scope of internal performance
management, EBITDA pre allows for the necessary changes or
restructuring without penalizing the performance of the operating
business.
83.9
-35.7
The Merck Group
¹Financial indicators not defined by International Financial Reporting Standards.
4.1
3,253.3
3,387.7
EBITDA pre one-time items
365.2
2.3
10.6
130.5
0.0
Other one-time items
Acquisition-related one-time items
-182.6
-1.9
Gains/losses on the divesment of businesses
78.0
49.0
87.2
Integration costs/IT costs
85.0
EBITDA pre one-time items is the main performance indicator
measuring ongoing operational profitability and is used internally
and externally. To allow for a better understanding of the under-
lying operational performance, it excludes from the operating
result depreciation and amortization as well as one-time items.
One-time items are restricted to the following categories: impair-
ments, integration costs/IT costs, restructuring costs, gains/losses
EBITDA pre one-time items
5.5
ROCE
EBITDA pre margin
NPV, IRR
Payback period
Capex
PoS
ROCE
EBITDA pre margin
Licensing
eNPV
NPV, IRR
EBITDA pre margin
EPS
ROCE, MEVA
M & A
Abbreviations
Sales Growth
EBITDA pre margin
MEVA
Net Income, EPS
Dividend ratio
Credit rating
Sales
EBITDA pre
Sales
EBITDA pre
BFCF
Business
Merck Group
Projects
The Value Creation and Financial KPI Pyramid, which summarizes
the important financial performance measures of the Merck
Group, reflects the comprehensive framework of financial KPIs to
steer the businesses and prioritize the allocation of cash resources.
It consists of three managerial dimensions, which require the use
of different indicators: Merck Group, Business and Projects.
As a global company with a diverse portfolio of products and
services, Merck uses a comprehensive framework of indicators to
manage performance. The most important KPI (key performance
indicator) to measure performance is EBITDA pre one-time items.
ROCE, MEVA
EBITDA pre = Earnings before interest, income tax, depreciation and amortization pre one-time items
EPS = Earnings per share
MEVA = Merck value added
BFCF
10,700.1
11,291.5
Change
2013
2014
Sales
€ million/change in %
SALES
MERCK GROUP
Sales are defined as the revenues from the sale of goods and
services rendered to external customers net of value added tax
and after sales deductions such as rebates or discounts. Sales are
the main indicator of business growth in the Merck Group and
therefore an important parameter of external as well as internal
performance measurement.
Sales
The three key performance indicators sales, EBITDA pre one-time
items', and business free cash flow¹ are the most important factors
for assessing operational performance. Reference to these KPIs
can therefore be found in the Report on Economic Position, the
Report on Risks and Opportunities, and in the Report on Expected
Developments. As the most important indicators of Merck's finan-
cial business performance, the KPIs are key elements of Merck's
performance management system.
KEY PERFORMANCE INDICATORS OF THE
MERCK GROUP AND ITS BUSINESSES
GROUP MANAGEMENT REPORT → FUNDAMENTAL INFORMATION ABOUT THE GROUP Internal management system of the Merck Group
56
PoS Probability of success
eNPV = expected Net present value
IRR Internal rate of return
NPV = Net present value
ROCE Return on capital employed
Business free cash flow
55
GROUP MANAGEMENT REPORT FUNDAMENTAL INFORMATION ABOUT THE GROUP →
MERCK MILLIPORE
Additionally, Merck Millipore underlined its technology leader-
ship with the announcement that its Chromocult® Coliform Agar
(CCA) has been used by the International Organization for Stan-
dardization (ISO®) as the only suitable culture medium to develop
a revised standard for enumerating coliform bacteria and E. coli
in water samples to replace Lactose TTC Agar. The completely
revised ISO® 9308-1 standard became effective on September 16,
2014.
The Process Solutions business area offers a diversity of pro-
ducts to pharmaceutical and biotechnology companies that enable
customers to manufacture large- and small-molecule drugs safely,
effectively and cost-efficiently. Accounting for 44% of Merck
Millipore sales in 2014, Process Solutions offers its customers
continuous innovations, highest quality standards as well as high
reliability of supply. In addition, the business area's portfolio
comprises more than 400 chemicals for the synthesis of active
pharmaceutical ingredients as well as drug delivery compounds.
The offering in biotech production comprises products supporting
cell growth and gene expression, a wide range of filtration systems,
as well as salts and sugars. The single-use solutions offered by the
Process Solutions business area provide increased operational
flexibility to biopharmaceutical customers since they eliminate
time- and cost-intensive cleaning procedures. Moreover, these
single-use solutions are compatible with various products, reducing
investment costs for customers.
GROUP MANAGEMENT REPORT FUNDAMENTAL INFORMATION ABOUT THE GROUP →
47
The Merck Group
PERFORMANCE MATERIALS
Performance Materials comprises Merck's entire specialty chemicals
business. The portfolio includes high-tech performance chemicals
for applications in fields such as consumer electronics, lighting,
coatings, printing technology, plastics, and cosmetics. The acqui-
sition in May 2014 of AZ Electronic Materials (AZ), a leading
supplier of high-tech materials for the electronics industry, sig-
nificantly strengthened Performance Materials.
Up until December 31, 2014, i.e. during the reporting period,
Performance Materials consisted of four business units: Liquid
Crystals, Pigments & Cosmetics, Advanced Technologies and AZ.
Effective January 1, 2015, Performance Materials was organized
into the following business units: Display Materials, Pigments &
Functional Materials, Integrated Circuit Materials comprising the
AZ business with specialty chemicals for use in integrated circuits
(semiconductors), as well as Advanced Technologies.
The Liquid Crystals business, which became part of the Display
Materials business unit on January 1, 2015, generated more than
half of Performance Materials' sales in 2014. With a high market
share, Merck has established itself as the global market and tech-
nology leader in liquid crystal mixtures. The market is highly con-
solidated. In addition, barriers to market entry exist due to the
technological complexity of liquid crystals and the high quality
requirements of customers and consumers. The seven largest LC
display manufacturers are primarily among the customers of the
Liquid Crystals business. Merck has the broadest product offering
in the industry and offers, among other things, liquid crystals
based on PS-VA and IPS technologies. This enables Performance
Materials to meet individual customer needs and offer solutions
for all display sizes, from smartphones and tablet computers to
large-size television screens. Merck is pursuing a strategy of lever-
aging its expertise in liquid crystals in order to develop new fields
of application for innovative liquid crystal technology. On July 1,
2014, Merck completely acquired Peer+, a Dutch specialist for
smart window technology. The company has meanwhile been fully
integrated. With the acquisition of its long-standing cooperation
partner Peer+, Merck is further advancing the development of the
future-oriented market for liquid crystal windows (LCW). The major
innovation of liquid crystal windows lies in their continuously
variable switching functionality from light to dark in just seconds.
In January 2015, the first LCW panels were installed in the new
modular Innovation Center in Darmstadt. At the same time, the new
technology is being presented to a wider audience at exhibitions
and congresses.
The Pigments & Functional Materials business unit develops
and markets a comprehensive product portfolio of decorative
effect pigments and functional materials. The effect pigments are
primarily used in automotive and industrial coatings, plastics,
printing applications, and cosmetics in order to give products a
unique shine. Functional materials include laser marking, conduc-
tive additives and applications for counterfeit protection, as well
as high-quality cosmetic active ingredients, for example for use in
skin care, sun protection or insect repellants.
Performance Materials' share of Group sales increased in 2014
to 18% (2013: 15%) and its share of EBITDA pre one-time items
(excluding Corporate and Other) rose to 25% (2013: 23%). The
results of AZ have been included since May 2, 2014. The EBITDA
margin pre one-time items amounted to 43.4% of sales.
The Advanced Technologies business unit invests in future-
oriented research and development, supporting the growth and
sustainable competitiveness of Performance Materials. The busi-
ness unit also manufactures and markets materials for organic
light-emitting diodes (OLEDS), which are used in new lighting
applications and display technologies. The performance of the
OLED materials business was very positive in 2014. The demand
for OLED materials from Merck increased significantly, particu-
larly in Asian countries. At the same time, the customer base
expanded.
48
GROUP MANAGEMENT REPORT -> FUNDAMENTAL INFORMATION ABOUT THE GROUP → The Merck Group
Merck Millipore has a broad product and technology portfolio and
offers innovative solutions for scientists and engineers in the life
science industry. Life science comprises the research branches of
natural and engineering sciences concerned with the structure
and behavior of living organisms. Merck Millipore's products and
services are used in the research, development and manufacture of
biotechnological and pharmaceutical drug therapies, as well as
in research and application laboratories. In addition, products and
services from Merck Millipore also reach adjacent markets, such
as food and beverages. Merck Millipore was established in 2010
following the acquisition of the Millipore Corporation. It is a
leading supplier of life science tools.
In 2014, Merck Millipore contributed 24% to Group sales
and 19% to EBITDA pre one-time items (excluding Corporate and
Other). The majority of sales are generated by consumables. This
enables Merck Millipore to achieve recurring sales and stable,
attractive cash flows in an industry that is characterized by
stringent regulatory requirements. A highly diversified and loyal
customer base additionally ensures a favorable risk profile. At the
same time, Merck Millipore benefits from its broad portfolio and
its global reach. Merck Millipore comprises three business areas:
Bioscience, Lab Solutions and Process Solutions, as well as multiple
specialized business fields.
The main product groups of the Bioscience business area in-
clude tools and consumables for filtration and sample preparation,
reagents and kits for cell biology experiments, as well as small
tools and consumables for cell analysis. With these products,
Merck Millipore supports its customers in understanding complex
biological systems and identifying new target molecules. The
Bioscience business area accounted for 15% of Merck Millipore's
sales in 2014. Since innovation is a key component of Bioscience,
Merck Millipore offers complete and validated applications to make
research processes faster and more efficient.
The Lab Solutions business area manufactures products for
research as well as analytical and clinical laboratories in a wide
variety of industries. The business area accounted for 41% of
Merck Millipore's sales in 2014. It is one of the leading suppliers of
laboratory water equipment, laboratory chemicals and consumables.
Merck completed the integration of AZ and its global work-
force of around 1,100 employees according to schedule by the end
of 2014. During the integration phase in 2014, AZ was treated as
an independent business unit within Performance Materials for
reporting purposes. On January 1, 2015, AZ was transferred to the
Integrated Circuit Materials business unit. As a key partner to
leading global electronics manufacturers, in 2014 AZ generated
nearly 80% of its sales in Asia. AZ materials are widely used in
integrated circuits, flat-panel displays and light-emitting diodes.
The AZ portfolio thus optimally complements the range of mate-
rials offered by Performance Materials.
In addition, Lab Solutions develops and markets test solutions to
identify microbial contamination, for example in pharmaceutical
products, food and drinking water. For inorganic chemistry, Lab
Solutions supplies ultrapure reagents, including salts, acids, caustic
alkalis, and buffering agents. It also manufactures reference ma-
terials for instrumental analysis and products for inorganic trace
analysis. In 2014, the Lab Solutions business area launched new
Steritest™ Symbio Pumps for easier, safer and more reliable sterility
testing of pharmaceutical products in laminar flow hoods, isolators
and cleanrooms. The Steritest™ Symbio Pumps were developed to
address stringent pharmaceutical testing requirements. The launch
continues Merck Millipore's 40-year legacy of providing ground-
breaking sterility testing products.
Cultural promotion is a core element of our engagement in society
that reflects Merck's centuries-old tradition of supporting art and
culture. After all, culture nurtures characteristics that are indis-
pensable to our business activities as a high-tech company:
creativity, enthusiasm for new discoveries and the courage to
transcend boundaries. Our cultural engagement focuses on music,
literature and education.
Deutsche Philharmonie Merck
The Deutsche Philharmonie Merck is our musical ambassador. We
consider classical music to be the universal language that brings
people together; as such, it represents an important part of our
culture. The concerts of this professional ensemble are highly
popular, with around 26,000 people attending them per year.
They represent an integral part of the cultural life in the vicinity
of our global headquarters in Darmstadt. Special events for chil-
dren and adolescents as well as collaboration with schools, such
as the orchestra workshop held once a year since 2010, aim to
make classical music more accessible to young people.
Additionally, the Deutsche Philharmonie Merck regularly in-
vites international ensembles to play in Darmstadt while also
touring the globe itself. In 2014 the orchestra gave a charity con-
cert in the United Arab Emirates to raise money for patients with
multiple sclerosis.
Merck grants and promotes four literary prizes worldwide.
Since 1964, we have been sponsoring the renowned Johann
Heinrich Merck Award for Literary Critique and Essay, which is
presented by the German Academy for Language and Poetry at
its annual autumn conference. The award, which comes with a
€ 20,000 prize, went to publicist Carolin Emcke in 2014.
Literature can stimulate the imagination; it can alleviate fears and
give courage. Literature can also address scientific topics, thus
furthering a deeper understanding of science and research. Through
our engagement, we aim to help society better accept science and
scientific progress. In addition, as an international company, we
foster writers who further cultural exchange in our globalized
world.
For 12 years, Merck has been sponsoring the Premio Letterario
Merck in Italy. This award is worth € 10,000 and recognizes au-
thors who build bridges between literature and science, thereby
making them accessible to a wide audience. In 2014, the award
went to Carlo Rovelli, an Italian physicist, and to Francisco
Gonzales-Crussi, a Mexican physician and writer.
STRATEGIC SPHERE OF ACTIVITY:
CULTURE
Fostering literature
Additionally, Merck fosters its employees' ideas for new busi-
nesses through its Innospire program. In 2014, the program cen-
tered on the topics of energy conservation, conversion and effi-
ciency, water treatment, water quality analyses, and efficient water
consumption, along with patient focus, personalized medicine and
digital/mobile health. Merck employees were called upon to sub-
mit suggestions for new materials and systems, as well as for new
business models. During the 2014 Innospire program, 300 ideas
were submitted, including some that pertained to the aforemen-
tioned topics.
Merck promotes initiatives to strengthen supply chains and to
develop localized health solutions in order to deliver and reach
out efficiently at the point of care. One example is Merck's Temp-
tation Project, which uses heat and humidity sensors to monitor
transportation conditions of all its products shipped from Europe
to the rest of the world. Furthermore, the company supports the
expertise and training of managers in Africa, Asia and Latin
America to strengthen local quality manufacturing standards. The
BSR GPAH status report recognized the River Ambulance in India
as an innovative approach to reaching underserved populations.
Merck supports the non-governmental organization River Narmada
Samagra, which among other things transports health workers
and provides solutions to local populations living in the remote
region along the Narmada River.
Within the scope of our cosmetic products business, we are work-
ing to sustainably procure and produce cosmetic ingredients as
well as optimize the related production processes. In dialogue with
our customers from the cosmetics industry, we are also developing
cosmetic formulations that meet strict sustainability criteria and
address the current trend towards more natural cosmetics. Several
of our products have been certified by Ecocert, an independent
organization that represents high international standards for en-
vironmentally sustainable products.
GROUP MANAGEMENT REPORT FUNDAMENTAL INFORMATION ABOUT THE GROUP → Corporate Responsibility
62
62
We strive to continuously enhance the sustainability footprint of
our products and are working to offer our customers products that
enable them to reduce the negative impact of their own activities,
as well as to achieve their own sustainability goals. For instance,
we are developing innovative materials for energy-efficient liquid
crystal and OLED displays and are thus helping our customers
develop environmentally sustainable processes. Thanks to liquid
crystals from Merck, displays consume approximately 20% less
energy in comparison to the preceding generation of technology.
The new UB FFS technology (ultra-brightness fringe field switch-
ing) provides displays with up to 15% more light transmittance,
thus further reducing energy consumption. Merck is also devel-
oping liquid crystals for new applications. For instance, we are
working with architects, glass makers and facade manufacturers
to create the windows of tomorrow. Our ambitious goal is to use
smart windows to make buildings more energy-efficient.
Developing sustainable products
Through our products, we are helping to overcome global
challenges such as climate change and resource scarcity. At the
same time, we are also helping our customers achieve their own
sustainability goals.
STRATEGIC SPHERE OF ACTIVITY:
ENVIRONMENT
In India, Merck collaborates with the Goethe-Institut Calcutta
to present the Merck Tagore Award, which is worth 500,000 Indian
rupees (around € 7,200); this literary prize is granted every two
years to authors who have made a distinctive contribution to the
cultural exchange between Germany and India. In April 2014, the
award went to Professor Pramod Talgeri, Vice-Chancellor of the
India International Multiversity.
Accessibility
Merck, fights counterfeit medicines in developing countries and
emerging economies. Additionally, within the scope of the Merck
Capacity Advancement Program (CAP), Merck seeks to improve
access to and the quality of diabetes treatment in Africa and India.
At Merck Millipore, the Design for Sustainability (DFS)
program is especially aimed at reducing environmental impacts,
also through customers' own use, for example their greenhouse
gas emissions and water use. In 2014, Merck Millipore completed
the integration of the DFS approach into the product development
process. Beginning with the concept stage, product teams identify
potential environmental impacts in various product life cycle
stages as well as opportunities to make improvements. A scorecard
is used to assess product designs in six focus categories: Materials,
Energy and Emissions, Waste, Water, Packaging, as well as Usabi-
lity and Innovation.
GROUP MANAGEMENT REPORT FUNDAMENTAL INFORMATION ABOUT THE GROUP → Corporate Responsibility
Through our Pharma Code for Conducting Pharmaceutical
Business and Pharmaceutical Operations, we set standards for
responsible marketing activities in order to ensure that patients
and health care professionals have access to relevant information
and that patients receive effective treatment.
In October 2014, Merck and the Goethe-Institut Tokyo presented
the first-ever Merck Kakehashi Literature Prize. Worth a total of
€ 20,000, this award is granted to contemporary works by German
authors that are made accessible to a wider readership in Japan.
The prize went to German author Arno Schmidt for his book
“Seelandschaft mit Pocahontas” (Lake Scenery with Pocahontas)
and to the book's Japanese translator, Jun Wada.
Employees are crucial to the success of a company. They therefore
play a central role in our business endeavors. In accordance with
the Merck Values, we live a culture of mutual esteem and respect.
We want to contribute to entrepreneurial success by recruiting,
developing and motivating the most suitable employees. We
therefore place a strategic focus on the topics of talent develop-
ment, compensation and performance management. Furthermore,
we want to strengthen the diversity of our employees (see also
"Employees" on page 77 et seq.).
Responsibility for our employees
In addition, Merck regularly requests self-disclosures from
suppliers and conducts supplier audits. In order to underscore the
importance of supplier management as part of our corporate
responsibility, we joined the Together for Sustainability (TFS)
chemical industry initiative at the end of 2014. Starting in 2015,
we will have access to a significantly greater number of supplier
assessments via the TfS network, which we can then use to select
and manage our suppliers.
Due to the growing significance of emerging markets as sour-
cing markets for Merck, we have reinforced our efforts to ensure
adherence to our supply chain standards.
(4) Supplier management
Merck sources raw materials, packaging materials, technical
products, components, and services from suppliers in more than
120 countries. Our basic expectations for suppliers and service
providers include their compliance with fundamental environ-
mental and social standards, which are primarily derived from the
core labor standards of the ILO (International Labour Organisation),
from the UN Global Compact, and from the Code of Conduct of the
BME (German Federal Association for Materials Management,
Purchasing and Logistics). Since 2013, our Group Procurement
Policy and Responsible Sourcing Principles have defined our pro-
curement practices and are now integrated into our general terms
and conditions. They therefore constitute the foundation of every
sourcing transaction and procedure.
GROUP MANAGEMENT REPORT FUNDAMENTAL INFORMATION ABOUT THE GROUP → Corporate Responsibility
64
ठ
Our goal is to provide customers and patients with high-quality
brand-name products. Through our quality vision, “Quality is
embedded in everything we do!" we remind our employees of their
responsibility - across all divisions, all Group functions and all
levels of the company.
(3) Quality of products
63
In everything we do, our number-one priority is patient safety.
Ultimate responsibility for drug safety at Merck Serono is borne
by our Medical Safety and Ethics Board (MSEB), which is chaired
by our Global Chief Medical Officer. Merck Serono's Global Drug
Safety unit is responsible for continuously and systematically
monitoring the safety of our drugs (pharmacovigilance). This unit
processes safety information from various sources such as clinical
trials, adverse reaction reports and scientific literature in order to
provide patients with risk-benefit evaluations during the entire
life cycle of a drug.
Merck has successfully completed the second phase of REACH
implementation. All substances we produce or import in quantities
ranging from 100 to 1,000 metric tons per year - 70 different
substances in total - were successfully registered with the European
Chemicals Agency (ECHA) by June 1, 2013. We are currently in
phase three, during which we are working to register all substances
produced or imported in quantities between one and 100 metric
tons per year by mid-2018. We are fully on schedule with our
activities.
There are numerous regulations intended to ensure that chemicals
pose no risk to humans or the environment. Compliance with
these regulatory requirements is an important part of our work.
Through our Group-wide Product Safety Chemicals policy, we
have introduced global processes for defining, steering and imple-
menting product safety, and have established the corresponding
management structures. Merck incorporates all relevant national
and international chemical regulations into its policies and regu-
lations and adheres to them. This includes for instance the EU
chemicals regulation REACH (Registration, Evaluation, Authorisa-
tion and Restriction of Chemicals) and CLP (Classification, Label-
ling and Packaging of Substances and Mixtures, EU GHS). Further-
more, we are committed to transparency. For instance, in line with
the Global Product Strategy, an international initiative of the
chemical industry, we provide our customers with product safety
summaries for hazardous materials.
(1) Safety of chemical products
Merck contributes to raising awareness by providing health work-
ers, communities and patients with appropriate tools, knowledge,
information and skills to help them make informed decisions. In
its report on the Guiding Principles on Access to Healthcare
(GPAH), the corporate network Business for Social Responsibility
(BSR) recognized the Merck-initiated Access Dialogues as a best
practice for information exchange and discussion between public
and private stakeholders. In India, Merck initiated the Suswastha
project. The aim is to provide underserved rural populations with
affordable health solutions and to engage patients through com-
munity-level meetings as well as educative health programs. The
Global Pharma Health Fund, a charitable organization funded by
The safety of our products is at the core of our corporate respon-
sibility. As long as used properly, our products should pose no risk
to customers or the environment, nor should our pharmaceuticals
have a negative benefit-risk evaluation. We therefore examine
safety across the entire life cycle of our products and continuously
take steps to minimize risks. We make our products safer to use
by providing patients and customers with extensive information
material so that they can use the products in a responsible, safe
and proper manner.
Responsibility for our products
Responsible business practices form the foundation of our opera-
ting business. We minimize ethical, economic and legal risks so as
to secure Merck's license to operate. We take responsibility for our
products, our employees, the environment and the community.
RESPONSIBLE GOVERNANCE
We view education as a key component of culture - and vice versa.
Education can help us understand culture. But culture can also
build a bridge to education; it can stimulate curiosity and nurture
creativity. We therefore support educational projects at many of
our sites, by granting scholarships for instance, or sponsoring
specific classes. In order to promote young scientists, for example,
Merck has been organizing the renowned annual "Jugend forscht"
competition for the German federal state of Hesse every year since
1996.
Education
(2) Safety of drugs
Awareness
STRATEGIC SPHERE OF ACTIVITY: HEALTH
Affordability
All of our CR activities come under the umbrella of “responsible
governance" (see page 63 et seq.). Based on our corporate strategy,
at the end of 2014 we selected three strategic spheres of activity
from our CR framework in which we seek to excel. Our aim is to
hone Merck's competitive edge while helping to sustainably secure
its future.
Mankind is confronted with global societal challenges such as
climate change, resource scarcity and insufficient access to health
in low- and middle-income countries. We believe that we can help
resolve these global challenges through our innovative products
in the Healthcare, Life Science and Performance Materials sectors,
as well as through responsible governance.
to create added value for consumers, market partners and the
community while also helping them lead better lives.
CORPORATE RESPONSIBILITY AT MERCK →
Our corporate responsibility (CR) activities are directed by our
Group-wide CR Committee, which consists of representatives from
the businesses and relevant Group functions. Stefan Oschmann,
Vice Chairman of the Executive Board, became chairman of this
committee in January 2015. As a global company, our ambition is
STRATEGY AND MANAGEMENT
Responsible conduct plays a key role in Merck's corporate cul-
ture - with respect to employees, products, the environment,
and society. Over the course of Merck's nearly 350-year history,
the principle of corporate responsibility has become a firm pil-
lar of corporate governance. It is part of daily conduct and is thus
a fundamental prerequisite for Merck's business success.
59
CORPORATE RESPONSIBILITY
GROUP MANAGEMENT REPORT FUNDAMENTAL INFORMATION ABOUT THE GROUP → Corporate Responsibility
GOVERNANCE
Employing a highly qualified and motivated workforce is the basis
for achieving Merck's ambitious business goals. Therefore, Merck
puts a strong focus on establishing the processes and the environ-
ment needed to attract and retain the right talent with the right
capabilities at the right time. To measure the success of the related
measures, Merck has implemented talent retention as an important
non-financial indicator.
Innovation is the foundation of the business and will also be the
prerequisite for future success in changing markets. Merck is
continuously working to develop new products and service
innovations for patients and customers. Indicators for the degree
of innovation are defined individually depending on the specifics
of the respective businesses.
Innovation
tance.
Apart from the indicators of the financial performance of the
businesses, non-financial measures also play an important role in
furthering the success of the company. From a Group perspective,
specifically innovations in the businesses as well as the attraction
and retention of highly qualified employees are of central impor-
OTHER RELEVANT/NON-FINANCIAL
PERFORMANCE MEASURES
With the aim of ensuring an attractive return to shareholders,
Merck pursues a reliable dividend policy with a target payout ratio
based on EPS pre one-time items (see definition above).
Dividend ratio
The rating of Merck's credit worthiness by external agencies is an
important indicator with respect to the company's ability to raise
debt capital at attractive market conditions. The capital market
makes use of the assessments published by independent rating
agencies in order to assist debt providers in estimating the risks
associated with a financial instrument. Merck is currently assessed
by Moody's and Standard & Poor's (S&P). The most important
factor for the credit rating is the ability to repay debt, which is
determined in particular by the ratio of operating cash flow to
(net) financial debt.
Credit rating
Earnings per share are calculated by dividing profit after tax
attributable to the shareholders of Merck KGaA (net income) by
the weighted average number of theoretical shares outstanding.
The use of a theoretical number of shares takes into account the
fact that the general partner's capital is not represented by shares.
To provide a more comparable view, Merck also publishes EPS pre,
which excludes one-time items and amortization of intangible as-
sets and is based on the company's underlying tax ratio.
Talent retention
Culture
MISSION STATEMENT AND VALUES UN GLOBAL COMPACT•
CR
Availability entails the research, development and refinement of
health solutions that address unmet needs and are tailored to local
environments. Through partnerships and innovative alliances,
Merck is working to tackle diseases most affecting developing
countries. One example is our engagement within the Pediatric
Praziquantel Consortium. Through this public-private partnership,
Merck is developing a pediatric formulation of praziquantel to
treat the worm disease schistosomiasis. In March 2014, the
consortium was awarded a prestigious research grant from the
Japanese Global Health Innovation Technology Fund. Another
example is our partnership with the non-profit research foundation
Medicines for Malaria Venture, to develop new anti-malarials.
Availability
61
GROUP MANAGEMENT REPORT FUNDAMENTAL INFORMATION ABOUT THE GROUP → Corporate Responsibility
Merck's holistic Access to Health strategy focuses on four
areas, known as the "4As of Access" framework: Availability,
Affordability, Awareness, and Accessibility. In its ranking, the
Access to Medicine Foundation particularly recognized Merck for
its strategic and comprehensive access approach and its access
initiatives.
In November 2014, the Access to Medicine Foundation of the
Netherlands recognized our efforts to improve access to health. In
the 2014 Access to Medicine Index, Merck ranked sixth, moving
up two places compared to 2012 and 11 places compared to 2010.
Every two years, the index assesses the world's leading pharma-
ceutical companies with respect to their activities and initiatives
to promote access to medicine in developing countries.
Stefan Oschmann, Vice Chairman of the Executive Board, plans
to focus his presidency of the International Federation of Pharma-
ceutical Manufacturers & Associations (IFPMA) on accelerating
access to high-quality health solutions for people in low- and
middle-income countries. Oschmann was elected President of the
IFPMA for a two-year term at the 27th IFPMA Assembly in New
York, USA in November 2014.
Access to Health (A2H) is a strategic priority for Merck (see page
26 et seq.). Through our A2H approach, which spans all our busi-
nesses, we aim to help improve sustainable access to high-quality
health solutions for underserved populations and communities in
low- and middle-income countries. Recognizing that access is a
complex and multifaceted challenge with no one-size-fits-all
solution, our programs and initiatives are tailored to global, regional
and local needs. We realize that we cannot work alone to address all
the access gaps and that partnerships, collaboration and dialogue
are key to delivering sustainable access results.
Responsibility for the environment
Thanks to good performance with respect to responsible,
sustainable entrepreneurial conduct, Merck was again included
in the FTSE4Good index in 2014. To be included in this leading
international sustainability index, a company must demonstrate
socially conscientious, ecological and ethical conduct. In 2014,
Merck maintained its good position in other major sustainability
indices as well. For instance, we were once more included in the
STOXX Global ESG Leaders index. Moreover, Merck has remained
listed on the Euronext Vigeo Eurozone 120 index, which features
the 120 most progressive companies in Europe in terms of eco-
logical, social and governance-related criteria.
To prepare for the conference, Merck organized an expert
workshop in July 2014 with representatives from the worlds of
politics, business and society.
To Merck, corporate responsibility does not merely mean
taking action, but also listening. The dialogue with our various
stakeholder groups is therefore highly important to us. These
stakeholders include our employees, our business associates, the
Merck family, investors, regulatory agencies, and associations. We
also engage in a continuous exchange in order to create transpar-
ency and clearly demonstrate how we live the Merck Values. One
example of this exchange is a conference held on the topic of
"Germany needs the chemical industry. Sustainability - a prere-
quisite for growth and prosperity?", which Merck held in Septem-
ber 2014 in collaboration with its Chemie³ partners, VCI, BAVC and
IG BCE. The sustainability conference took place during the German
event series entitled "The Chemistry is Right in Darmstadt", which
Merck, Darmstadt - the city of science, and the Technical Univer-
sity of Darmstadt are offering from September 2014 to June 2015.
Merck supports relevant initiatives concerning responsible gover-
nance. The company is a member of the United Nations Global
Compact and is committed to complying with the compact's princi-
ples regarding human rights, labor standards, environmental pro-
tection and anti-corruption. Moreover, we also live our corporate
responsibility through our commitment to follow the guidelines of
the Responsible Care Global Charter, an initiative of the Interna-
tional Council of Chemical Associations (ICCA). This charter aims
to continuously improve the products and services of the chemical
industry in terms of environmental protection, health, plant safety
and security. Merck was among the first companies to sign the
revised version of the Responsible Care Global Charter. In addition,
we are a member of the "Chemie³" initiative, a collaboration be-
tween the German Chemical Industry Association (VCI), the German
Employers' Federation of the Chemical Industry (BAVC), and the
German Mining, Chemical and Energy Industrial Union (IG BCE).
As part of this globally unique collaboration, the partners aim to
make sustainability a core part of the chemical industry's guiding
principles and to jointly drive the sector's position within the
German economy as a key contributor to sustainable develop-
ment.
→ Culture: Culture inspires people and opens up their minds to
new possibilities. As a high-tech, research-based company, we
therefore promote cultural projects worldwide. Moreover, we
are engaged in educational projects, especially since education
is key to making culture accessible.
→ Environment: A number of our innovative chemical and life
science products contribute to environmental protection or help
our customers conserve energy.
Health: We aim to help underserved populations in low- and
middle-income countries to gain access to high-quality health
solutions.
->
GROUP MANAGEMENT REPORT FUNDAMENTAL INFORMATION ABOUT THE GROUP → Corporate Responsibility
60
HUMAN RIGHTS CHARTER MERCK CODE OF CONDUCT
Health
Environment
Strategy
Merck seeks to address affordability challenges by providing
assistance to those who are unable to pay for the health solutions
they need. To tackle these challenges, we have taken a pro-access
approach through our intellectual property initiatives and are en-
gaging in equitable pricing strategies. In 2014, Merck joined WIPO
Re:Search, an open innovation platform sponsored by the World
Intellectual Property Organization. With over 90 members world-
wide, the platform accelerates early discovery for infectious
diseases through intellectual property and knowledge sharing.
Furthermore, Merck is supporting the World Health Organization
(WHO) in the fight against the worm disease schistosomiasis in
Africa. Merck donates Cesol® 600 tablets containing the active
ingredient praziquantel to WHO. In 2014, Merck's donation to
WHO amounted to more than 72 million tablets. Since the start of
the program, over 54 million patients, primarily children, have
been treated. At the end of 2014, Merck joined with partners to
establish the Global Schistosomiasis Alliance in order to help
eliminate schistosomiasis worldwide.
In the manufacture of our products, we seek to impact the envi-
ronment as little as possible. This especially includes efficiently
conserving resources such as energy, water and raw materials
while also continuously reducing our emissions and waste.
CORPORATE RESPONSIBILITY →
Our Corporate EHS Policy defines our principles and strategies for
environment, health and safety. It is implemented through inter-
nal guidelines and instruction manuals on compliant behavior in
day-to-day operations, such as the Merck Group EHS Security and
Quality Manual. At all sites, the local EHS managers are in charge of
2014
2013
2012
2011
2010
Indirect CO,eq emissions
Direct CO₂eq emissions
Total CO2eq emissions
Emissions in kilotons, Scope 1 and 2
CO₂EQ EMISSIONS (EQ = EQUIVALENTS)
577
CORPORATE RESPONSIBILITY →
85
65
114
58
68
Steam, heat, refrigeration
466
500
502
519
Portfolio-adjusted in accordance with the Greenhouse Gas Protocol (including the new production sites of AZ).
541
551
567
Our subsidiaries are also engaged in a wide variety of local projects.
Merck has defined overarching criteria for selecting projects, while
the decisions concerning specific local projects are made by our
subsidiaries. In 2014, Merck spent a total of € 50.8 million on
community engagement activities. Of the total monetary and non-
monetary donations made by our subsidiaries in 2014, 61% went
to Emerging Markets (Latin America and Asia, excluding Japan),
37% to Europe, as well as 2% to the North America and the Rest
of World regions.
Our social responsibility activities are primarily focused on
those areas in which we have specific expertise stemming from our
core businesses. We are thus engaged in health and environmental
projects and support education, specifically in the natural sciences.
We provide disaster relief in emergency situations, especially in
those regions in which we operate.
Merck sees itself as part of society, not only at its individual
locations, but also at a global level. Taking responsibility towards
society is an integral part of our entrepreneurial approach. We
believe that we can make an important contribution to the com-
munity through our knowledge, our skills and our products.
Responsibility for society
GROUP MANAGEMENT REPORT FUNDAMENTAL INFORMATION ABOUT THE GROUP → Corporate Responsibility
99
66
In addition to energy, in 2014 Merck also focused on the topic
of water. We examined our sites to determine which ones are
located in regions where water is scarce and thus an especially
precious resource. Based on a detailed assessment, we plan to im-
plement sustainable water management systems at these sites.
performance band B in the Climate Performance Scoring, and was
thus clearly in the upper range of all participating companies in
the Germany, Austria and Switzerland category. In the Climate
Disclosure Scoring, which rates the thoroughness and transparency
of a company's reporting, Merck scored 87 out of 100 points, putting
it well above the average. The Carbon Disclosure Project, an inde-
pendent non-profit organization, assessed the emissions reduction
progress and climate change reporting of companies.
The results of the Carbon Disclosure Project likewise indicate
that Merck is on the right path. In 2014, Merck again ranked in
Energy management plays a key role in our efforts for sustainable
energy efficiency and climate change mitigation. Merck's produc-
tion sites in Darmstadt and Gernsheim account for around 40% of
Merck's global energy consumption. In 2012, both of these sites
qualified for ISO 50001 - Energy Management System certificates,
which were reaffirmed in 2014. The Molsheim site in France, the
Poseung site in Korea and the Taoyuan site in Taiwan received the
ISO 50001 certificate in 2014 for the first time. The Wiesbaden site
was certified for the first time in January 2015. Counting the Bari
and Tiburtina sites in Italy, eight Merck production sites have a
certified energy management system.
Portfolio-adjusted in accordance with the Greenhouse Gas Protocol (including the new production sites of AZ).
201
217
230
223
225
323
350
321
318
352
524
518
(1) Environmental management system
Electricity
565
Direct energy consumption
1,622
1,566
1,556
1,497
1,505
Total energy consumption
2014
2013
2012
919
2011
65
ENERGY CONSUMPTION (IN GWH)
Net income and earnings per share (EPS)
GROUP MANAGEMENT REPORT FUNDAMENTAL INFORMATION ABOUT THE GROUP → Corporate Responsibility
Around two-thirds of the EDISON projects planned Group-
wide have already been or are being rolled out, including major
energy generation projects as well. In November 2014, Merck
commissioned a carbon-neutral biomass energy plant in Goa,
India. In December 2014, a further biomass energy station was
commissioned in Jaffrey, New Hampshire, USA. At the Darmstadt
site, Merck is spending around € 27 million on the construction of
two state-of-the-art energy stations. The first of these two sta-
tions, which supplies the site's pharmaceutical production opera-
tions and research activities with power, was commissioned in
July 2014. The second station is currently under construction and
will cover the refrigeration requirements of the site's chemical
plants and laboratories, among other power needs. Once both
plants are in operation, the site's CO2 emissions will decrease by
around 2,500 metric tons per year.
In order to achieve this goal, Merck has launched a climate
protection program called EDISON that consolidates all climate
change mitigation and energy efficiency activities of the Merck
Group. In 2015, as in the three preceding years, the Executive
Board will earmark additional funds specifically for measures to
conserve energy and reduce greenhouse gas emissions. Through
more than 300 EDISON projects that have been initiated since
2012, Merck aims to annually save around 60 metric kilotons of
CO₂ in the medium term. In 2014, Merck lowered its total green-
house gas emissions by around 9% relative to the 2006 baseline,
despite growth in its operating business.
Climate change and its consequences are one of the main
challenges facing society in the 21st century. As a responsible
company, it is especially important to contribute to climate pro-
tection, which is why we have set ourselves the goal of reducing
total direct and indirect greenhouse gas emissions by 20% by
2020, measured against the 2006 baseline.
(2) Focus topics: Energy efficiency, greenhouse gas emissions,
water scarcity
Spending on environmental protection, health and safety
totaled € 146 million in 2014, which also includes investments
made during the year.
operational environmental protection measures. These employees
continually receive training and obtain additional qualifications.
Since our businesses are constantly changing, our environ-
mental management system must also remain flexible and adap-
table. For this reason, we have internal and external audits con-
ducted on a regular basis to determine whether the ISO 14001
requirements are still being met. In 2014, Merck received the ISO
14001 group certificate for its environmental management system
for the sixth consecutive year. This certificate covers 58 sites, in-
cluding eight of the nine production sites of the newly acquired
AZ Electronic Materials.
2010
920
940
1,001
616
577
586
Indirect energy consumption
27
15
13
13
15
Biomass and other self-generated renewable energy
107
102
100
105
105
Liquid fossil fuels
937
884
827
802
799
Natural gas
1,071
551
CAPITAL MARKET-RELATED PARAMETERS
RESPONSIBLE
58
-446.2
-527.5
Investments in property plant and equipment and software as well as advance payments
for intangible assets
4.1
3,253.3
3,387.7
EBITDA pre one-time items
Change
2014
€ million/change in %
MERCK GROUP →>
BUSINESS FREE CASH FLOW
intangible assets, as well as changes in inventories and trade
accounts receivable. To manage working capital on a regional and
local level, the businesses use the two indicators days sales out-
standing and days in inventory.
Business free cash flow comprises the major cash-relevant items
that the individual businesses can influence and are under their
full control. It sums up EBITDA pre one-time items less investments
in property, plant and equipment, software, advance payments for
Business free cash flow (BFCF)
57
GROUP MANAGEMENT REPORT → FUNDAMENTAL INFORMATION ABOUT THE GROUP Internal management system of the Merck Group
GROUP MANAGEMENT REPORT → FUNDAMENTAL INFORMATION ABOUT THE GROUP Internal management system of the Merck Group
18.2
Changes in inventories as reported in the balance sheet
2013
59.7
-185.5
MEVA gives information about the financial value created in a
period. Value is created when the return on capital employed
(ROCE) of the company or the business is higher than the weighted
average cost of capital (WACC). MEVA metrics provide Merck
with a powerful tool to weigh investment and spending decisions
against capital requirements and investors' expectations.
Merck value added (MEVA)
An additional parameter to prioritize investments into property,
plant and equipment is the payback period, which indicates the
time in years after which an investment will generate positive net
cash flow.
Payback period
In addition to NPV and IRR, ROCE is an important metric for the
assessment of investment projects. It is calculated as the operating
result (EBIT) pre one-time items divided by the sum of property,
plant and equipment, intangible assets, trade accounts receivable
and trade accounts payable, as well as inventories.
The internal rate of return is a further important criterion for the
assessment of acquisition projects and investments in property,
plant and equipment. It is the discount rate that makes the present
value of all future free cash flows equal to the initial investment
or the purchase price of an acquisition. A project adds value if the
internal rate of return is higher than the weighted cost of capital
including mark-ups.
Internal rate of return (IRR)
The main criterion for the prioritization of investment opportu-
nities is net present value. It is based on the discounted cash flow
method and is calculated as the sum of the discounted free cash
flows over the projection period of a project. Consistent with the
definition of free cash flow, the weighted average cost of capital
(WACC), representing the weighted average of the cost of equity
and cost of debt, is used as the discount rate. Depending on the
type and location of a project different mark-ups are applied to
the WACC.
Return on capital employed (ROCE)
Net present value
Changes in trade accounts receivable as reported in the balance sheet
Adjustment first-time consolidation of AZ Electronic Materials S.A.
Business free cash flow
93.2
144.6
2,605.1
2,960.0
-214.2
INVESTMENTS AND VALUE MANAGEMENT
Sustainable value creation is essential to secure the long-term
success of Merck. To optimize the allocation of financial resources,
Merck uses a defined set of parameters as criteria for the prioriti-
zation of investment opportunities and portfolio decisions.
-12.0
In the area of LC displays for mobile devices, Merck has developed
a new LC switching mode, UB-FFS technology (ultra-brightness
fringe field switching). The new LC switching mode has the
potential to increase display light transmittance by 15%. The new
technology offers many advantages: Firstly, it reduces energy
consumption and increases the battery life of the mobile devices.
Secondly, it improves mobile display quality and supports the
GROUP MANAGEMENT REPORT FUNDAMENTAL INFORMATION ABOUT THE GROUP Research and development at Merck
☑
CONSUMER HEALTH
-
In its Consumer Health business, Merck markets over-the-counter
medicines and food supplements in Europe – primarily for France,
Germany, and the United Kingdom - as well as in Latin America
and Southeast Asia, where sales volumes are rising. The focus of
research and development activities in Consumer Health is on
constantly improving tried and proven formulations consistent
with the needs of consumers. Innovations by Consumer Health
center on consumers and their needs. On the one hand, established
products are being adapted to changing consumer needs while
on the other hand, new technological innovations are being
developed to satisfy entirely new needs. A good example of this
is the new product Apaisyl® Nits Detect, which colors nits on the
scalp with a fluorescent dye, thus making it much easier to comb
them out. Since 2014 Merck has been increasingly entering into
cooperation agreements with independent research institutions in
order to tap into their expertise in developing new and existing
products in a targeted manner. At the same time, Consumer Health
is further developing its established brand-name products by
making them simpler to use and by offering accompanying
services.
PERFORMANCE MATERIALS
Merck is the undisputed market and technology leader in liquid
crystals, which are primarily used in televisions and mobile com-
munication applications. We are also one of the leading suppliers
of decorative and functional effect pigments. Our high-tech
materials and solutions are used by customers in the consumer
electronics, lighting, coatings, printing technology, plastics
applications, and cosmetics industries. In Performance Materials,
Merck is also focusing on the growth dynamics of emerging
markets. As a new part of Performance Materials, AZ Electronic
Materials (AZ) brings additional fields of business to the Merck
portfolio. AZ serves two main markets, the sector of IC Materials
for integrated circuit manufacture, and materials for display
applications (Optronics).
Liquid crystals
trend towards higher resolutions. The market launch is proceeding
faster than expected. The new switching mode is already used in
many smartphones and tablet PCs.
Besides high-quality decorative effect pigments, Merck also offers
functional materials used, for example, in laser marking of plastics,
conductive coatings, and heat-reflective glazing for greenhouses.
The Meoxal® brand is the latest development in effect pigments.
These pigments captivate with their brilliant color saturation and
exceptional performance, as a result of their innovative layer
technology and the use of aluminum flakes as substrate. They are
highly suitable for a multitude of high-performance applications,
especially for automotive and plastic coatings. The third pigment
in the new brand family - Meoxal® Atacama Red - was launched
in the second quarter of 2014.
In November, a Merck team won the 2014 Meyer-Galow Prize
for business chemistry. Four LC researchers and managers were
recognized for their work on the project “Energy-efficient liquid
crystals for smartphones and tablet PCs".
OLEDS
Organic light-emitting diodes (OLEDs) are used in innovative
lighting applications and display technologies. They provide bril-
liant colors and sharp images from any viewing angle; they have
a long lifespan and are highly energy-efficient. In addition, OLEDS
enable round or flexible displays, making them perfect for use in
the latest technical applications. One such example is the smart-
watch, a wristwatch that provides Internet access along with
additional computer functionality.
The name of the Merck product line for these types of appli-
cations is livilux®. Merck has developed a strong portfolio of
worldwide patents, based on more than ten years of experience.
Development partnerships with customers are a way of testing
new technologies and making them market-ready. For instance,
Performance Materials has co-developed a technology that can be
used to print OLED displays in collaboration with printer manu-
facturer Seiko Epson. While Merck contributed its expertise in
OLED material and ink development to the collaboration, Seiko
Epson contributed its expertise in print heads featuring Micro
Piezo inkjet technology as well as process expertise. The jointly
developed technology offers the advantage of lower costs and
higher material efficiency. In contrast to evaporated OLED displays,
the materials are applied at room temperature and under normal
pressure in the case of printed OLED displays. In addition, this
technique only deposits material in the areas where diodes are
actually located, thereby helping to conserve resources.
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75
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High-quality pigments and functional materials
With Xirallic® NXT, Merck is launching a new patented product
generation of the well-known high-tech effect pigments. These
offer customers an exceptional “living-sparkle-effect”, high styling
potential and consistent quality. The first product of the new genera-
Xirallic® NXT Panthera Silver - is a dark-gray, metallic
effect pigment, which Merck has been offering since April 2014.
74
The Merck "LC 2021" strategic initiative combines the company's
future LC activities, with a special focus on applications beyond
displays. For example, liquid crystals can regulate the light and
heat transmittance of windows in building facades. Since the
acquisition in July 2014 of the remaining interest in Peer+, a
Dutch specialist for smart window technology, the company has
now been fully integrated. Merck is investing further in LC windows,
the new name for the material development of these applications.
The pilot production of the windows is in full swing. Several
examples were installed in Merck's own Innovation Center at the
Darmstadt site in early 2015. Collaborations with partners in the
glass and facade technology sector are planned for broad-based
marketing of the windows.
73
Diseases
BTK:
Healthy volunteers
Phase I
Neurodegenerative
tion
ATX-MS-1467 (immune-tolerizing agent)
Multiple sclerosis
Phase II
Fertility
PergoverisⓇ (follitropin alfa and lutropin alpha)
Assisted Reproductive Technology,
poor ovarian responders
Phase III
Endocrinology
Kuvan (sapropterin dihydrochloride)
PKU in pediatric patients < 4 years
Submitted for
approval³
1 Combined with hDM2 inhibitor (SAR 405838) from Sanofi, conducted under the responsibility
of Sanofi.
2Sponsored by the National Cancer Institute (USA).
3Post-approval request by the European Medicines Agency (EMA). EMA application under review.
More information on ongoing clinical trials can be found at www.clinicaltrials.gov.
IL:
Interleukin
hDM2: Human Double Minute 2 homolog
mAb: Monoclonal antibody
MEK: Mitogen Activated Protein Kinase
EGFR: Epidermal Growth Factor Receptor
PARP: Poly [ADP-Ribose] Polymerase
Bruton's Tyrosine Kinase
Phenylketonuria
PKU:
-
GROUP MANAGEMENT REPORT FUNDAMENTAL INFORMATION ABOUT THE GROUP Research and development at Merck
In the IC (Integrated Circuit) Materials business, which supplies
products for integrated circuit manufacture, AZ has developed a
range of products for "Extreme UV Lithography" (EUV) applications
which has already been qualified by several customers from the
semiconductor industry for their processes. AZ's "shrink" tech-
nology makes it possible to reduce lithographically generated
structures after patterning, thus circumventing resolution limita-
tions of existing exposure equipment in a cost-effective manner.
New products are on the verge of production implementation.
AZ is a leader in Directed Self Assembly (DSA), a revolutionary
technology which is crucial to all advanced semiconductor manu-
facturers. In DSA, the information for the smallest structures is
already contained in the chemical make-up of the coating material.
Additionally, AZ is intensively engaged in developing thick
perhydropolysilazane (PHPS) products for 3D-chip-technology as
well as novel insulator materials.
68
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20
With a forward-looking view, the global Merck Serono R&D
organization is positioning itself for future success. Strong collabo-
ration, an unwavering commitment to exceptional science and a
focus on objective decision-making are the key principles that will
With hubs in Darmstadt, Germany; Boston, Massachusetts,
USA; Tokyo, Japan; and Beijing, China, the broad footprint of
Merck Serono gives it access to innovation in its key markets.
Across the entire biopharma spectrum - from academia and hos-
pitals to research institutions and other companies in the bio-
pharmaceutical industry - Merck Serono complements its internal
expertise by leveraging the experience and knowledge of others
through partnerships. In 2014, Merck Serono delivered clear
examples of this strategic priority, announcing agreements with
several companies and academic institutions around the world, as
well as awarding external grants for research innovation in several
disease areas, as detailed in the next section.
Program prioritization became a critical priority in 2014,
streamlining the R&D portfolio based on key data milestones,
among other things. With a core set of compounds now targeted
as high-priority, the R&D organization can better distribute re-
sources across its programs to optimize their potential for success.
With early development now part of Global Development,
R&D teams share the common goal of advancing programs in a
seamless fashion, collaborating to identify the right strategies for
key programs as they progress along the pipeline, and aligning
with Commercial from the earliest stages in the process, in order
to build the right target product profile in the most effective way
possible.
In Research, the early phases of discovery remain structured
across three distinct yet closely aligned Translational Innovation
Platforms (TIPS): Oncology, Immuno-Oncology, and Immunology,
as well as a specific department focused on Global Health, which
targets critical health needs in vulnerable populations.
In 2014, Merck Serono R&D continued its change strategy to
better position the organization for success in the years to come.
Today, founded on a solution-oriented and collaborative mindset,
almost 2,300 R&D professionals are working to advance inno-
vation across the Merck Serono R&D pipeline.
Research and development strategy
clinical development. Across the continuum of R&D, there is a
renewed energy to build a solution-oriented, collaborative and
accountable culture that delivers value to the business and to
patients. With an unwavering focus on world-class science and
the development of strategic external opportunities, Merck Serono
R&D aims to accelerate its pipeline.
Along with a sustained effort to foster an environment of
end-to-end development - from early research through to late-
stage development and product registration - there is also a reso-
lute commitment to ensuring the patient's needs are the primary
driver in all decision-making. A patient-centric approach to R&D
is becoming increasingly inherent across Merck Serono, from
research of the highest quality through to quick and efficient
Merck Serono R&D continues to evolve with a focus on both
strategic and operational improvements. In the course of 2014,
with new leadership in place after the appointment of Luciano
Rossetti, MD, as Executive Vice President and Head of Global R&D
in July, the R&D organization further enhanced the structure of
R&D to strengthen collaboration across the spectrum of Research,
Development and Commercial, prioritized key development pro-
grams, and created a governance model founded on collaboration,
agility and objectivity in science.
General
MERCK SERONO
The organizational set-up of our research and development
activities reflects the structure of Merck. Within the Executive
Board, Stefan Oschmann, who became Vice Chairman of the
Executive Board at the beginning of 2015, was responsible for
Merck Serono and Consumer Health until December 31, 2014.
Effective January 1, Belén Garijo assumed this responsibility as a
Member of the Executive Board. Bernd Reckmann is responsible
for Performance Materials and Merck Millipore.
Merck spent around € 1.7 billion on research and development in
2014. In our research and development activities, we focus on both
in-house research and external collaborations, which enable us to
increase the productivity of our research while simultaneously
reducing financial outlay.
Around 4,700 employees work for Merck researching inno-
vations to serve long-term health and technology trends in
established and emerging markets as well as in developing
countries.
Merck conducts research and development worldwide in order
to develop new products and services designed to improve the
quality of life of patients and customers. In 2014, Merck focused
on further optimizing the relevance and efficiency of its
research and development activities. For this purpose, Merck
increased the number of new collaborations with external
research and development partners.
RESEARCH AND DEVELOPMENT AT MERCK
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GROUP MANAGEMENT REPORT FUNDAMENTAL INFORMATION ABOUT THE GROUP Research and development at Merck
guide the R&D teams in 2015. As a recent example, the Global
Medical Affairs (GMA) organization underwent a complete re-
design and strategic refocusing in 2014. Patient centricity was at
the core of this effort which has several cornerstones: enhance-
ment of therapeutic area expertise in key areas, a global best-
practice sharing working style and the establishment of a novel
function known as medical excellence. The new GMA organization
was launched in August and implementation at headquarters, in
regions and in countries worldwide is progressing rapidly, and is
on track for completion in early 2015. The new organization is
already delivering enhanced value to life cycle management of
Merck Serono's registered products, as well as contributing signifi-
cantly to the late-stage development process.
At the Merck Serono Investor & Analyst Day in September,
Merck gave an update on its plans for its Biosimilars activities. In
addition to the already disclosed investment plan of € 100 million
for 2014, the unit plans to continue to invest in 2015, depending
on the outcome of ongoing Phase I studies. Existing partnerships
with India's Dr. Reddy's and Brazil's Bionovis will be expanded by
another, as yet undisclosed in-licensing agreement for a late-stage
biosimilar, initially for smaller emerging markets. Between 2015
and 2016, Merck plans to initiate between two and five Phase III
clinical trials.
THE MERCK SERONO PIPELINE IN 2014
The continuous development of flat-panel display technology
towards larger formats and higher operating frequencies requires
the use of transistors with feature sizes that are at the limit of the
resolution capability of the exposure tools. In the Optronics busi-
ness, AZ has successfully transferred from its IC sector so-called
tandem resin technology with a specific molecular weight distri-
bution, thus achieving a photoresist resolution near the theoretical
resolution limit. In silicon technology, new siloxane materials are
in an advanced stage of qualification as planarization materials
for high-resolution displays and as a thin film barrier for OLED
lighting.
MERCK MILLIPORE
With nearly 800 employees focused on R&D, Merck Millipore is
working with customers to develop innovative solutions for the
research, development and production of pharmaceutical and bio-
tech processes worldwide. Through dedicated collaboration on new
scientific and engineering insights, Merck Millipore serves as a
strategic partner to customers and helps advance the promise of life
science.
In 2014, Merck Millipore launched over 20 new products,
proving the innovative power of its Research & Development or-
ganization, and once again received R&D Magazine 100 Awards
for innovative products. The 52nd annual R&D Awards recognize
the 100 most technologically significant products introduced onto
the market over the past year. The Merck Millipore products that
were recognized are the SmartFlare™ detection reagent and
Clarisolve depth filters.
The SmartFlare™ detection reagent is a novel probe capable of
detecting specific mRNAs and miRNAs in live, intact cells. This
technology allows for carrier-free cellular endocytosis of the
reagent, followed by detection and relative quantitative analysis
of RNA levels. Because the reagent leaves the cell after the
detection event, the same sample can be used for any downstream
analysis, meaning it is possible to assess multiple biomarkers or
downstream functionalities in the same cells.
ClarisolveⓇ depth filters are specifically tuned to the particle
size distribution of various pretreatment methodologies, enabling
the fastest and most efficient way to clarify high-density streams
and easily transfer processes from upstream to downstream
without the use of centrifugation. Clarisolve® depth filters were
designed for high cell density/titer mammalian cell culture feed
streams for mAb production. Early success has also been achieved
in microbial and vaccine applications.
In March 2014, Merck Millipore announced a clinical research,
licensing and joint development agreement with Sysmex Corpora-
tion of Japan. This collaboration will use Merck Millipore's flow
cytometry technology as a platform to accelerate the creation of
new, more powerful diagnostic tools for research in blood dis-
orders. If successful, Sysmex and Merck Millipore will collaborate
on developing the imaging flow technology platform for future
commercialization in hematology.
76
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In the second quarter of 2014, Merck Millipore launched a € 12
million investment in its Molsheim, France facility. This investment
will expand Merck Millipore's ready-to-use (RTU) media manu-
facturing capabilities, better provide security of supplies for cus-
tomers in the region, and sustain the heipha Hycon product lines.
The increased manufacturing capacity will serve global market
demand, and will ensure sufficient capacity to support the market
growth.
AZ Electronic Materials
The Bioscience business area launched Simplicon™ RNA
Reprogramming Technology, which uses synthetic self-replicating
RNA to create large numbers of human induced pluripotent stem
cells (iPSCs) using a single transfection step. This efficient repro-
gramming of somatic cells offers a more defined and safer system
for iPSC generation.
2014 also marked the 40th anniversary of the Steritest™ system, the
first closed filtration device for sterility testing. Since introducing
the Steritest™ system in 1974, Merck Millipore has improved stan-
dards in sterility testing, reducing the risk of false positive and
false negative results, increasing reliability and streamlining
workflows for microbiologists around the world. As part of the
celebration of 40 years of sterility testing, Merck Millipore will be
launching three new pumps in 2014.
In August 2014, Merck Millipore and Samsung BioLogics
signed a Memorandum of Understanding for a strategic alliance in
the biopharmaceutical business. The proposed alliance is intended
to encompass a long-term supply agreement in which Merck
Millipore will provide raw materials for biopharmaceutical manu-
facturing.
In the third quarter of 2014, Merck Millipore also announced
the opening of a new Biomanufacturing Sciences Training Center
(BSTC) facility in Tokyo, Japan. The state-of-the-art facility is
designed to help biopharmaceutical companies develop manu-
facturing processes and find solutions to processing challenges in
collaboration with engineers from Merck Millipore. The goal for
this facility, now the ninth of its kind for Merck Millipore, is to
enhance the customer experience by delivering innovation, quality
products, and comprehensive technological support all major
components of our product and service portfolio offering.
-
In December, Merck Millipore launched its first round of new
large lab water purification systems (AFS) expanding the ability to
feed high-throughput analyzers.
Phase I
There were several important changes in the oncology pipeline
during 2014. Evofosfamide (also known as TH-302), an investiga-
tional hypoxia-activated prodrug which is being developed in
collaboration with Threshold Pharmaceuticals, is currently being
evaluated in two Phase III trials, respectively in locally advanced,
unresectable or metastatic soft tissue sarcoma (STS) and in
advanced pancreatic cancer. A pre-planned interim efficacy and
safety analysis of the STS study was performed in the third quarter
of 2014. The Independent Data Monitoring Committee (IDMC),
which conducted the analysis, recommended that the study should
continue as planned to its natural conclusion. The analysis of the
primary endpoint, overall survival (OS), is expected to be conduc-
ted in 2016. This date is only an approximation since the final
analyses will be triggered only when a certain number of events
have occurred. The second Phase III study (known as MAESTRO),
which is being performed in advanced pancreatic cancer, reached
planned enrollment of 660 patients in October. It is estimated that
the final analysis of the primary endpoint of this trial, which is OS,
will be performed in 2016. A Phase II trial of evofosfamide in
combination with pemetrexed as a potential second-line treatment
for patients with advanced non-squamous non-small cell lung
cancer (NSCLC) was initiated in the second quarter of 2014. The
primary endpoint in this 440-patient trial is OS.
Oncology
In addition, the company announced the launch of Merck
Global Grants with a total annual investment of over € 20 million,
thereby underscoring Merck's commitment to funding scientific
innovation and independent medical education around the world.
The Grants for Innovation in Research identify and fund what are
considered to be the most promising research projects in specific
fields worldwide, originating from across the biopharma spectrum,
including: academia, research centers, and smaller biotech
companies. During the third quarter, Grants for Innovation were
awarded in the areas of Multiple Sclerosis, Oncology, Growth
Disorders and Fertility.
Merck Serono's core R&D fields include oncology, immuno-
oncology, immunology and neurology. The development pipeline
continues to be weighted towards oncology; however, 2014 saw
important scientific and business development advances in several
disease areas. In line with its open collaborative model in R&D,
Merck Serono entered into a number of collaborations during
2014, some of which are highlighted below.
The Process Solutions business area expanded Provantage®
upstream bioproduction services to the North American market.
The expansion provides North American customers with media
and feed screening, small-scale material production, and optimi-
zation of conditions for scale-up and technology transfer. Process
Solutions also announced a new Formulation Lab in India, its first
outside of Europe. The Lab is strategically located at Nerul, Navi
Mumbai, with easy accessibility from the major pharmaceutical
manufacturing centers at Ahmedabad, Goa and Hyderabad. The
facilities at the lab are built to provide services and application
assistance to the pharmaceutical industry for classical pharma-
ceutical clients working on solid-dose formulations.
Psoriasis
Systemic lupus erythematosus
Osteoarthritis
Concerning tecemotide, an investigational cancer immunotherapy
(also known as L-BLP25), a Phase III study called START2 was
initiated in April 2014, following the results of the START study
of tecemotide in stage III NSCLC. Although START did not meet
its primary endpoint of demonstrating an improved OS with
tecemotide compared with placebo in the overall patient popula-
tion, data from an exploratory analysis of a pre-defined subgroup
of patients who received tecemotide after concurrent chemo-
radiotherapy (CRT), showed that these patients survived longer.
However in September, the results of study EMR 63325-009, a
Phase I/II trial in Japanese patients with stage III, unresectable,
locally advanced NSCLC, the majority of whom had received
concurrent CRT, indicated that no effect had been observed for
either the primary endpoint, OS, or for any of the secondary
efficacy endpoints. Based on these results, Merck Serono decided
to discontinue the clinical development program for tecemotide.
After a careful analysis of its pipeline assets Merck Serono
decided to discontinue development of NHS-IL2 (MSB0010445),
also known as Selectikine, which was in Phase II testing in
advanced melanoma. This decision was not related to any new
safety or efficacy findings. It will allow the company to refocus its
efforts on other pipeline candidates.
Merck and MorphoSys entered into a strategic immuno-
oncology collaboration to discover and develop therapeutic anti-
bodies against immune checkpoints. Under the terms of the agree-
ment, the two companies will join forces to develop therapies that
modulate the immune system's natural ability to fight tumors.
MorphoSys will apply its proprietary Ylanthia®Ⓡ antibody phage
library and technology platform to identify antibodies against
targets of interest. With its strong portfolio and capabilities in
the field of immuno-oncology and clinical development, Merck
Serono will be fully responsible for execution of development
from Phase I onwards.
Immunology
In the field of Immunology, a Phase IIb study of atacicept, an anti-
Blys and anti-APRIL fusion protein, in patients with systemic
lupus erythematosus (SLE) was initiated. This study is known as
ADDRESS II and follows the promising results of the completed
APRIL SLE study which were presented at the Annual Meeting
of the European League against Rheumatism (EULAR) in 2013.
ADDRESS II is a double-blind, placebo-controlled study of atacicept
given at two doses in 279 patients with active SLE to assess its
efficacy and safety in reducing SLE-disease activity in patients
receiving standard-of-care therapy. The outcome of this study
is expected in 2016. A two-year long-term extension study
(ADDRESS II LTE) has also been initiated in order to develop
atacicept's safety database.
Phase II
The FORWARD study, a Phase II trial of sprifermin, an inves-
tigational fibroblast growth factor given at four doses vs placebo
in patients with primary osteoarthritis of the knee, is being con-
ducted in collaboration with Merck's strategic alliance partner,
Nordic Bioscience Clinical Development. The study completed
enrollment in mid-2014, following the inclusion of 549 patients,
and the outcome of the study is expected to become available in
2016. Following the completion of a Phase I study in healthy
volunteers of the anti-IL-17-A/F nanobody, MSB 0010841 (also
known as ALX-0761), a Phase Ib study in patients with psoriasis
has been initiated.
A small-molecule BTK inhibitor (MSC 2364447) entered Phase I
clinical testing in healthy volunteers in the third quarter of
2014. This investigational agent is a highly selective inhibitor of
the Bruton's tyrosine kinase (BTK), which is important in the
development and functioning of various immune cells including
B-lymphocytes and macrophages. Preclinical research suggests it
may be therapeutically useful in certain autoimmune diseases.
72
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Neurology
Merck Serono and the Institute of Experimental Neurology at San
Raffaele University and Research Hospital in Milan announced
the continuation of a strategic alliance to develop pre-clinical and
clinical research projects in the field of neurodegenerative diseases.
The translational research will focus on developing innovative
therapies against serious and disabling neurological diseases
affecting young adults in particular, such as multiple sclerosis (MS).
Established in 2004, the renewal of this partnership extends the
agreement between the parties for two additional years.
Following completion of a Phase I clinical study that demon-
strated encouraging MRI results following intradermal treatment
of patients with relapsing multiple sclerosis (RMS) with ATX-
MS-1467, an investigational immune-tolerizing agent, a Phase II
study has been initiated in RMS.
Following a thorough portfolio review, Merck Serono decided
not to pursue further development of plovamer acetate, an inves-
tigational second-generation copolymer for relapsing-remitting
MS. As a consequence, the Phase II study was terminated early.
Merck and Ono Pharmaceutical reached a mutual agreement
to terminate the license agreement on ceralifimod (ONO-4641)
since the project did not meet Merck's threshold for continued
investment.
Merck Serono remains committed to driving innovation in the
field of MS and improving the lives of people living with the
disease. In refocusing the pipeline, additional resources will be
available to strengthen our pipeline in this area and bring
additional, meaningful products and devices to people with MS.
Fertility
In the field of Fertility, a Phase III trial of Pergoveris® was initiated
in the first quarter of 2014 and enrollment was already completed,
following the inclusion of 946 patients, in the third quarter. The
trial, which is known as ESPART® (Evaluating the Efficacy and
Safety of Pergoveris® in ART), is a multicenter, randomized,
controlled, single-blind trial with the primary endpoint being the
total number of retrieved oocytes. The study is designed to assess
the efficacy and safety of Pergoveris® (follitropin alfa and lutropin
alfa) versus Gonal-f® (follitropin alfa) for multifollicular develop-
ment as part of an Assisted Reproductive Technology (ART) treat-
ment cycle in women who are classified as poor ovarian responders
(POR) to previous ART. Data are expected in 2015.
Endocrinology
In the field of Endocrinology, Merck Serono announced in April
that the Phase IIIb study of Kuvan® (sapropterin dihydrochloride)
had met its primary endpoint. At the Society for the Study of
Inborn Errors of Metabolism (SSIEM) Annual Symposium in
Innsbruck in early September, detailed 26-week data from the
study known as SPARK (Safety Pediatric Efficacy Pharmacokinetic
with Kuvan®) were presented. Results from the study showed that
the addition of KuvanⓇ at a dose of 10 or 20 mg/kg/day to a
phenylalanine-restricted diet significantly increased phenylalanine
tolerance in children with phenylketonuria (PKU) who are below
four years of age and responsive to Kuvan®, compared with pa-
tients on diet alone. The SPARK study was requested by the EMA
as a post-authorization measure. Given the positive outcome of
the study, Merck Serono has submitted an application to the EMA
for a label extension.
GROUP MANAGEMENT REPORT FUNDAMENTAL INFORMATION ABOUT THE GROUP Research and development at Merck
71
MERCK SERONO PIPELINE,
GROUP MANAGEMENT REPORT FUNDAMENTAL INFORMATION ABOUT THE GROUP Research and development at Merck
For avelumab (also known as MSB0010718C), an investigational
anti-PD-L1 antibody currently in development, initial data from
the Phase I dose escalation study in solid tumors were presented
at ASCO 2014. The study is advancing rapidly and anti-tumor
activity of avelumab has already been observed in a number of pa-
tients, notably in NSCLC and in ovarian cancer. Avelumab is also
being tested in a Phase II study initiated in July 2014 in patients
with metastatic Merkel cell carcinoma. This is an aggressive form of
skin cancer, which is rare and currently has limited treatment op-
tions. The study is a multicenter, single-arm, open trial in patients
who have previously been treated with one line of chemotherapy.
69
69
As regards Erbitux® (cetuximab), new biomarker findings from a
retrospective analysis of the completed Phase III CRYSTAL study
were presented at the American Society of Clinical Oncology
(ASCO) 50th Annual Meeting in Chicago. This study compared
Erbitux® plus FOLFIRI with FOLFIRI alone in the first-line treat-
ment of metastatic colorectal cancer (mCRC). A significant clinical
improvement in terms of response rate, progression-free survival
and overall survival was observed in patients with RAS wild-type
tumors when Erbitux® was added to FOLFIRI compared with
patients receiving FOLFIRI alone. Additionally, the results of the
FIRE-3 study, a randomized, controlled, open-label, Phase III trial
to compare the efficacy of Erbitux® plus FOLFIRI with bevacizumab
plus FOLFIRI in first-line KRAS wild-type mCRC (mCRC), were
published in Lancet Oncology in August 2014. Updated results in
the RAS wild-type population were presented at the 2014 ESMO
Congress in Madrid in September. While the primary endpoint of
increased overall response rate with Erbitux® plus FOLFIRI com-
pared with bevacizumab plus FOLFIRI was not met, a pre-planned
exploratory analysis in the patient sub-group selected based on
RAS status showed a statistically significant difference in overall
survival in favor of Erbitux®. Given this clinically meaningful
difference in overall survival, the authors state that "the data
suggest that FOLFIRI plus cetuximab should be chosen as the
first-line treatment regimen for patients with RAS wild-type mCRC."
(Lancet Oncology 2014; 15: 1,065 -1,075).
These results are in line with the Erbitux® label as updated by
the European Medicines Agency (EMA) in December 2013, and
were included in an update of the Summary of Product Charac-
teristics in June 2014. They confirm that RAS biomarker testing is
essential for patient-centric care and is thus a truly personalized
approach to the treatment of mCRC. Results of a second random-
ized, controlled, open-label, Phase III trial (CALGB / SWOG 80405),
comparing Erbitux® plus chemotherapy (either FOLFOX or FOLFIRI
based on each investigator's choice) as compared to bevacizumab
plus chemotherapy, were presented at the ASCO 2014 Congress
and the ESMO 2014 Congress. Although showing a slight but not
significant trend towards improved overall survival for patients in
the RAS wild-type population treated with ErbituxⓇ plus chemo-
therapy, the results seemed to differ from those of the aforemen-
tioned study. However it should be noted that the data so far are
immature and the final results have not yet been published in a
peer-reviewed journal.
The Chinese Food and Drug Administration (SFDA) issued a
negative opinion concerning the application of Erbitux® in squa-
mous cell carcinoma of the head and neck (SCCHN) because it
considered the bridging study in Chinese patients inadequate
to justify approval in China. Merck Serono decided to perform a
randomized, controlled study in China in SCCHN with a view to
obtaining approval for this indication. Erbitux® is currently
registered in over 90 countries in this indication.
In June, Merck announced it had signed an agreement to
collaborate with Sysmex Inostics GmbH, Hamburg, Germany, for
the development and commercialization of a blood-based RAS
biomarker test for patients with mCRC. Blood-based biomarker
testing is a faster and easier approach for determining the muta-
tion status of tumors as it requires only a small blood sample
rather than a tissue biopsy procedure. The test has the potential to
provide mutation status results within days, which in turn can
help guide treatment decisions. In addition, it may become the
method of choice in situations where a tissue biopsy is difficult to
obtain, for example in patients whose physical condition does not
allow for a surgical procedure.
After a careful analysis, Merck Serono decided not to pursue
its development program for Sym004, and to return the rights to
the compound to Symphogen for further development. This
decision was not related to any new safety or efficacy findings.
It will allow the company to refocus its efforts on other pipeline
candidates.
Subsequent to the promising results of pre-clinical work
and the ongoing Phase I trial of its c-Met kinase inhibitor
tepotinib (MSC 2156119J), Merck Serono decided to embark on
Phase I/II studies in solid tumors, especially focusing on the indi-
cations of NSCLC and hepatocellular carcinoma. Studies in both
indications were initiated in the first quarter of 2014.
For abituzumab, an investigational anti-integrin monoclonal
antibody designed to target certain integrins expressed on tumor
and endothelial cells, two Phase II trials were completed this year.
The results of the POSEIDON study, a combination of abituzumab
with Erbitux® and irinotecan in KRAS wild-type mCRC, were pre-
sented at the ESMO World Congress on Gastrointestinal Cancer.
Although the primary endpoint of increased progression-free
survival was not met, the addition of abituzumab to ErbituxⓇ and
irinotecan resulted in a trend toward improved overall survival;
high avẞ6 integrin expression was identified as a potential pre-
dictive marker of increased response rate, as was prolonged over-
all survival in the abituzumab treatment arms. Further biomarker
analyses are warranted to confirm and further validate the current
findings. The results of the PERSEUS study in patients with meta-
static castration-resistant prostate cancer were presented at the
2014 ASCO Meeting. No significant improvement in progression-
70
70
GROUP MANAGEMENT REPORT FUNDAMENTAL INFORMATION ABOUT THE GROUP Research and development at Merck
free survival was observed and development therefore will not
continue in this indication.
BGB-290 (an inhibitor of poly [ADP-ribose] polymerase, or
PARP), currently being developed in collaboration with BeiGene,
entered Phase I clinical testing in patients with solid tumors.
Enrollment was discontinued in a combination Phase II study
of the MEK inhibitor pimasertib (a small-molecule inhibitor of
MEK, an enzyme that is a part of a pathway that is frequently
activated in many types of solid tumors) and the PI3K/mTOR in-
hibitor from Sanofi U.S. (SAR245409) in low-grade serous ovarian
cancer. This decision was based on the results of a futility analysis,
conducted by the IDMC, which indicated that the trial was no
longer expected to achieve its objective of showing a meaningful
difference between the efficacy of the combination compared with
pimasertib alone. However, the safety profile was in line with pre-
vious clinical data for this combination, and no unusual toxicities
outside of those associated with this class were observed. The fur-
ther development of pimasertib in pancreatic cancer was also dis-
continued as a Phase II study in this indication did not reach its
primary endpoint of prolongation of progression-free survival.
Pimasertib will continue to be investigated in patients with NRAS
mutant malignant melanoma in a Phase II trial which is fully
recruited, and expected to report results on progression-free survi-
val (primary endpoint) during 2015. Additionally, a Phase Ib trial
in solid tumors, in collaboration with Sanofi U.S., investigating
pimasertib in combination with Sanofi U.S.'s hDM2 antagonist
(SAR405838) will also continue.
MSC 2490484A (DNA-PK inhibitor), a small-molecule inhibi-
tor of the repair mechanisms of DNA damage in cancer cells, en-
tered Phase I clinical testing in patients with solid tumors.
Merck Serono and Sutro Biopharma, a privately held biotech-
nology company, entered into a collaboration and license agree-
ment to develop next-generation antibody drug conjugates (ADCs)
for multiple targets in oncology. Merck Serono and Mersana Thera-
peutics, Inc. also announced a cooperation agreement to develop
next-generation ADCs. ADCs are composed of an antibody linked
to a cytotoxic drug, whereby the antibody part specifically targets
and delivers the cytotoxic drug to cancer cells, which could lead
to higher drug levels at the tumor site.
In October 2014, Merck Serono, the Institute of Cancer
Research (ICR), London, and the Wellcome Trust, London, entered
into a co-development and license agreement building on two
independent research programs at both the ICR and Merck Serono
to identify inhibitors of tankyrase, an enzyme of the poly (ADP-
ribose) polymerase (PARP) family. In a joint effort, this collabora-
tion will aim to progress chemical compounds that have emerged
from both organizations' tankyrase inhibitor programs towards
clinical development. At the end of the collaboration period,
Merck Serono will take over full responsibility for the selected
clinical development candidate. The agreements mentioned above
underline Merck Serono's approach to employing a collaborative
research and development model, creating strategic partnerships
in order to drive innovation.
Immuno-Oncology
In November 2014, Merck announced that it had entered into
a global strategic alliance with Pfizer Inc. to develop and commer-
cialize avelumab in order to accelerate both companies' presence
in immuno-oncology. The antibody will be developed as a single
agent as well as in various combinations with Pfizer's and Merck
Serono's broad portfolio of approved and investigational pipeline
candidates. The two companies will also combine resources and
expertise to advance Pfizer's anti-PD-1 antibody into Phase I
trials. As part of the strategic alliance, Merck will co-promote
Pfizer's Xalkori®, a medicine to treat NSCLC, in the United States
and several other key markets. Global collaboration with Pfizer is
expected to accelerate the development of avelumab in multiple
tumor types. Up to 20 high priority immuno-oncology clinical
development programs are expected to commence in 2015, in-
cluding up to six pivotal registration studies. The global alliance is
expected to enable Merck's entry into the U.S. oncology market and
to strengthen its Oncology franchise in several other important
global markets.
AS OF DECEMBER 31, 2014
Also aiming at the treatment of SLE, an agreement was entered
into by Merck KGaA, Pfizer Inc. and the Broad Institute in
Cambridge, Massachusetts, in April. The collaboration is focused
on the genomic profiling of patients with SLE and lupus nephritis.
The goal of this research project, which will be jointly funded
by Merck Serono and Pfizer, is to identify biomarkers to better
define target patient populations for future therapies as well as to
discover potential novel drug targets for innovative therapies.
Compound
Phase I
MSC 2363318A (P70S6K and Akt inhibitor)
BGB-283 (BRAF inhibitor)
BGB-290 (PARP inhibitor)
MSC 2490484A (DNA-PK inhibitor)
MSB 0010360N (NHS-IL12; cancer immunotherapy)
Avelumab (MSB 0010718C; anti-PD-L1 mAb)
Avelumab (MSB 0010718C; anti-PD-L1 mAb)
Atacicept (anti-Blys/anti-APRIL fusion protein)
Sprifermin (fibroblast growth factor 18)
MSB 0010841 (ALX-0761; anti-IL-17 A/F nanobody)
MSC 2364447 (BTK inhibitor)
Solid tumors
Phase I
Solid tumors
Solid tumors
Phase I
Phase I
Solid tumors
Therapeutic area
Solid tumors
Phase 12
Merkel cell skin carcinoma
Phase II
Solid tumors
Phase I
Phase II
Solid tumors
Tepotinib (MSC 2156119J; c-Met kinase inhibitor)
Phase I
Solid tumors
Phase I¹
Oncology
Immuno-Oncology
Immunology
Status
Evofosfamide (TH-302; hypoxia-activated prodrug)
Evofosfamide (TH-302; hypoxia-activated prodrug)
Evofosfamide (TH-302; hypoxia-activated prodrug)
Evofosfamide (TH-302; hypoxia-activated prodrug)
Evofosfamide (TH-302; hypoxia-activated prodrug)
Abituzumab (DI17E6; anti-integrin mAb)
Soft tissue sarcoma
Phase III
Pancreatic cancer
Phase III
Non-small cell lung cancer
Melanoma
Indication
Phase II
Phase II
Phase II
Pimasertib/hDM2 inhibitor combination
Pimasertib (MEK inhibitor)
Melanoma
Phase II
Colorectal cancer
Phase I
Hematological malignancies & solid tumors
-1.7
4.5
2,682.5
25.4
22.8
-0.7
-1.5
-2.2
2,059.6
3.2
5.4
766.1
2.1
1.7
4.1
11,291.5
Rest of World → 874.5
-1.8
-1.9
North America → 2,152.2
35 Europe 4,014.6
19
Emerging Markets → 4,250.2 38
%
4.0
8
SALES BY REGION - 2014
MERCK GROUP
lion equivalent to a growth rate of 4.5% and Performance Materials
with € 67 million, or 4.1%. At 5.4%, Consumer Health generated
the highest organic growth rate of all the operating divisions,
equivalent to an absolute sales increase of € 40 million. Owing
to the first-time consolidation of AZ, the Performance Materials
division posted the highest overall sales increase of 25.4%, repre-
senting an absolute increase of € 418 million.
In 2014, all four divisions of the Merck Group posted organic sales
increases with growth rates of between 3.6% and 5.4% as well as
negative foreign exchange effects of around 2% in each division.
Achieving an organic sales growth rate of 3.6%, which corre-
sponded to an absolute increase of € 207 million, Merck Serono
made the strongest absolute contribution to organic sales growth,
followed by Merck Millipore with organic sales growth of € 119 mil-
5.5
3.3
€ million/% of sales
3.6
SALES COMPONENTS BY DIVISION - 2014
Total change
€ 3.3-3.4 billion
Business
free cash flow
2,960
slight increase
€ 2.7 2.8 billion
€ 2.7-2.8 billion
Earnings per share pre
€ 3.3 3.4 billion
one-time items¹
€ 4.50 -4.75
€ 4.50 -4.75
€ 4.50 -4.75
€ 11.0-11.2 billion +3.3% acquisition)
3,388
(+4.1%)
2,605
(-12.0%)
€ 4.60
(+4.8%)
Merck Serono
€ 4.39
€ 3.3 3.4 billion
moderate increase
3,253
Merck Group
83
Guidance for 2014 provided in
Actual results
2013
€ million
Forecast 2014 in
Annual Report 2013
Q1/2014 Interim Report
Q2/2014 Interim Report
Q3/2014 Interim Report
Actual results 2014
€ million
moderate increase,
11,291 (+5.5/
+4.0% org./
Sales
10,700 slight organic growth
€ 10.9-11.1 billion
€ 10.9-11.1 billion
EBITDA pre
one-time items
Sales²
Review of forecast against actual business developments in 2014
5,688
one-time items²
growth
moderate organic
growth
moderate organic
growth
€ 170-180 million
€ 170-180 million
€ 170-180 million
Business
free cash flow²
moderate organic
172
€ 150-170 million
€ 150-170 million
€ 150-160 million
Performance Materials
766 (+3.2%/
+5.4% org.)
169
(-1.7%)
124
(-28.1%)
2,060 (+25.4 %/
+4.1% org./
slight increase on a
comparable basis
moderate increase on
a comparable basis
moderate increase on
a comparable basis
172
one-time items²
1,855
Business
free cash flow²
1,787
organic stable on a
comparable basis
slight decline on a
comparable basis
moderate decline on a
comparable basis
€ 1.75-1.85 billion
€ 1.75-1.83 billion
€ 1.5-1.6 billion
€ 1.5-1.6 billion
organic stable slight organic growth slight organic growth
5,783 (+1.7%/
+3.6% org.)
1,831
(-1.3%)
1,577
(-11.7%)
€ 1.77-1.83 billion
€ 1.5-1.6 billion
Consumer Health
Sales²
742
EBITDA pre
EBITDA pre
Sales
GROUP MANAGEMENT REPORT → REPORT ON ECONOMIC POSITION → Review of forecast against actual business developments
As forecast, EBITDA pre one-time items of the Merck Group,
which amounted to € 3,388 million in 2014, increased moderately
in comparison with 2013, particularly as a result of the acquisition
of AZ Electronic Materials. EBITDA pre one-time items of the
Merck Serono division declined slightly by -1.3% as expected.
This was mainly attributable to lower royalty and license income
from HumiraⓇ, as well as the loss of royalty and license income
from Avonex® and Enbrel®. The Consumer Health division did not
achieve the forecast of a moderate increase in EBITDA pre one-
time items due to higher marketing and selling expenses, showing
a slight decline of 1.7% to € 169 million. In line with the forecast,
the Performance Materials division posted a significant increase in
EBITDA pre one-time items to € 895 million, due to the integra-
tion of the AZ Electronic Materials business. Likewise as forecast,
the Merck Millipore division posted a slight increase in EBITDA
pre one-time items to € 659 million thanks to moderate organic
sales growth. EBITDA pre one-time items of Corporate and Other
showed an improvement of 15.5% to € -166 million particularly
as a consequence of slightly higher gains from currency hedging,
thereby achieving a more positive result than expected.
Internal talent development and external recruiting
Through the aforementioned approach, Merck aims to bolster its
performance culture and develop talent in a more targeted manner.
We succeeded with this again in 2014, expanding our workforce
pool to internally fill management positions when they become
vacant. In 2014, the vast majority of management position vacan-
cies were also filled by internal candidates. In addition, Merck
recruited external executives in order to add new outside perspec-
tives to our long-standing in-house expertise.
Merck is using the motto "Make great things happen" to posi-
tion itself in the global job market, which conveys to potential
applicants a sense of what makes Merck unique: an inspiring,
motivating work environment in which innovations thrive; an
environment in which everyone has the opportunity to apply their
ideas and engagement to benefit customers and the company,
while at the same time growing as employees.
Focus areas: Internationality, demographics, gender ratio
In our global markets, we want to hire the right people and retain
them. It is also our goal to anchor knowledge about our growth
markets within the company. Therefore, as part of our diversity
and inclusion strategy, we are focusing on topics such as interna-
tionality, demographics and gender balance.
People from a total of 122 different nations work at Merck.
Only 27% of Merck employees are German citizens and 72% work
outside Germany.
In Germany, several other EU countries, the United States, and
Japan we must prepare ourselves for demographic change. In
these countries, the average age of our employees exceeds 40 -
and we assume that this figure will continue to rise in the coming
years. In Europe, we are addressing these demographic challenges
through various programs. These include adapting workplaces to
the needs of older employees and establishing a health manage-
ment program to maintain their ability to do their jobs. In addi-
tion, Merck created the preconditions in 2014 in order to attract
the interest of even more young specialists to Merck and to retain
them.
Women currently make up 41% of the workforce. Since the
ratio of women to men varies widely across the different regions,
divisions and functions, Merck has set itself the goal of increasing
the percentage of female employees wherever they are under-
represented. Here we take into account the situation that is typical
for the industry as well as regional differences.
A diverse management team
We believe that balanced diversity among management enhances
career advancement opportunities for talented employees while also
helping to provide a broad experience base within the company.
In addition, it allows for differentiated decision-making, thereby
making a significant contribution to the success of the
company.
GROUP MANAGEMENT REPORT FUNDAMENTAL INFORMATION ABOUT THE GROUP → Employees
-
The percentage of management positions held by women
(Global Grade 14 and above) is currently 26% Group-wide. In the
subsidiaries outside Germany, this percentage is higher than at
global headquarters in Darmstadt. Likewise, more women work in
managerial positions in our Pharmaceuticals business than in our
Chemicals business. Certain Group functions such as IT have a
lower percentage of women in management positions. However,
the figures are clearly increasing across Merck as a whole. Merck
has reached its strategic goal of raising the percentage of manage-
ment positions held by women from 25% to 30% and intends to
further increase this percentage by 2016. In order to achieve this
ambition, Merck is implementing numerous measures at local
level. In 2014, we filled two of four divisional leadership positions
with employees who are not from Germany. In addition, Belén
Garijo, a native of Spain, joined the Executive Board and took
over leadership of the Healthcare business sector at the beginning
of 2015.
Workforce diversity
To us, diversity means much more than having a certain gender
ratio and is not only important to us on a managerial level, but
also throughout the entire workforce. Together with a culture
of inclusion, diversity promotes innovation and improves team
performance. In addition to the Chief Diversity Officer, who is
responsible for strategically managing diversity within the com-
pany, Merck also established the Diversity Council in 2013. This
aims to build further buy-in for diversity and inclusion within the
company. The council consists of high-ranking managers from all
parts of the company. In 2014, the Diversity Council developed the
Diversity Framework, which bundles the diversity and inclusion
strategies. It focuses on the following topics: recruiting the right
people to work for the company, developing and retaining them,
promoting efficient collaboration, driving innovations and im-
provements, and serving customers with diverse needs.
GROUP MANAGEMENT REPORT FUNDAMENTAL INFORMATION ABOUT THE GROUP → Employees
79
In addition, Merck supports specific employee networks in order
to foster exchange among like-minded individuals. In 2014, we
launched a project to develop the individual members of the
networks in a targeted manner and to utilize the potential of the
networks to an even greater extent for Merck's business activities.
The results were presented to the Diversity Council and will be
implemented in 2015.
Industrial safety
As a responsible employer, it is especially important to us to do
everything in our power to prevent workplace-related illnesses and
accidents. We apply the lost time injury rate (LTIR) as an indicator
to determine the success of measures aimed at accident prevention
as well as occupational health and safety. This internationally
recognized key performance indicator describes the number of
workplace accidents resulting in lost time of more than one day per
one million working hours. Merck set itself the goal of reducing
the LTIR to 2.5 by 2015. In 2014, we again outperformed this goal,
achieving an LTIR of 1.8. This continuous rate of improvement
can be particularly attributed to the “BeSafe!” program, which was
launched in 2010. “BeSafe!” is a global initiative with harmonized
standards and local modules for the specific requirements at
individual sites. This program focuses on engaging managers in
the safety culture and empowering our employees to take respon-
sibility for their own safety. In 2014, we continued to sensitize our
employees to workplace hazards through numerous activities and
awareness campaigns.
As a global company, Merck considers it highly important to
have an international management team. Currently, 60% of our
managers meaning positions rated Global Grade 14 and above
in our Global Grading System - have a nationality other than
German. Altogether, 67 different nationalities are represented in
such positions.
78
In this context we systematically combine talent recognition
with the Performance Management Process, which allows us to
objectively assess the performance of each individual employee.
Clear objectives, differentiated and open feedback, and individual
development plans are important prerequisites for personal develop-
ment, as well as for the success of the company. As of 2015, Merck
will be linking the variable bonus more closely with performance.
In this way we will create greater incentives for employees to
achieve top performance, while at the same time allowing them to
participate to a greater extent in the success of the company.
more efficient manner. In 2014, we rolled out the talent and per-
formance management process at Merck globally. The evaluations
of all participating employees are now carried out on the same
basis and are recorded in a uniform IT system.
5,783.3
EMPLOYEES
77
Employees are crucial to the success of Merck. We are therefore
focusing on recruiting the right employees with the right capa-
bilities at the right time and retaining this talent. Within the
context of our Group strategy we also place particular emphasis
on talent development, compensation and performance manage-
ment. In addition, we want to foster employee diversity in order
to be optimally positioned to meet future challenges together
with our workforce.
As of December 31, 2014, Merck had 39,639 employees world-
wide (2013: 38,154.) The slight increase in the number of
employees is largely attributable to the integration of AZ
Electronic Materials. In 2014, Merck was represented by a total
of 146 companies in 65 countries.
DISTRIBUTION OF EMPLOYEES →
BY REGION
in %
Emerging Markets
31
North America
13
Rest of World
%
52
Europe
Strategic initiative: “ONE Talent Development, Rewards
and Performance Management"
Within the framework of the "Fit for 2018" program, Merck
launched the capability initiative “ONE Talent Development,
Rewards and Performance Management" as part of its Group
strategy. The aim is to attract highly qualified graduates from
around the world to Merck and to retain them.
Performance management
Merck considers it important to identify employee potential early
on and foster it on an individual basis. We want to offer our talent
attractive career opportunities, continual personal and professional
development as well as prospects within the company. Our pro-
cesses are also meant to help strengthen the performance culture
at Merck and to ensure that internal positions are filled in an even
Since 2010, Merck has been presenting the Safety Excellence
Award annually in order to underscore the importance of safety.
It is granted to all production sites with no workplace accidents
on record for the year. In 2014, 42 out of production 69 sites were
recognized. Merck also issued a Group Health Policy in 2014. The
aim is to maintain and systematically strengthen the health and
performance capability of employees.
Declining by -12.0% compared with 2013, the development of
the Merck Group's business free cash flow to € 2,605 million fell
short of forecasts. As expected, the decrease at Merck Serono was
caused by the initiation of further investments in growth projects,
as well as lower EBITDA pre one-time items. In the other divi-
sions, the increase in inventories and trade accounts receivable
was primarily responsible for the deviation.
Despite our efforts to prevent accidents, there were two work-
place accidents resulting in fatalities in 2014. In Venezuela, an
employee died in a car accident. In Pakistan, an employee was
killed while performing maintenance work on a scissor lift.
Merck continues to place a great deal of importance on the
vocational and advanced training of its employees. In 2014, we
therefore also maintained a constant vocational training rate at
Darmstadt, Merck's largest site. In 2014, 498 young people were
enrolled in vocational training programs at this site, in a total of
GROUP MANAGEMENT REPORT → REPORT ON ECONOMIC POSITION → Macroeconomic and sector-specific environment
81
Life science market
Merck Millipore is a leading supplier of products and services
for general laboratory applications, as well as for the research,
development and production of drug therapies of biological and
chemical origin.
For the global laboratory product market relevant to the Lab
Solutions business, the market research firm Frost & Sullivan cal-
culated slight growth of 2.6% for 2014. Growth was thus 0.8 per-
centage points higher than the original forecast for the year 2014
(+1.8%). In terms of growth, the individual regions varied consid-
erably. In comparison with 2013, the market situation in Europe
(+1.6%) and the United States (+2.5%) improved, especially due
to positive market developments in Germany, the United Kingdom
and Spain, as well as an initial slight improvement in the U.S.
academic and government sectors. Emerging economies grew
much more strongly than industrialized countries; however their
11.9% share of the global market volume remains relatively low.
The main drivers of growth in emerging economies were India
(+8.7%) and China (+8.5%).
The demand for Process Solutions products depends heavily
on the sales as well as research & development activities of pharma-
ceutical companies. Both primary influencing factors had a positive
impact on the Process Solutions market, leading to noticeable
growth. Global pharmaceutical sales increased by 8.1% according
to IMS Health. Moreover, research & development spending in-
creased by 3.2% compared with the previous year, according to
the market research firm Evaluate Pharma, and the number of
Phase I to III clinical trials continues to increase, leading to higher
demand for Process Solutions products. This is mostly being driven
by greater demand for monoclonal antibodies as well as increased
biosimilars development and biological manufacturing, particu-
larly in emerging markets.
62
The semiconductor industry is one of the main sales markets
for AZ Electronic Materials, another key business for the Perfor-
mance Materials division. According to Gartner, a market research
institute specializing in technology and electronics markets, the
semiconductor industry grew by 7.2% in 2014 compared with
5.0% in 2013.
82
Review of forecast against actual business developments
REVIEW OF FORECAST AGAINST ACTUAL BUSINESS
DEVELOPMENTS
In the Annual Report for 2013, Merck forecast slight organic sales
growth for the Merck Group in 2014, mainly driven by the Merck
Millipore and Consumer Health divisions. For EBITDA pre one-
time items in 2014, a value at the 2013 level was expected. This
assumed that significantly reduced royalty and license income,
higher investments in research and development activities in the
Biosimilars business unit and expected negative foreign exchange
effects could be compensated for by the positive effect resulting
from the implemented efficiency measures. Business free cash
flow was forecast to decrease slightly owing to further imminent
investments in strategic growth projects.
In the event of the successful acquisition and consolidation of
AZ Electronic Materials as of the second quarter of 2014, Merck
had forecast a moderate increase in Group sales and EBITDA pre
one-time items as well as a slight improvement in business free
cash flow for 2014, compared with 2013.
Since Merck was able to successfully complete the acquisition
of AZ Electronic Materials and the first-time consolidation of the
business as of May 2, 2014, the forecast assuming the acquisition
of AZ Electronic Materials is used for the following comparison.
Regarding the forecast of slight organic sales growth in the
Annual Report for 2013, Merck showed moderate organic sales
growth of 4.0% in 2014. This was mainly attributable to the
organic sales developments of Merck Serono and Performance
Materials, which exceeded expectations. The Merck Group's
organic sales growth was reduced by negative foreign exchange
effects amounting to -1.8%. However, owing to the appreciation
of the U.S. dollar and important Asian currencies in the fourth
quarter, negative foreign exchange effects were not as pronounced
as expected. Due to the acquisition of AZ Electronic Materials and
the associated positive acquisition effect of 3.3%, Merck achieved
overall sales growth of 5.5% in the actual course of business and
thereby fulfilled its forecast of a moderate increase in sales.
Thanks to stable sales of the drug Rebif® and organic growth
in all other key franchises, Merck Serono achieved organic growth
of 3.6%. Assuming that sales of Rebif® would decline, the division
still expected stable organic sales at the beginning of 2014. The
Performance Materials division achieved organic sales growth of
4.1% due to slightly higher sales than expected in the Liquid
Crystals business unit, as well as the good performance of the
Advanced Technologies business unit. Only slight organic growth
had been forecast. As a result of the positive acquisition effect
arising from the acquisition of AZ Electronic Materials, the Perfor-
mance Materials division was able to significantly increase sales
overall as forecast. The Consumer Health and Merck Millipore
divisions achieved organic sales growth of 5.4% and 4.5% respec-
tively in accordance with the corresponding forecasts.
GROUP MANAGEMENT REPORT → REPORT ON ECONOMIC POSITION →
The markets for automotive coatings and cosmetics are crucial
to Merck's Pigments business. As reported by the German Auto-
mobile Industry Association (VDA), global automobile sales in-
creased by 2% in 2014. Declines in other markets were offset by
growth in China (+10%), as well as the United States and western
Europe (+4% each). Nevertheless, global automobile sales growth
in 2014 fell by 3 percentage points compared with 2013 (+5%).
According to Euromonitor International, global consumption of
materials used to produce cosmetics grew by 1.9%, with Asia
reporting the highest growth rate of 4.9%.
With its liquid crystals business, Merck is the leading producer of
liquid crystal mixtures for the display industry. According to market
researchers from Display Search, the display industry registered a
sharper sales increase of 10% in 2014 following slightly lower
sales growth of 5% in 2013, based on the surface areas of liquid
crystal displays sold. Liquid crystals remain the leading display
technology, with growth primarily coming from the increasing
size of television screens.
Market for high-tech materials
24 different occupations. Since 2014, Merck has been giving
unlimited employment contracts to all apprentices working in
occupations for which Merck has sustainable demand. The hiring
rate - taking into account voluntary terminations has been
around 90% for several years now. We also continue to offer
vocational training to a large number of young people at other
sites.
-
As part of the "MobiPro-EU" program of the Federal German
Ministry of Labour and Social Affairs, for the first time five young
people from Spain started an apprenticeship at Merck in Darmstadt
in 2014. "Start in die Ausbildung", a German program to prepare
young people for an apprenticeship, was continued with 20 interns,
the same number as in 2013.
Our global advanced training program ensures that our em-
ployees and managers around the world develop the relevant skills
that we need in order to implement our company strategy and to
continue to succeed in the future. In 2014, we launched special
management programs in China and the Middle East, among
other things. So far, a total of 160 managers have participated.
An example is the “Emerging Markets Management" program for
young, local managers, which focuses on business management
topics, tailored to Merck.
Work-life balance
Merck wishes to help its employees achieve a good balance be-
tween their professional and personal objectives. This maintains
and strengthens their motivation and performance potential, en-
abling them to better schedule their lives to suit their own needs.
In Germany and the United States, Merck offers various flexible
working models. In 2013, Merck implemented mywork@Merck
at the Darmstadt, Gernsheim and Grafing sites for all exempt
employees. The flexible working model aims to strengthen a culture
of performance and trust within the company. Employees can choose
their working hours and work location freely. In October 2014, this
was also extended to non-exempt employees whose positions are
suitable for the working model. At the end of 2014, a total of around
3,500 employees benefited from mywork@Merck.
Globally, 5% of our employees worked part-time in 2014. 11%
of our part-time employees are men. In addition, Merck offers its
employees throughout Germany comprehensive advice and assis-
tance with regard to finding childcare and nursing care, as well as
home and garden services. At various sites, employees benefit from
childcare options that Merck subsidizes. A daycare center with
capacity for 150 children has been operating at the Darmstadt site
for more than 40 years, financially supported by the Merck family.
80
GROUP MANAGEMENT REPORT REPORT ON ECONOMIC POSITION Macroeconomic and sector-specific environment
REPORT ON ECONOMIC POSITION
MACROECONOMIC AND SECTOR-SPECIFIC ENVIRONMENT
The year 2014 was characterized by the repercussions of the finan-
cial crisis and uncertainties regarding future economic and political
developments. According to the most recent report published by the
International Monetary Fund (IMF), global gross domestic product
(GDP) grew by 3.3% in 2014, which was 0.4 percentage points
more than in 2013. While the industrialized countries generated an
increase of 1.8%, emerging markets continued to make the largest
contribution to global growth, with GDP in emerging economies
rising by 4.4%.
The GDP of the United States, the world's largest economy,
grew by 2.2% in 2014, which was 0.4 percentage points slower
than the 2013 forecast. Growth in the United States was stalled by
a decline in exports and a harsh winter. For the eurozone, the IMF
noted an increase of 0.8% in GDP. While particularly the countries
of southern Europe continued to struggle with the consequences
of the sovereign debt crisis, some nations, for example Germany,
showed signs of recovery.
Merck's performance was influenced by general global trends
as well as the continued growing importance of emerging markets.
In 2014, the Emerging Markets region accounted for around 80%
of Merck's organic sales growth. While Merck Millipore generated
around 50% of its sales growth in the Emerging Markets region,
the sales growth of both Performance Materials (approx. 80%) and
Consumer Health (approx. 70%) was particularly strong in this
region. Merck Serono generated its sales growth nearly entirely in
the Emerging Markets region, thus compensating for a slight sales
decline in Europe.
Healthcare market
IMS Health, a market research firm specialized in the health sector,
reported 8.1% sales growth for the pharmaceutical market in
2014. This sales increase approximately corresponded to the 2013
forecast. The increase was primarily attributable to emerging
markets. For instance, the pharmaceutical market of China posted
growth of 11.6% and in Latin America, the pharmaceutical market
grew by as much as 15.1%. However, after having seen slightly
declining growth rates in 2013, the United States and Europe also
reported growth of 11.7% and 2.5% respectively. According to the
market research institute Evaluate Pharma, particularly the markets
for multiple sclerosis therapies and type 2 diabetes treatments
delivered above-average growth rates of 13% and 14% respectively.
Whereas the market for oncology therapies to treat colorectal
cancer saw a 2% decline in sales, sales of Erbitux®, one of Merck
Serono's top-selling products, increased organically by around 6%
in this indication.
Nicholas Hall, a market research firm for the pharmaceutical
industry, reported a 4.0% increase for the global over-the-counter
drug market in 2014, which fell 1 percentage point short of the
forecast made in 2013. Latin America and Asia were growth drivers
here, while Europe posted growth of 2.4%.
Vocational and advanced training
1,642
€ 2.7-2.8 billion
EBITDA pre
one-time items
'Taking into account the share split; previous year's figures have been adjusted accordingly. See "Earnings per share" in the Notes to the Group accounts.
Development of sales and results of operations
In 2014, the Merck Group generated sales of € 11,291 million
(2013: € 10,700 million). This represented an increase in sales of
5.5% or € 591 million compared with 2013. Organic growth of
4.0% was responsible for the vast majority of this improvement.
Acquisitions/divestments (net) increased sales overall by 3.3% or
€ 355 million. The first-time consolidation of AZ in the Perfor-
mance Materials division as of May 2, 2014 made a positive con-
tribution of € 375 million to Group sales in 2014. Owing to the
divestment of the Merck Millipore division's Discovery and Devel-
opment Solutions business field, which became effective on
March 31, 2014, sales declined in comparison with 2013 by € - 20
million (see "Acquisitions and divestments as well as assets held
for sale and disposal groups" in the Notes to the Group accounts).
Negative foreign exchange effects lowered sales by -1.8%.
85
GROUP MANAGEMENT REPORT → REPORT ON ECONOMIC POSITION →
Merck Group
The development of sales in the individual quarters in comparison
with 2013 as well as the respective organic growth rates are pre-
sented in the following overview:
-12.0
MERCK GROUP →
€ million/organic growth in %
1 Quarterly breakdown unaudited.
%
2014
2,614
01->
3.7
2,660
SALES AND ORGANIC GROWTH BY QUARTER¹
2,960.0
2,605.1
4.8
10,700.1
5.5
1,762.0
1,610.8
9.4
15.6
15.1
3,122.9
3,069.2
1.7
27.7
28.7
3,387.7
3,253.3
4.1
30.0
30.4
4.60
4.39
2013
11,291.5
22
Q2
Merck Serono→ 5,783.3
7
Consumer Health →766.1
86
GROUP MANAGEMENT REPORT → REPORT ON ECONOMIC POSITION
→ Merck Group
MERCK GROUP →
GROUP MANAGEMENT REPORT FUNDAMENTAL INFORMATION ABOUT THE GROUP → Employees
51
€ million/change in %
Consumer Health
Performance Materials
Merck Millipore
Merck Group
Sales
Organic growth
Exchange rate
effects
Acquisitions/
divestments
Merck Serono
%
→ 2,682.5
Merck Millipore
→
3.4
2,744
2,906
03 →>
04 →>
4.6
2,659
2,976
4.4
2,637
significant increase slight organic growth slight organic growth slight organic growth +22.8% acquisition)
centage point increase in the contribution of Performance Mate-
rials to Group sales is largely due to the acquisition of AZ. As in
2013, the Consumer Health division accounted for 7% of Group
sales.
MERCK GROUP →
SALES BY DIVISION - 2014
€ million/% of sales
Performance Materials 2,059.6
18
24
2,796
3.7
In 2014, Merck Serono generated 51 % of Group sales (2013: 53%),
remaining the largest division by sales. Merck Millipore and
Performance Materials followed, contributing 24% (2013: 25%)
and 18% (2013: 15%) to Group sales, respectively. The three per-
11,500.8
slight increase
€ 640-670 million
€ 640-670 million
€ 640-670 million
Business
moderate organic
growth
700
(-11.2%)
2,682 (+2.1 %/
+4.5% org.)
659
(+2.5%)
419
free cash flow
494
stable
€ 460-490 million
€ 460-490 million
€ 460-490 million
(-15.2%)
Corporate and Other
643
EBITDA pre
one-time items
moderate organic
growth
780
895
11,095.1
significant increase
€ 830-880 million
€ 850-880 million
€ 860-880 million
(+14.8%)
Business
free cash flow
788
significant increase
€ 720-770 million
€ 720-770 million
€ 720-770 million
Merck Millipore
Sales
slight increase
moderate organic
growth
EBITDA pre
one-time items
2,628
stable €-170-200 million € -160-190 million € -160--190 million
→ EBITDA pre one-time items increase by 4.1% to around € 3.4
billion main drivers were the Performance Materials division
due to the first-time consolidation of AZ Electronic Materials
(AZ) as well as the successful operating business of Liquid
Crystals
Net financial debt as of December 31, 2014 only increased
slightly to € 0.6 billion, despite payment of the AZ purchase
price of € 1.9 billion
Only a slight adjustment to the long-term credit ratings to "A"
with negative outlook (Standard & Poor's) and "Baal" with
negative outlook (Moody's), despite the announcement of the
acquisition of the Sigma-Aldrich Corporation (Sigma-Aldrich)
for around US$ 17 billion
MERCK GROUP
KEY FIGURES
€ million
Total revenues
Sales
Operating result (EBIT)
EBITDA
Margin (% of sales)
EBITDA pre one-time items
Margin (% of sales)
Earnings per share pre one-time items (€)'
Business free cash flow
-197
2014
2013
Change
in %
→
Emerging Markets contribute significantly to organic sales
growth
Margin (% of sales)
84
-166
(-15.5%)
-215
~ € -240 million € -200- - 230 million € - 200--220 million
(-23.7%)
'Based on the number of shares following the share split, which was approved by the Annual General Meeting on May 9, 2014.
2Previous year's figures have been adjusted, see "The Merck Group" in the Group management report.
free cash flow
GROUP MANAGEMENT REPORT → REPORT ON ECONOMIC POSITION
→ Merck Group
→>
COURSE OF BUSINESS AND ECONOMIC POSITION
-281
OVERVIEW OF 2014
→ Sales increase by 5.5% to € 11.3 billion - organic growth of
4.0%, acquisition-related increases of 3.3% as well as slight
negative foreign exchange effects of -1.8%
→
Improvement in earnings per share before one-time items by
4.8% to € 4.60
→
Business free cash flow remains at a high level
MERCK GROUP
Business
Group
Performance
Materials
€ million
Biopharma
Life Science
Life Science
Performance
Materials
Businesses
Consumer
Health
Business
sectors
Healthcare
3,253.3
Business sectors and businesses
MERCK
2,723.8
2011
2,964.9
2012
2013
3,387.7
2014
3,629.8
Allergopharma
EBITDA pre exceptionals
2015
Merck
Biosimilars
OLED displays offer captivating advan-
tages, whether for smartphones or large
televisions. With innovative printing
processes, Merck wants to play a pio-
neering role in this field.
fundamentally changed over the past ten years. We have developed from a classic supplier of
pharmaceuticals and chemicals to a global science and technology company. With our unique
combination of highly specialized biopharmaceutical, life science and materials businesses, we
are in a position today to offer solutions to support global megatrends such as health and digital-
ization. Our new brand communicates this new direction to our customers, partners and applicants.
We want to be recognizable and remain visible as Merck so as to strengthen our well-known brand
name. To achieve this, we have adopted a bold and vibrant appearance.
145-168
033
MERCK GROUP
Corporate Governance
5
Annual Report
Table of contents
31-42
To Our Shareholders
Having completed the acquisition of the
laboratory supply company Sigma-Aldrich,
Merck is now one of the leading players
in the global life science industry - and
also has a superb e-commerce platform.
GROWTH
28-30
READY FOR
PRINTING
14-19
With its Capacity Advancement Program,
Merck aims to strengthen its education
and prevention efforts among people
living in developing countries. The focus
is on diabetes, cancer and fertility treat-
ment.
24-27
AWARENESS
At the new Merck Innovation Center,
scientists are working to develop future-
oriented products and solutions, such as
an ingenious artificial eye lens in which
liquid crystal technology is used.
A CLEAR VIEW
8-13
a new era in cancer treatment. Merck
and Pfizer aim to unlock the potential of
this area of research through a strategic
alliance.
Immuno-oncological therapies represent
6-7
2015
HIGHLIGHTS OF
Innovations are the essence of our activities. We work enthusiastically to develop
future-oriented technologies and invest all our strength in promising areas of
research such as cancer therapy, fertility treatment and new medicines, as well as
in the development of cutting-edge materials for displays. The magazine in this
annual report shows how we work on improving human life through technological
progress on a daily basis.
4 Magazine Table of contents
Chairman of the Executive Board
Karl-Ludwig Kley
"Today, Merck is better positioned
than ever before. We can be proud
of what Merck is today: a leading
science and technology company
whose ideas and products can
really make a difference in the world.
With our three business sectors
Healthcare, Life Science and
Performance Materials, we are not
only successful, but also improve
the lives of patients, customers and
partners all over the world."
Merck has
9,922.2
4.6
10,755.7
Margin (% of net sales)¹
7.4
3,122.9
3,354.1
EBITDA
15.5
14.3
Margin (% of net sales) 1
1,762.0
1,843.2
Operating result (EBIT)
13.0
11,362.8
12,844.7
Net sales¹
in %
2014
2015
€ million
Change
Key figures
MERCK GROUP
Merck Group and
Structure
STRONGER
Merck
Letter from Karl-Ludwig Kley
Annual Report 2015
26.1
27.5
EBITDA pre exceptionals
3,629.8
2012
10,735.3
2013 —
11,362.8
2014
12,844.7
2015
€ million
Net sales
MERCK GROUP
¹The composition of net sales has changed, see "Changes to accounting and measurement principles and disclosure changes" in the
Notes to the Group accounts.
6.2
2,605.1
2011
2,766.2
5.9
4.60
4.87
Earnings per share pre exceptionals (€)
- 3.8
2.66
2.56
Earnings per share (€)
29.8
28.3
Margin (% of net sales) 1
7.1
3,387.7
Business free cash flow
147
PROGRESS
20-23
The Executive Board
25
April
We opened our new OLED Application
Center (OAC) in Pyeongtaek, Korea.
With this € 7 million investment, we are
strengthening our OLED research activi-
ties and Korea's leading role in the
display industry.
Opening of the OLED Application
Center in Korea
28
May
We paid out a total of around € 300 mil-
lion to employees around the world in
recognition of our business success in
2014, making this our highest profit-
sharing payment ever. The good results
of 2014 were mainly due to the success-
ful implementation of the "Fit for 2018"
transformation and growth program.
Merck enables employees to share
in the company's success
4
March
Highlights
of 2015
6 Magazine Highlights of 2015
* The management report of Merck KGaA has been combined
with the Group management report and published in both
the 2015 Merck Annual Report and the Annual Financial
Statements of Merck KGaA. The annual financial statements
and the combined management report of the Merck Group
and Merck KGaA for 2015 have been filed with the electron-
ic German Federal Gazette and are available on the website
of the German company register.
144 Subsequent Events
Code (HGB)
Report in accordance with section 315 (4)
of the German Commercial Code (HGB)
Additional information on Merck KGaA in
accordance with the German Commercial
138
136
Report on Expected Developments
131
Report on Risks and Opportunities
120
Corporate and Other
119
Performance Materials
114
Life Science
German Innovation Award
We received the German Innovation
Award of the German Federal Ministry
for Economic Affairs and Energy for
our innovative liquid crystal technology.
A few weeks earlier (March 22), we had
also been awarded the Innovation Prize
of German Industry in the "companies
with innovative HR concepts" category
for the Merck Serono Innovation Cup
and Innospire initiatives.
June
3
038
8 Magazine A clear view
Merck intends to double its
presence in Africa by 2020
During its visit to Africa, our Executive
Board announced plans to double the
company's headcount and sales on the
continent within the next five years. To
achieve further growth, we are count-
ing on the entrepreneurial spirit and
innovative strength of this region.
20
November
Sigma-Aldrich acquisition closes
With the acquisition of Sigma-Aldrich
for around US$ 17 billion, we completed
the largest acquisition in our company's
history, thus establishing one of the
leading players in the over € 100 bil-
lion life science industry and a business
with around 20,000 employees, 300,000
products and approximately one million
customers.
18
November
We were chosen as one of the world's
best employers in the biopharmaceutical
industry by Science magazine, an inde-
pendent international publication.
Merck distinguished as a top
employer by Science magazine
2
November
We announced the relaunch of our brand
identity. The revamped visual appear-
ance and the introduction of a new logo
reflect the transformation into a global
science and technology company. Out-
side the United States and Canada, we
operate uniformly as Merck.
109
14
Stefan Oschmann appointed new
Chairman of the Executive Board
The Board of Partners of E. Merck KG
appointed Stefan Oschmann as the new
Chairman of the Executive Board and
CEO of Merck KGaA. On conclusion of
the Annual General Meeting on April 29,
2016, he will succeed Karl-Ludwig Kley,
who will then retire after nine years at
the helm.
13
october
Innovation Center inaugurated
We opened our Innovation Center in
Darmstadt, thereby creating a new
platform for innovations. The aims are
to promote the innovative potential of
employees and give external innovators
the opportunity to develop their ideas
with our support.
1
october
We laid the cornerstone for a new OLED
materials production unit in Darmstadt.
Production of high-purity OLED materials
for use in state-of-the-art displays and
lighting systems is scheduled to start in
the approximately 2,000 square meter
building in summer 2016. Costing around
€ 30 million, the project is one of the
largest single investments made at the
site in recent years.
in Darmstadt
New OLED production unit
19
June
Highlights of 2015 Magazine 7
Launch of our Curiosity Campaign
in the United States
Launch of the cross-business "Smarter,
Together" campaign. With the initiative,
we underscored our rich history of
innovation and relentless questioning
in the United States, the world's largest
pharmaceutical market. Our campaign
aims to encourage scientists and engi-
neers, among others, all over the world
to share their passion and curiosity.
october
Financial Calendar for 2016
Merck brand relaunched
103
Consolidated
respect to its composition
Objectives of the Supervisory Board with
Report of the Supervisory Board
Statement on Corporate Governance
of Merck KGaA
Capital structure and governance bodies
Research and Development
People at Merck
080
070
062 Corporate Responsibility
Internal Management System
Objectives and Strategies
Merck
Fundamental Information about the Group
058
052
045
045
Management Report*
Combined
166
164
148
Our Shares
Healthcare
040
Financial Statements
169-257
43-144
173
262
172 Consolidated Income Statement
Information and Service
Merck
092
Business Development 2011-2015
Course of Business and Economic Position
092
Business Developments
Auditor's Report
259
Review of Forecast against Actual
088
Responsibility Statement
260
176
175
Consolidated Cash Flow Statement
174 Consolidated Balance Sheet
178
Consolidated Statement of Comprehensive Income
Notes to the Group Accounts
Consolidated Statement of Changes in Net Equity
086
Report on Economic Position
086
Macroeconomic and
Sector-Specific Environment
258
-1.5
10.1
13.0
(of which: amortization of intangible assets)²
Gross profit
26.5
-10.5
12.6
17.9
23.2
Merck
follows:
Combined Management Report
95
The consolidated income statement of the Merck Group is as
MERCK GROUP
Consolidated Income Statement¹
€ million
Net sales
Total change
Cost of sales
Report on Economic Position
divestments
Merck Group
LLLLI
In Latin America, Group sales decreased slightly owing to
currency effects to € 1,265 million (2014: € 1,285 million).
Negative exchange rate effects stemmed mainly from the
change in the translation of the Venezuelan bolivar into the
reporting currency, euros. In this connection, reference is
made to the explanations in Note [7] "Management judgments
and sources of estimation uncertainty" in the Notes to the
Group accounts. All business sectors contributed to organic
sales growth of 8.6%. In 2015, Latin America generated 10%
(2014: 11%) of Group sales.
Marketing and selling expenses
Net sales in the Middle East and Africa region rose in 2015
by 10.1%, amounting to € 513 million (2014: € 466 million).
Organic sales growth of 6.8% was mainly attributable to the
Healthcare business sector. This region accounted for an
unchanged 4% of Group sales.
Net sales components by region
- 2015
€ million/change in %
Europe
North America
Asia-Pacific (APAC)
Latin America
Middle East and Africa (MEA)
Exchange rate
Acquisitions/
Net sales Organic growth
4,102.7
2,722.9
-0.9
4,240.8
1,265.3
513.0
12,844.7
effects
2015
Administration expenses
in %
100.0
(-778.9)
Research and development costs
(of which: amortization of intangible assets)²
Other operating expenses and income
Operating result (EBIT)
Financial result
Profit before income tax
Income tax
Profit after tax from continuing operations
Profit after tax from discontinued operations
Profit after tax
Non-controlling interests
Net income
-356.7 -2.8
1,486.5 11.6
-205.0 -1.8
1,557.0 13.7
-151.7
-70.5
74.0
-4.5
-368.0 -2.9
1,118.5
8.7
-392.2
1,164.8
-3.5
10.3
24.2 -6.2
-46.3
Sales in North America amounted to € 2,723 million (2014:
€ 2,152 million), which represents a year-on-year increase of
26.5%. This was due in particular to favorable currency effects
from the strong U.S. dollar and acquisition-related sales
increases that were primarily attributable to the acquisition
of Sigma-Aldrich. The organic growth generated by the Life
Science business sector (+8.5%) was canceled out by the
organic sales declines in the other two business sectors. The
contribution to Group sales by this region in 2015 was 21%,
representing an increase of two percentage points (2014:
19%).
(of which: amortization of intangible assets)²
4.6
81.2
0.3
-4,076.3 -31.7
(-166.6)
8,768.4 68.3
Change
2014
in %
100.0
in € million
in %
1,481.9
-549.9
(-72.6) (77.3)
932.0
13.0
12,844.7
15.6
11,362.8
-3,526.4 - 31.0
(-94.0)
7,836.4 69.0
14.3
-4,049.5 -31.5
-719.9 -5.6
-1,709.2 -13.3
(-2.7)
-446.6 -3.5
1,843.2
-3,589.1 -31.6
(-719.0)
-608.6 -5.4
-1,703.7 -15.0
(-3.8)
-173.0 -1.5
1,762.0 15.5
-460.4 12.8
(-59.9) (8.4)
-111.3 18.3
-5.5
(1.1) (-30.5)
-273.6 158.2
11.9
Sales generated in Europe grew by 2.1% to € 4,103 mil-
lion (2014: € 4,017 million). While the Life Science (+ 12.7%)
and Performance Materials (+6.5%) business sectors achieved
sales growth, Healthcare posted a sales decline (-2.1%). Over-
all, this region's contribution to Group sales in 2015 declined
to 32% (2014: 36%).
1 Quarterly breakdown unaudited.
2,722.9
2015
3,041
3,219
3,120
3,464
2014
2,628
2,815
2,921
2,999
%
1.3
2.2
-4.0
3.3
3.3
In 2015, Healthcare accounted for 54% (2014: 58%) of our
total Group sales and thus remained our largest business sec-
tor in terms of sales. Life Science and Performance Materials
followed behind, contributing 26% (2014: 24%) and 20%
(2014: 18%) to Group sales, respectively. The respective two
percentage-point increases in the share of sales accounted for
by both Life Science and Performance Materials were mainly
related to the acquisitions of Sigma-Aldrich and AZ.
MERCK GROUP
Net sales by business sector - 2015
€ million/% of net sales
20%
Performance Materials
2,555.6
Q4
MERCK GROUP
Q3
Q1
29.8
2.56
2.66
-3.8
4.87
4.60
5.9
2,766.2
2,605.1
6.2
1The composition of net sales has changed, see "Changes to accounting and measurement principles and disclosure changes" in the Notes to the Group accounts.
Development of net sales and results of operations
In 2015, we generated net sales of € 12,845 million (2014:
€ 11,363 million), representing an increase of 13.0% or
€ 1,482 million over 2014. This positive sales development
was due to organic growth, positive exchange rate effects and
acquisition-related increases. In 2015, the organic increase in
sales amounted to 2.6% or € 293 million. As a consequence of
the weaker value of the euro against the most important cur-
rencies, this led to net positive exchange rate effects of 6.2%
or € 702 million. This was primarily due to the U.S. dollar and
Asian currencies, especially the Chinese renminbi and the
Taiwan dollar. Negative exchange rate effects resulted mainly
from Latin American currencies, for instance the Venezuelan
bolivar and the Brazilian real. Acquisitions/divestments
increased net sales overall by 4.3% or € 487 million. The
acquisition-related effect from the first-time consolidation of
AZ Electronic Materials (AZ) on May 2, 2014 amounted to
€ 203 million. The increase in sales due to the consolidation of
Sigma-Aldrich since November 18, 2015 totaled € 289 million.
Of this amount, € 279 million was generated by the Life
Science business sector and € 10 million by the Performance
Materials business sector. Subsequent to the divestment of
the Discovery and Development Solutions business field in the
Life Science business sector as of March 31, 2014, net sales
declined by € 5 million compared with the previous year.
Merck
Report on Economic Position
Combined Management Report
93
The development of net sales in the individual quarters in
comparison with 2014 as well as respective organic growth
rates are presented in the following overview:
MERCK GROUP
Net sales and organic growth by quarter¹
€ million/organic growth in %
Q2
Net sales components by business sector - 2015
€ million/change in %
Healthcare
2.6
6.2
4.3
13.0
94
Combined Management Report Report on Economic Position
Merck
All our business sectors recorded organic sales increases and
positive exchange rate effects in 2015. Achieving an organic
growth rate of 6.5%, which corresponded to an absolute
increase of € 173 million, Life Science made the strongest
absolute contribution to organic sales growth, followed by
Healthcare with organic sales growth of € 106 million, equiva-
lent to a growth rate of 1.6%, and Performance Materials with
€ 13 million, or 0.6%. The overall change in net sales reflects
the benefits of positive exchange rate effects and sales contri-
butions from the acquired businesses. Driven mainly by the
first-time consolidation of Sigma-Aldrich, Life Science deliv-
ered a growth rate of 25.1% or € 673 million, the strongest
sales increase among our business sectors.
MERCK GROUP
Net sales by region
€ million/% of net sales
- 2015
10%
Latin America
1,265.3
33%
Asia-Pacific (APAC)
4,240.8
4%
Middle East and Africa (MEA)
513.0
32%
Europe
4,102.7
21%
North America
12,844.7
24.1
10.4
13.1
Life Science
Performance Materials
Merck Group
26%
Life Science
3,355.3
54%
Healthcare
6,933.8
Exchange rate
Net sales
6,933.8
Organic growth
effects
Driven by positive exchange rate movements and acquisition-
related growth, sales in the Asia-Pacific region rose by 23.2%
or € 798 million to € 4,241 million (2014: € 3,443 million).
Asia-Pacific thus became our top-selling region and the growth
engine of the Group; more than half of total sales growth in
2015 was generated in this region. In particular, Performance
Materials benefited in this region from positive currency effects
and the consolidation of AZ Electronic Materials. All business
sectors contributed to organic growth of 4.7%, although this
development was mainly attributable to Healthcare, which
reported organic growth of 10.4%. The contribution to Group
sales by the Asia-Pacific region rose by three percentage points
to 33% (2014: 30%).
Acquisitions/
divestments
1.6
3.1
4.7
3,355.3
6.5
8.4
10.2
25.1
2,555.6
0.6
Total change
5.6
6.3
1,124.1
1,523.3
-590.4
Cash and cash equivalents
832.2
2,878.5
-2,046.3
Total assets
Equity
Non-current liabilities
of which:
Provisions for pensions and other post-employment benefits
Other non-current provisions
Non-current financial liabilities
Other non-current liabilities
Current liabilities
of which:
Current provisions
Current financial liabilities
Trade accounts payable
Other current liabilities
Total liabilities and equity
932.9
38,007.2
Other current assets²
2,199.4
59.7
15,127.3
13,943.5
1,018.7
165.1
Current assets
7,350.2
19.3
10,480.4
40.3 -3,130.2
-29.9
of which:
Inventories
2,619.8
1,659.7
960.1
Trade accounts receivable²
2,738.3
2,219.5
518.8
Current financial assets
227.0
-1,972.4
€ million
100.0
11,997.1
25.4
2,781.6
42.1
535.4
4,096.6
1,921.2
2,829.8
561.7
-26.3
2,075.9
2,020.7
1,539.4
2,424.4
381.8
405.4
38,007.2
100.0
26,010.1
100.0
11,997.1
46.1
1 Since January 1, 2015, the consolidated balance sheet has been structured in descending order of maturity.
2 Previous year's figures have been adjusted, see "Changes to accounting and measurement principles and disclosure changes" in the Notes to the Group accounts.
6,601.4
26,010.1 100.0
24.7
16.0
229.2
46.1
12,855.3 33.8
11,801.0 45.4
1,054.3
8.9
28.3
15,768.9
41.5
7,607.7
29.2
8,161.2 107.3
1,836.1
855.3
9,616.3
3,461.2
1,820.1
626.1
3,561.1
6,055.2
1,600.4
1,860.8
9,383.0
in %
97.4
in %
197.0
77%
Healthcare
1,310.1
96 Combined Management Report Report on Economic Position Merck
In 2015, other operating expenses and income (net) amounted
to € -447 million (2014: € -173 million) and comprised
expenses of € 917 million (2014: € 737 million) as well as
income of € 471 million (2014: € 564 million). The increase in
other operating expenses was primarily due to exchange rate
losses in operating business and higher allowances for receiv-
ables. The decrease in other operating income was mainly due
to one-time income in 2014 from the adjustment of provisions
for litigation with Israel Bio-Engineering Project Limited Part-
nership ("IBEP"). This effect could not be offset by higher
income from milestone payments largely attributable to the
alliance entered into with Pfizer in November 2014 to co-
develop and co-commercialize active ingredients in immuno-
oncology. Further information about the development and
composition of other operating expenses and income can be
found in Note [12] "Other operating income" and Note [13]
"Other operating expenses" in the Notes to the Group accounts.
Overall, our operating result (EBIT) increased by 4.6% to
€ 1,843 million.
In 2015, the negative financial result grew by € 152 million
to € -357 million (2014: € - 205 million), particularly owing to
higher interest expenses in connection with the financing
measures for the Sigma-Aldrich acquisition. Furthermore, we
incurred higher exchange rate losses from financial trans-
actions that burdened the financial result more strongly than
in 2014 (see Note [14] "Financial result" in the Notes to the
Group accounts).
Income tax expenses of € 368 million (2014: € 392 million)
led to a tax ratio of 24.8% (2014: 25.2%). Further informa-
tion about income taxes can be found in Note [15] "Income
taxes" in the Notes to the Group accounts.
Profit after tax of discontinued operations comprises
the business activities of Sigma-Aldrich acquired with a view
to resale. As a consequence of the antitrust commitments
imposed by the European Commission, Merck and Sigma-
Aldrich had agreed to sell parts of Sigma-Aldrich's solvents
and inorganics business in Europe (see also Note [4] "Acquisi-
tions, assets held for sale and disposal groups" in the Notes to
the Group accounts).
Net income, i.e. profit after tax attributable to Merck
shareholders, for 2015 was € 1,115 million (2014: € 1,157 mil-
lion), resulting in earnings per share of € 2.56 (2014: € 2.66).
The key financial indicator used to steer operating business,
EBITDA pre exceptionals, climbed 7.1% to € 3,630 million
(2014: € 3,388 million). The resulting EBITDA margin pre
exceptionals of 28.3% nearly reached the year-earlier level
(29.8%). The reconciliation of the operating result (EBIT) to
EBITDA pre exceptionals is presented under "Internal Manage-
ment System".
The development of EBITDA pre exceptionals in the indi-
vidual quarters in comparison with 2014 is presented in the
following overview:
MERCK GROUP
EBITDA pre exceptionals and change by quarter¹
€ million/change in %
Q2
Q3
899
944
857
Q1
Performance Materials
2015
11%
12%
8.8
1,164.8
10.3
-40.7
-3.5
-9.3
1,114.8
-0.1
8.7
-7.5
-0.1
-1.8
25.1
1,157.3
10.2
-42.5
-3.7
1The reporting structure has changed, see "Changes to accounting and measurement principles and disclosure changes" in the Notes to the Group accounts.
2 Excluding amortization of internally generated or separately acquired software.
The increase in cost of sales as well as other functional costs,
for example marketing and selling expenses and administra-
tion expenses, was significantly influenced by exchange rate
effects and the first-time consolidation of Sigma-Aldrich.
Despite the rise in cost of sales to € 4,076 million (2014:
€ 3,526 million), gross profit saw a double-digit increase
(+11.9%) to € 8,768 million. Gross margin, i.e. gross profit
as a percentage of sales, declined slightly to 68.3% (2014:
69.0%).
In 2015, research and development costs were at the
previous year's level. Healthcare, which is the Group's most
research-intense business sector, accounted for 77% (2014:
80%) of Group-wide R&D spending. The Group research
spending ratio (research and development costs as a percent-
age of sales) declined to 13.3% (2014: 15.0%). Our research
spending ratio in the Healthcare business sector was 18.9%
(2014: 20.6%).
MERCK GROUP
Research and development costs by business sector - 2015
€ million/in %
Life Science
197.5
853
2014
807
MERCK GROUP
Balance sheet structure¹
Non-current assets
of which:
Intangible assets
Property, plant and equipment
Other non-current assets
Dec. 31, 2015
Dec. 31, 2014
€ million
30,657.0
in %
€ million
80.7
15,529.7
25,339.0
4,009.1
1,308.9
11,395.5
2,990.4
1,143.8
Change
Net assets and financial position
Report on Economic Position Merck
98 Combined Management Report
Not presented: Decline in Group EBITDA pre exceptionals by € - 360 million due to
Corporate and Other.
846
%
5.7
6.3
1 Quarterly breakdown unaudited.
10.2
878
Q4
933
Merck
5.6
Report on Economic Position
The increase in Group EBITDA pre exceptionals was driven by
the Life Science and Performance Materials business sectors.
Life Science improved this key performance indicator by
€ 198 million or 30.0%, and Performance Materials delivered
an increase of € 237 million or 26.5%. At € 2,002 million,
EBITDA pre exceptionals of the Healthcare business sector
remained at the level of 2014, accounting for a 50% share
(2014: 56%) of Group EBITDA pre exceptionals (excluding the
€ 360 million decline due to Corporate and Other). The per-
centage shares of EBITDA pre exceptionals attributable to Life
Science and Performance Materials rose to 22% (2014: 19%)
and 28% (2014: 25%), respectively.
MERCK GROUP
EBITDA pre exceptionals by business sector - 2015
€ million/in %
28%
Performance Materials
1,132.1
22%
Life Science
856.1
50%
Healthcare
2,001.7
Combined Management Report 97
7.1
MERCK GROUP
27.5
Review of Forecast against Actual Business Developments
1The composition of net sales has changed, see "Changes to accounting and measurement principles and disclosure changes" in the Notes to the Group accounts.
-215
Double-digit
percentage decline
-166
Low double-digit
percentage increase
700
Low double-digit
percentage increase
strong portfolio effect
Report on Economic Position
895
Slight organic increase,
Double-digit growth rates
Forecast incl. Sigma-Aldrich:
Strong increase
Double-digit growth rates
419
659
Forecast incl. Sigma-Aldrich:
Moderate increase
2,060
Combined Management Report 91
Q1/2015 Interim Report
Forecast for 2015 in:
€ 80-95 million
of which Sigma-Aldrich:
3,630
(+7.1%)
€ 3.58-3.65 billion,
+2.6% org.
+4.3% portfolio,
+6.2% currency)
12,845
(+13.0%
€ 300 million
€ 12.6-12.8 billion,
of which Sigma-Aldrich:
€ 2.4-2.5 billion
Forecast incl. Sigma-Aldrich:
Stable development
Strong growth
Forecast incl. Sigma-Aldrich:
€ 2.4-2.5 billion
Low double-digit
percentage growth
€ 3.45-3.55 billion
Forecast incl. Sigma-Aldrich:
€ 3.45-3.55 billion
Forecast incl. Sigma-Aldrich:
Double-digit growth rates
Low double-digit
percentage growth
€ 12.3-12.5 billion
Forecast incl. Sigma-Aldrich:
€ 12.3-12.5 billion
Forecast incl. Sigma-Aldrich:
Double-digit growth rates
Results 2015 in € million (% YoY)
Q3/2015 Interim Report
Q2/2015 Interim Report
Double-digit growth rates
€ 2.6-2.7 billion,
of which Sigma-Aldrich:
Forecast incl. Sigma-Aldrich:
2,682
11,363
Forecast for 2015 in the
Annual Report for 2014
Actual results 2014
in € million
Healthcare
Business free cash flow
EBITDA pre exceptionals
Net sales¹
Merck Group
Review of forecast against actual business developments in 2015
3,388
90 Combined Management Report Report on Economic Position Review of Forecast against Actual Business Developments
Business free cash flow
For EBITDA pre exceptionals of Corporate and Other, we
expected a low double-digit percentage decline. Owing to
expenses for currency hedging transactions as a result of the
global exchange rate movements against the euro and the
intensification of future-oriented Group initiatives (e.g. new
branding), the Corporate and Other expense of EBITDA pre
exceptionals more than doubled overall. Consequently, we did
not meet our forecast.
We forecast a low double-digit increase in EBITDA pre
exceptionals for the Performance Materials business sector in
2015. With medium double-digit growth (excluding Sigma-
Aldrich), we significantly exceeded this forecast. Both good
operating business performance and positive exchange rate
effects were responsible for this development.
In the Annual Report for 2014, we predicted a moderate
increase for the Life Science business sector. Excluding Sigma-
Aldrich, EBITDA pre exceptionals of the Life Science business
sector saw a low double-digit increase, thus exceeding our
guidance provided in the Annual Report for 2014. In addition
to positive exchange rate effects, this development was also
attributable to a favorable product mix.
For the Healthcare business sector, we predicted a slight
decline in EBITDA pre exceptionals in the Annual Report for
2014. The good development of organic sales helped us to
exceed this forecast, achieving the year-earlier level with
EBITDA pre exceptionals of € 2,002 million.
Combined Management Report 89
Report on Economic Position
Review of Forecast against Actual Business Developments
3,387.7
For 2015, we had forecast a slight improvement in business
free cash flow of the Merck Group. Excluding the contribution
from Sigma-Aldrich, we can confirm this forecast. While busi-
ness free cash flows of the Life Science and Performance
Materials business sectors showed a sharp increase over 2014,
both the Healthcare business sector and Corporate and Other
saw a decline. The decrease in Healthcare is attributable to
higher investments and the high amount of capital tied up in
receivables. In Corporate and Other, expenses for the ONE
Global Headquarters and strategic Group initiatives in particu-
lar led to a decrease in business free cash flow. Including
Sigma-Aldrich, our Group business free cash flow increased
sharply by 6.2%.
2,605
Slight organic growth, slight
portfolio effect, moderately
positive foreign exchange effect
Forecast incl. Sigma-Aldrich:
Double-digit growth rates
Slight increase
Business free cash flow
EBITDA pre exceptionals
Business free cash flow
Corporate and Other
EBITDA pre exceptionals
Net sales¹
Performance Materials
Business free cash flow
EBITDA pre exceptionals
Net sales¹
Life Science
Slight decline
1,701
Business free cash flow
Slight decline
2,000
Organic at the
previous year's level
6,621
EBITDA pre exceptionals
Net sales¹
Very strong growth
Forecast incl. Sigma-Aldrich:
Moderate organic growth
€ 50-70 million
Slight increase due to operating
business developments and
positive foreign exchange effects;
at least at the 2014 level
Forecast incl. Sigma-Aldrich:
Very strong growth
(+6.2%)
MERCK GROUP
Corporate objectives for 2015 met in full
•
• Performance Materials: Market positions in all businesses
successfully defended with organic sales at 2014 level
• Life Science: Strong and profitable organic sales growth
amid successful completion of the Sigma-Aldrich acquisition
Healthcare: Robust base business; cooperation with Pfizer
developing according to plan
•
• Business free cash flow increases by 6.2% to € 2.8 billion
Earnings per share pre exceptionals rise 5.9% to € 4.87
•
• EBITDA pre exceptionals up 7.1% to around € 3.6 billion
All business sectors report organic sales growth
•
• Sales increase by 13.0% to € 12.8 billion
Overview of 2015
Merck
POSITION
COURSE OF BUSINESS AND ECONOMIC
92 Combined Management Report Report on Economic Position Merck
-421
(+96.2%)
(+116.9%)
Key figures
-360
€ million
Operating result (EBIT)
26.1
3,629.8
2,766
7.4
3,122.9
15.5
4.6
1,762.0
1,843.2
14.3
3,354.1
13.0
11,362.8
12,844.7
in %
2014
Change
Business free cash flow
Earnings per share pre exceptionals (€)
Earnings per share (€)
Margin (% of net sales)¹
EBITDA pre exceptionals
Margin (% of net sales)¹
Margin (% of net sales)¹
EBITDA
Net sales¹
€ 440-410 million
2015
€ 420--390 million
€ 760-780 billion,
in addition from Sigma-Aldrich:
€ 80-95 million
Solid organic growth,
portfolio effect in the low
double-digit percentage range
€ 450-480 million
€ 450-480 million
Moderate organic growth
Forecast incl. Sigma-Aldrich:
Double-digit growth rates
€ 740-760 million
Forecast incl. Sigma-Aldrich:
Double-digit growth rates
Moderate organic growth
Forecast incl. Sigma-Aldrich:
Double-digit growth rates
€ 730-760 million
Forecast incl. Sigma-Aldrich:
Double-digit growth rates
1,581
(-7.1%)
2,002
(+0.1%)
+3.1% currency)
€ 530-560 million,
+1.6% org.
€ 1.5-1.55 billion
€ 1.5-1.55 billion
€ 1.93 2.0 billion
€ 1.9 2.0 billion
€ 1.9 2.0 billion
Organic at the
previous year's level
€ 420 390 million
Organic at the
previous year's level
Organic at the
previous year's level
6,934
(+4.7%
in addition from Sigma-Aldrich:
€ 50-70 million
€ 1.5-1.55 billion
+0.6% org.
€ 350-300 million
€ 360--340 million
931
(+33.0%)
1,132
(+26.5%)
+10.4% portfolio,
+13.1% currency)
2,556
(+24.1%
€ 890-940 million
€ 850-900 million
€ 1.1-1.14 billion
€ 330 280 million
€ 850-900 million
€ 1.05-1.1 billion
+6.5% org.
+10.2% portfolio,
+8.4% currency)
856
(+ 30.0%)
676
€ 1.06-1.1 billion
(+61.2%)
Slight organic increase,
strong portfolio effect
Slight organic increase,
strong portfolio effect
Slight organic increase,
strong portfolio effect
3,355
(+25.1%
76.0
69.4
41.9
Equity
Asset coverage
82.4
Net sales¹
71.1
69.4
64.5
66.7
59.7
80.7
Asset ratio
Total assets
Non-current assets
We again achieved very good operational success with our
strong businesses in 2015. At the same time, we also realized
important strategic objectives concerning the long-term direc-
tion of the Group. Net sales grew by 13% to € 12,845 million
and EBITDA pre exceptionals, our key financial indicator to
assess operational performance, rose by 7.1% to € 3,630 mil-
lion. All our business sectors contributed to this success.
Finance structure
€ million
Non-current assets
Key figures
HEALTHCARE
Healthcare
The solid accounting and finance policy of the Merck Group
is again reflected by the very good key balance sheet figures.
The equity ratio as of December 31, 2015 was 33.8%, thus
remaining at a good level. As expected, net financial debt
rose massively owing to the acquisition of Sigma-Aldrich. We
assume that our strong internal financing power will enable us
to quickly reduce our financial liabilities. This is underscored
by the unchanged long-term ratings from Moody's and Stand-
ard & Poor's. Against the backdrop of our solid net assets and
financial position as well as the earning strength of our busi-
nesses, we assess the economic position of the Merck Group
positively overall. It represents a superb starting basis for
future organic growth of the Group.
of our pharmaceutical pipeline in 2015. The operating busi-
ness of the Performance Materials business sector benefited
from the successful integration of AZ Electronic Materials.
The successful acquisition of Sigma-Aldrich in Novem-
ber 2015, through which our Life Science business sector has
become a leading supplier in the lucrative Life Science market,
was of major significance to us. We thus achieved an impor-
tant step in the implementation of our long-term strategy,
through which we want to secure future growth and profitability.
Additionally, we made progress with the further development
Overall assessment of business performance and
economic situation
Liabilities (total)
37.5
40.6
40.0
46.5
37.3
Current liabilities
Total assets
The increase in Group business free cash flow in 2015 was
attributable to the two operating business sectors Life Science
and Performance Materials. Healthcare generated business
free cash flow amounting to € 1,581 million (2014: € 1,701 mil-
lion). Consequently, with a 50% share (2014: 60%) of Group
business free cash flow (excluding the decline of € -421 mil-
lion due to Corporate and Other), Healthcare was once again
the business sector with the highest cash flows. In 2015, the
Life Science business sector achieved a 61.2% increase in
business free cash flow to € 676 million (2014: € 419 million),
thus also increasing its share of Group business cash flow
to 21% (2014: 15%). Performance Materials contributed
€ 931 million (2014: € 700 million) to this Group financial indi-
cator, equivalent to 29% (2014: 25%).
48.1
Healthcare
1,581.0
50%
675.6
Life Science
21%
930.8
Performance Materials
29%
€ million/in %
Business free cash flow by business sector - 2015
MERCK GROUP
8.9
37.0
Operating Result (EBIT)
1 Quarterly breakdown unaudited.
Not presented: Decline in Group business free cash flow by € -421 million due to
Corporate and other.
The investments in property, plant, equipment and software
included in the calculation of business free cash flow as well as
advance payments for intangible assets increased in 2015 by
15.4% to a total of € 609 million (2014: € 528 million). The
investments in property, plant and equipment included therein
amounted to € 564 million in 2015 (2014: € 485 million), of
which € 262 million was attributable to strategic investment
projects each with a project volume of more than € 2 million;
the remainder was attributable to smaller capital spending
projects.
In 2015, strategic investments of € 83 million were made
to expand the Darmstadt site. Of this amount, € 29 million was
used to upgrade global headquarters; the projects include an
Innovation Center, a Visitor Center and an employee cafeteria,
among other things. Moreover, in the Performance Materials
business sector, OLED production capacity was expanded with
an investment of € 13 million in order to better meet growing
demand. In the Healthcare business sector, € 8 million was
invested in a new laboratory research building.
Globally, strategic investments were made in the Healthcare
business sector. Special mention should be made of the pro-
duction facility in Nantong, China (€ 50 million), a new pro-
duction plant for the Allergy business in Reinbek, Germany
(€ 17 million), an expansion of the existing filling plant at the
Bari site in Italy (€ 18 million), and the construction of a new
packaging unit at the Aubonne site in Switzerland (€ 8 mil-
lion). Within the Life Science business sector, € 7 million was
invested in a new production unit in Spain.
53.2
45.4
33.8
Dec. 31, 2011
Dec. 31, 2012
Dec. 31, 2013
Dec. 31, 2014
47.4
Dec. 31, 2015
Equity
in %
Key balance sheet figures
MERCK GROUP
The development of key balance sheet figures was as follows:
102 Combined Management Report Report on Economic Position Merck
In 2015, there were no changes to our long-term credit
ratings by the two rating agencies Moody's and Standard &
Poor's. The latter continues to issue a rating of "A" with a neg-
ative outlook and Moody's a "Baa1" rating with a negative out-
look. An overview of the development of our rating in recent
years is presented in the Report on Risks and Opportunities.
Equity ratio
Margin (% of net sales)¹
EBITDA
%
Healthcare
€ million/% of net sales of the business sector
Net sales by region - 2015
HEALTHCARE
104 Combined Management Report Report on Economic Position Healthcare
2.6
¹ Quarterly breakdown unaudited.
1.9
1.5
0.3
1,717
1,684
1,651
1,569
2014
1,737
15%
1,708
Latin America
19%
HEALTHCARE
31.2
With net sales of € 450 million (2014: € 408 million), the
Middle East and Africa region recorded an organic sales increase
of 7.6%, mainly in the CardioMetabolic Care franchise. Positive
currency effects increased sales by 2.8%.
Sales in Latin America amounted to € 1,022 million in 2015
(2014: € 1,059 million). This reflects an organic sales increase
of 8.4% and negative exchange rate effects of -11.8%.
Organic sales growth was mainly attributable to the develop-
ment of sales in the CardioMetabolic Care franchise and of
the Neurobion® brand. The negative currency effects mainly
stemmed from the translation of the Venezuelan bolivar into
the reporting currency, euros. In this connection, reference is
made to the explanations in Note [7] "Management judgments
and sources of estimation uncertainty" in the Notes to the
Group accounts. The contribution by the Latin America region
to net sales of the Healthcare business sector fell by one per-
centage point to 15%.
In the Asia-Pacific region, organic sales growth of 10.4%
was recorded in 2015. Including positive exchange rate effects
of 10.7%, sales thus rose to € 1,302 million (2014: € 1,075 mil-
lion). Organic growth was driven in particular by the Fertility
and CardioMetabolic Care franchises. This region's share of the
business sector's net sales increased from 16% in 2014 to 19%
in 2015.
In North America, the second-largest region in terms of
sales, net sales amounted to € 1,430 million in 2015 (2014:
€ 1,292 million). This was due to an organic decline of -6.1%,
offset by positive currency effects of 16.8%. Sales of Rebif®,
which increased to € 1,042 million (2014: € 971 million) owing
to currency effects, contributed significantly to the business
sector's sales performance in North America. The share of
Healthcare sales attributable to this region thus rose by one
percentage point to 21% in 2015.
North America
1,430.4
21%
Europe, the Healthcare business sector's largest region,
accounting for 39% of net sales (2014: 42%), recorded a
slight organic sales decline of -1.7%. Consequently, net sales
totaled € 2,729 million (2014: € 2,787 million). The good sales
performance by other franchises could not fully offset the
organic decline in sales of RebifⓇ, which was particularly due
to the difficult competitive environment.
2,729.4
39%
Europe
450.1
Middle East and Africa (MEA)
6%
Asia-Pacific (APAC)
1,302.2
1,021.7
Margin (% of net sales)¹
EBITDA pre exceptionals
Margin (% of net sales)¹
Business free cash flow
1,803
2015
16.7
15.8
1,970.4
28.4
2,001.7
-0.9
1,106.4
1,096.7
4.7
Change
in %
2014
6,620.5
6,933.8
2015
1The composition of net sales has changed, see "Information on segment reporting" in the Notes to the Group accounts.
103
Combined Management Report
Report on Economic Position
1,946.4
1,686
1.2
2,000.3
Q4
Q3
Q2
Q1
€ million/organic growth in %
HEALTHCARE
The development of sales in the individual quarters in
comparison with 2014 as well as the respective organic growth
rates are presented in the following overview:
Commission income, which is also included in net sales, rose
to € 103 million in 2015 (2014: € 71 million). The agreement
reached with Bristol-Myers Squibb in 2013 on the co-promotion
of GlucophageⓇ in China had a positive effect on commission
income in 2015.
In 2015, our Healthcare business sector generated slight organic
sales growth of 1.6%. Including positive exchange rate effects
of 3.1%, net sales rose overall by 4.7% to € 6,934 million
(2014: € 6,621 million). Nearly all the franchises contributed
to the business sector's organic growth. In 2015, the organic
increase in sales was driven in particular by products to treat
diabetes (GlucophageⓇ), cardiovascular diseases (ConcorⓇ),
infertility (Gonal-f®), thyroid disorders (EuthyroxⓇ), as well as
Neurobion®, a brand marketed by the Consumer Health busi-
ness. However, our two top-selling drugs Rebif® and ErbituxⓇ
posted organic sales declines.
Development of net sales and results of operations
-7.1
1,701.2
30.2
28.9
1,581.0
0.1
29.4
-47.3
13,712.9
675
-1.7
6.5
4.8
20.1
30.7
153.0
183.7
5.6
4.7
84.5
89.2
15.2
76.4
501.4
577.8
-26.2
in %
113.0
Net sales components by region - 2015
8,075.9
567.8
-737.2
2015
559.1
12,094.6
559.1
12,653.7
- 89.7
-1,972.4
2,199.4
227.0
-71.1
-2,046.3
2,878.5
832.2
143.3
5,637.0
13,482.3
€ million
5,227.2
2,738.6
3,006.0
Current financial assets
Cash and cash equivalents
less
Total financial liabilities
Finance lease liabilities
Liabilities from derivatives (financial transactions)
Loans from third parties and other financial liabilities
Liabilities to related parties
Loans to banks
Bonds and commercial paper
Net financial debt
MERCK GROUP
Note [4] "Acquisitions, assets held for sale and disposal
groups" in the Notes to the Group accounts. The purchase
price of € 15,974 million was financed through cash on our
balance sheet, bank loans and bonds. Following the issuance
of a hybrid bond (€ 1.5 billion) in December 2014, we issued
a further bond with a volume of US$ 4 billion in March 2015.
Lastly, in August 2015, we issued a euro bond amounting to
€ 2.1 billion. Moreover, credit lines totaling € 2.95 billion were
utilized for the purchase price payment. An overview of the
outstanding bonds can be found in Note [28] "Financial liabili-
ties/Capital management" in the Notes to the Group accounts.
The composition and the development of net financial debt
were as follows:
As of December 31, 2015, total assets amounted to € 38,007
million. This represents an increase of € 11,997 million or
46.1% over December 31, 2014 (€ 26,010 million). Both this
very strong increase and the change in the balance sheet
structure were mainly due to the acquisition of Sigma-
Aldrich, which closed in November 2015. As part of the pre-
liminary purchase price allocation for this transaction, the
acquired assets and liabilities were measured at fair values
in the balance sheet. On the date of first-time consolidation,
this increased intangible assets (excluding goodwill) by
€ 5,873 million. The goodwill from the acquisition amounted
to € 8,613 million. Further information on the purchase price
allocation for the Sigma-Aldrich acquisition can be found in
Combined Management Report 99
Net financial debt
267.4
MERCK GROUP
€ million
€ million
4,624.2
9,851.4
€ million
Change
Dec. 31, 2014
Dec. 31, 2015
¹According to the consolidated cash flow statement.
December 31
Other
Free cash flow
Payment from the disposal of assets held for sale¹
Assumption of financial liabilities from Sigma-Aldrich
Dividend payments to shareholders and to E. Merck¹
Acquisitions¹
Currency translation
January 1
Reconciliation of net financial debt
425.3
-86.0
-1,538.5
-19.1
Merck
Driven by the development of EBITDA pre exceptionals, busi-
ness free cash flow of the Merck Group rose in 2015 by 6.2%
to € 2,766 million (2014: € 2,605 million). The composition of
this financial indicator is presented under "Internal Manage-
ment System".
-26.6
6.9
-36.3
14.0
2,097.4
8.9
1,538.5
Payments from the disposal of property, plant and equipment
Free cash flow
-480.9
2.1
27.4
-513.9
Payments for investments in property, plant and equipment
Payments from the disposal of intangible assets
25.0
-143.3
-179.1
Report on Economic Position
Payments for investments in intangible assets
Combined Management Report 10I
MERCK GROUP
614
735
Q4
841
Q3
632
684
2014
830
361
2015
Q2
Q1
€ million/change in %
Business free cash flow and change by quarter¹
The distribution of business free cash flow across the individual
quarters and the percentage changes in comparison with 2014
were as follows:
- 18.9
2,705.5
2,195.2
in € million
Dec. 31, 2014
Dec. 31, 2015
2,738.3
Change
Working capital
Trade accounts payables
Inventories
Receivables from royalties and licenses
Trade accounts receivable
€ million
Working capital
MERCK GROUP
Thanks to the strong internal financing power of the Merck
Group, the increase in net financial debt in 2015 was signifi-
cantly lower than the cash outflow in connection with the
acquisition of Sigma-Aldrich.
100 Combined Management Report Report on Economic Position Merck
12,653.7
in %
11.5
2,619.8
-1,921.2
3,448.4
2,219.5
16.1
1,659.7
-1,539.4
2,355.9
Cash flow from operating activities according to the cash flow statement
Change
in %
2014
2015
€ million
Free cash flow
MERCK GROUP
%
Free cash flow was € 1,539 million in 2015, which did not
meet the high level achieved in 2014. The composition and the
development of the relevant items are presented in the follow-
ing table:
Our equity increased by € 1,054 million, amounting to
€ 12,855 million on December 31, 2015 (December 31, 2014:
€ 11,801 million). This strong increase of 8.9% was mainly
driven by profit after tax generated in 2015 amounting to
€ 1,124 million and the development of currency translation
differences from the translation of assets held in foreign cur-
rencies into euros, the reporting currency. This was countered
by the reclassification of the Sigma-Aldrich purchase price
The increase in working capital was likewise due to the first-
time consolidation of Sigma-Aldrich and to exchange rate
effects. Excluding these effects, working capital would have
been at the level of 2014.
57.8
960.1
- 381.8 24.8
1,092.5
46.4
-4.6 -28.6
23.4
518.8
hedging gains, dividend payments, and the profit transfer to
E. Merck KG (see "Consolidated Statement of Comprehensive
Income" and "Consolidated Statement of Changes in Net
Equity" in the Consolidated Financial Statements). Owing to
the sharp increase in total assets, the equity ratio decreased
by 11.6 percentage points, amounting to 33.8% as of Decem-
ber 31, 2015 (December 31, 2014: 45.4%).
€ million/change in %
-10.7
North America
1,946.4
28.4
1,970.4
(85.6)
(4.7)
(90.3)
4.0
33.7
12.7
840.0
12.6
873.7
EBITDA pre exceptionals
Other exceptionals
Acquisition-related exceptionals
29.4
Gains/losses on the divestment of businesses
24.0
30.4
lowing the settlement with Israel Bio-Engineering Project Lim-
ited Partnership (IBEP) led to higher income in 2014 whereas,
on the other hand, the discontinuation of the aforementioned
clinical development projects led to impairments of intangible
assets. In 2015, income generated in connection with the
alliance entered into with Pfizer in 2014 to co-develop and
co-commercialize active ingredients in immuno-oncology had
a positive impact.
The development of other operating expenses and income
(net) in 2015 was mainly due to one-time effects in 2014. On
the one hand, the adjustment of provisions for litigation fol-
The business sector's research spending ratio decreased to
18.9% (2014: 20.6%). The decline in research and develop-
ment costs was mainly due to one-time effects in connection
with the discontinuation of clinical development projects that
had increased research and development costs in 2014.
Gross profit of the Healthcare business sector rose by
€ 241 million to € 5,491 million (2014: € 5,250 million),
resulting in a gross margin of 79.2% (2014: 79.3%). Due to
ongoing investments in growth markets as well as currency
effects, marketing and selling expenses were higher in 2015
than in 2014.
1The reporting structure has changed, see "Information on segment reporting" in the Notes to the Group accounts.
2 Excluding amortization of internally generated or separately acquired software.
0.1
1.4
30.2
2,000.3
28.9
2,001.7
-40.8
-61.6
-21.1
-1.5
51.5
2.4
0.9
1.2
After adjusting for depreciation, amortization and excep-
tionals, EBITDA pre exceptionals, the key financial indicator
used to steer operating business, amounted to € 2,002 million
(2014: € 2,000 million), which was thus at the previous year's
level. The EBITDA margin pre exceptionals declined to 28.9%
(2014: 30.2%).
Integration costs/IT costs
EBITDA
9.8
-250.5
(-10.4)
-12.5
-2,550.8 -38.5
(-555.4)
-246.9 -3.7
-1,366.0 -20.6
-259.4 -3.7
-1,310.1 -18.9
Research and development costs
Administration expenses
(-565.8)
(of which: amortization of intangible assets)²
-40.4
-2,801.3
Marketing and selling expenses
4.6
241.4
5,250.0 79.3
79.2
(1.9)
Restructuring costs
5.1
(-1.5)
(of which: exceptionals)
reversals of impairment losses
Depreciation/amortization/impairment losses/
-9.7 -0.9
16.7
1,106.4
15.8
1,096.7
-44.0
0.3
20.1
-23.9 -0.3
-4.1
55.9
(-0.5) (50.0)
(-1.0)
(of which: amortization of intangible assets)²
Other operating expenses and income
Operating result (EBIT)
108
Combined Management Report Report on Economic Position Healthcare
The development of EBITDA pre exceptionals in the individual
quarters in comparison with 2014 is presented in the following
overview:
Q1
€ million/change in %
Business free cash flow and change by quarter¹
HEALTHCARE
The development of business free cash flow in the individual
quarters in comparison with 2014 is presented in the following
overview:
-7.1
1,701.2
-16.7
- 104.9
1,581.0
Changes in trade accounts receivables as well as receivables from royalties and licenses
Business free cash flow
-37.0
20.4
-240.0
-42.4
-26.7
Changes in inventories
Q2
- 289.1
Q3
2015
-0.7
17.9
441
1 Quarterly breakdown unaudited.
14.4
-48.5
%
391
374
496
2014
438
460
427
256
Q4
as well as advance payments for intangible assets
Investments in property, plant and equipment, software
EBITDA pre exceptionals
493
524
537
480
Q4
Q3
Q2
479
2014
461
2015
Q1
€ million/change in %
EBITDA pre exceptionals and change by quarter¹
HEALTHCARE
497
530
%
-3.8
in %
0.1
2,000.3
2,001.7
2014
2015
Change
€ million
5,491.4
Business free cash flow
year's level of € 1,701 million. The decline of € 120 million was
mainly due to higher investments and the high amount of cap-
ital tied up in receivables.
In 2015, business free cash flow of the Healthcare business
sector amounted to € 1,581 million, falling short of the previous
Development of business free cash flow
1 Quarterly breakdown unaudited.
-1.3
8.1
-2.8
HEALTHCARE
Gross profit
(-)
(-0.9)
312
378
20.0
GlucophageⓇ
437
8.9
3.7
-1.5
-10.7
%
2014
2015
428
ConcorⓇ
463
EuthyroxⓇ
628
296
NeurobionⓇ
Report on Economic Position
106 Combined Management Report
In Europe, which accounted for 55% (2014: 56%) of
ErbituxⓇ sales and is thus the top-selling region for this prod-
uct, sales declined organically by -1.4%, mainly owing to the
competitive situation and customary price decreases. Includ-
ing negative currency effects (-0.1%), sales amounted to
€ 496 million (2014: € 504 million).
At € 899 million, Group sales of the oncology drug ErbituxⓇ
in 2015 were at the previous year's level (2014: € 904 mil-
lion). The slight organic sales decline of -1.5% was partly off-
set by positive exchange rate effects of 0.9%.
Together, the remaining regions Latin America, Middle East
and Africa, and Asia-Pacific accounted for an 8% share of sales
(2014: 9%).
In Europe, which accounts for 34% of sales (2014: 38%)
and is the second-largest region for the product, sales of
RebifⓇ declined organically by -13.0% to € 605 million due to
competition (2014: € 698 million).
North America generated 58% of Rebif® sales (2014:
53%) and is the largest market for this product. Owing to the
strength of the U.S. dollar (currency effect: +16.7%), this
region reported a strong increase in Rebif® sales to € 1,042 mil-
lion (2014: € 971 million). Despite price increases in 2015,
sales declined organically by -9.4% compared with 2014 due
to the difficult market environment.
Sales of Rebif®, which is used to treat relapsing forms of
multiple sclerosis, declined organically by -10.7% in 2015 due
to continued competitive pressure from oral formulations.
Amid currency tailwinds of 8.5%, RebifⓇ sales amounted to
€ 1,798 million (2014: € 1,840 million).
15.8
17.3
5.3
237
SaizenⓇ
261
240
278
Gonal-f®
685
904
1,021.7
1,302.2
17177
10.7
21.2
Total change
16.8
-0.4
1,430.4
Acquisitions/
divestments
Exchange rate
effects
Organic growth
-1.7
Net sales
2,729.4
Middle East and Africa (MEA)
Healthcare
Latin America
Asia-Pacific (APAC)
450.1
6,933.8
10.4
7.6
Erbitux®
899
1,840
RebifⓇ
1,798
€ million/organic growth in %
Product sales and organic growth
Healthcare
HEALTHCARE
Combined Management Report 105
Report on Economic Position
Healthcare
10.5
2.8
-11.8
10.7
Net sales and organic growth rates of the key products devel-
oped in 2015 as follows:
Europe
The Asia-Pacific region, which contributed a 29% (2014: 27%)
share of ErbituxⓇ sales, generated an increase in sales to
€ 265 million (2014: € 240 million). Both organic growth of
1.6% and currency tailwinds of 9.0% had a positive impact on
the development of sales.
-22.2% decline in sales was mainly attributable to the nega-
tive currency effects in Venezuela and an organic sales decline
in Brazil. This region's contribution to total ErbituxⓇ sales thus
decreased to 10% (2014: 12%).
Combined Management Report
Report on Economic Position
Healthcare
Result of operations¹
HEALTHCARE
The results of operations developed as follows:
In 2015, the Consumer Health business delivered a very
strong organic increase of 10.2% with sales of over-the-counter
pharmaceuticals. Including negative exchange rate effects of
-1.4%, sales amounted to € 833 million (2014: € 766 million).
Organic sales growth was mainly generated in Latin America.
Here, the growth rate was 11.6% and was especially bolstered
by demand for the strategic brands Neurobion® and Dolo-
NeurobionⓇ, as well as local brands.
GlucophageⓇ, which is used for the treatment of diabetes,
also delivered a strong organic sales increase of 20.0%.
Including negative foreign exchange effects, sales climbed to
€ 437 million (2014: € 378 million). Organic sales growth was
mainly achieved in Europe and the Middle East and Africa
region.
General Medicine (including CardioMetabolic Care), which
commercializes products to treat cardiovascular diseases
and diabetes, among other things, generated organic sales
growth of 7.4%. Including negative foreign exchange effects
of -1.2%, mainly in Venezuela, sales amounted to € 1,849 mil-
lion (2014: € 1,742 million).
Sales by the Endocrinology franchise, which mainly con-
sists of products to treat metabolic and growth disorders,
amounted to € 461 million, thus considerably exceeding the
year-earlier figure of € 394 million. The reported sales increase
reflected good organic growth of 9.9% and a positive foreign
exchange impact of 7.2%. Sales of the growth hormone
SaizenⓇ, the top-selling product of this franchise, saw an
organic increase of 6.7% and positive foreign exchange effects
of 3.4%. Consequently, sales amounted to € 261 million
(2014: € 237 million).
In 2015, the Healthcare business sector generated organic
sales growth of 3.7% with Gonal-f®, the leading recombinant
hormone used in the treatment of infertility. Including positive
currency effects, sales rose to € 685 million (2014: € 628 mil-
lion). Sales of this medicine showed the strongest growth in
the Asia-Pacific region. The other products in the Fertility fran-
chise also developed positively.
6
1.1
-10.0
10
1.6
29
107
-1.4
55
Change
Net sales
(-0.9)
(of which: amortization of intangible assets)²
5.3
-71.9
4.7
313.3
in %
€ million
in %
100.0
6,620.5
-1,370.5 -20.7
2014
in %
100.0
6,933.8
-1,442.4 - 20.8
Cost of sales
2015
€ million
100
-1.5
Organic growth in %
% of sales
58.5
76.5
Middle East and
Africa (MEA)
Latin America
(APAC)
16.3
1,041.5
North America
Europe
605.3
1,798.1
€ million
Total
Asia-Pacific
Product sales and organic growth of Rebif® and ErbituxⓇ by region - 2015
HEALTHCARE
In the Middle East and Africa region, sales amounted to
€ 50 million and were thus slightly higher than in 2014.
Rebif®
Organic growth in %
% of sales
Report on Economic Position
-13.0
ErbituxⓇ
49.8
87.3
265.2
496.4
898.7
€ million
In Latin America, the business sector generated net sales
of € 87 million with Erbitux® (2014: € 112 million). The overall
3
1
-11.4
-7.4
-9.0
-9.4
58
34
100
4
Merck
Net sales and organic growth by quarter¹
2015
75.4
22.3
598.9
20.1
674.3
(-)
(0.6)
12.6
(-)
EBITDA
(of which: exceptionals)
20.6
63.8
11.5
309.7
11.1
(0.6)
373.5
Restructuring costs
Gains/losses on the divestment of businesses
115.4
0.4
35.9
11.4
-43.0
- 5.1
16.6
Integration costs/IT costs
-0.4
11.9
132.0
43.0
6.8
EBITDA pre exceptionals
Other exceptionals
Acquisition-related exceptionals
31.6
Depreciation/amortization/impairment losses/
reversals of impairment losses
4.0
11.6
Administration expenses
(-197.2)
(of which: amortization of intangible assets)³
- 31.0
-1,038.5
Marketing and selling expenses
23.7
-151.1
358.7
(6.6)
(-3.1)
26.9
-314.1
25.1
672.8
in %
1,513.8 56.4
-4.5
Research and development costs
-197.5 -5.9
10.8
289.2
9.0
300.8
101.1
-92.8
(-0.5)
(-)
-91.8 -3.4
-5.5
-184.6
Other operating expenses and income
Operating result (EBIT)
(-0.5)
(of which: amortization of intangible assets)³
-178.7 20.8
(-45.4) (29.9)
-40.7 36.9
21.4
-34.9
-4.1
-6.1
-859.8 -32.1
(-151.8)
-110.4
-162.6
856.1
€ million
25.5
24.6
- 54.4
-375.4
Changes in trade accounts receivables as well as receivables from royalties and licenses
Adjustments first-time consolidation of Sigma-Aldrich
-44.2
-850.1
Changes in inventories
6.3
1,194.8
-141.0
as well as advance payments for intangible assets
Investments in property, plant and equipment, software
EBITDA pre exceptionals
30.0
658.6
in %
2014
-149.9
2015
856.1
Business free cash flow
419.0
213
202
23
2015
Q3
Q2
Q1
675.6
€ million/change in %
LIFE SCIENCE
The development of business free cash flow items in the indi-
vidual quarters in comparison with 2014 is presented in the
following overview:
113
Combined Management Report
Report on Economic Position
Life Science
61.2
Business free cash flow and change by quarter¹
Change
66.7
271
Q2
Q1
€ million/change in %
EBITDA pre exceptionals and change by quarter¹
LIFE SCIENCE
The development of EBITDA pre exceptionals in the indi-
vidual quarters in comparison with 2014 is presented in the
following overview:
Adjusted for exceptionals, EBITDA pre exceptionals rose
by 30.0% to € 856 million, or 25.5% of net sales (2014:
€ 659 million, 24.6% of net sales). Consequently, the key
financial indicator rose more sharply than sales (+25.1%)
thanks to the execution of efficiency initiatives, leveraging of
Life Science capabilities and competencies, and the Sigma-
Aldrich acquisition. The improvement in the EBITDA margin
pre exceptionals reflects strong organic sales growth, a favora-
ble product mix, exchange rate effects, and strict cost control.
Q3
After eliminating depreciation and amortization, EBITDA rose
by 12.6% to € 674 million (2014: € 599 million).
Gross profit amounted to € 1,872 million (2014: € 1,514 mil-
lion), equivalent to an increase of 23.7%. This very strong
increase was driven by a manufacturing site optimization pro-
gram, a price increase initiative and a favorable product mix.
This development was also positively impacted by exchange
rate effects and the Sigma-Aldrich acquisition.
112 Combined Management Report Report on Economic Position Life Science
3 Excluding amortization of software either produced in-house or purchased individually.
2 The reporting structure has changed, see "Information on segment reporting" in the Notes to the Group accounts.
1 Previous year's figures have been adjusted owing to an internal reorganization.
30.0
197.5
In addition to the Sigma-Aldrich acquisition, Life Science
continued to execute its growth strategy by investing in com-
mercial operations and developing new products. Marketing
and selling expenses increased by 20.8% to € 1,038 million
(2014: € 860 million) while R&D expenses grew by 21.4%.
Part of this increase was also driven by the stronger U.S. dollar
since a significant portion of our Life Science operations is
located in the United States. Other operating expenses and
income increased significantly to € 185 million (2014: € 92 mil-
lion) due to the Sigma-Aldrich acquisition, integration costs
and restructuring activities.
2015
184
200
Q4
25.2
€ million
Business free cash flow
LIFE SCIENCE
In 2015, business free cash flow of the Life Science business
sector rose by 61% or € 257 million to € 676 million. This very
strong increase was primarily due to the positive development
of EBITDA pre exceptionals.
Development of business free cash flow
20.6
1 Quarterly breakdown unaudited.
8.5
%
163
161
166
170
2014
201
658.6
in %
100.0
2,682.5
-1,168.7 -43.6
(-47.6)
(-50.7)
1,872.5 55.8
659
657
2014
1,085
759
773
738
661
Q4
Q2
Q1
€ million/organic growth in %
Net sales and organic growth by quarter¹
LIFE SCIENCE
The development of net sales in the individual quarters in
comparison with 2014 as well as the respective organic growth
rates are presented in the following overview:
During the period from November 18, 2015 to Decem-
ber 31, 2015, Sigma-Aldrich contributed sales of € 279 mil-
lion. This was slightly lowered by the divestment of the Dis-
covery and Development Solutions business field in the first
quarter of 2014.
Q3
3.1%. The Bioscience business area, which provides products
and services to support life science research for pharma-
ceutical, biotechnological and academic research laboratories,
reported an organic increase of 0.7%.
706
3.4
35%
Europe
54.7
Asia-Pacific (APAC)
831.1
25%
203.3
Latin America
6%
%
€ million/% of net sales of the business sector
LIFE SCIENCE
Combined Management Report Report on Economic Position Life Science
סון
8.1
8.1
6.2
1 Quarterly breakdown unaudited.
Net sales by region - 2015
All three business areas contributed to the organic growth
of the Life Science business sector in 2015. In particular, Pro-
cess Solutions generated double-digit organic sales growth of
11.6% owing to price increases and higher sales volumes. Lab
Solutions continued to perform well, posting organic growth of
2015 was another successful year for our Life Science busi-
ness sector. Net sales grew by 25.1% to € 3,355 million (2014:
€ 2,682 million), stemming from strong organic growth of
6.5%; positive exchange rate effects of 8.4% primarily related
to the development of the U.S. dollar; and 10.2% from acqui-
sitions and divestments.
Development of sales and results of operations
in %
2014
2015
Change
1The composition of net sales has changed, see "Information on segment reporting" in the Notes to the Group accounts.
109
Combined Management Report
3,355.3
Report on Economic Position
Business free cash flow
Margin (% of net sales)¹
EBITDA pre exceptionals
Margin (% of net sales)¹
Margin (% of net sales)¹
EBITDA
Operating Result (EBIT)
Net sales¹
€ million
Key figures
Life Science
2,682.5
25.1
300.8
61.2
419.0
675.6
24.6
25.5
30.0
658.6
856.1
22.3
20.1
12.6
598.9
674.3
10.8
9.0
4.0
289.2
Compared with 2014, the geographic breakdown of Life
Science sales changed as a result of different regional growth
trends and the Sigma-Aldrich acquisition.
Europe remained the business sector's largest geographic
market, generating sales of € 1,168 million (2014: € 1,036 mil-
lion), or 35% of Life Science sales (2014: 39%). The organic
sales increase of 5.6% in this region was mainly attributable
to the Process Solutions business area.
1%
Middle East and Africa (MEA)
10.4
0.7
450.3
Total change
Acquisitions/
divestments
effects
Organic growth
11.1
Net sales
Result of operations²
LIFE SCIENCE
The results of operations developed as follows:
Sigma-Aldrich
Process Solutions
Lab Solutions
Bioscience
Exchange rate
1,196.3
3.1
6.2
-1,482.8 -44.2
2014
in %
100.0
3,355.3
2015
(of which: amortization of intangible assets)³
Gross profit
Cost of sales
Net sales
€ million
Change
279.0
20.9
-0.5
9.8
11.6
1,429.7
9.3
€ million/change in %
2014
Net sales components by business area - 2015
The first-time consolidation of Sigma-Aldrich on Novem-
ber 18 boosted Life Science sales by € 279 million, accounting
for 8% of the business sector's net sales.
Latin America
Asia-Pacific (APAC)
North America
Europe
€ million/change in %
Net sales components by region - 2015
LIFE SCIENCE
Middle East and Africa (MEA)
Life Science
Lastly, exchange rate effects boosted sales in all regions
with the exception of Latin America, where currency head-
winds of -3.4% partly offset the increases stemming from
organic growth and acquisitions.
In the Middle East and Africa region, sales showed moder-
ate organic growth of 3.1%, representing 1% (2014: 2%) of
Life Science net sales.
Sales developed very well in the Latin America region, which
grew organically by 7.8%. The organic sales development was
fueled by good demand for Process Solutions and Lab Solutions
products. Latin America's share of Life Science sales slightly
decreased to 6% (2014: 7%).
The Asia-Pacific region continued to perform well, delivering
organic growth of 5.5%. Sales rose sharply particularly in major
Asian countries such as China, India, Singapore, and South
Korea. Sales increased to € 831 million (2014: € 681 million),
which represents 25% (2014: 25%) of Life Science net sales.
In North America, Life Science achieved organic growth of 8.5%,
which was driven by the Process Solutions business area and its
products for biopharmaceutical manufacturing processes, with
contributions from Lab Solutions and Bioscience as well. Sales
in North America rose to € 1,098 million (2014: € 725 million).
This region's share of Life Science sales thus increased from
27% in 2014 to 33% in 2015.
North America
1,098.4
33%
1,167.8
Sales attributable to the Sigma-Aldrich acquisition had a
positive impact across all regions, particularly in North America.
Net sales
Organic growth
Exchange rate
effects
Cell Biology. The share of sales accounted for by Bioscience in
2015 was 13% (2014: 15%).
The Bioscience business area recorded a slight organic increase
of 0.7%. Including a positive foreign exchange effect of 10.4%,
sales amounted to € 450 million (2014¹: € 405 million). This
growth was primarily driven by a recovery in demand in the
United States and good sales performance of Separation &
Preparation products, as well as hardware demand in Molecular
Combined Management Report 111
Report on Economic Position
Life Science
1 Previous year's figures have been adjusted owing to an internal reorganization.
Lab Solutions, which accounted for a 36% (2014: 41%)
share of Life Science net sales, delivered healthy organic sales
growth of 3.1% with its broad range of products for research-
ers and scientific laboratories. Organic growth was mainly
driven by higher demand for biomonitoring solutions, particu-
larly from customers in the pharmaceutical industry, as well as
for Lab Water products and by price increases across the port-
folio. Including positive exchange rate effects of 6.2%, sales
amounted to € 1,196 million (2014¹: € 1,094 million).
as well as by the very positive development of sales to the
pharmaceutical industry in 2015.
The Process Solutions business area, which markets products
and services for the entire pharmaceutical production value
chain, generated organic sales growth of 11.6%, which was
the highest rate within the Life Science business sector. Includ-
ing a positive foreign exchange effect of 9.8% and the 0.5%
decrease in sales due to the divestment of the Drug Discovery
Solutions business field in the first quarter of 2014, sales
amounted to € 1,430 million in 2015 (2014¹: € 1,183 million).
Process Solutions thus accounted for 43% of Life Science net
sales (2014: 44%). The increase was driven by higher demand
for products used in biopharmaceutical production, especially
in the United States, western Europe, and a few Asian countries,
3,355.3
203.3
831.1
11111
1,098.4
1,167.8
Total change
Acquisitions/
divestments
LIFE SCIENCE
LIFE SCIENCE
54
109
-5.8
15.0
1.8
EBITDA pre exceptionals
Other exceptionals
Acquisition-related exceptionals
Gains/losses on the divestment of businesses
0.7
Integration costs/IT costs
39.4
316.8
39.0
803.6
43.8
1,120.4
EBITDA
Restructuring costs
(-)
6.0
4.6
Combined Management Report 117
Report on Economic Position
Performance Materials
1The reporting structure has changed, see "Information on segment reporting" in the Notes to the Group accounts.
2 Excluding amortization of internally generated or separately acquired software.
26.5
237.3
43.4
12.2
894.8
1,132.1
-67.7 -99.0
-10.4
24.4
-70.3
-4.2
2.8
68.4
44.3
(-)
(of which: exceptionals)
26.2
(-2.8)
(-0.7)
(of which: amortization of intangible assets)²
-26.4 15.4
12.6
16.2
- 29.0
(-4.3) (36.4)
-7.0
(2.1) (-76.4)
-8.7
-7.7
-197.0
Research and development costs
-2.5
-63.1
Administration expenses
(-16.0)
-178.8
(-11.7)
-56.1 -2.7
-170.6 -8.3
Other operating expenses and income
-58.3
-2.3
50.3
9.3
192.1
9.5
242.4
reversals of impairment losses
Depreciation/amortization/impairment losses/
43.6
266.5
29.7
611.5
34.4
878.0
Operating result (EBIT)
1.3 -2.3
-2.9
-59.6
The increase in gross profit was attributable to favorable
exchange rate effects and good business performance. In
addition, the AZ Electronic Materials business acquired in
May 2014 and the SAFC Hitech business from the Sigma-
Aldrich acquisition in November 2015 contributed to the
improvement in gross profit. Within the scope of the first-time
consolidation, in 2014 the acquired AZ inventories were
stepped up to fair values and recognized as an expense in cost
of sales. Overall, this resulted in an increase in the gross mar-
gin in 2015 to 54.9% (2014: 52.3%). The operating result
(of which: amortization of intangible assets)²
(EBIT) rose by € 267 million to € 878 million in 2015
(2014: € 611 million). Consequently, both good operating
business performance and positive exchange rate effects
increased EBITDA pre exceptionals by 26.5% to € 1,132 mil-
lion (2014: € 895 million). The EBITDA margin pre exception-
als improved to 44.3% in 2015 (2014: 43.4%).
PERFORMANCE MATERIALS
€ million/change in %
Business free cash flow and change by quarter¹
PERFORMANCE MATERIALS
The development of business free cash flow items in the indi-
vidual quarters in comparison with 2014 is presented in the
following overview:
118 Combined Management Report Report on Economic Position Performance Materials
33.0
699.6
Q1
930.8
24.9
Adjustments first-time consolidation of Sigma-Aldrich
144.6
Adjustments first-time consolidation of AZ Electronic Materials
-76.5
-143.4
-33.6
Business free cash flow
Changes in trade accounts receivable and receivables from royalties and licenses
Q2
162
14.0
214
Q4
58.7
188
167
265
2015
Q3
1 Quarterly breakdown unaudited.
-1.8
%
179
165
2014
289
61.2
-15.8
-98.8
-83.2
1 Quarterly breakdown unaudited.
48.4
%
239
243
226
186
30.5
2014
295
277
2015
Q2
Q1
€ million/change in %
EBITDA pre exceptionals and change by quarter¹
298
Development of business free cash flow
In 2015, the Performance Materials business sector generated
business free cash flow of € 931 million, which represents a
significant year-on-year increase of € 231 million (2014:
€ 700 million). This was mainly attributable to the strong
improvement in EBITDA pre exceptionals.
PERFORMANCE MATERIALS
Changes in inventories
12.1
-97.6
-109.4
as well as advance payments for intangible assets
Investments in property, plant and equipment, software
in %
26.5
2014
894.8
2015
1,132.1
EBITDA pre exceptionals
€ million
Change
9.8
263
Q4
22.5
Business free cash flow
The development of EBITDA pre exceptionals in the indi-
vidual quarters in comparison with 2014 is presented in the
following overview:
125
- 8.1
Marketing and selling expenses
Combined Management Report
Report on Economic Position
Performance Materials
The Advanced Technologies business unit achieved the
highest growth rates within the Performance Materials busi-
ness sector. Special mention should be made of the dynamic
development of the OLED materials business.
manufacture.
The Integrated Circuit Materials (ICM) business unit
includes the former AZ business with materials used to manu-
facture integrated circuits and the SAFC Hitech business of
Sigma-Aldrich acquired in November 2015. The business unit
recorded a slight organic sales increase mainly fueled by
strong growth of the business with dielectric materials for chip
For the Pigments & Functional Materials business unit,
2015 was a stable year with sales at the previous year's level.
In contrast to the continuing success story of the high-quality
XirallicⓇ pigments for automotive coatings, a comparatively
sharp decline in sales was recorded for IriodinⓇ pigments used
in plastics and printing applications.
115
it solidified its global market leadership position. The doubling
of the business with the energy-saving UB-FFS technology
could not fully compensate for the accelerated decline in
volumes of the mature LC technology TN-TFT. The leading
active-matrix technologies PS-VA and IPS generated stable
sales.
In 2015, net sales of the Performance Materials business sec-
tor grew by 24.1% to € 2,556 million (2014: € 2,060 million).
This double-digit sales increase was mainly due to the signifi-
cantly positive currency effect of 13.1%, stemming primarily
from the strong U.S. dollar, the leading transaction currency in
the Performance Materials business. Revenues from acquired
businesses also contributed considerably to the strong sales
growth (+10.4%). These acquisition-related sales effects
were largely attributable to AZ Electronic Materials (AZ),
acquired in May 2014. In addition, the first-time consolida-
tion of the SAFC Hitech business of Sigma-Aldrich acquired in
November 2015 contributed around € 10 million to the sales
increase in the Performance Materials business sector. Organ-
ically, sales were at the previous year's level (+0.6%), based
on stable business performance, to which all business units
contributed.
Development of net sales and results of operations
33.0
699.6
43.4
44.3
930.8
26.5
The Display Materials business unit, which was established
at the beginning of 2015 and consists of Merck's liquid crystals
business and the business with the complementary display
materials from the acquisition of AZ, represents more than
60% of the net sales of Performance Materials. In 2015, this
business unit recorded a slight organic sales decline, however
894.8
The development of net sales in the individual quarters in
comparison with 2014 as well as the respective organic growth
rates are presented in the following overview:
Net sales and organic growth by quarter¹
653
Q3
-0.4
1 Quarterly breakdown unaudited.
1.6
%
576
PERFORMANCE MATERIALS
506
2014
643
617
2015
Q2
Q1
€ million/organic growth in %
402
1,132.1
39.0
43.8
Operating Result (EBIT)
Net sales¹
€ million
Key figures
PERFORMANCE MATERIALS
Performance Materials
114 Combined Management Report Report on Economic Position Performance Materials
Margin (% of net sales) 1
96.6
238
Q4
60.7
1 Quarterly breakdown unaudited.
-58.1
%
131
82.1
EBITDA
Margin (% of net sales)¹
EBITDA pre exceptionals
39.4
803.6
1,120.4
29.7
34.4
43.6
611.5
24.1
2,059.8
2,555.6
878.0
in %
2014
2015
Change
1The composition of net sales has changed, see "Information on segment reporting" in the Notes to the Group accounts.
Business free cash flow
Margin (% of net sales) 1
576
-207.8
2.2
642
2,555.6
2015
Change
24.1
2.6
11.1
-10.1
in %
100.0
2,555.6
2,107.5
17177
24.9
43.9
194.1
Total change
Acquisitions/
divestments
-10.0
2014
2,059.8
in %
100.0
30.4
327.6
52.3
1,076.6
1,404.2 54.9
(-68.5) (147.8)
(-46.4)
(-114.9)
17.1
-168.2
-47.7
-983.2
-1,151.4 -45.1
24.1
495.8
in %
€ million
Exchange rate
effects
Organic growth
Net sales
205.5
6.5
In North America, due to acquisition and exchange rate
effects, net sales climbed to € 194 million (2014: € 135 mil-
lion). Organically, regional sales decreased by -2.2%. This
In Europe, Performance Materials generated net sales of
€ 206 million (2014: € 193 million). The rise in sales was
mainly attributable to acquisition-related effects due to the
first-time consolidation of AZ on May 2, 2014. Organically,
sales declined slightly in 2015, mainly as a result of weaker
demand for cosmetic actives as well as pigments for plastics
and printing applications.
Accounting for a stable 82% share, the Asia-Pacific region
again generated the vast majority of the business sector's net
sales. This is attributable to the concentration of customers for
display and integrated circuit materials in Asia. In this region,
the business sector achieved significant sales growth of
24.9%, mainly due to acquisition and currency effects. Organ-
ically, sales were stable (+0.8%); however, increases in OLED
and dielectric IC materials were almost canceled out by
declines in the Display Materials business unit. This led to net
sales of € 2,107 million (2014: € 1,688 million), underscoring
the sustainable strength of the Performance Materials busi-
ness sector in the strategically important Asia-Pacific region.
194.1
8%
North America
8%
Europe
205.5
Middle East and Africa (MEA)
8.1
0%
Asia-Pacific (APAC)
2,107.5
82%
40.4
Latin America
2%
€ million/% of net sales of the business sector
Net sales by region - 2015
PERFORMANCE MATERIALS
-0.8
was mainly attributable to the weaker demand in Pigments &
Functional Materials, particularly pigments for plastics and
printing applications.
Q4
Since they account for a low proportion of sales, the two
regions Latin America and Middle East and Africa (MEA) only
played a subordinate role. Latin America recorded double-
digit organic growth, albeit a low level of net sales. Organic
growth was generated by strong increases in the Pigments &
Functional Materials business unit.
Combined Management Report Report on Economic Position Performance Materials
(of which: amortization of intangible assets)²
Gross profit
Cost of sales
Net sales
€ million
Result of operations¹
PERFORMANCE MATERIALS
The results of operations developed as follows:
Performance Materials
Middle East and Africa (MEA)
Latin America
Asia-Pacific (APAC)
North America
Europe
€ million/change in %
Net sales components by region - 2015
PERFORMANCE MATERIALS
116
Life Science
We continue to assume that in the coming years, the markets
of Asia, the Middle East, Latin America, and Africa will be of
above-average importance to the growth of all the business
sectors. In order to further use this potential for our businesses,
we have moved forward with several investment projects in
recent years. These include for example the construction of our
new OLED Application Center in Korea and a new production
facility for liquid crystals as well as the establishment of a new
Biopharma site in China. Moreover, we are strengthening our
activities in Africa through strategic investments as well as
geographic expansion in selected regions. The greater local
presence and customer proximity could give us a key com-
petitive edge and, in the medium to long term, offers the
opportunity for significant growth in sales and EBITDA pre
exceptionals.
126 Combined Management Report Report on Risks and Opportunities
Tax risks are reviewed regularly and systematically by
Group Tax. Corresponding standards and guidelines are used
in order to identify tax risks at an early stage as well as to
review, evaluate and correspondingly minimize them. Risk
reduction measures are coordinated by Group Tax together
with the subsidiaries abroad.
Future refinancing and cash investments are exposed to
the risks and opportunities of interest rate fluctuations. These
are also managed and reduced using derivatives. Following
the issue of multiple fixed-interest financing instruments
within the context of the Sigma-Aldrich acquisition, interest
rate risks have declined. They have a potentially moderate
negative impact, are considered unlikely and pose low risks
overall.
Risks of impairment of balance sheet items
The carrying amounts of individual balance sheet items are
subject to the risk of changing market and business conditions
and thus to changes in fair values as well. Necessary impair-
ments could have a significant negative non-cash impact on
earnings and affect the accounting ratios. This applies in par-
ticular to the high level of intangible assets including goodwill,
which mainly derive from the purchase price allocations made
in connection with past acquisitions (further information can
be found under "Intangible assets" in the Notes to the Group
accounts). All relevant risks were assessed during the prepa-
ration of the consolidated financial statements and taken into
account accordingly. We rate risks beyond this as low.
Risks and opportunities from pension obligations
We have commitments in connection with pension obligations.
The present value of defined benefit obligations can be signifi-
cantly increased or reduced by changes in the relevant valuation
parameters, for example the interest rate or future salary
increases. Pension obligations are regularly assessed as part of
annual actuarial reports. Some of these obligations are covered
Report on Risks and Opportunities Combined Management Report 127
by the pension provisions reported in the balance sheet, while
other obligations are funded by plan assets (further infor-
mation can be found under "Provisions for pensions and other
post-employment benefits" in the Notes to the Group accounts).
To the extent that pension obligations are covered by plan
assets consisting of interest-bearing securities, shares, real
estate, and other financial assets, decreasing or negative
returns on these assets can adversely affect the fair value of
plan assets and thus result in further additions to pension pro-
visions. By contrast, rising returns increase the value of plan
assets, thereby resulting in excess cover of plan liabilities. We
increase the opportunities of fluctuations in the market value
of plan assets on the one hand and reduce the risks on the
other by using a diversified investment strategy. The possible
risk due to pension obligations could have a moderate nega-
tive impact on the net assets, financial position and results of
operations, and is classified as a medium risk.
Assessments by independent rating agencies
The capital market uses the assessments published by rating
agencies to help lenders assess the risks of a financial instru-
ment. We are currently rated by the agencies Standard & Poor's
and Moody's. While Standard & Poor's issued a long-term rating
of A with a negative outlook, Moody's issued a Baal rating
with a negative outlook. The latest drop in the Moody's rating
by one grade in 2014 as well as the negative outlook of both
rating agencies is due to the higher debt level following the
Sigma-Aldrich transaction. In line with market procedures, our
financing conditions are closely tied to our rating. The better
a rating, the more favorably we can generally raise funds on
the capital market or from banks.
REPORT ON RISKS AND OPPORTUNITIES
Overview of rating development
S&P/Moody's
As a result of our international business activities and global
corporate structure, we are exposed to risks and opportunities
from fluctuations in exchange rates. These result from financial
transactions, operating receivables and liabilities, as well as
forecast future cash flows from sales and costs in foreign
currency. We use derivatives to manage and reduce the afore-
mentioned risks and opportunities (further information can be
found in "Derivative financial instruments" in the Notes to the
Group accounts). Due to their possible occurrence with a poten-
tially critical negative effect on the net assets, financial position
and results of operations, foreign exchange rate risks are
rated as medium risk.
A / A2
BBB+/ Baal
BBB Baa2
• S&P
• Moody's
2003
2004
2005
2006
2007
2008
A- / A3
Financial market opportunities and risks
Counterparty risk is classified as a medium risk overall
owing to the unlikely probability of occurrence with a potential
critical negative effect.
The solvency and operational development of trading partners
is regularly reviewed as part of the management of opera-
tional counterparty risks. Sovereign risks are also analyzed.
The volume of receivables of each customer is capped in line
with their credit ratings. Risk-mitigating measures, such as
credit insurance, are utilized as appropriate. Nevertheless,
defaults by isolated trading partners, even those with out-
standing credit ratings, cannot be entirely ruled out, although
rated as unlikely (further information can be found in "Credit
risks" under "Management of financial risks" in the Notes to
the Group accounts).
The effectiveness of Merck's internal control system with
regard to accounting and the compliance of financial reporting
by the individual companies is confirmed by both the local
managing director and the local chief financial officer when
they sign the single-entity reporting. All the structures and
processes described are subject to regular review by Group
Internal Auditing based on an annual audit plan set out by the
Executive Board. The results of these audits are dealt with by
the Executive Board, the Supervisory Board and the Finance
Committee.
The internal control system at Merck makes it possible to
lower the risk of material misstatements in accounting to
a minimum. However, no internal control system - regardless
of its design - can entirely rule out a residual risk.
Business-related risks and
opportunities
Political and regulatory risks and opportunities
As a global company, we face political and regulatory changes
in a large number of countries and markets.
Risk of more restrictive regulatory requirements regarding
drug pricing, reimbursement and approval
In the Healthcare business sector, the known trend towards
increasingly restrictive requirements in terms of drug pricing,
reimbursement and approval is continuing. These requirements
can negatively influence the profitability of our products, also
through market referencing between countries, and jeopardize
the success of market launches and new approvals. Close
communication with health and regulatory authorities serves
as a preventive measure to avert risks. The effects of corre-
sponding risks are taken into account as best possible in the
business sector's plans.
Risk of stricter regulations for the manufacture, testing
and marketing of products
Likewise, in our Life Science and Performance Materials
business sectors, we must adhere to a multitude of regulatory
specifications regarding the manufacture, testing and mar-
keting of many of our products. Specifically in the European
Union, we are subject to the European chemicals regulation
REACH. It demands comprehensive tests for chemical prod-
ucts. Moreover, the use of chemicals in production could be
restricted, which would make it impossible to continue manu-
facturing certain products. We are constantly pursuing
research and development in substance characterization and
the possible substitution of critical substances so as to reduce
the occurrence of this risk, and therefore view it as unlikely.
Report on Risks and Opportunities Combined Management Report 123
Nevertheless, it is classified as a medium risk given its critical
negative impact on the net assets, financial position and results
of operations.
Risk of destabilization of political systems and the
establishment of trade barriers
The destabilization of political systems as for example in
Ukraine and the Middle East and the possible establishment of
trade barriers as well as foreign exchange policy changes can
lead to declines in sales in certain countries and regions.
Diversification in terms of products, industries and regions
enables the mitigation of potential negative effects. The effects
of corresponding risks are taken into account to the best of
ability in the business plans for the countries and regions con-
cerned. In particular, our business can furthermore be affected
by macroeconomic developments in, for example, Venezuela,
Argentina, Brazil, Russia, and Greece. Corresponding sales
strategy measures have been introduced in these countries to
minimize the impact on business. Nevertheless, the remaining
possible net risk could have critical negative effects on the net
assets, financial position and results of operations and there-
fore we rate this as a medium risk.
Market risks and opportunities
Merck competes with numerous companies in the pharma-
ceutical, chemical and life science sectors. Rising competitive
pressure can have a significant impact on the quantities sold
and prices attainable for our products.
Financial risks and opportunities
As a corporate group that operates internationally and due to
our presence in the capital market, we are exposed to various
financial risks and opportunities. Above all, these are liquidity
and counterparty risks, financial market risks and opportu-
nities, risks of fluctuations in the market values of operational
tangible and intangible assets, as well as risks and opportu-
nities from pension obligations.
Risk and opportunity management in relation to the use
of financial instruments
In the area of financial risks and opportunities, we use an active
management strategy to reduce the effects of fluctuations in
exchange and interest rates. The management of financial
risks and opportunities by using derivatives in particular is
regulated by extensive guidelines. Speculation is prohibited.
Derivative transactions are subject to constant risk controls.
A strict separation of functions between trading, settlement
and control functions is ensured.
Liquidity risks
In order to ensure its continued existence, a company must be
able to fulfill its commitments from operating and financial
activities at all times. We therefore have a central Group-wide
liquidity management process to reduce potential liquidity
risks. Furthermore, we have a multi-currency revolving credit
facility of € 2 billion with a term of five years, which ensures
continuing solvency if any liquidity bottlenecks occur. As our
loan agreements do not contain any financial covenants, these
agreed lines of credit can be accessed even if Merck's credit
rating should deteriorate. Additionally, we have a commercial
paper program with a maximum volume of € 2 billion as well
as a debt issuance program that forms the contractual basis
for the issue of bonds with a maximum volume of € 15 billion.
The acquisition of Sigma-Aldrich (US$ 17 billion) was
financed by cash on hand, diverse euro and U.S. dollar bonds,
as well as various bilateral loans and a syndicated credit line
with a bank consortium. The financing instruments are to be
successively repaid in the coming years. Overall, the liquidity
risk is rated as low.
Counterparty risks
Counterparty risks arise from the potential default by a partner
in connection with financial investments, loans and financing
commitments on the one hand and receivables in operating
business on the other.
As for counterparty risks from financial transactions, we
review all positions relating to trading partners and their credit
ratings on a daily basis. We manage financial risks of default
by diversifying our financial positions and through the related
active management of our trading partners. Significant finan-
cial transactions involving credit risk are entered into with banks
and industrial companies that have a good credit rating. More-
over, our large banking syndicate - the multi-currency revolving
credit facility of € 2 billion was syndicated by 19 banks
reduces possible losses in the event of default.
2009
2010
2011
2012
We are required to comply with the highest standards of quality
in the manufacture of pharmaceutical products (Good Manufac-
turing Practice). In this regard we are subject to the supervision
of the regulatory authorities. Conditions imposed by national
regulatory authorities could result in a temporary ban on
products/production facilities, and possibly affect new regis-
trations with the respective authority. We take the utmost
effort to ensure compliance with regulations, regularly perform
our own internal inspections and also carry out external audits.
Thanks to these quality assurance processes, the occurrence
of a risk is unlikely, however cannot be entirely ruled out.
Depending on the product concerned and the severity of the
objection, such a risk can have a critical negative impact on
the net assets, financial position and results of operations.
Therefore, we rate this as a medium risk.
Risk of a temporary ban on products/production facilities
or of non-registration of products due to non-compliance
with quality standards
Risks and opportunities of product quality and
availability
Sometimes development projects are discontinued after high
levels of investment at a late phase of clinical development.
Decisions - such as those relating to the transition to the next
clinical phase are taken with a view to minimizing risk. Fur-
thermore, there is the risk that the regulatory authorities
either do not grant or delay approval, which can have an
impact on earnings. Additionally, there is the danger that
undesirable side effects of a pharmaceutical product could
remain undetected until after approval or registration, which
could result in a restriction of approval or withdrawal from the
market. We are currently not aware of any risks beyond
general development risks that could significantly affect the
net assets, financial position and results of operations.
Risks of discontinuing development projects and regulatory
approval of developed medicines
and combining their strengths and expertise, Pfizer and we
will maximize the potential value of the research compound
MSB0010718C, an anti-PD-L1 antibody that we developed.
Owing to the relatively long cycles in active ingredient devel-
opment, we expect that positive effects of this alliance will be
reflected in the sales and profitability of the Healthcare busi-
ness sector in the medium to long term. By contrast, expenses
currently being incurred particularly in the research and
development units of our Healthcare business sector are
already reflected in the latest plans. The same applies to the
pro rata recognition of deferred income from Pfizer's upfront
payment.
Special mention should be made of the strategic alliance
formed in 2014 between our company and Pfizer Inc. as a
research and development opportunity in the Healthcare
business sector. By making the required investments jointly
Risks and opportunities of research and development
For us, innovation is a major element of the Group strategy.
Research and development projects can experience delays,
expected budgets can be exceeded, or targets can remain
unmet. Research and development activities are of special
importance to the Healthcare business sector. In the course of
portfolio management, we regularly evaluate and, if necessary,
refocus research areas and all R&D pipeline projects.
In the Healthcare business sector, both our biopharmaceutical
products and classic pharmaceutical business are exposed to
increased competition from rival products (in the form of bio-
similars and generics). In the Life Science and Performance
Materials business sectors, risks are posed not only by cyclical
business fluctuations but also, particularly with respect to
liquid crystals, by changes in the technologies used or customer
sourcing strategies. We use close customer relationships and
in-house further developments as well as precise market
analyses as mitigating measures. Overall, owing to its possible
occurrence with a critical negative impact, the market risk is
classified as a medium risk.
Risk due to increased competition and customer technol-
ogy changes
With the acquisition of Sigma-Aldrich we have gained access
to the leading life science e-commerce platform. Our cus-
tomers are already benefiting from an offering of more than
300,000 products including highly respected brands distrib-
uted via this e-commerce platform. Our goal is to expand this
platform and to continuously increase the number of products
available on it. Making ordering processes faster and more
convenient for our customers could lead to higher sales vol-
umes and enable us to reach new customers. If this opportunity
materializes, our net sales could increase faster than expected.
Opportunities from leveraging the e-commerce and
distribution platform
Through this step, we will be uniformly and widely visible.
Due to the higher recognition and the brand strengthening we
are aiming for, potential new business opportunities could
arise. Moreover, stronger customer ties could have positive
effects on our business and financial results. However, since
the new brand must first be established, the effects on our
business will only be possible in the medium to long term.
In October 2015, we announced that we had relaunched our
branding and in this context presented our new visual appear-
ance and new logo to the public. Our new branding reflects our
transformation into a science and technology company while
at the same time ensuring that we operate uniformly as Merck
worldwide, with the exception of the United States and Canada.
Opportunities from the launch of our new branding
124 Combined Management Report Report on Risks and Opportunities
Antennas that can receive signals transmitted in the high
frequency range (e.g. Ka and Ku band) can also be realized
with the aid of corresponding liquid crystal mixtures. As a result,
mobile data exchange could improve significantly in a wide vari-
ety of fields of application. Since novel liquid crystal materials
for antennas are currently being developed, the market launch
of liquid crystal antennas could still take a few years. New
application opportunities for liquid crystals could have medium-
to long-term positive effects on the financial indicators of the
Performance Materials business sector.
We are pursuing a strategy of leveraging our expertise as the
global market leader in liquid crystals in order to develop new
fields of application for innovative liquid crystal technologies,
e.g. liquid crystal windows (LCWs), mobile antennas or liquid
crystal displays (LCDs). With the acquisition of our long-standing
cooperation partner Peer+ B.V., we are further advancing the
development of the future-oriented market for LCWs. Thanks
to licrivision™ technology, LCWs create new architectural pos-
sibilities. Through progressive brightness control, they can for
example increase a building's energy efficiency.
Opportunities due to new application possibilities for
liquid crystals
Lastly, we fully acquired the Israeli company Qlight Nano-
tech Ltd., Tel Aviv, Israel in order to actively support techno-
logical advances in the display industry. This move is expected
to strengthen the further development of quantum materials
for display applications.
Moreover, within the framework of partnerships with display
manufacturers, start-ups and universities, progress has been
made in the realization of shapeable displays. Through the
application of flexible organic electronics, an entirely glass-free
plastic LC display that is both bendable and extremely robust
has been developed.
driven by the diversification of applications for OLED displays.
OLED technology is an established alternative to LCDs in
small-area displays, for instance smartphones. However, owing
to technological advances, OLED technology is increasingly
being used in more and more large-area displays, such as
televisions. High-quality lighting applications, for example for
automobiles, offer further growth potential for OLEDs. In order
to make the mass production of large-area OLED displays
more efficient, we have been cooperating since the end of 2012
with Seiko Epson Corporation to enable printing processes for
OLED displays. To support the expected market growth, we
are investing around € 30 million in a new OLED production
unit at the Darmstadt site, where we will start manufacturing
ultra-high-purity OLED materials for applications in modern
displays and lighting systems as of summer 2016. We made
a further investment of around € 7 million to construct a new
OLED Application Center (OAC) in Korea, which was inaugu-
rated in May 2015. With the OAC, we are securing competitive
advantages since it enables us to better meet the needs of
Korean customers and to correspondingly shorten the time to
market launch.
We see opportunities in the medium- to long-term possibilities
of significant market growth of OLED applications in high-
quality display applications. We are building on more than ten
years of experience in manufacturing organic light-emitting
diode (OLED) materials as well as a strong portfolio of world-
wide patents in order to develop ultrapure and extremely
stable materials that are precisely tailored to customer
requirements. The development in the OLED market is being
Risks of dependency on suppliers
For the Group accounting process, we use a standard SAP
software tool in most countries. Via a detailed authorization
concept to limit user rights on a need-to-have basis, and in
line with the principles of the separation of duties, the system
contains both single-entity reporting and the consolidated
financial statements.
Quality controls along the entire value chain reduce the risks
related to product quality and availability. This starts with the
qualification of our suppliers. Quality controls also include
comprehensive quality requirements for raw materials, pur-
chased semi-finished products and plants. We are dependent
on individual suppliers of precursor products for some of our
main products. In the event that one of these suppliers curtails
or discontinues production, or supply is disrupted, this could
potentially have a critical impact on the business concerned.
With long-term strategic alliances for precursor products critical
to supply and price as well as alternative sourcing strategies,
we reduce the probability of occurrence of these risks and rate
them as unlikely. Overall, these are classified as medium risks.
2013
2014
2015
128 Combined Management Report Report on Risks and Opportunities
Legal risks
Generally, we strive to minimize and control our legal risks. To
this end, we have taken the necessary precautions to identify
threats and defend our rights where necessary.
Nevertheless, we are still exposed to litigation risks or legal
proceedings. In particular, these include risks in the areas of
product liability, competition and antitrust law, pharmaceutical
law, patent law, tax law, and environmental protection. As
a research-based company, we have a valuable portfolio of
industrial property rights, patents and brands that could
become the target of attacks and infringements. The outcome
of future proceedings or those currently pending is difficult to
foresee. Generally, due to long statutes of limitations or in
some cases the absence thereof, it is not possible to rule out
that we will face third-party claims arising from the same issue
despite the conclusion of legal proceedings. Court or official
rulings or settlements can lead to expenses with a significant
impact on our business and earnings.
Opportunities due to the further development of the
Biosimilars business
In our opinion, the lawsuits described below constitute the
most significant legal risks. This should not be seen as an
exhaustive list of all legal disputes currently ongoing.
Risks from product-related and patent law disputes
We are involved in a patent dispute in the United States with
Biogen IDEC Inc. (Massachusetts, USA) ("Biogen"). Biogen
claims that the sale of RebifⓇ in the United States infringes on
a Biogen patent. The disputed patent was granted to Biogen in
2009 in the United States. Subsequently, Biogen sued Merck
and other pharmaceutical companies for infringement of this
patent. Merck defended itself against all allegations and
brought a countersuit claiming that the patent was invalid and
not infringed on by our actions. A Markman hearing took
place in January 2012, however a decision has not yet been
announced. The parties are currently engaged in court-ordered
mediation proceedings that have not yet officially ended. It is
currently not clear when a first-instance decision will be made.
We have taken appropriate accounting measures. Given the
potential critical negative effects of the legal dispute on the
financial position in the event of a negative decision, we never-
theless classify this as a high risk.
In the Performance Materials business sector we have
negotiated with a competitor regarding potential patent
infringements. We maintain that the competitor's patent
infringement assertion is invalid owing to relevant prior art
and have filed the corresponding nullity actions. The compet-
itor has meanwhile filed two patent infringement lawsuits.
We are prepared for a confrontation in this issue and have
taken appropriate measures. Nevertheless, a potentially critical
negative impact on the financial position cannot be ruled out.
Risks due to antitrust and other government
proceedings
RaptivaⓇ: In December 2011, the federal state of São Paulo
sued us for damages because of alleged collusion between
various pharmaceutical companies and an association of
patients suffering from psoriasis and vitiligo. This collusion is
alleged to have been intended to increase sales of the medi-
cines from the companies involved to the detriment of patients
and state coffers. Moreover, patients are also suing for dam-
ages in connection with the product RaptivaⓇ. We have taken
appropriate accounting measures for these issues. Risks in
excess of this with a substantial negative effect on the net
assets, financial position and results of operations cannot be
ruled out, but are considered unlikely. This is rated as a medium
risk.
In one jurisdiction, we are subject to a government inves-
tigation regarding compliance with foreign exchange transfer
restrictions. In this connection, the responsible authorities are
investigating whether import prices led to impermissibly high
foreign exchange transfers. Appropriate accounting measures
have been taken for repayments and fines that are estimated to
be probable due to the uncertain legal situation in the affected
country. We classify this as a medium risk since a substantial
negative impact on the financial position cannot be ruled out.
Risks from drug pricing by the divested Generics Group
Paroxetine: In connection with the divested generics busi-
ness, we are subject to antitrust investigations by the British
Competition and Market Authority (CMA) in the United Kingdom.
In March 2013, the authorities informed us of the assumption
that a settlement agreement entered into in 2002 between
Generics (UK) Ltd. and several GlaxoSmithKline companies in
connection with the antidepressant drug paroxetine violates
British and European competition law. Merck, the then owner of
Generics (UK) Ltd., was allegedly involved in the negotiations
for the settlement agreement and is therefore liable. The
investigations into Generics (UK) Ltd. started in 2011, without
this being known to us. On February 11, 2016, the CMA
imposed a fine in this matter. We intend to take legal action
against this decision and have taken appropriate accounting
measures. Given the latest decision, we classify this as a
medium risk with a moderate negative impact on the financial
position.
Opportunities due to an expanding local presence in
high-growth markets
The impact of these risks on business operations depends
on the respective individual case, product-specific factors, the
value chain, as well as on regional aspects in particular. Group
Security is responsible for the overall coordination of all meas-
ures in this area. Overall, the threat resulting from crime in
general is seen as being possible and is classified as a medium
risk.
To combat product-related crime, an internal coordination
network covering all functions and businesses ("Merck Anti-
Counterfeiting Operational Network") was set up several years
ago. In addition, security measures are in use to protect
products against counterfeiting. Innovative technical security
solutions and defined preventive approaches are used to ward
off dangers relating to cybercrime and espionage. Measures
to prevent risks and to prosecute identified offenses are con-
ducted in all the relevant crime areas in close and trustworthy
cooperation with the responsible authorities.
Risks due to product-related crime and espionage
Owing to our portfolio, we are exposed to a number of sector-
specific crime risks. This relates primarily to products, including
among other things, counterfeiting, illegal channeling, misuse as
well as all types of property crime, including attempts at these
crimes. Crime phenomena such as cybercrime and espionage
could equally affect our innovations or innovation abilities as
such.
Companies in the chemical and pharmaceutical industries
are exposed to product liability risks in particular. Product
liability risks can lead to considerable claims for damages and
costs to avert damages. We have taken out the liability insur-
ance that is standard in the industry for such risks. However,
it could be that the insurance coverage available is insufficient
for individual cases. Although the occurrence of product liability
claims in excess of the existing insurance coverage is consid-
ered unlikely, individual cases could still have a critical negative
effect on the net assets, financial position and results of oper-
ations. We therefore rate a potential product liability risk as
a medium risk.
Further risks include the risk of operational failures due to
force majeure, for example natural disasters such as floods or
earthquakes, which could lead to a substantial interruption or
restriction of business activities. Insofar as it is possible and
economical to do so, the Group limits its damage risks with
insurance coverage, the nature and extent of which is constantly
adapted to current requirements. Although the occurrence of
these risks is considered unlikely, an individual event could
have a critical negative effect on the net assets, financial
position and results of operations and is therefore classified as
a medium risk.
Damage and product liability risks
Report on Risks and Opportunities Combined Management Report 125
Opportunities due to new technologies in the
manufacture of displays
For the assessment of balance sheet items, Group Account-
ing closely cooperates with Group Risk Management in order
to correctly present potential balance sheet risks. For special
issues, such as the measurement of intangible assets within
the scope of company acquisitions or pension obligations,
external experts are additionally involved where necessary.
Group Accounting provides support to the local contacts
and ensures a consistently high quality of reporting throughout
the entire reporting process.
-214.7
96.2
In 2015, administration expenses reported under Corporate
and Other amounted to € 246 million (2014: € 195 million).
Other operating expenses (net) rose to € -180 million
(2014: € -42 million). This was due primarily to the develop-
ment of the foreign currency result from operating activities.
Whereas foreign currency gains of € 53 million were reported
in 2014, a loss of € - 72 million was incurred in 2015. Taking
these effects into account, in 2015 EBIT amounted to
€ -432 million (2014: € -245 million) and EBITDA was
€ -411 million (2014: € -226 million). Adjusted for one-
time effects, EBITDA pre exceptionals totaled € - 360 mil-
lion (2014: € -166 million). This had a significant impact on
the development of business free cash flow, which dropped to
€ -421 million in 2015 (2014: € -215 million).
120 Combined Management Report Report on Risks and Opportunities
REPORT ON RISKS AND OPPORTUNITIES
Risks and opportunities are inherent to entrepreneurial activity.
We have put systems and processes in place to identify risks
at an early stage and to counteract them by taking appropriate
action. Within the company, opportunity management is an
integral component of internal decision-making processes such
as short- and medium-term operational planning and intra-year
business plans.
Risk and opportunity management
Merck is part of a complex, global business world and is there-
fore exposed to a multitude of external and internal influences.
Every business decision is therefore based on the associated
risks and opportunities.
In our internal risk reporting, risks are defined as possible
future events or developments that could lead to a negative
deviation from our (financial) targets. In parallel, opportuni-
ties are defined as possible events or developments that imply
a positive deviation from our planned (financial) targets. Iden-
tified future events and expected developments are taken into
account in internal planning provided that it can be assumed
that their occurrence is likely in the planning period. The risks
and opportunities presented in the following risk and opportu-
nities report are those possible future events that could
respectively lead to a negative or positive deviation from the
topics covered by planning.
-421.2
Risk management process
If risk-mitigating measures can be taken, their impact on
risk is also assessed. The residual risk after the implementation
of mitigation measures is presented in the internal risk report
as net risk. The planned timeframe for implementation and the
assumed mitigation effect are tracked by Group Risk Manage-
ment.
Group Controlling & Risk Management forms the organizational
framework for risk management and reports directly to the
Group Chief Financial Officer. Group Risk Management uses the
information reported to determine the current risk portfolio for
the Merck Group, presenting this in a report to the Executive
Board, the Supervisory Board and the Finance Committee with
detailed explanations twice per year. Furthermore, significant
changes in the assessment of the risks already known and
new significant risks can be reported at any time and are com-
municated to the corporate bodies on an ad hoc basis.
In the standard process a lower limit for reporting risks
is set at a value of € 5 million and for the ad hoc process at
a value of € 25 million. Risks below these limits are steered
independently within the business sectors. The relevant time-
frame for internal risk reporting is five years. The effects of
risks described in this report on risks and opportunities are
presented as annual values. The assessment of the risks pre-
sented relates to December 31, 2015. There were no relevant
changes after the end of the reporting period that would have
necessitated an amended presentation of the risk situation
of the Group.
Within the scope of audits, Group Internal Auditing regu-
larly reviews the performance of risk management processes
within the units and, at the same time, the communication of
relevant risks from the operating businesses to Group Risk
Management.
Opportunity management process
The risk management system described concentrates on
business risks, and not on opportunities at the same time. The
opportunity management process is integrated into our internal
controlling processes and carried out in the operating units on
the basis of the Group strategy. The businesses analyze and
assess potential market opportunities as part of strategy and
planning processes. In this connection, investment opportuni-
ties are examined and prioritized primarily in terms of their
potential value proposition in order to ensure an effective allo-
cation of resources. We selectively invest in growth markets to
leverage the opportunities of dynamic development and cus-
tomer proximity at a local level.
If the occurrence of the identified opportunities is rated as
likely, they are incorporated into the business plans and the
short-term forecasts. Trends going beyond this or events that
could lead to a positive development in the net assets, financial
position and results of operations are presented in the following
report as opportunities. These could have a positive effect on
our medium-term prospects and lead to a positive deviation
from forecasts.
Report on Risks and Opportunities
Combined Management Report 121
Risk and opportunity assessment
The objective of our risk management activities is to recognize,
assess and manage risks early on and to implement appropriate
measures to minimize them. The responsibilities, objectives
and processes of risk management are described in our internal
risk management guidelines. The business heads, managing
directors of Merck subsidiaries, and the heads of Group func-
tions are specified as employees with responsibility for risks.
The group of consolidated companies for risk reporting pur-
poses is the same as the group of consolidated companies for
the consolidated financial statements. Every six months, the
risk owners assess their risk status and report their risk port-
folio to Risk Management. We use special risk management
software in the context of these activities.
116.9
-166.0
-360.1
Corporate and Other
Corporate and Other
Report on Economic Position
Combined Management Report 119
Corporate and Other comprises Group administration expenses
for Group functions that cannot be directly allocated to the busi-
ness sectors, such as Finance, Procurement, Legal, Commu-
nications, and Human Resources. Corporate costs additionally
encompass expenses for central, non-allocated IT functions,
including expenses related to the expansion and harmonization
of IT systems within the Merck Group.
CORPORATE AND OTHER
Key figures
€ million
Operating result (EBIT)
EBITDA
EBITDA pre exceptionals
Business free cash flow
Change
2015
2014
in %
-432.3
-245.1
76.3
-411.0
-226.0
81.8
Risks
The significance of risks is calculated on the basis of their
possible negative impact on the forecast financial targets in
conjunction with the probability of occurrence of the respec-
tive risk. In line with these two factors, risks are classified as
"high", "medium" or "low".
The underlying scales for measuring these factors are
shown below:
Immaterial negative impact on the net assets, financial position and
results of operations
Medium
Medium
Low
Medium
Medium
Medium
Low
Low
High
Medium
Medium
Low
High
High
Medium
Low
Probability of occurrence <20%
20-50%
51-80%
> 80%
Opportunities
Opportunities are assessed in their respective specific business
environment. Marketing measures for operational planning are
usually quantified in relation to sales, EBITDA pre exceptionals
and business free cash flow. Net present value, internal rate of
return, the return on capital employed (ROCE), and the amor-
tization period of the investment are primarily used to assess
and prioritize investment opportunities. Similarly, scenarios are
frequently set up to simulate the influence of possible fluctua-
tions and changes in the respective factors on results. There is
no overarching, systematic classification of the probability of
occurrence and impact of opportunities.
122 Combined Management Report Report on Risks and Opportunities
Internal control system for the Group
accounting process
The objective of the internal control system for the accounting
process is to implement controls that provide assurance that
the financial statements are prepared in compliance with the
relevant accounting laws and standards. It covers measures
designed to ensure the complete, correct and timely convey-
ance and presentation of information that is relevant for the
preparation of the consolidated financial statements and the
management report.
Key tools
The internal control system is geared to ensuring the accuracy
of the consolidated accounting process and the implementation
of internal controls for the preparation of compliant financial
statements with reasonable assurance. The Group Accounting
function centrally steers the preparation of the consolidated
financial statements of Merck KGaA as the parent company of
the Merck Group. This Group function defines the reporting
requirements that the Merck subsidiaries must meet as a min-
imum requirement. At the same time, this function steers and
monitors the scheduling and process-related requirements of
the consolidated financial statements. Group-wide accounting
guidelines form the basis for the preparation of the statutory
financial statements of the parent company and of the subsid-
iaries, which are reported to Group Accounting; the guidelines
are adapted in a timely manner to reflect changes in the finan-
cial regulatory environment and are updated in accordance
with internal reporting requirements. Intra-group transactions
are eliminated during the consolidation process. This gives rise
to the need for a mirrored entry at the corresponding subsidi-
aries that is monitored during the consolidation process.
Group Accounting also ensures the timely central manage-
ment of changes to the equity holding structure and corre-
spondingly adapts the Group's scope of consolidation. The
individual companies have a local internal control system.
Where financial processes are handled by a Shared Service
Center, the internal control system of the Shared Service
Center is additionally applied. Both ensure that accounting
complies with IFRS (International Financial Reporting Stand-
ards) and with the Group accounting guidelines.
Moderate negative impact on the net assets, financial position and
results of operations
The accounting process is designed at all levels to ensure
a clearly defined segregation of duties and assignment of
responsibilities to the units involved in the accounting process
at all times within the scope of dual control.
Substantial negative impact on the net assets, financial position and
results of operations
Explanation
PROBABILITY OF OCCURRENCE
Probability of occurrence
< 20%
20-50%
51-80%
> 80%
DEGREE OF IMPACT
Degree of impact
> € 50 million
€ 20-50 million
€ 5 <20 million
< € 5 million
The combination of the two factors results in the risk matrix
below, which shows the individual risks and their significance
to the Group.
RISK MATRIX
> € 50 million
€ 20-50 million
€ 5-20 million
< € 5 million
Impact
Explanation
Unlikely
Possible
Likely
Very likely
Critical negative impact on the net assets, financial position and
results of operations
Over the past three and a half years, we have moved forward
with the development of our own Biosimilars business with
a focus on the therapeutic areas of oncology and autoimmune
diseases. Apart from the development of our own active ingre-
dients, we entered into a partnership with Dr. Reddy's Labora-
tories Ltd., Hyderabad, India, among others, to co-develop
a portfolio of biosimilars in oncology. Moreover, in 2014 we
established a partnership in the Brazilian market with Bionovis
SA, Barueri, Brazil to develop a portfolio of biosimilars. Signifi-
cant contributions to sales by the Biosimilars business unit are
not to be expected before the medium to long term. However,
the expenditure required for the development of this business
unit has already been taken into account in today's planning.
Net sales
Report on Risks and Opportunities Combined Management Report 129
Negative currency effect, particularly due to Latin American
currencies
Negative product mix due to RebifⓇ decline
Significant market launch costs, especially for avelumab and
cladribine
Absence of commission expenses resulting from the termination
of the agreement between Merck and Pfizer to co-promote Rebif®
in the United States
Rising research and development costs owing to pipeline develop-
ment, particularly in immuno-oncology
Negative currency effect, due in particular to Latin American
currencies
Increase in growth markets and co-promotion of XalkoriⓇ
offset RebifⓇ decline
-
Key assumptions
Low double-digit percentage
decline
Low double-digit percentage
decline taking into considera-
tion commercialization costs,
especially for avelumab
(excluding market launch
costs: high single-digit to
mid-teens percentage decline
Negative portfolio effect
in the medium double-digit
million range due to the
divestment of KuvanⓇ
Slight organic growth
Slight negative portfolio
effect due to the divestment
of KuvanⓇ
-
-
1,581.0
Business free
cash flow
2,001.7
EBITDA pre
exceptionals
6,933.8
Net sales
Forecast for 2016
Actual results
2015
€ million
Forecast for the Healthcare business sector
Business free cash flow of the Merck Group is forecast to show
a high single-digit percentage increase in 2016. Apart from an
increase in the operating result, we also expect further invest-
ments in property, plant and equipment within the scope of
strategic growth initiatives.
Business free cash flow
Expenses reported under Corporate and Other are expected
to increase significantly in 2016 since we plan to further expand
future-oriented Group initiatives such as branding and ONE
Global Headquarters and also drive forward the digitalization
of the company.
Divestment of KuvanⓇ
acquisition of Sigma-Aldrich can be expected. This forecast
has already taken into account the scheduled realization of
synergies as part of the integration of Sigma-Aldrich. In 2016,
EBITDA pre exceptionals of the Performance Materials busi-
ness sector is forecast to increase slightly, but at least reach-
ing the level of 2015.
Decline in EBITDA pre exceptionals
Further investments in property, plant and equipment within the
scope of strategic growth projects
In line with the development of sales
Research Solutions and Applied Solutions also to contribute to
growth to a smaller extent
Process Solutions expected to be key growth driver
Key assumptions
High double-digit percentage
increase
- High double-digit percentage
portfolio effect due to the
acquisition of Sigma-Aldrich
Moderate increase due to
organic sales growth
- High double-digit percentage
portfolio effect due to the
acquisition of Sigma-Aldrich
Moderate organic growth
Forecast for 2016
675.6
Business free
cash flow
856.1
EBITDA pre
exceptionals
3,355.3
Net sales
Actual results
2015
€ million
Forecast for the Life Science business sector
In 2016, we expect business free cash flow of the Healthcare
business sector to show a low double-digit percentage decline
over the previous year. The key driver will be the development
of EBITDA pre exceptionals. We expect the development of
inventories and trade accounts receivable to be at the previous
year's level. Likewise, we expect further investments in prop-
erty, plant and equipment within the scope of strategic growth
projects.
Business free cash flow
incurred. A lower-margin product mix, significant commercial-
ization costs for avelumab and cladribine, and an expected
negative currency effect particularly attributable to Latin
American currencies will burden the margin of the Healthcare
business sector in 2016. Furthermore, since the divestment
of KuvanⓇ will also have a noticeable impact on EBITDA pre
exceptionals, we expect a negative portfolio effect in the mid
double-digit million range.
EBITDA pre exceptionals for the Healthcare business sector is
likely to see a low double-digit percentage decline. We predict
that the focused further development of our pipeline, espe-
cially in immuno-oncology, will result in significant research
and development costs. By contrast, due to the termination of
the agreement between Merck and Pfizer to co-promote RebifⓇ
in the United States, commission expenses will no longer be
EBITDA pre exceptionals
We expect slight organic growth of net sales in the Healthcare
business sector in 2016 compared with the previous year. We
forecast a sharp organic increase in growth markets and higher
sales from our co-promotion of XalkoriⓇ. This growth is to offset
the expected decline in sales of Rebif®, Healthcare's top-selling
product. Since the rights to KuvanⓇ were returned to BioMarin
Pharmaceutical Inc. in January 2016, we additionally forecast
a slightly negative portfolio effect in 2016.
Net sales
Report on Expected Developments Combined Management Report 133
Stable level of inventories and trade accounts receivable
Scheduled realization of synergies of € 90 million from the Sigma-
Aldrich integration
For the Healthcare business sector, we expect a low double-
digit percentage decline in EBITDA pre exceptionals, primarily
as a result of additional investments in research and develop-
ment (particularly in immuno-oncology). We expect EBITDA
pre exceptionals of the Life Science business sector to increase
moderately as a result of organic sales growth. Additionally,
a high double-digit percentage portfolio effect due to the
EBITDA pre exceptionals
REPORT ON EXPECTED DEVELOPMENTS
Report on Expected Developments Combined Management Report 131
We pursue the opportunities that arise and show their
expected effects in the forecast development of our key per-
formance indicators - net sales, EBITDA pre exceptionals and
business free cash flow. Furthermore, we will actively seek new
opportunities, examine their implementation and drive them
forward where appropriate. If opportunities arise in addition to
the forecast developments, or these occur more quickly than
anticipated, this could have correspondingly positive effects
on our net assets, financial position and results of operations.
In our view, business-related opportunities offer the great-
est potential. An important element here is the continuous
expansion in Asia, Latin America, Africa, and the Middle East.
With the continuing intensification and focusing of our research
and development activities, we want to be able to continue to
offer our customers innovative products and help shape mar-
kets. Moreover, we also consolidate our expertise in numerous
alliances, for instance with Pfizer Inc., Seiko Epson, as well as
with various universities and start-ups. The topic of innovation
is at the forefront of all our activities. Externally, this is becom-
ing particularly apparent through our new Innovation Center
at Group headquarters in Darmstadt, which is to develop into
a nucleus of creativity at Merck. The activities listed hold sig-
nificant opportunities for us in the medium to long term,
beyond the underlying forecast period.
assessment that the risks are not of a nature to threaten the
existence of the Group as a going concern. We are confident
that we will continue to successfully master the challenges
arising from the above risks in the future as well.
The overall view of the risk situation of the Group, which is
derived from the summary of the risks described on the basis
of their impact and probability of occurrence, leads to the
With respect to high and medium risks, certain changes
have resulted as the assessment of the individual risks has of
course altered over the fiscal year due to changing external
and internal conditions, while the overall risk assessment
remained stable. Thanks to the risk reduction measures taken -
such as the consistent implementation of management action
(organizational responsibility and process improvements),
existing insurance coverage and accounting precautions
Merck's significant risks in particular have been further mini-
mized in net terms.
The most significant individual risks in the businesses have
been named in the report above, with business-related risks
being the most significant alongside legal risks.
Although the number of risks reported is higher than the
specific opportunities identified, we consider the distribution
of risks and opportunities to be balanced. A balanced overall
view is also supported by the fact that net sales and business
success are built on a diverse range of pharmaceutical and
chemical products for a variety of industries. As the markets
differ in their structure and economic cycles, this diversification
helps to lower risk. This diversification is being strengthened
by the current acquisition of Sigma-Aldrich and the strategic
alliance entered into with Pfizer in 2014.
and opportunity situation and
management assessment
Overall view of the risk
130 Combined Management Report Report on Risks and Opportunities
Irrespective of the fact that acquisitions made in the past
have been successfully completed, the risk of conducting the
acquisition and integration exists for future transactions, for
instance for the current integration of Sigma-Aldrich. This
includes, among other things, the inability to meet sales vol-
ume targets and higher integration costs than expected, as
well as the failure to meet synergy goals. The divestment of
companies and businesses can lead to liability vis-à-vis the
buyer, for instance through indemnity clauses and guarantee
commitments. Through strong due diligence processes and
closely managed integration processes, we seek to reduce the
probability of occurrence of this risk. Nevertheless, owing to
a possible occurrence of this risk with potentially critical neg-
ative effects on the net assets, financial position and results of
operations, we classify this as a medium risk.
businesses
Risks of the divestment, acquisition
and integration of companies and
As a company with global production operations, we are
exposed to risks of possible damage to people, goods and our
reputation. Audits, consulting and training on environmental
protection and occupational health and safety minimize these
risks to people and the environment. In order to ensure the
continuity of plant and equipment, we monitor these risks
both at our own sites as well as at suppliers and contract
manufacturers. By adhering to high technical standards, our
rules of conduct and all legal requirements in environmental
protection and occupational health and safety, we ensure the
preservation of goods and assets. We have taken sufficient
appropriate accounting measures for the environmental risks
known to us. Nevertheless, we classify these as a high risk
since a critical negative impact on the financial position cannot
be ruled out.
Environmental and safety risks
Despite the mitigating measures taken and functional continuity
plans, the effects of cybercrime or the failure of business-
critical IT applications and their influence on the net assets,
financial position and results of operations are considered
medium risks owing to possibly substantial impacts.
Additionally, IT applications used globally form the basis for
the contractual delivery of products and solutions. The failure of
business-critical IT applications could therefore have a direct
influence on our ability to deliver; likewise this applies to
the failure of a data center. To achieve the required service
quality, we use a quality management system certified to
ISO 20000:2011. In addition, to reduce the risk of failure, we
operate several redundantly designed data centers.
Increasing international networking and the related possibility
of IT system abuse are resulting in cybercrime risks for Merck,
such as the failure of central IT systems, the disclosure of
confidential research and business development data, the
manipulation of IT systems in chemical process control, or an
increased burden or adverse impact on IT systems as a result
of virus attacks. The entire Group has global security guidelines
and information protection management for IT and non-IT
areas, each with organizational and technical standards for
access rights as well as information and data protection, based
on ISO 27001.
Risks due to cybercrime and the failure of business-
critical IT applications
We use a variety of IT systems and processes in order to opti-
mally focus and adequately support our globalization. Trends
in information technology offer various opportunities but also
harbor risks.
Information technology risks
Recruiting and retaining specialists and talent is therefore
one of the key priorities for the company and is managed
through the targeted use of, for instance, employer branding
initiatives, global talent and succession management processes
as well as competitive compensation packages. Nevertheless,
employee-related risks that affect business activities are
possible, even though their impact is difficult to assess. We
rate this as a medium risk.
The markets relevant to the company are characterized
by intensive competition for qualified specialists and by demo-
graphic challenges. Fluctuation risks specific to countries and
industries have to be identified ahead of time and specifically
addressed in order to keep the skills and expertise critical to
success and business within the company.
Our future growth is highly dependent on our innovative
strength. Therefore, the expertise and engagement of employ-
ees in all sectors in which we operate are crucial to the success
of the company.
Human resources risks
The following report provides a forecast for fiscal 2016 of the
development of the Merck Group and its three business sectors:
Healthcare, Life Science and Performance Materials. The fore-
cast again covers our key performance indicators as in 2014,
EBITDA pre exceptionals is our key financial indicator to steer
operating business. In 2016, owing to the expected operating
development and the acquisition of Sigma-Aldrich, we forecast
a low double-digit percentage increase of EBITDA pre excep-
tionals of the Merck Group over the previous year.
namely net sales, EBITDA pre exceptionals and business free
cash flow. Subsequent to the successful completion of the
Sigma-Aldrich acquisition in November 2015, all forecasts take
into account the effects of this acquisition on our businesses.
€ million
We expect that the Performance Materials business sector will
achieve slight organic sales growth despite sustained price
pressure on liquid crystals, while the UB-FFS and OLED tech-
nologies are increasingly becoming the business sector's growth
drivers.
132 Combined Management Report Report on Expected Developments
In the Life Science business sector, we forecast a moderate
organic increase in net sales as well as a high double-digit
portfolio effect due to the acquisition of Sigma-Aldrich. It is
assumed that the strongest driver of growth will be Process
Solutions.
For the Healthcare business sector, we forecast slight organic
sales growth in 2016. For Rebif®, Healthcare's top-selling prod-
uct, we continue to expect a challenging market environment
that will lead to a sharp organic decline in net sales. However,
we plan to offset this decline through a strong organic increase
in growth markets and sales from our co-promotion of XalkoriⓇ.
In addition, we expect a slightly negative portfolio effect due to
the divestment of KuvanⓇ.
For the Merck Group, we expect slight organic sales growth in
2016 compared with the previous year. Owing to the acquisition
of Sigma-Aldrich, we additionally expect a positive portfolio
effect in the low double-digit percentage range. As a global
corporate group, we are exposed to currency effects due to the
fluctuation of foreign exchange rates. In 2016, we forecast a
€/US$ rate of 1.07 -1.12, which we expect will lead to a posi-
tive currency effect compared with 2015. In growth markets,
however, especially Latin America, the Merck Group is likely to
see a negative development as a result of exchange rate
effects. Overall, we expect a slightly negative exchange rate
effect for the Merck Group in 2016.
Net sales
Further investments in property, plant and equipment within the
scope of strategic growth initiatives
Expected increase in EBITDA pre exceptionals
sustained price pressure on liquid crystals
Scheduled realization of synergies from the Sigma-Aldrich integration
Maintaining the profitability of Performance Materials despite
Additional investments in Healthcare research and development,
particularly in immuno-oncology
Positive low double-digit portfolio effect due to the acquisition of
Sigma-Aldrich
Slight organic growth in Performance Materials despite continued
price pressure on liquid crystals; strong growth dynamics for OLED
and UB-FFS
- Moderate organic growth in Life Science, with Process Solutions as
the main growth driver
Slight organic growth in Healthcare despite continued challenging
environment for RebifⓇ
Key assumptions
High single-digit percentage
increase
Low double-digit percentage
increase taking into account
the Sigma-Aldrich portfolio
effect
Slight organic growth
Portfolio effect amounting
to a low double-digit
percentage increase
2,766.2
Business free
cash flow
3,629.8
EBITDA pre
exceptionals
12,844.7
Net sales
Forecast for 2016
Actual results
2015
Forecast for the Merck Group
2,555.6
Improvement in EBITDA pre exceptionals
3,888
Sales increases, particularly in the Healthcare and Performance
Materials business sectors, were achieved in all four quarters
of 2015 compared with the previous year.
14.0
3,410
26.4
1,263
1,597
3,888
8.4
622
674
6.0
1,525
€ million/Change in %
1,617
2014
2015
Total
Performance Materials
Life Science
Healthcare
€ million/Change in %
Merck KGaA's sales rose further in 2015. All business sectors
contributed to the increase of € 478 million:
Business Development
The Statement on Corporate Governance according to section
289a HGB can be found on pages 148 to 163.
Statement on Corporate Governance
Change
Group sales
Sales to third parties
Total
14.0
3,410
-5.5
488
461
Change
17.3
2,922
3,427
2014
2015
14.0
3,410
-8.7
310
283
3,888
16.3
Change
2014
3,100
3,605
2015
Total
Germany
Outside Germany
€ million/Change in %
At 88.1%, the share of exports increased again in 2015 com-
pared with the previous year (2014: 85.7%).
The management report of Merck KGaA has been combined
with the Group management report. The annual financial
statements and the combined management reports of the
Merck Group and Merck KGaA for 2015 have been filed with
the electronic German Federal Gazette (elektronischer Bundes-
anzeiger) and are available on the website of the German
company register.
ADDITIONAL INFORMATION ON MERCK KGAA
IN ACCORDANCE WITH THE GERMAN
COMMERCIAL CODE (HGB)
The share of Group sales also rose in 2015 (92.7%; 2014:
90.9%). This development underscores the importance of
Merck KGaA to the Merck Group as a production company:
The company is not authorized to acquire its own shares.
The company has not entered into any material agree-
ments subject to a change of control pursuant to a takeover
offer nor has it entered into any compensation agreements
with the members of the Executive Board or employees in the
event of a takeover offer.
- Sustained volume increases in all businesses
Key assumptions
Moderate increase
930.8
cash flow
Business free
the 2015 level
1,132.1
Slight increase, yet at least at
EBITDA pre
exceptionals
Development of inventories and trade accounts receivable in line
with net sales growth
134
Combined Management Report Report on Expected Developments
Net sales
Overall, we expect moderate organic growth of net sales in
the Life Science business sector in 2016 compared with the
previous year. Process Solutions is expected to continue to
contribute substantially to this growth, benefiting from the
sustained growth dynamics of the market for biopharmaceuti-
cals. Research Solutions and Applied Solutions are also expected
to contribute to organic sales growth, but to a smaller extent.
Owing to the acquisition of Sigma-Aldrich, we expect a portfolio
effect in the high double-digit percentage range.
EBITDA pre exceptionals
In 2016, we expect EBITDA pre exceptionals of the Life Science
business sector to increase moderately over the previous year
as a result of organic growth of net sales. In addition, as a
consequence of the acquisition of Sigma-Aldrich, we expect
EBITDA pre exceptionals to see portfolio-related growth in the
high double-digit percentage range. This forecast already takes
into account the scheduled realization of synergies amounting
to around € 90 million in 2016.
Business free cash flow
We expect business free cash flow of the Life Science business
sector in 2016 to show a high double-digit percentage increase
over the previous year. The predicted rise in EBITDA pre
exceptionals should be the main driver of this increase. We
forecast the development of inventories and trade accounts
receivable in line with that of net sales.
Forecast for the Performance Materials business sector
€ million
138 Combined Management Report Additional information on Merck KGaA in accordance with the German Commercial Code (HGB)
Actual results
2015
Forecast for 2016
Typical price decline in the liquid crystals business
Strong growth dynamics in OLED and UB-FFS
Slight organic growth
Report in accordance with section 315 (4) of the German Commercial Code (HGB) Combined Management Report 137
instead of paying the sum of money due and to the extent that
in each case a cash settlement is not granted, or own shares
or other forms of fulfillment are used. Each issue of new shares
shall take place at the determined option or conversion price,
pursuant to the aforementioned authorization resolution. The
new shares participate in the profit from the beginning of the
fiscal year in which they are created; insofar as this is legally
permissible, the Executive Board may, with the approval of the
Supervisory Board, and in deviation from section 60 (2) AktG,
stipulate that the new shares also participate in the profit for
a past fiscal year. The Executive Board is authorized, with the
approval of the Supervisory Board and of E. Merck, to stipulate
the further details of the implementation of the increase in
contingent capital.
exchange rights to E. Merck KG in accordance with Article 33
of the Articles of Association to enable the conversion of its
equity interest. The shares carry dividend rights from the
beginning of the fiscal year following the year in which the
conversion option is exercised. Moreover, the share capital is
contingently increased by up to € 16,801,491.20 composed
of up to 12,924,224 no-par value bearer shares (Contingent
Capital II). This increase in contingent capital is only to be
implemented insofar as the bearers or creditors of option or
conversion rights or the conversion obligations on warrant
bonds, option participation certificates, option participation
bonds, convertible bonds, convertible participation certificates
or convertible participation bonds issued against contributions
that are issued or guaranteed by the company or a subordi-
nate Group company on the basis of the authorization resolu-
tion of the Annual General Meeting of May 9, 2014 to May 8,
2019, utilize their option or conversion rights or, to fulfill their
conversion obligation insofar as they are obliged to fulfill their
conversion obligation, or insofar as the company exercises an
option, wholly or in part, of granting shares in the company
Maintaining the profitability of the Liquid Crystals business despite
noticeable price decline
The Articles of Association also encompass contingent
capital. The share capital is contingently increased by up to
€ 66,406,298.40 divided into 51,081,768 shares (Contingent
Capital I). The contingent capital increase serves to grant
Executive Board is authorized to exclude, with the approval of
the Supervisory Board, the statutory subscription right of the
limited liability shareholders in the case of capital increases
against cash contributions if the issue price of the new shares
is not significantly lower than the stock exchange price of
already listed shares carrying the same rights, as defined in
section 203 (1) and (2) and section 186 (3) sentence 4 of the
German Stock Corporation Act (AktG), at the time when the
Executive Board finally fixes the issue price, and if the pro-
portion of the share capital represented by the new shares
for which the subscription right is excluded does not exceed
10% of the share capital available at the time of the resolu-
tion of the Annual General Meeting or - if this amount is
lower - of the share capital available at the time of exercising
this authorization. This upper limit shall be reduced by the
prorated amount of shares that are sold during the term of the
authorized capital under exclusion of shareholders' subscrip-
tion rights pursuant to section 71 (1) no. 8 sentence 5 and
section 186 (3) sentence 4 of the German Stock Corporation
Act, as well as shares that must be issued to redeem option
or convertible bonds, as long as the bonds have been issued
during the term of this authorization under exclusion of sub-
scription rights. In addition, with the approval of the Super-
visory Board, the subscription right of the shareholders can be
excluded in order to enable E. Merck KG to exercise its right
pursuant to Article 32 (3) of the Articles of Association to par-
ticipate in a capital increase by issuing shares or freely trans-
ferable share subscription rights and to enable E. Merck KG
to exercise its right pursuant to Article 33 of the Articles of
Association to convert its equity interest into share capital.
Moreover, with the approval of the Supervisory Board, the
subscription right of the shareholders can be excluded as far
as this is necessary, in order to grant subscription rights for
new shares to holders of warrants and convertible bonds
issued by the company or its subsidiaries, to the extent to
which they would be entitled after exercising their option and
conversion rights or fulfilling their option and conversion obli-
gations. Lastly, with the approval of the Supervisory Board,
the subscription right of the shareholders can be excluded in
order to exclude fractional amounts from the subscription
right.
The Executive Board is authorized, with the approval of the
Supervisory Board and of E. Merck KG, to increase the share
capital on one or several occasions until April 26, 2018 by up
to a total of € 56,521,124.19 by issuing new shares against
cash and/or contributions in kind (Authorized Capital). The
The Articles of Association can be amended by a resolution
by the Annual Meeting that requires the approval of the gen-
eral partners. The resolutions of the General Meeting are, not-
withstanding any statutory provisions to the contrary, adopted
by a simple majority of the votes cast. Where the law requires
a capital majority in addition to the voting majority, resolu-
tions are adopted by a simple majority of the share capital
represented in the vote. The Articles of Association of the
company specify the authorized share capital.
According to the Articles of Association of Merck, the gen-
eral partners not holding an equity interest who form the
Executive Board are admitted by E. Merck KG with the consent
of a simple majority of the other general partners. A person
may only be a general partner not holding an equity interest if
he or she is also a general partner of E. Merck KG. In addition,
at the proposal of E. Merck KG and with the approval of all
general partners not holding an equity interest, further per-
sons who are not general partners not holding an equity inter-
est may be appointed to the Executive Board.
Pursuant to the information on voting rights submitted
to us in accordance with the German Securities Trading Act
(WPHG), on December 31, 2015 no shareholders owned direct
or indirect investments exceeding more than 10% of the vot-
ing rights.
The following information is provided in accordance with sec-
tion 315 (4) of the German Commercial Code and the explana-
tory report pursuant to section 176 (1) sentence 1 of the
German Stock Corporation Act (AktG).
REPORT IN ACCORDANCE WITH SECTION 315 (4)
OF THE GERMAN COMMERCIAL CODE (HGB)
136 Combined Management Report Report in accordance with section 315 (4) of the German Commercial Code (HGB)
EBITDA pre exceptionals of the Merck Group is expected to
increase by a low double-digit percentage in 2016, taking into
consideration the portfolio effect resulting from the Sigma-
Aldrich acquisition. This includes expected cost synergies from
the integration of Sigma-Aldrich. In the Healthcare business
sector, we will invest further in the research and development
of innovative medicines and therefore expect additional
expenses for the pharmaceutical pipeline. For the Performance
Materials business sector, we continue to expect high earning
power and assume that EBITDA pre exceptionals will increase
slightly, but at least remain at the level of 2015. We expect
business free cash flow of the Merck Group to show a high
single-digit percentage increase over 2015.
As of the balance sheet date, the company's subscribed
capital is divided into 129,242,251 no-par value bearer shares
plus one registered share. Each share therefore corresponds
to € 1.30 of the share capital. The holder of the registered
share is E. Merck Beteiligungen KG. It is entitled and obliged
to appoint one-third of the members of the Supervisory Board
representing the limited liability shareholders. If the holder of
the registered share is a general partner, he or she has no
such right of appointment. The transfer of the registered share
requires the company's approval. The approval is granted at
the sole discretion of the personally liable general partner with
an equity interest, namely E. Merck KG.
- Optimization of inventories
Summary
In 2016, business free cash flow of the Performance Materials
business sector is forecast to increase moderately. This fore-
cast is in line with the expected development of EBITDA pre
exceptionals. As regards inventories, we expect an optimiza-
tion of these in 2016.
Business free cash flow
Report on Expected Developments Combined Management Report 135
In our estimation, EBITDA pre exceptionals of the Performance
Materials business sector in 2016 will see a slight increase, but
at least remain at the level of 2015. One of our key objectives
is to maintain the profitability of the Liquid Crystals business
at a high level despite the price decline.
EBITDA pre exceptionals
We forecast slight organic sales growth in the Performance
Materials business sector in 2016 compared with the previous
year. All Performance Materials businesses are likely to increase
their sales volumes. We assume that the growth dynamics,
especially in the businesses with OLED and UB-FFS technologies,
will be particularly strong. By contrast, we expect a liquid crys-
tals price decline typical for the market.
Net sales
For 2016, we expect a slight organic increase in Group net sales,
to which all business sectors are forecast to contribute. Owing
to the acquisition of Sigma-Aldrich, we additionally expect a
positive portfolio effect in the low double-digit percentage
range compared with the previous year.
At least stable EBITDA pre exceptionals
-29
-19.5
The increase in other income was mainly attributable to both
higher license income and releases of provisions. This was offset
by inventory reduction costs.
The cost of materials decreased slightly in relation to sales
(24.6%; 2014: 25.8%).
The rise in personnel expenses was attributable to the
higher number of employees and higher pension expenses.
The borrowing of funds for the acquisition of Sigma-Aldrich
resulted in higher interest expenses, which increased the nega-
tive financial result.
Other operating expenses increased as a result of the inten-
sified marketing and selling activities as well as due to legal
and advisory expenses in connection with the Sigma-Aldrich
acquisition.
The investment result declined mainly due to lower divi-
dend payments from Merck Capital Holding Ltd., Malta, and
Merck Holding GmbH, Darmstadt.
149
140 Combined Management Report Additional information on Merck KGaA in accordance with the German Commercial Code (HGB)
The decrease in depreciation, amortization, write-downs
and impairment losses was mainly due to lower impairment
losses (€ 73 million). In fiscal 2015, impairment losses of
€ 105 million on intangible assets related particularly to the
discontinuation of development projects (2014: € 176 million).
120
609
-39
-77
-116
-12.4
53
-426
-373
-6.6
-43
652
Net assets and financial position
- 50.6
ASSETS
182.5
€ million
-446.9
1,280
10,737
5,885
16,622
4.9
43
879
921
- 30.2
150.7
%
10,682
-98
325
227
€ million
Dec. 31, 2014
7,089
17,770
Dec. 31, 2015
Inventories
Current assets
Financial assets
Tangible assets
Intangible assets
Fixed assets
Change
-143
5
-175
2014
2015
3,888
Change
Profit after tax and profit transfers
Taxes
Profit transfers
Profit from ordinary activities
Financial result
Investment result/Write-downs of financial assets
Other operating expenses
Depreciation, amortization, write-downs and impairment losses
€ million
Personnel expenses
Other income
Sales
€ million
Results of operations
In the Life Science business sector the strongest growth
was achieved by the Process Solutions business area (+10.7%).
The business sector performed particularly well in North America
(+47.0%) and Latin America (+15.9%). However, slight declines
in sales were recorded in Europe (-1.0%).
sales growth (+26.4%). The Display Materials (+ 27.9%) and
Advanced Technologies (+84.1%) business units contributed
significantly to this growth. The Pigments & Functional Materials
business unit (+7.9%) also maintained its level of sales in
Europe and increased sales in North America and Latin America.
In all major markets, particularly in the Asia-Pacific region
(+29.9%), the Performance Materials business sector recorded
In the Healthcare business sector, particularly sales of prod-
ucts in the Cardiovascular (+ 20.0%) and Thyroid (+12.9%)
franchises increased in almost all regions, with notable sales
increases in the Asia-Pacific and Europe regions. In comparison,
the declines in reported sales of General Medicine (-22.3%),
Neurodegenerative Diseases (-7.7%) and Oncology (-1.5%)
products were not as high. These declines relate primarily to
the European market.
Additional information on Merck KGaA in accordance with the German Commercial Code (HGB) Combined Management Report 139
1,485
The general partner E. Merck KG holds around 70% of the
total capital of Merck KGaA (equity interest); the shareholders
hold the remainder, which is divided into shares (share capital).
E. Merck KG is excluded from the management of business
activities. The general partners with no equity interest (Exec-
utive Board) manage the business activities. Nevertheless, due
to its substantial capital investment and unlimited personal
liability, E. Merck KG has a strong interest in the businesses
of Merck KGaA operating efficiently in compliance with pro-
cedures, and exercises its influence accordingly. Merck KGaA's
participation in the profit/loss of E. Merck KG in accordance
with Articles 26 et seq. of the Articles of Association further
harmonizes the interests of the shareholders and of E. Merck KG.
E. Merck KG appoints and dismisses the Executive Board. In
addition, E. Merck KG has created bodies - complementing the
expertise and activities of the Supervisory Board - to monitor
and advise the Executive Board. This task applies primarily to
the Board of Partners of E. Merck KG. Based on the provisions
of the German Stock Corporation Act, the Articles of Associa-
tion of Merck KGaA and the rules of procedure of the various
committees, Merck KGaA has a set of rules for the Executive
Board and its supervision that meet the requirements of the
Code. The investors, who bear the entrepreneurial risk, are
protected as provided for by the Code.
Cost of materials
%
3,410
478
-23.8
-106
445
339
9.2
-173
-1,877
−2,050
-19.5
68
- 348
-280
10.2
-104
-1,019
-1,123
8.8
-77
-879
-956
1.5
14
952
966
14.0
-32
-205
-13.8
617
Statement on Corporate Governance
Capital structure and governance bodies of Merck KGaA
166
164
148
147
pages 145-168
corporate
Governance
pages 145-168
corporate
Governance
03
Report of the Supervisory Board
Subsequent to the balance sheet date, no further events of
special importance occurred that could have a material impact
on the net assets, financial position or results of operations.
At the beginning of January 2016, two contracts entered into
with BioMarin Pharmaceutical Inc., USA (BioMarin), became
effective. Firstly, the sale of the rights to Kuvan®, a drug used
to treat the metabolic disorder known as phenylketonuria
(PKU), was agreed. And secondly, Merck returned its option
to develop and commercialize Peg-Pal to BioMarin. Based on
these two agreements, in January 2016 Merck received an
upfront payment of € 340 million for the sale of the rights to
KuvanⓇ as well as an entitlement to milestone payments of up
SUBSEQUENT EVENTS
144 Combined Management Report Subsequent Events
The results of these audits are dealt with regularly in
meetings of the Executive Board, the Supervisory Board and
the Finance Committee of E. Merck KG.
All the structures and processes described are subject to
constant review by Group Internal Auditing. The Executive
Board determines the structures and processes that are to be
audited in an annual audit plan.
The annual financial statements of Merck are the respon-
sibility of the Chief Financial Officer, who is a member of the
Executive Board of Merck KGaA. This responsibility is laid down
in the rules of procedure of the Executive Board.
Consideration of risks recorded and assessed by the risk
management system in the annual financial statements
insofar as this is required by existing accounting rules.
The management of the respective department is responsible
for the implementation of these rules and utilization of the
tools.
System-based IT controls as well as manual, process-inte-
grated controls, particularly within the scope of the financial
reporting process
•
.
• Use of suitable, largely uniform IT finance systems and the
application of detailed authorization concepts to limit user
rights on a need-to-have basis, taking into account principles
concerning the segregation of duties.
to € 185 million. The financial statements of Merck KGaA pre-
pared in accordance with the German Commercial Code are
only affected by this via future dividend payments from sub-
sidiaries. More information can be found in Note [4] "Acquisi-
tions, assets held for sale and disposal groups" in the Notes to
the Group accounts.
Clearly defined segregation of tasks and assignment of
responsibilities to the units involved in the financial report-
ing process. Through corresponding organizational measures,
the company ensures that in the accounting system duties
are segregated between the booking of transactions and
the review and approval of transactions. These measures
include the power of disposition approved by the Executive
Board in relation to authorizing contracts and credit notes,
as well as consistently implementing a dual-control principle.
⚫ Involvement of external experts as needed, for example for
the valuation of pension obligations
Objectives of the Supervisory Board with respect to its composition
Corporate Governance
Consequently, in addition to other responsibilities typical
of the supervisory board of an AG (see description of the pro-
cedures of the Supervisory Board on page 159 et seq.), the
supervisory board of a KGaA does not have the authority to
appoint the management board, draw up management board
contracts or specify compensation of the management board.
This legal form also involves special features with regard to
the General Meeting. For example, in a KGaA, many of the
resolutions made require the consent of the general partners
(section 285 (2) AktG), including in particular the adoption of
the annual financial statements (section 286 (1) AktG).
The German Corporate Governance Code is geared toward
the conditions found in a German stock corporation ("Aktien-
gesellschaft" or "AG") and does not take into consideration
the special characteristics of a corporation with general part-
ners ("Kommanditgesellschaft auf Aktien" or "KGaA") such as
Merck KGaA. Given the structural differences between an AG
and a KGaA, several recommendations of the German Corporate
Governance Code are to be applied to a KGaA only in a modified
form. Major differences between the two legal forms exist in
terms of liability and management. While, in the case of an AG,
only the AG is liable as a legal entity, the general partners of a
KGaA also have unlimited personal liability for the company's
obligations (section 278 (1) of the German Stock Corporation
Act "AktG"). At Merck KGaA, this pertains to both E. Merck KG -
which pursuant to Art. 8 (5) of the Articles of Association is
excluded from management and representation - as well as to
the managing general partners, who together make up the
Executive Board of Merck KGaA. The members of the Execu-
tive Board of Merck KGaA are therefore subject to unlimited
personal liability. Unlike an AG, their executive authority is not
conferred by the Supervisory Board, but rather by their status
as general partners.
Joint report of the Executive Board
and the Supervisory Board according
to section 3.10 of the German
Corporate Governance Code including
Statement of Compliance
The Statement on Corporate Governance contains the
Statement of Compliance, relevant information on prac-
tices within the company as well as a description of the
procedures of the corporate bodies.
STATEMENT ON CORPORATE GOVERNANCE
148 Corporate Governance Statement on Corporate Governance
E. Merck KG
Board of Partners of
€ 397,196,314.35
Monitoring
Monitoring
Capital structure and governance bodies of Merck KGaA
Supervisory Board
€ 168,014,927.60
E. Merck KG holds
the equity interest
The general partner
Shareholders hold
the share capital
General partners with no equity interest
Executive Board of Merck KGaA
€ 565,211,241.95
Total capital of Merck KGaA
BODIES OF MERCK KGAA
CAPITAL STRUCTURE AND GOVERNANCE
147
General Meeting
•
Other R&D spending that cannot be allocated to the individual business sectors
Total
The annual financial statements of Merck KGaA are prepared
by Merck Accounting Solutions & Services Europe GmbH,
Darmstadt, an independent legal entity within the Merck Group.
The financial statement process of Merck KGaA is based on the
accounting provisions of the German Commercial Code with
due consideration of key processes and uniform deadlines.
The objective of the internal control system for accounting is
to implement controls that will provide the security needed to
ensure that financial statements are prepared in compliance
with the relevant accounting laws and standards. It covers
measures designed to ensure the complete, correct and timely
conveyance and presentation of information that is relevant
for the preparation of the financial statements. The financial
reporting processes are monitored via a stringent internal
control system that ensures the accuracy of financial reporting
as well as compliance with the relevant legal regulations.
The main rules and tools used are as follows:
2,254
3,024
3,114
2014
2015
Total
Other
Sales and marketing
Engineering
Logistics
Research
2,174
Administration
Average number of employees during the year
As of December 31, 2015, Merck KGaA had 9,537 employees,
a slight increase over the previous year (2014: 9,407).
Average number of employees by functional area:
Personnel
For 2015, we will propose to the General Meeting a dividend
of € 1.05 per share. Based on our earnings expectations, the
family of owners and shareholders of Merck can continue to
expect to receive an earnings-oriented dividend.
Dividend
142 Combined Management Report Additional information on Merck KGaA in accordance with the German Commercial Code (HGB)
The research spending ratio (research and development costs
as a percentage of sales) was 20.1% (2014: 22.7%). In total,
an average of 2,186 employees were engaged in R&D activi-
ties. Merck KGaA was one of the main research sites of the
Merck Group, accounting for 45.7% (2014: 45.5%) of total
Group research and development spending.
1.0
774
782
0.0
Production
2,186
2,160
583
The internal control system for the
accounting process according to
section 289 (5) HGB
Currently no risks can be identified that could jeopardize
the continued existence of Merck KGaA.
The financing costs of the Sigma-Aldrich acquisition will
have a negative impact on earnings. Accordingly, we expect
net income to decline. Net income will also be influenced
significantly by investment results and dividend payments of
subsidiaries. The provision of a sufficient amount of financial
resources is ensured by Merck Financial Services GmbH.
A slight decline in sales is assumed for 2016 for the Healthcare
and Performance Materials business sectors. This decline is
expected to be nearly fully offset by sales growth in the Life
Science business sector.
Forecast for 2016
Additional information on Merck KGaA in accordance with the German Commercial Code (HGB) Combined Management Report 143
Profit from ordinary activities in 2015 mainly declined
compared with 2014 due to a lower investment result and
the associated increase in financing costs in connection with
the Sigma-Aldrich acquisition. The financial resources for this
acquisition were provided through borrowings from Merck
Financial Services GmbH, Darmstadt.
As stated in the Annual Financial Statements for 2014,
we expected a decrease in profit from ordinary activities and
thus also of financial resources.
As expected, the Life Science business sector increased its
sales (+8.4%) in 2015.
In the Performance Materials business sector, sales were
expected to decrease due to the persisting high competitive
pressure in the context of liquid crystals. This development did
not materialize. The business units Display Materials (+ 27.9%),
Advanced Technologies (+84.1%) and Pigments & Functional
Materials (+7.9%) achieved sales growth, resulting in an over-
all sales increase in the Performance Materials business sector
of 26.4%.
In our sales forecast, we anticipated a slight sales decrease
for the Healthcare business sector as a result of lower sales of
ErbituxⓇ. The expected decline in sales of the Oncology fran-
chise, however, was more than compensated for by the sales
increases in the Cardiovascular and Thyroid franchises, lead-
ing to overall sales growth of 6.0%.
In the 2014 Annual Financial Statements of Merck KGaA, we
expected sales to increase slightly in 2015.
Deviations of actual business developments in 2015 from
previously reported guidance:
Forecast for Merck KGaA
Merck KGaA is largely subject to the same opportunities and
risks as the Merck Group. More detailed information on risks
and opportunities is provided in the consolidated financial
statements of Merck.
Risks and opportunities
9,378
9,449
551
348
389
409
538
555
542
Merck KGaA applies the Code analogously where these regula-
tions are compatible with the legal form of a KGaA. In order to
enable shareholders to compare the situation at other compa-
nies more easily, to a broad extent we base corporate govern-
ance on the conduct recommendations made by the Govern-
ment Commission of the German Corporate Governance Code
and forego having our own, equally permissible, code. The
recommendations of the Code in both of the last two versions
dated June 24, 2014 and May 5, 2015, the intent and meaning
of which are applied, were complied with in the period between
the last Statement of Compliance issued on February 27, 2015
with four exceptions. In the future, the recommendations of
the Code will again be adhered to with four exceptions. Further
details can be found on page 149.
5
For a clearer understanding, the following gives a general
explanation of the application of German company law at
Merck with additional references to the General Meeting and
shareholder rights.
Performance Materials
8,808
10,269
116.6
EQUITY AND LIABILITIES
€ million
Net equity
Provisions
Provisions for pensions and other post-employment benefits
Other provisions
Liabilities
Financial obligations
19,077
Trade accounts payable
Deferred income
Change
Dec. 31, 2015
Dec. 31, 2014
€ million
%
5,268
5,312
-44
-0.8
930
Other liabilities
750
-100.0
195
588
29
4.9
Trade accounts receivable
213
220
-7
-3.2
Receivables and other assets
450
677
-195
-228
Cash and cash equivalents
0
0
0
0.0
Prepaid expenses
27
40
-13
-32.5
Excess of plan assets over relevant obligations
-33.7
180
24.0
5
The decline in current assets (€ -205 million) was mainly
due to lower receivables from affiliates, primarily because of
the increased funding requirement for the acquisition of Sigma-
Aldrich.
The increase in other provisions (€ 175 million) was partly
due to the repayment of a cash deposit in a trust agreement
to cover provisions for a partial retirement program amount-
ing to € 48 million. These provisions under the partial retire-
ment program will now be secured by a bank guarantee. In
addition, the provisions for outstanding invoices increased by
€ 32 million.
In 2015, no excess of plan assets over relevant obligations
was disclosed for pension provisions, as pension obligations
exceeded plan assets by € 5 million. This is largely attributable
to the decrease in the applicable discount rate pursuant to the
specifications of the German Central Bank (Deutsche Bundes-
bank).
The increase in liabilities to affiliates resulted primarily from
the granting of intragroup loans (€ 8.5 billion) and from the
clearing account (€ 1.5 billion) with Merck Financial Services
GmbH, Darmstadt.
Additional information on Merck KGaA in accordance with the German Commercial Code (HGB)
Combined Management Report 141
Research and Development
Research and development spending amounted to € 782 mil-
lion in 2015 (2014: € 774 million), a large portion of which
was incurred also by companies outside the Merck Group. The
Performance Materials business sector accounted for € 4 mil-
lion of the total increase of € 8 million (1.0%). At 77.8%
(2014: 78.6%) the Healthcare business sector accounted for
the largest share of research and development spending.
In Darmstadt, Healthcare mainly focuses on oncology as well
as autoimmune and inflammatory diseases. The Performance
Materials business sector focuses its research primarily on
developing new and improved basic materials and mixtures
for LC displays as well as for innovative OLED applications. To
strengthen the Pigments business, new effect pigments for the
automotive, cosmetics and printing ink sectors were devel-
oped. In the Life Science business sector, research activities
focused on technologies in the laboratory and life science
segment, and new developments progressed. These include
improved test kits, chromatography methods, substrates for
separating active substances, and innovations in the fields of
microbiology and hygiene monitoring.
2015
2014
In addition, the progress of the construction project ONE
Global Headquarters at the Darmstadt site contributed signifi-
cantly to an increase in fixed assets.
€ million/Change in %
Change
609
608
0.2
38
35
8.6
Life Science
130
126
3.2
Healthcare
Intangible assets declined primarily due to the discontinu-
ation of the development project for evofosfamide and the
associated impairment losses of capitalized rights amounting
to € 82 million.
The development of Merck KGaA's net assets and financial
position in fiscal 2015 was characterized by the acquisition of
the Sigma-Aldrich Corporation, USA. The increase in total assets
by € 10,269 million to € 19,077 million was largely attributable
to the completion of this important transaction, increasing
financial assets by € 10,737 million. The intragroup sale of
Merck Ltd., Japan, within the scope of the reorganization sub-
sequent to acquisition of AZ in 2014 caused financial assets
to decline in 2015.
116.6
5
925
750
175
23.4
12,878
2,746
10,132
369.0
1,500
1,500
0
0.0
289
11,089
192
1,054
97
50.4
10,035
952.3
1
1
19,077
8,808
10,269
Merck KGaA
• Accounting guidelines based on Group-wide guidelines.
These Group-wide accounting guidelines are the responsi-
bility of Group Accounting and are available to all employees
of the relevant units via the Merck intranet. Detailed account
allocation instructions are provided here for all major trans-
actions. These guidelines include, for example, clear require-
ments for the inventory valuation process and transfer pric-
ing within intragroup supply relationships.
2015
The Executive Board informs the Board of Partners and the
Supervisory Board at least quarterly of the progress of busi-
ness and the situation of the company. In addition, the Execu-
tive Board informs the aforementioned boards at least annually
of the company's annual plans and strategic considerations.
5,752
1,973
Kai Beckmann
2014
1,000
41
3,049
8,141
765
4,855
2,797
1,316
2015
6
3,411
13,418
1,316
5,733
383
Belén Garijo Lopez
2014
800
20
2,411
1,000
13,418
13,418
25
5,265
12,211
1,147
7,765
4,196
2015
1,200
25
4,161
13,418
1,316
3,411
6,702
Stefan Oschmann
2014
1,200
21
4,799
8,141
765
6,785
2,797
2015
1,000
1,973
1,316
4,547
687
2014
250
6
2015
6,500
252
762
22,269
1,018
0
Total
2014
(until March 31, 2014)
5,283
18,306
87,217
40,026
8,554
3,904
37,575
9,948
27,649
12,694
1 The one-time payment for 2015 granted to Bernd Reckmann as well as the one-time payments for 2014 granted to Karl-Ludwig Kley and Stefan Oschmann are included in the
variable compensation components for 2015 and 2014, respectively.
2 Number of the potential MSUS subject to target achievement. For details see page 150/151. The actual number of MSUS to be granted after the expiration of the three-year per-
formance cycle may deviate from this.
The share split that took effect on June 30, 2014 does not affect the number of MSUS granted. The 1:2 share split was compensated for by a doubling in the accounting value of
an MSU.
3 Time value on the date of the grant (date of the legally binding entitlement). The amount of a potential payment is thus not predefined. Payment is subject to target achievement
and is only made on a specified date after the expiration of a three-year performance cycle. The time value was calculated using a Monte Carlo simulation based on the previously
described KPIs. The expected volatilities are based on the implicit volatility of Merck shares and the DAX® index in accordance with the remaining term of the Long-Term Incentive
Plan tranche. The dividend payments incorporated into the valuation model orient towards medium-term dividend expectations.
156
2015
Matthias Zachert
2,797
Marcus Kuhnert
2014
333
7
882
3,392
462
1,684
107
2015
1,200
28
4,411
13,418
1,316
6,955
1,973
Bernd Reckmann
2014
1,200
28
3,549
8,141
765
5,542
53
1,300
2014
Karl-Ludwig Kley
Variable compensation is based on the three-year rolling aver-
age of profit after tax of the E. Merck Group. The Personnel
Committee of E. Merck KG decides at its own and equitable
discretion whether to consider exceptional factors of particular
importance. From the net income determined in this manner,
the members of the Executive Board receive individually fixed
per mille rates based on the net income of the E. Merck Group.
Additionally, in exceptional cases the Personnel Committee
of E. Merck KG, which is responsible for the compensation of
the Executive Board, may grant one-time payments volun-
tarily and at its own discretion.
Additional variable compensation (Merck Long-Term
Incentive Plan)
In 2012, a long-term variable compensation component known
as the Merck Long-Term Incentive Plan was added to the vari-
able compensation of the members of the Executive Board.
It aims to enhance the sustainability of the compensation sys-
tem and to align it not only with target achievement based on
key performance indicators, but above all with a sustainable
performance of Merck shares.
Subject to the resolution of the Personnel Committee each
year, under the Merck Long-Term Incentive Plan the members
of the Executive Board could be eligible to receive a certain
number of virtual shares - Merck Share Units (MSUS) - at the
end of a three-year performance cycle. The number of MSUS
that could be received depends on the total value defined for
the respective person and the average closing price of Merck
shares in Xetra® trading during the last 60 trading days prior
to January 1 of the respective fiscal year (reference price).
In order to participate in the Plan, members of the Executive
Board must personally own an investment in Merck shares
equivalent to 10% of their respective fixed annual compensa-
tion, taking into account the equity interest held in E. Merck KG
as a personally liable general partner. It is not permitted to sell
these shares during the performance cycle. After termination
of the three-year performance cycle, the number of MSUs to
be granted then is determined based on the development of
two key performance indicators (KPIs). These are:
a) the performance of the Merck share price compared to the
DAX® with a weighting of 70%, and
b) the development of the EBITDA pre margin during the per-
formance cycle as a proportion of a defined target value
with a weighting of 30%.
Depending on the development of the KPIs, at the end of the
respective performance cycle the members of the Executive
Board are granted between 0% and 150% of the MSUS they
could be eligible to receive.
Based on the number of MSUS granted, the members of
the Executive Board receive a cash payment at a defined point
in time in the year following the expiration of the three-year
performance cycle. The value of an MSU corresponds to the
average closing price of Merck shares in Xetra® trading during
the last 60 trading days prior to January 1 after the perform-
ance cycle. The payment amount is limited to three times the
reference price. The members of the Executive Board invest
50% of the payment amount in Merck shares. One-third of
Statement on Corporate Governance
Corporate Governance 151
these shares may be sold at the earliest one year after ter-
mination of the performance cycle, another third after two
years, and another third after three years.
In fiscal 2015, the following total values were specified for
members of the Executive Board, which resulted in the respec-
tive number of MSUs they were eligible to receive based upon
the definitive reference price of Merck shares (60 trading
days preceding January 1, 2015) of € 74.53: Karl-Ludwig Kley
Variable compensation
€ 1.5 million (20,127 MSUS), Stefan Oschmann € 1.0 million
(13,418 MSUS), Kai Beckmann € 1.0 million (13,418 MSUS),
Belén Garijo Lopez € 1.0 million (13,418 MSUs), Marcus Kuhnert
€ 1.0 million (13,418 MSUS), and Bernd Reckmann € 1.0 mil-
lion (13,418 MSUS).
Karl-Ludwig Kley
Stefan Oschmann
Kai Beckmann
Belén Garijo Lopez
Marcus Kuhnert
Bernd Reckmann
Additional benefits
The members of the Executive Board also receive certain
additional benefits, mainly contributions to insurance policies,
personal security expenses, as well as a company car, which
they are entitled to use privately. Overall, the value of other
additional benefits totaled € 252 thousand in 2015 (2014:
€ 156 thousand). Of this amount, in 2015 € 148 thousand
was attributable to Karl-Ludwig Kley (2014: € 53 thousand);
€ 25 thousand to Stefan Oschmann (2014: € 21 thousand);
€ 25 thousand to Kai Beckmann (2014: € 41 thousand);
€ 6 thousand to Belén Garijo Lopez; € 20 thousand to Marcus
Kuhnert (2014: € 7 thousand); € 28 thousand to Bernd Reckmann
(2014: € 28 thousand); and € 0 thousand to Matthias Zachert
(2014: € 6 thousand).
One-time payment
(€ thousand)
2,000
Variable
compensation
(€ thousand)
The following maximum compensation amounts for variable
compensation components, which were applicable for the first
time in 2014, have been agreed.
Fixed compensation is paid in the form of 12 equivalent
monthly installments. The table on page 152 provides an
overview of the amount of the fixed compensation paid in
2014 and 2015.
Fixed compensation
The compensation paid to the Executive Board members of
Merck KGaA in fiscal 2015 comprises fixed components, vari-
able compensation components and additions to pension pro-
visions. Benefits in kind and other benefits are additionally
granted.
The twentieth General Meeting of Merck KGaA was held on
April 17, 2015 in Frankfurt am Main, Germany. At 64.32%, the
proportion of share capital represented at the meeting was
slightly higher than in the previous year. In 2014, the propor-
tion of share capital represented was 63.85%.
In particular, the Annual General Meeting passes resolutions
concerning the approval of the annual financial statements, the
appropriation of net retained profit, the approval of the actions
of the Executive Board members and the Supervisory Board
members, as well as the choice of the auditor. Changes to the
Articles of Association likewise require the adoption of a reso-
lution by the General Meeting.
The shareholders of Merck KGaA exercise their rights at
the General Meeting. They may exercise their voting rights
personally, through an authorized representative or through a
proxy appointed by the company. The proxy is in attendance
throughout the duration of the General Meeting. All the docu-
ments and information concerning upcoming General Meetings
(including a summary explanation of shareholder rights) are also
posted on our website. Moreover, the General Meeting is web-
cast live on the Internet from its commencement until the end
of the speech by the Chairman of the Executive Board. The
introductory speeches by the Chairman of the Executive Board
and the Chairman of the Supervisory Board are recorded in
order to make them available to interested members of the
public at any time after the meeting. In this way, we are satis-
fying the high transparency requirements of the Merck Group.
Statement of Compliance
In accordance with section 161 AktG, applying the provisions
of the German Corporate Governance Code correspondingly,
the Executive Board and the Supervisory Board issued the
following statement of compliance with the recommendations
of the Government Commission of the German Corporate
Governance Code:
"Declaration of the Executive Board and the Supervisory
Board of Merck KGaA on the recommendations of the Govern-
ment Commission of the German Corporate Governance Code
pursuant to section 161 AktG.
Since the last statement of compliance on February 27,
2015, the Merck Group has complied with the recommenda-
tions of the Government Commission of the German Corporate
Governance Code in the versions dated June 24, 2014 and
May 5, 2015 published in the official section of the German
Federal Gazette during its period of validity with the following
exceptions:
Contrary to section 4.2.5 para 3 sentences 1 and 2 of the
German Corporate Governance Code, certain information on
the compensation of Executive Board members has not been
included, nor have the model tables provided for this purpose
been utilized. It seems doubtful as to whether the largely
repetitive provision of identical information in two additional
tables contributes to the transparency or the understandability
of the Compensation Report (see section 4.2.5 para 1 sen-
tence 3 of the German Corporate Governance Code).
Contrary to section 5.3.2 of the German Corporate Gov-
ernance Code, the Supervisory Board has not established an
audit committee. However, an audit committee does exist in
the form of the Finance Committee of the Board of Partners
of E. Merck KG, which to a large extent exercises the duties
described in section 5.3.2 of the Code. Due to the relatively
limited authority of the supervisory board of a KGaA in com-
parison with that of an AG, this therefore satisfies the require-
ments of the German Corporate Governance Code.
Contrary to section 5.4.1 para 2 sentence 1 of the German
Corporate Governance Code, no age limit or regular limit on the
length of Supervisory Board membership is taken into account
when proposing candidates for election to the Supervisory
Board pursuant to the published objectives of the Supervisory
Board. The age and length of membership of Supervisory
Board members are not criteria for their qualifications and
competence. Moreover, we do not wish to forego the many
years of experience of Supervisory Board members. Crucial
to the successful work of the Supervisory Board is a good bal-
ance among Supervisory Board members in terms of age and
length of membership.
Contrary to section 7.1.2 sentence 4 of the German Corpo-
rate Governance Code, owing to the way in which the German
legal holidays fall, the interim report for the first quarter was
only made publicly accessible slightly after the allotted 45-day
time limit from the end of the reporting period. In fiscal 2016,
the allotted 45-day time limit for publication of the interim
report for the first quarter will also be slightly exceeded again
for the same reason.
In view of future compliance with the current recommen-
dations of the Government Commission of the German Corpo-
rate Governance Code, the Executive Board and the Super-
visory Board declare the following: With the exception of
the aforementioned deviations from section 4.2.5 para 3
sentences 1 and 2 (disclosure of compensation), section 5.3.2
(audit committee), section 5.4.1 para 2 sentence 1 (age limit,
regular limit on length of membership), and section 7.1.2 sen-
tence 4 (publication deadline), the company will comply with
the recommendations of the Code in the version dated May 5,
2015."
Darmstadt, March 4, 2016
For the Executive Board
For the Supervisory Board
s. Karl-Ludwig Kley
s. Wolfgang Büchele
150
Corporate Governance Statement on Corporate Governance
Compensation report
(The Compensation Report is part of the audited Notes to the
Group accounts).
Compensation of members of the Executive Board of
Merck KGaA
Unlike management board members of German stock corpora-
tions, the members of the Executive Board of Merck KGaA are
not employed officers of the company. Rather, they are per-
sonally liable general partners of both Merck KGaA and the
general partner E. Merck KG, and in this capacity they receive
profit-based compensation from E. Merck KG. Given this con-
text, the stipulations of the German Corporate Governance
Code concerning the compensation of management board
members of publicly listed German stock corporations as well
as the individual disclosure thereof do not apply to the Execu-
tive Board members of Merck KGaA. Nevertheless, Merck KGaA
has decided to disclose the individual compensation of each
Executive Board member in the following report.
Unlike publicly listed German stock corporations, at
Merck KGaA it is not the Supervisory Board, but the Board
of Partners of E. Merck KG that decides on the amount and
composition of compensation. E. Merck KG has transferred the
execution of this right to its Personnel Committee. Among
other things, the Personnel Committee is responsible for the
following decisions: contents of contracts with Executive Board
members, granting of loans and advance salary payments,
approval for taking on honorary offices, board positions and
other sideline activities, as well as the division of responsibili-
ties within the Executive Board of Merck KGaA. The compen-
sation system defined by the Personnel Committee for Execu-
tive Board members takes into account various aspects
relevant to compensation, including the responsibilities and
duties of the individual Executive Board members and their
status as personally liable partners, their individual perform-
ance, the economic situation, performance and prospects of
the company as well as normal compensation levels (by way
of peer comparison) and the rewards structure otherwise in
place in the company. The relationship between Executive
Board compensation and the compensation of top manage-
ment and the workforce as a whole is also taken into account,
also in a multiyear assessment. The Personnel Committee reg-
ularly commissions an independent compensation consultant
to review the appropriateness of the compensation.
Features of the compensation system
8,000
4 In accordance with IFRS, the expense recorded for 2015 includes the values for the 2013, 2014, and 2015 Long-Term Incentive Plan tranches. In accordance with IFRS, the
expense recorded in 2014 includes the values for the Long-Term Incentive Plan tranches 2012, 2013 and 2014.
Merck Long-Term
Incentive Plan
(times the respec-
tive total amount)
Total variable
compensation
components
(€ thousand)
incentive
effect
With a long-term
incentive effect
Fixed com-
pensation
Additional
benefits
Variable
compensation¹
Merck Long-Term
Incentive Plan
Time value³
(€ thousand) MSUS² (units) (€ thousand)
Number of
Total
long-term
Expense
recorded in
the period for
share-based
compensation4
(€ thousand)
(€ thousand)
Current members
2015
1,300
148
4,464
20,127
1,974
7,886
2,959
(€ thousand) (€ thousand)
Without a
Performance-related
components
Performance-independent
components
9,800
1111
6,000
8,000
1,500
4.5
1,500
6,000
4.5
1,500
1,500
6,000
6,000
4.5
8,000
8,000
4.5
8,000
1,500
6,000
4.5
8,000
152
Corporate Governance
Statement on Corporate Governance
Total compensation
Accordingly, the following total compensation results for
the members of the Executive Board of Merck KGaA broken
down by performance-independent and performance-related
components:
4.5
The Executive Board passes its resolutions in meetings
that are normally held twice a month.
Statement on Corporate Governance
Pension provisions
As a member of corporate bodies of E. Merck KG, Frank Binder, who left the Supervisory Board in 2014, received an additional payment of € 8,220 for performing this function in 2014.
As a member of corporate bodies of E. Merck KG, Rolf Krebs, who left the Supervisory Board in 2014, received an additional payment of € 10,274 for performing this function in 2014.
As a member of corporate bodies of E. Merck KG, Hans-Jürgen Leuchs, who left the Supervisory Board in 2014, received an additional payment of € 9,590 for performing this
function in 2014.
Statement on Corporate Governance
Corporate Governance 155
Ownership, purchase or sale of shares in the company by
members of the Executive Board and of the Supervisory
Board
As of December 31, 2015, the members of the Executive
Board and of the Supervisory Board either directly or indirectly
held 81,992 shares of Merck KGaA. Their total ownership rep-
resents less than 1% of the issued shares of Merck KGaA.
Transactions executed by members of the Executive Board and
of the Supervisory Board are disclosed on the Merck website at
www.merckgroup.com->Investors->Corporate Governance->
Directors' Dealings.
Information on corporate governance
practices
Reporting
It is Merck KGaA's objective to provide the latest information
to all shareholders, media, financial analysts and interested
members of the public, while creating the greatest possible
transparency. For this reason, Merck uses a wide range of
communication platforms to engage in a timely dialogue with
all interested parties about the situation of the company and
business changes. Merck's principles include providing factu-
ally correct, comprehensive and fair information.
Information subject to disclosure requirements, as well
as information that is not, can be accessed worldwide on the
Merck KGaA website (www.merckgroup.com), which is the
company's most important publication platform. Apart from a
detailed financial calendar, quarterly and half-year financial
reports covering the past three years are available here in
German and English. In addition, in line with the legal require-
ments, ad hoc announcements are published on the website.
These contain information on circumstances and facts that
could impact the Merck share price.
Regular press conferences, investor meetings on the occa-
sion of investor conferences as well as road shows offer another
platform for dialogue. The company presentations prepared
for this purpose are also available on the Merck KGaA website.
In addition, the Investor Relations team is always available to
private and institutional investors who wish to receive further
information.
As a member of corporate bodies of E. Merck KG, Wolfgang Büchele received an additional payment of € 140,000 for performing this function in 2015 (2014: € 140,000).
As a member of corporate bodies of E. Merck KG, Michaela Freifrau von Glenck received an additional payment of € 80,000 for performing this function in 2015 (2014: € 80,000).
As a member of corporate bodies of E. Merck KG, Siegfried Karjetta received an additional payment of € 140,000 for performing this function in 2015 (2014: € 137,260).
140,000). As a member of corporate bodies of E. Merck KG, Albrecht Merck received an additional payment of € 120,000 for performing this function in 2015 (2014: € 120,000).
As a member of corporate bodies of E. Merck KG, Helga Rübsamen-Schaeff received an additional payment of € 140,000 for performing this function in 2015 (2014: € 139,727).
As a member of corporate bodies of E. Merck KG, Gregor Schulz received an additional payment of € 140,0000 for performing this function in 2015 (2014: € 130,411).
As a member of corporate bodies of E. Merck KG, Theo Siegert received an additional payment of € 150,000 for performing this function in 2015 (2014: € 150,000).
As a member of corporate bodies of E. Merck KG, Tobias Thelen received an additional payment of € 140,000 for performing this function in 2015 (2014: € 135,890).
As a member of corporate bodies of E. Merck KG, Johannes Baillou, who left the Supervisory Board in 2014, received an additional payment of € 9,590 for performing this
function in 2014.
To ensure the greatest possible transparency, all docu-
ments concerning the General Meeting are available on the
company website. Additionally, some parts of the General
Meeting are webcast live on the Internet.
Dealing properly with insider information is very important to
us. Our insider committee examines the existence of insider
information, ensures compliance with legal obligations and
prepares any necessary measures. The members of the insider
committee are appointed by the Executive Board; at least
two members work in Group Legal & Compliance. The insider
committee meets at regular intervals, yet also meets when
circumstances require. The Chief Financial Officer is vested with
the authority to make the final decision on handling potential
insider information.
In order to ensure a high level of protection for insider infor-
mation, in 2011 the Executive Board issued internal insider
guidelines applicable throughout the Merck Group worldwide.
The guidelines inform employees about their responsibilities
under insider trading laws and gives clear instructions for
compliant behavior. In addition, it describes the function of the
insider committee in detail. Moreover, our Code of Conduct,
which is binding on all employees, also contains an explicit,
detailed reference to the ban on using insider information.
Within the scope of obligatory training courses on the Code of
Conduct as well as specific training courses on insider law, all
employees are instructed on the stipulations of insider trading.
Accounting and audits of financial statements
Merck KGaA prepares its consolidated financial statements
and combined management report in accordance with Inter-
national Financial Reporting Standards (IFRS), as applicable in
the EU, as well as the supplementary rules applicable under
section 315a (1) of the German Commercial Code (HGB) and
as stipulated by our Articles of Association. The consolidated
financial statements and the combined management report are
prepared by the Executive Board and examined by an auditor,
taking into account the generally accepted standards for the
audit of financial statements promulgated by the Institute of
Public Auditors in Germany (Institut der Wirtschaftsprüfer -
IDW).
The Supervisory Board commissioned KPMG AG Wirtschafts-
prüfungsgesellschaft, Berlin, to audit the consolidated finan-
cial statements and the combined management report for
2015. Moreover, the Supervisory Board agreed with KPMG AG
Wirtschaftsprüfungsgesellschaft, Berlin, that the auditor shall
inform the Supervisory Board without delay of any grounds for
bias or disqualification occurring during the audit if these can-
not be immediately rectified. Additionally, the auditor shall
immediately report to the Supervisory Board any findings
and issues which emerge during the audit that have a direct
bearing upon the tasks of the Supervisory Board. The auditor
shall inform the Supervisory Board or note in the audit report
any circumstances determined during the audit that would
render inaccurate the Statement of Compliance made by the
Executive Board and the Supervisory Board. It has also been
agreed with the auditor that in order to assess whether the
Executive Board has fulfilled its obligations in accordance with
section 91 (2) AktG, the audit will also cover the company's
early warning risk identification system. Moreover, the auditor
is required to examine and evaluate the accounting-relevant
internal control system insofar as this is necessary and appro-
priate for assessing the accuracy of financial reporting.
The auditor responsible for auditing the consolidated finan-
cial statements changes regularly in accordance with the stat-
utory requirements. Bodo Rackwitz is currently leading the
audit engagement and has been the auditor in charge of the
engagement since fiscal 2015. The Supervisory Board had
KPMG AG Wirtschaftsprüfungsgesellschaft, Berlin, provide a
statement regarding the scope of the business, financial, per-
sonal, and other relationships between KPMG AG, its bodies
and head auditors, and Merck KGaA, its Group companies and
the members of their bodies. The statement also covers the
scope of the services provided by KPMG AG in the previous
156
Corporate Governance Statement on Corporate Governance
fiscal year as well as the services (other than auditing ser-
vices) that are contracted for the upcoming year (especially
consultancy services) for Merck KGaA and its subsidiaries
(independence declaration). Having examined the declaration,
the Supervisory Board has found no grounds to doubt the
independence of KPMG AG Wirtschaftsprüfungsgesellschaft,
Berlin. Neither party identified any conflicts of interest.
Values and compliance
-
-
Dealing with insider information
Based on a corporate culture that places the fundamental com-
pany values
courage, achievement, responsibility, respect,
integrity and transparency at the center of our entrepre-
neurial actions, the Code of Conduct helps those involved in
the business process to implement the values when dealing
with one another on a daily basis.
2 Since May 9, 2014.
750.00
0.00 25,666.44
58,500.00 881,000.00 882,094.54
0.00
0.00
17,360.96
17,360.96
50,750.00
33,517.81
0.00
17,360.96
49,250.00 50,000.00
0.00 17,360.96
50,750.00 50,750.00
50,750.00 33,517.81
Dietmar Oeter²
Alexander Putz²
1 Until May 9, 2014.
Helga Rübsamen-Schaeff2
Gregor Schulz²
Theo Siegert
Tobias Thelen²
Heiner Wilhelm¹
(Vice Chairman until May 9, 2014)
Total
0.00 33,221.92
0.00
750.00
0.00 16,610.96
0.00
750.00
47,000.00 47,000.00 3,750.00 3,750.00 50,750.00 50,750.00
47,000.00 30,517.81 3,750.00 3,000.00 50,750.00 33,517.81
47,000.00 30,517.81 3,750.00 3,000.00 50,750.00 33,517.81
47,000.00 30,517.81 3,750.00 3,000.00 50,750.00 33,517.81
47,000.00 47,000.00 3,750.00 3,750.00 50,750.00 50,750.00
47,000.00 30,517.81 3,750.00 3,000.00 50,750.00 33,517.81
47,000.00 47,000.00 3,750.00 3,750.00 50,750.00 50,750.00
47,000.00 30,517.81 3,750.00 3,000.00 50,750.00 33,517.81
0.00 33,971.92
0.00 17,360.96
0.00 24,916.44
822,500.00 823,594.54 58,500.00
0.00
Karl-Heinz Scheider
Merck has created the Code of Conduct as a set of rules
and regulations intended to help our employees to act respon-
sibly and to make the right decisions in their daily work.
The Code of Conduct explains the principles for dealings
with business associates, general partners, colleagues and
employees, as well as the communities in which we operate.
Thus, it supports all employees in acting ethically - not only in
their dealings with one another, but also outside the company.
The Code of Conduct is thus the main set of rules of our com-
pliance program.
To Merck, compliance means observing legal and company
internal regulations and the basic ethical principles anchored
in the company values. With the Code of Conduct and the
various unit-specific ethical compliance rules, the values are
integrated into daily work and business practice. The Code of
Conduct is binding on all employees, both at headquarters
and in the subsidiaries. The Compliance Office monitors obser-
vance of the Code of Conduct with support from corresponding
monitoring and training programs throughout the Group. All
employees are called upon to report compliance violations to
their supervisor, Legal, HR or other relevant departments.
Merck created the position of Group Compliance Officer in
2002. This employee is responsible for setting up, maintaining
and further developing our global compliance program. By
taking appropriate measures, the Group Compliance Officer
and his team, including regional compliance officers, help to
lower the risk of serious legal violations of, for instance, anti-
trust law or anticorruption rules. Since 2014 and 2015, com-
pliance officers of the business sectors have been providing
specific compliance input. A further focal area of the Compli-
ance program is ensuring legally and ethically correct dealings
with medical professionals and adhering to the transparency
requirements. Since October 2013, the Group Compliance
Officer has agreed extensive measures with the affected areas
of the company in order to establish an internal framework of
rules as well as the corresponding approval and documenta-
tion processes that ensure truthful publication. The role of the
Group Compliance Officer is reflected in the subsidiaries, which
ensure that compliance measures are implemented in the
countries. Since 2013, Compliance tasks in the countries and
Stefan Oschmann
Munich, Vice Chairman
Kai Beckmann
Darmstadt, Chief Administration Officer
Belén Garijo Lopez
Frankfurt am Main, CEO Healthcare
Marcus Kuhnert
Königstein, Chief Financial Officer
Bernd Reckmann
Seeheim-Jugenheim, CEO Life Science and Performance Materials
(b)
Karl-Ludwig Kley
Darmstadt, Chairman
- Bertelsmann Management SE, Gütersloh (until May 2016)
- Deutsche Lufthansa AG, Cologne
Verizon Communications Inc., Wilmington (Delaware), USA
(since November 5, 2015)
no board positions
no board positions
(b)
- Banco Bilbao Vizcaya Argentaria S. A., Bilbao, Spain
- L'Oréal S.A., Clichy, France
no board positions
(a) - Zschimmer & Schwarz GmbH & Co KG Chemische Fabriken,
Lahnstein (since June 26, 2015)
The general partners with no equity interest (Executive Board)
manage the business activities in accordance with the laws,
the Articles of Association and the rules of procedure. They are
appointed by E. Merck KG in accordance with the consent of
a simple majority of the other general partners. The members
of the Executive Board are jointly responsible for the entire
management of the company. Certain tasks are assigned to
individual Executive Board members based on a responsibility
distribution plan. Each Executive Board member promptly
informs the other members of any important actions or oper-
ations in his respective business area. The Executive Board is
responsible for preparing the annual financial statements of
Merck KGaA and of the Merck Group as well as for approving
the quarterly and half-year financial statements of the Merck
Group. In addition, the Executive Board ensures that all legal
provisions, official regulations and the company's internal pol-
icies are abided by, and works to achieve compliance with
them by all the companies of the Merck Group. A Group-wide
guideline defines in detail which transactions require prior
Executive Board approval.
The Executive Board provides the Supervisory Board
with regular, up-to-date and comprehensive reports about all
company-relevant issues concerning strategy, planning, busi-
ness developments, the risk situation, risk management and
compliance. The rules of procedure of the Executive Board and
of the Supervisory Board as well as a Supervisory Board
resolution regulate further details on the information and
reporting duties of the Executive Board vis-à-vis the Super-
visory Board.
- BMW AG, Munich (Vice Chairman)
- Bertelsmann SE & Co. KGaA, Gütersloh (until May 2016)
(a)
(b) comparable German and foreign supervisory bodies of corporations
on a regional basis have largely been performed by full-time
compliance officers. As a result, a higher level of compliance
expertise is based locally and the increasing tasks in all busi-
ness sectors are taken into account. At the same time, the
management structure was streamlined and the reporting lines
for the countries were consolidated regionally. Regular regional
compliance meetings are held to promote the exchange of infor-
mation within the Compliance organization. Newcomer training
seminars were introduced in 2010 for newly appointed compli-
ance officers. These seminars serve to build up compliance
expertise and strengthen cooperation within the Compliance
organization. This Group-wide network is used to steer the
global compliance program.
Within the scope of this program, a high degree of impor-
tance is attached to regular compliance seminars of the Merck
Compliance Training Plan, which are conducted as Web-based
training courses and onsite events. By presenting various
training topics, particularly on the Code of Conduct, corrup-
tion, antitrust and competition law as well as healthcare com-
pliance, they serve to sensitize employees and management
to the consequences of compliance violations and to show
ways of avoiding them. Since Merck set up a central SpeakUp
line, employees have been able to report compliance violations
by telephone or via a Web-based application in their respective
national language. The SpeakUp line is available 24 hours a
day, free of charge. Case numbers enable anonymous, two-way
communication. The reports received are individually reviewed.
If a compliance violation exists, corresponding corrective action
is taken based on concrete action plans. If necessary, discipli-
nary measures are taken. These can range from a simple warn-
ing up to the dismissal of the employee who violated a compli-
ance rule. In 2010, Merck set up a Compliance Committee to
guide these processes. The Compliance Committee consists of
members from various Group functions; they are involved in
reviewing compliance violations and introducing countermeas-
ures. The joint work in the Compliance Committee enables pro-
cesses between the various Group functions to be optimally
coordinated and designed efficiently. Further significant ele-
ments of the Compliance program include requirements on
locally identifying and assessing risks and reporting these,
both within the subsidiary abroad and to the Group functions.
Group Compliance regularly reviews and assesses the imple-
mentation status of the Compliance program at the subsidiaries
abroad. In cooperation with Group Internal Auditing, the Com-
pliance Office regularly reviews the implementation of Group-
wide compliance measures at the subsidiaries abroad. The
audits regularly focus on the local compliance structure, the
compliance measures taken, as well as the existence of corre-
sponding compliance guidelines and processes.
The Compliance Office reports regularly to the Executive
Board and the Supervisory Board, informing them of the sta-
tus of compliance activities (including training status), compli-
ance risks and serious compliance violations.
The Executive Board informs the supervisory bodies at
least once a year about the key compliance issues.
Statement on Corporate Governance Corporate Governance 157
Risk and opportunity management
The Executive Board, the Supervisory Board and the Finance
Committee are regularly informed about the current risk port-
folio of the Group and the individual companies. More detailed
information can be found in the Report on Risks and Opportu-
nities on page 120.
Avoidance of conflicts of interest
Within the framework of their work, all Executive Board and
Supervisory Board members of Merck KGaA are exclusively
committed to the interests of the company and neither pursue
personal interests nor grant unjustified advantages to third
parties.
Before an Executive Board member takes on honorary
offices, board positions or other sideline activities, this must be
approved by the Personnel Committee of the Board of Partners
of E. Merck KG. The Chairman of the Executive Board, Karl-
Ludwig Kley, and the Chief Financial Officer, Marcus Kuhnert,
are both members of the Executive Board of E. Merck KG. This
does not, however, lead to conflicts of interest.
In its report to the General Meeting, the Supervisory Board
discloses any conflicts of interest involving its members and
how they were dealt with. Consultancy agreements as well as
other service and work contracts of a Supervisory Board mem-
ber with Merck require the approval of the Supervisory Board.
In fiscal 2015, there were neither conflicts of interest nor con-
sultancy agreements or other service or work contracts with
Merck KGaA involving Supervisory Board members.
Adherence to environmental and safety standards
At Merck, closed-loop thinking guides the way in which we
address environmental concerns and environmental protection
issues. To this end, we integrate precautionary measures into
our planning processes. Our Environment, Health and Safety
Policy with its principles and strategies implements the guide-
lines formulated by the national and international associations
of the chemical industry in the Responsible Care guidelines.
The Responsible Care Global Charter developed by the Inter-
national Council of Chemical Associations (ICCA) in 2006 puts
even more emphasis than before on overall responsibility for
products, supply chains and the community. Merck signed this
expanded version of Responsible Care for the entire Group in
February 2007. In addition, Merck was one of the first compa-
nies in 2014 to sign the new version of the Responsible Care
Global Charter, which is currently being rolled out by Merck
internationally. We report our ecological, economic and social
performance transparently in accordance with the internation-
ally recognized principles of the Global Reporting Initiative
(GRI), taking into account the requirements of the German
Sustainability Code and the principles of the UN Global Com-
pact.
One of our major climate protection objectives is to achieve
a 20% reduction in our greenhouse gas emissions by 2020
measured against the 2006 baseline.
Many guidelines specify how the sites and employees of
the Merck Group are to observe the principles in their daily
work. The Group function Environment, Health, Safety, Secu-
rity & Quality steers these global activities and ensures com-
pliance with regulatory requirements, standards and business
needs throughout the entire Group. In this way, Group-wide
risks are minimized and continuous improvement is promoted in
the areas of Environment, Health, Safety, Security and Quality.
Corporate Responsibility reports are also published at regular
intervals.
158
Corporate Governance Statement on Corporate Governance
Procedures of the Executive Board,
Supervisory Board, Board of Partners
and its Committees
Members of the Executive Board of Merck KGaA
Notes on memberships of statutory supervisory boards and
comparable German and foreign supervisory bodies (section
285 No. 10 HGB in conjunction with section 125 (1) sentence
5 AktG).
Member
Memberships of
(a) statutory supervisory boards and
50,750.00
50,750.00
3,750.00 3,750.00 74,250.00 66,008.90
3,750.00 3,000.00 50,750.00 50,000.00
3,750.00 3,750.00
750.00
750.00
3,000.00
750.00
3,000.00
750.00
3,750.00
3,000.00
0.00
0.00
3,750.00
0.00
2,250.00
0.00
3,750.00
3,750.00
Stefan Oschmann
Kai Beckmann
Belén Garijo Lopez
Marcus Kuhnert
Bernd Reckmann
Total
Service cost
Amount of pension
provisions as
of Dec. 31, 2015
2015
2014
1,607
Karl-Ludwig Kley
1,127
953
549
3,502
230
108
5,053
672
672
353
144
435
13,957
€ thousand
The pension provisions and the service cost are presented in
the following table.
For Belén Garijo Lopez and Marcus Kuhnert, as of 2016 the percentage entitlement will increase up until retirement by two percentage points per year of service up to 70%.
The individual contractual pension obligations grant the mem-
bers of the Executive Board entitlement to a life-long old-age
pension or surviving dependents' pension in the event of reach-
ing the individual contractually agreed age limit, permanent
disability or death. As an alternative to an old-age pension,
upon reaching the age limit specified in their individual con-
tracts, the members of the Executive Board have been offered
the possibility to receive their pension entitlement in the form
of a one-time lump-sum payment calculated in accordance with
actuarial principles.
The amount of the old-age pension is determined by a
percentage share of pensionable compensation defined by the
Personnel Committee.
The individual values are presented in the following table:
Karl-Ludwig Kley
Stefan Oschmann
Kai Beckmann
Belén Garijo Lopez
Marcus Kuhnert
Bernd Reckmann
Pensionable
compensation
(€ thousand)
Percentage
entitlement
900
70
650
55
400
49
400
50
300
40
650
64
The percentage entitlement increases up until retirement by two percentage points per year of service up to 70% for Kai Beckmann and Bernd Reckmann. Their pension entitlement
was thus accordingly increased in 2015.
375
4,190
Corporate Governance 153
215
2,143
94,000.00 77,517.81
3,750.00
3,750.00 97,750.00 81,267.81
Michael Fletterich
(Vice Chairman since May 9, 2014)
70,500.00 62,258.90
Crocifissa Attardo
Mechthild Auge
Johannes Baillou¹
Frank Binder¹
Gabriele Eismann²
2014
Jens Frank¹
Jürgen Glaser¹
Michaela Freifrau von Glenck
Siegfried Karjetta²
Rolf Krebs¹
(Chairman until May 9, 2014)
Hans-Jürgen Leuchs¹
Albrecht Merck
47,000.00 47,000.00
47,000.00 47,000.00
0.00 16,610.96
0.00 16,610.96
47,000.00 30,517.81
0.00 16,610.96
47,000.00 47,000.00
0.00 16,610.96
47,000.00
47,000.00
47,000.00 30,517.81
Edeltraud Glänzer
2015
2014
Total compensation
33,750
The surviving dependents' pension grants the spouse a lifelong
surviving dependents' pension amounting to 60% of the pension
entitlement, and dependent children either a half-orphan's or
an orphan's pension maximally until the age of 25.
Benefits in the event of termination of duties as an
Executive Board member
The employment contracts of Karl-Ludwig Kley, Stefan
Oschmann, Kai Beckmann and Bernd Reckmann each contain
a post-contractual non-competition clause. An amount equal
to 50% of the average contractual benefits paid to the respec-
tive Executive Board member within the past 12 months prior
to leaving the company shall be provided as compensation for
each year of the two-year non-competition period. During the
period of the non-competition clause, other employment
income and pension payments will be credited toward this
compensation. Within certain time limits, E. Merck KG has the
possibility to dispense with adherence to the non-competition
clause with the consequence that the obligation to make the
compensation payments shall cease to apply.
The contracts of the Executive Board members further
provide for the continued payment of fixed compensation to
surviving dependents for a limited period of time in the event of
death. Above and beyond this and existing pension obligations,
no further obligations exist in the event of the termination of
the contractual relationships of the Executive Board members.
154
Corporate Governance Statement on Corporate Governance
Miscellaneous
The members of the Executive Board do not receive additional
compensation for serving on the boards of Group companies.
Should members of the Executive Board be held liable for
financial losses while executing their duties, under certain cir-
cumstances this liability risk is covered by a D&O insurance
policy from Merck KGaA. The D&O insurance policy has a
deductible in accordance with the legal requirements and rec-
ommendations of the German Corporate Governance Code.
Payments to former Executive Board members and their
surviving dependents
Pension payments to former members of the Executive Board
or their surviving dependents amounted to € 11,908 thousand
in 2015 (2014: € 11,220 thousand). Pension provisions total-
ing € 111,812 thousand exist for the pension entitlements of
this group of persons (2014: € 120,674 thousand).
Compensation of the Supervisory Board members of
Merck KGaA
The compensation of the Supervisory Board members is defined
by Article 20 of the Articles of Association of Merck KGaA. The
members of the Supervisory Board receive fixed compensa-
tion of € 47,000 per year. The Chairman receives double this
amount and the Vice Chairman receives one and a half times
this amount. In addition, the members receive additional com-
pensation of € 750 per meeting.
The individual values are presented in the following table:
in €
Wolfgang Büchele
(Chairman since May 9, 2014)
Compensation
Fixed compensation
2015
2014
for meeting attendance
2015
10,131
The General Meeting of Merck KGaA
Statement on Corporate Governance Corporate Governance 149
The Research and Development Committee is convened as
and when necessary, but holds at least two meetings a year.
Meetings of the Research and Development Committee are
attended by members of the Executive Board of Merck KGaA
upon request of the Committee. These meetings regularly
include the Chairman of the Executive Board as well as the CEO
Healthcare and the CEO Life Science/Performance Materials.
The Research and Development Committee is responsible,
among other things, for reviewing and discussing the research
activities of Healthcare and/or Life Science/Performance
Materials business sectors. The Chairperson of the Committee
reports to the Board of Partners on the insights gained from
the meetings held.
Vienna, Austria, Vice Chairman of the Executive Board
Johannes Baillou
Member
The Board of Partners has nine members.
Some of the responsibilities that lie with the supervisory board
of a German stock corporation are fulfilled at Merck by
E. Merck KG. This applies primarily to the Board of Partners of
E. Merck KG. Therefore, the Board of Partners and the compo-
sition and procedures of its committees are described in the
following.
Board of Partners of E. Merck KG
The German Stock Corporation Act prescribes that the
Supervisory Board of a publicly listed company must have at
least one independent member who has professional expertise
in accounting or auditing. Theo Siegert satisfies these require-
ments and is furthermore the Chairman of the Finance Com-
mittee of the Board of Partners of E. Merck KG.
The rules of procedure prescribe that the Supervisory Board
may form committees as and when necessary. The Supervisory
Board has formed a Nomination Committee comprising three
shareholder representatives. Its members are Albrecht Merck,
Wolfgang Büchele and Theo Siegert. The Nomination Commit-
tee is responsible for proposing to the Supervisory Board suit-
able candidates for its proposal to the Annual General Meet-
ing. Apart from legal requirements and the recommendations
of the German Corporate Governance Code, the "Objectives of
the Supervisory Board with respect to its composition" are to
be taken into consideration as well. Owing to the aforemen-
tioned limited authority, and since a corresponding need has
not yet arisen, the Supervisory Board currently has no further
committees.
The members of the Board of Partners of E. Merck KG and
of the Supervisory Board may be convened to a joint meeting
if so agreed by the chairmen of the two boards.
Group. The adoption of the annual financial statements is not
the responsibility of the Supervisory Board, but of the General
Meeting. The Supervisory Board normally meets four times a
year. Further meetings may be convened if requested by a
member of either the Supervisory Board or the Executive
Board. As a rule, resolutions of the Supervisory Board are
passed at meetings. At the instruction of the chairman, in
exceptional cases a resolution may be passed by other means,
details of which are given in the rules of procedure.
The Supervisory Board examines the annual financial
statements as well as the consolidated financial statements
and the combined management report, taking into account in
each case the reports of the auditor. Moreover, the Supervi-
sory Board discusses the quarterly reports and the half-year
financial report, taking into account in the latter case the
report of the auditor on the audit review of the abridged finan-
cial statements and the interim management report of the
and General Partner of E. Merck KG, Chairman
The Supervisory Board performs a monitoring function. It
supervises the management of the company by the Executive
Board. In comparison with the supervisory board of a German
stock corporation, the role of the supervisory board of a cor-
poration with general partners (KGaA) is limited. This is due to
the fact that the members of the Executive Board are person-
ally liable partners and therefore are themselves responsible
for the management of the company. In particular, the Super-
visory Board is not responsible for appointing and dismissing
general partners or for regulating the terms and conditions of
their contracts. This is the responsibility of E. Merck KG. Nor
does the Supervisory Board have the authority to issue rules
of procedure for the Executive Board or a catalogue of busi-
ness transactions requiring approval. This authority likewise
belongs to E. Merck KG (Article 13 (3) sentence 1 and (4) sen-
tence 1 of the Articles of Association). However, the fact that
the Supervisory Board has no possibilities to directly influence
the Executive Board restricts neither its information rights nor
audit duties. The Supervisory Board must monitor the Execu-
tive Board in terms of legality, regularity, usefulness, and eco-
nomic efficiency. In particular, the Supervisory Board has the
duty to examine the reports provided by the Executive Board.
This includes regular reports on the intended business policy,
as well as other fundamental issues pertaining to corporate
planning, especially financial, investment and HR planning;
the profitability of the Merck Group; the progress of business;
the risk situation; risk management (including compliance);
and the internal auditing system. In addition, by means of
consultation with the Executive Board, it creates the basis for
supervision of the management of the company by the Super-
visory Board according to section 111 (1) of the German Stock
Corporation Act (AktG).
160
2 Members appointed according to Article 6 (5) of the Articles of Association.
1 Internal board position.
(b) - E. Merck KG, Darmstadt¹
- DKSH Holding Ltd., Zurich, Switzerland
- Henkel AG & Co KGaA, Düsseldorf
(b) E. Merck KG, Darmstadt¹
(a) - E.ON SE, Düsseldorf
(b) E. Merck KG, Darmstadt¹
no board positions
(b) E. Merck KG, Darmstadt¹
Corporate Governance Statement on Corporate Governance
(a) - 4SC AG, Martinsried (since January 2, 2015)
- Supervisory Board of Bonn University Hospital
(since March 1, 2015)
Statement on Corporate Governance
Memberships of
Helga Rübsamen-Schaeff
(a) - Merck KGaA, Darmstadt
Schriesheim, Commercial Director of the Castel Peter Winery,
Bad Dürkheim
Albrecht Merck
(a) Merck KGaA, Darmstadt
Darmstadt, Physician
Siegfried Karjetta
Kemira Oyj, Helsinki, Finland
(b)
Munich, Chairman of the Executive Board of Linde AG, Munich
Corporate Governance 161
Merck KGaA, Darmstadt
Wolfgang Büchele
- Travel Asset Group Ltd., London, United Kingdom (Chairman)
Oras Invest Ltd, Helsinki, Finland
(b)
Darmstadt, Chairman of the Executive Board and General Partner
of E. Merck KG
Fortas AG, Rösrath (Chairman)
(a)
Frank Stangenberg-Haverkamp
no board positions
(b) comparable German and foreign supervisory bodies of corporations
(a) other statutory supervisory boards and
(a)
no board positions
no board positions
(b) E. Merck KG, Darmstadt¹
Michaela Freifrau von Glenck
Hannover, Vice Chairperson of the IG BCE
Edeltraud Glänzer
Seeheim-Jugenheim, Senior Product Manager
Gabriele Eismann
Wehrheim, Full-time member of the Works Council of Merck Darmstadt
Mechthild Auge
Darmstadt/Gernsheim
Darmstadt, Full-time member of the Works Council of Merck
Crocifissa Attardo
Darmstadt/Gernsheim, Vice Chairman
Zurich, Retired teacher
Gernsheim, Chairman of the Works Council of Merck
Munich, Chairman of the Executive Board of Linde AG, Munich,
Chairman
Wolfgang Büchele
Member
(b) comparable German and foreign supervisory bodies of corporations
(a) other statutory supervisory boards and
Memberships of
159
Corporate Governance
Statement on Corporate Governance
Supervisory Board
Statement on Corporate Governance
Michael Fletterich
Siegfried Karjetta²
Darmstadt, Physician
Albrecht Merck
(b) - E. Merck KG, Darmstadt¹
no board positions
(a) B. Braun Melsungen AG, Melsungen
Solvay Deutschland GmbH, Hannover
(Vice Chairperson)
no board positions
no board positions
BKK Merck
-
b)
no board positions
Kemira Oyj, Helsinki, Finland
b) - E. Merck KG, Darmstadt¹
Munich, Managing Partner of Altmann Analytik GmbH & Co. KG,
Munich
Tobias Thelen²
Theo Siegert
Umkirch, Pediatrician
Gross-Zimmern, Specialist, Merck Life Science Operations Strategy
Gregor Schulz
Karl-Heinz Scheider
Langenburg, Chairperson of the Advisory Board of AiCuris
Anti-infective Cures GmbH, Wuppertal
Helga Rübsamen-Schaeff
Michelstadt, Full-time member of the Works Council of Merck
Darmstadt
Alexander Putz
Seeheim-Jugenheim, Vice President Corporate Quality Assurance
Dietmar Oeter
Bad Dürkheim
Schriesheim, Commercial Director of the Castel Peter Winery,
Langenburg, Chairperson of the Advisory Board of AiCuris
Anti-infective Cures GmbH, Wuppertal
Düsseldorf, Managing Partner of de Haen-Carstanjen & Söhne,
Düsseldorf
Umkirch, Pediatrician
Report of the Supervisory Board
Corporate Governance
165
Merck Group, the combined management report for Merck KGaA
and the Merck Group, and the proposal by the Executive Board
for the appropriation of the net retained profit were presented
and distributed to the Supervisory Board, together with the
auditor's reports.
In accordance with Art. 14 (2) of the Articles of Association,
the Supervisory Board also examined the annual financial
statements of Merck KGaA, the proposal for the appropriation
of net retained profit and the auditor's report presented in
accordance with Article 27 (2) of the Articles of Association.
It also examined the consolidated financial statements of
the Merck Group as well as the combined management report
for Merck KGaA and the Merck Group, and took note of the
auditor's report of KPMG AG Wirtschaftsprüfungsgesellschaft,
Berlin.
The discussion of the relevant agenda item at the Super-
visory Board's meeting on March 4, 2016 to approve the finan-
cial statements was also attended by the auditors who sign the
audit opinion on the annual financial statements of Merck KGaA
and the consolidated financial statements of the Merck Group.
These auditors furthermore reported on their audit at this
meeting.
The Supervisory Board took note of and approved the
results of the audit. On completion of its examination, the
Supervisory Board raised no objections and thus approved the
annual financial statements for Merck KGaA, the consolidated
financial statements of the Merck Group and the combined
management report of Merck KGaA and the Merck Group pre-
pared by the Executive Board, as well as the report presented
by the auditor in accordance with Article 27 (2) of the Articles
of Association. Following its own examination of the situation,
the Supervisory Board gave its consent to the proposal of the
Executive Board for the appropriation of net retained profit.
Corporate governance and Statement of Compliance
Corporate governance is a topic of high priority for the Super-
visory Board. In its own estimation, the Supervisory Board
has an adequate number of independent members. There
were no conflicts of interest, as defined by the German Corpo-
rate Governance Code, involving Supervisory Board members
during 2015. After addressing corporate governance topics in
detail, the Executive Board and Supervisory Board resolved
to adopt and issue the updated Statement of Compliance on
February 18, 2016 (Executive Board) and on March 4, 2016
(Supervisory Board) and jointly issued it on March 4, 2016 in
accordance with section 161 of the German Stock Corporation
Act. The statement is permanently available on the website of
Merck KGaA (www.merckgroup.com-> Investors -> Corporate
Governance). More information about corporate governance
at Merck KGaA, including the compensation of the Executive
Board and Supervisory Board, is given in the Statement of
Compliance on pages 148 et seq. of the Annual Report.
Committees
Apart from the Nomination Committee, the Supervisory Board
of Merck KGaA currently has no further committees on account
of the special features that apply to the Supervisory Board of
a corporation with general partners (KGaA) under German
company law and because a corresponding need for this has
not emerged to date. The members of the Nomination Com-
mittee newly elected on November 11, 2014 did not convene
in fiscal 2015. No report is given on the work of further com-
mittees.
The annual financial statements of Merck KGaA, the consoli-
dated financial statements of the Merck Group, and the com-
bined management report for Merck KGaA and the Merck
Group, including the accounts, were audited by KPMG AG
Wirtschaftsprüfungsgesellschaft, Berlin. The auditors issued
an unqualified audit opinion on the annual financial state-
ments of Merck KGaA in accordance with German Auditing
Standards. For the consolidated financial statements prepared
in accordance with International Financial Reporting Stand-
ards, as well as the combined management report, the audi-
tors issued the unqualified auditor's report reproduced in the
Annual Report of the Merck Group. In addition, the auditor
audited the calculation of Merck KGaA's participation in the
profits of E. Merck KG in accordance with Art. 27 (2) of the
Articles of Association. The annual financial statements of
Merck KGaA, the consolidated financial statements of the
Personnel matters
Darmstadt, March 4, 2016
The Supervisory Board of Merck KGaA
Wolfgang Büchele
Chairman
166 Corporate Governance Objectives of the Supervisory Board with respect to its composition
OBJECTIVES OF THE SUPERVISORY BOARD
WITH RESPECT TO ITS COMPOSITION
Initial situation
According to section 5.4.1 (2) and (3) of the German Corpo-
rate Governance Code, the Supervisory Board shall specify
concrete objectives regarding its composition which, while
considering the specifics of the enterprise, take into account
the international activities of the enterprise, potential conflicts
of interest, the number of independent Supervisory Board
members, an age limit to be specified for Supervisory Board
members and a regular limit on the length of Supervisory
Board membership to be specified, as well as diversity.
General notes on the composition of the Supervisory
Board
The Supervisory Board of Merck KGaA currently consists of
16 members, eight of whom represent the shareholders and
a further eight who represent the employees. The eight
employee representative members are elected by employee
delegates pursuant to the provisions of the German Codeter-
mination Act (Mitbestimmungsgesetz "MitbestG"). These con-
sist of six company employees, including a senior executive,
as well as two union representatives. The Supervisory Board
has no statutory proposal right with respect to electing the
delegates or employee representatives. Owing to a delegation
right of E. Merck Beteiligungen KG, two of the eight share-
holder representatives are specified. The Supervisory Board
likewise has no statutory proposal right with respect to exer-
cising this delegation right. The remaining six shareholder
representatives are elected by the General Meeting. In accord-
ance with section 124 (3) sentence 1 AktG, the Supervisory
Board shall propose to the General Meeting Supervisory Board
members for election. These proposals require a majority of
the votes of the shareholder representative members of the
Supervisory Board. The next scheduled election to the Super-
visory Board shall take place at the 2019 General Meeting. The
General Meeting is not required to follow the election propos-
als. The appointment objectives that the Supervisory Board
sets forth below therefore do not represent requirements to be
met by those eligible to elect or to delegate members. Instead,
they are intended to express the objectives pursued by the
Supervisory Board in office with regard to its advisory and
monitoring functions.
Objectives of the Supervisory Board with respect to its
composition
In accordance with section 5.4.1 (2) of the German Corporate
Governance Code, the Supervisory Board has specified the fol-
lowing objectives with respect to its composition and reports
on the status of their implementation below.
With the exception of Edeltraud Glänzer, who was absent from
the meeting on November 10, 2015, all the Supervisory Board
members attended all the Supervisory Board meetings. There
were no changes in the composition of the Supervisory Board
in 2015.
Expertise and diversity
Annual financial statements
At its fourth meeting on November 10, 2015, the Supervi-
sory Board discussed the results of the efficiency examination
that took place in 2015. Furthermore, the Supervisory Board
dealt with the report of the Executive Board on the third quar-
ter of 2015. Additional topics of focus were the 2015 status
reports of Group Internal Auditing and on compliance and data
protection as well as the report of the Research and Develop-
ment Committee Healthcare. Furthermore, the Group Execu-
tive Conference and Merck's current strategic direction were
reported on and discussed.
Corporate Governance 163
Gregor Schulz
Stipulations to promote the percent-
age of management positions held
by women pursuant to section 76 (4)
and section 111 (5) AktG (German
Stock Corporation Act)
Stipulations pursuant to section 76 (4) AktG (target for
the percentage of positions held by women on the two
upper management levels below the Executive Board)
We foster diversity within the company, which also includes
ensuring a balance of genders in management. To this end, we
pursue both voluntary and statutory objectives, and we work
continuously and sustainably on achieving them.
Pursuant to section 76 (4) AktG, the management body of
companies that are listed or subject to co-determination are
required to set binding targets for the percentage of positions
held by women on the two management levels below the man-
agement body.
In September 2015, the Executive Board of Merck KGaA
set the following targets for the percentage of positions held
by women on the two management levels below the Executive
Board:
• First management level below the Executive Board: 21% of
positions held by women
• Second management level below the Executive Board: 21%
of positions held by women
The targets relate to the percentage of positions held by
women on the respective management level as of Septem-
ber 30, 2015 and correspond to the current status. This natu-
rally does not exclude an increase in the percentage of positions
held by women on these management levels. The deadline set
by the Executive Board of Merck KGaA for reaching this target
ends on December 31, 2016.
In addition, as a global company with correspondingly
aligned global (management) structures, Merck is continuing
to pursue the (voluntary) target of 25% to 30% of manage-
ment positions held by women (Global Grade 14 and up; see
page 83 "Diversity enriches our management team".
Stipulations pursuant to section 111 (5) AktG (target
for the percentage of positions on the Supervisory
Board held by women)
In addition, on October 13, 2015, the Supervisory Board
members were informed by telephone of Mr. Oschmann's
appointment as successor to Mr. Kley as Chairman of the Execu-
tive Board on April 30, 2016 as well as the launch of the new
Merck branding.
Pursuant to section 111 (5) AktG, the Supervisory Board of
companies that are listed or subject to co-determination stip-
ulates binding targets for the percentage of positions on the
Supervisory Board and on the Management Board held by
women. However, for Merck KGaA, stipulations pursuant to
section 111 (5) AktG need not be set for the following reasons:
The obligation to stipulate a target for the percentage of
positions held by women on the Management Board pursuant
to section 111 (5) AktG is not applicable to the legal form of a
corporation with general partners (Kommanditgesellschaft auf
Aktien) as a corporation with general partners does not have a
management board comparable to that of a stock corporation
with personnel authority of the supervisory board, but has an
executive board consisting of personally liable partners (see
also pages 159/160 for the description of Supervisory Board
procedures).
164
Corporate Governance Report of the Supervisory Board
REPORT OF THE SUPERVISORY BOARD
The Supervisory Board again properly executed its duties in
2015 in accordance with the law as well as the company's
Articles of Association and rules of procedure. In particular,
the Supervisory Board monitored the work of the Executive
Board diligently and regularly.
Cooperation with the Executive Board
The cooperation with the Executive Board was characterized
by intensive, trustworthy exchange. During fiscal 2015, the
Executive Board provided the Supervisory Board with regular
written and verbal reports on the business development of
Merck KGaA and the Merck Group. In particular, the Supervi-
sory Board was informed about the market and sales situation
of the company against the background of macroeconomic
development, the financial position of the company and its
subsidiaries, along with their earnings development, as well as
corporate planning. Within the scope of quarterly reporting,
the sales and operating results were presented for the Merck
Group as a whole, and broken down by business sector. Aside
from the Supervisory Board meetings, the Chairman of the
Supervisory Board also maintained and continues to maintain
a regular exchange of information with the Chairman of the
Executive Board.
Key topics of the Supervisory Board meetings
The meeting held on May 13, 2015 focused on current
business developments in the first quarter of 2015. The report
of the Research and Development Committee Life Science/
Performance Materials of the Board of Partners of E. Merck KG
was a further focus of the meeting. The Supervisory Board
also dealt with the report of the Group Compliance Officer, the
report of the Group Data Privacy Officer and a report on ERP
strategy.
At its meeting on July 29, 2015, the Supervisory Board
focused intensively on the report of the Executive Board on
business performance in the second quarter of 2015. In addi-
tion, KPMG explained the half-year financial report. Risk man-
agement within the company was a further topic. The Head of
Risk Management presented the status report for the first half
of 2015. No risks that threaten the continued existence of the
company were identified.
The statutory target of 30% pursuant to section 96 (2) AktG
is already applied on the Supervisory Board of Merck KGaA.
This eliminates the obligation to stipulate a further target for
the percentage of positions held by women on the Supervisory
Board (see section 111 (5) sentence 5 AktG).
Professional qualifications and personal expertise are the two
most important prerequisites for appointments to seats on the
Supervisory Board. When proposing Supervisory Board candi-
dates for election or delegation, the Supervisory Board will
always give top priority to these prerequisites, which are
essential for fulfilling its legal duties.
Four Supervisory Board meetings were held in fiscal 2015. At
these meetings, the Supervisory Board discussed the reports of
the Executive Board in detail and discussed company develop-
ments and strategic issues together with the Executive Board.
At the meeting held on February 27, 2015, the Executive
Board first reported on business performance during 2014.
In addition, the Supervisory Board intensively addressed the
annual financial statements and consolidated financial state-
ments for 2014 and the corresponding management reports.
The auditor explained the audit report. The Executive Board
reported on the financial statements. Furthermore, the Super-
visory Board resolved upon the Statement of Compliance with
the German Corporate Governance Code as well as the State-
ment on Corporate Governance, which simultaneously includes
the joint report on Corporate Governance of the Executive
Board and Supervisory Board. The Supervisory Board also
approved the proposals to be made to the General Meeting.
The Executive Board presented the plans for fiscal 2015. Fur-
ther topics were the report of Group Internal Auditing and the
status of the Sigma-Aldrich acquisition.
In-depth knowledge of the fields relevant to the company
The Supervisory Board shall have at least four members with
in-depth knowledge and experience of fields that are impor-
tant to the company, including at least one expert for the
Healthcare and Life Science/Performance Materials sectors,
respectively.
The Finance Committee holds at least four meetings a
year, at least one of which is a joint meeting with the auditor
of Merck KGaA. Further meetings are convened as and when
necessary. Meetings of the Finance Committee are attended
by the Chief Financial Officer of Merck KGaA. Other members
of the Executive Board of Merck KGaA may attend the meet-
ings upon request by the Finance Committee. These meetings
regularly include the Chairman of the Executive Board. The
Finance Committee is responsible for, among other things,
analyzing and discussing the annual financial statements, the
The Finance Committee has four members. These are Theo
Siegert (Chairman), Johannes Baillou, Wolfgang Büchele, and
Tobias Thelen.
Finance Committee
The Personnel Committee is responsible for, among other
things, the following decisions concerning members and for-
mer members of the Executive Board: contents of and entry
into employment contracts and pension contracts, granting of
loans and advance payments, changes to the compensation
structure and adaptation of compensation, approval for taking
on honorary offices, board positions and other sideline activi-
ties, as well as division of responsibilities within the Executive
Board of Merck KGaA. The Personnel Committee passes its
resolutions by a simple majority - in matters concerning the
Chairman of the Executive Board unanimity is required. The
Chairman of the Committee regularly informs the Board of
Partners of its activities.
The Personnel Committee meets at least twice a year. Fur-
ther meetings are convened as and when necessary. Meetings
of the Personnel Committee are attended by the Chairman of
the Executive Board of Merck KGaA unless the Committee
decides otherwise.
The Personnel Committee has four members. These are
Johannes Baillou (Chairman since February 9, 2015), Frank
Stangenberg-Haverkamp (Chairman until February 9, 2015),
Wolfgang Büchele, and Theo Siegert.
Personnel Committee
162 Corporate Governance Statement on Corporate Governance
The Board of Partners may confer the responsibility for
individual duties to committees. Currently the Board of Part-
ners has three committees in place: the Personnel Committee,
the Finance Committee, and the Research and Development
Committee.
at least four times a year. The members of the Executive Board
of Merck KGaA are invited to all meetings of the Board of Part-
ners, unless the Board of Partners resolves otherwise in indi-
vidual cases. The members of the Board of Partners may con-
vene a joint meeting with the Supervisory Board of Merck KGaA
if so agreed by the chairmen of the two boards.
The Board of Partners supervises the Executive Board in its
management of the company. It informs itself about the busi-
ness matters of Merck KGaA, and may inspect and examine
the company's accounts and other business documents, and
the assets for this purpose. According to Article 13 (4) of the
Articles of Association of Merck KGaA, the Executive Board
requires the approval of E. Merck KG for transactions that are
beyond the scope of the Group's ordinary business activities.
For such transactions to be approved, approval must first be
obtained from the Board of Partners of E. Merck KG. The Board
of Partners convenes as and when necessary; however, it meets
(a) Merck KGaA, Darmstadt
(b) DKSH Holding Ltd., Zurich, Switzerland
- E.ON SE, Düsseldorf
(a) Merck KGaA, Darmstadt
(a) - Merck KGaA, Darmstadt
- 4SC AG, Martinsried (since January 2, 2015)
Supervisory Board of Bonn University Hospital
(since March 1, 2015)
(a) - Merck KGaA, Darmstadt
Altmann Analytik GmbH & Co. KG, Munich
Munich, Managing Partner of
Tobias Thelen
de Haen-Carstanjen & Söhne, Düsseldorf
Overall, the Supervisory Board's policy is to optimally meet
its monitoring and advisory duties by having diversity among
its members. Diversity includes, in particular, internationality
as well as different experience backgrounds and career paths.
The proportion of women on the Supervisory Board is also
considered to be an aspect of diversity. When preparing pro-
posals for election or delegation, due consideration shall be
given in individual cases to the extent to which different, yet
complementary professional profiles, career and life experi-
ences, as well as appropriate representation of both genders
can benefit the work of the Supervisory Board. Additionally,
the Supervisory Board shall support the Executive Board in its
efforts to increase diversity within the company.
Theo Siegert
Düsseldorf, Managing Partner of
consolidated financial statements and the respective reports
of the auditor, as well as the half-year financial report (includ-
ing the report of the auditors for the audit review of the
abridged financial statements and interim management report
contained in the half-year report) and the quarterly reports.
Moreover, the Finance Committee recommends to the Chair-
man of the Supervisory Board annual audit focuses for the
auditors of the annual financial statements. It also recom-
mends to the Supervisory Board an auditor for the annual
financial statements as well as auditors for the audit review of
the abridged financial statements and interim management
report contained in the half-year financial report for the Super-
visory Board's corresponding suggestion to the General Meet-
ing. In addition, the Finance Committee is concerned with the
net assets, financial position, results of operations and liquid-
ity of Merck, as well as accounting, internal auditing, risk man-
agement and compliance issues. Upon request of the Board of
Partners, the Finance Committee examines investment pro-
jects that must be approved by the Board of Partners and
provides recommendations pertaining thereto.
Research and Development Committee
- Henkel AG & Co KGaA, Düsseldorf
Every year, the Supervisory Board will provide information in
the Annual Report on the status of implementing its objectives.
Objectives of the Supervisory Board with respect to its composition
Corporate Governance 167
The Research and Development Committee has four members.
These are Helga Rübsamen-Schaeff (Chairperson), Johannes
Baillou, Siegfried Karjetta, and Gregor Schulz.
Management experience
The Supervisory Board shall have at least three members
who have experience in managing or supervising a medium-
or large-sized company.
The Supervisory Board has more than three members who
have the corresponding experience. This includes both Super-
visory Board members who were or still are management
board members or directors in such companies, as well as
Supervisory Board members who have gained experience in
supervisory bodies of German and/or foreign companies of
this size.
Family-owned company
The Supervisory Board currently has multiple members
who have the appropriate management experience in family-
owned companies of this size.
Internationality
The Supervisory Board shall have at least three members with
business experience in the main sales markets of Merck KGaA.
Currently, the main sales markets of Merck KGaA are Europe,
North and Latin America, and Asia-Pacific.
The present composition of the Supervisory Board satisfies
this objective. More than three Supervisory Board members
have entrepreneurial experience in Europe, covering a wide
range of countries. More than three Supervisory Board mem-
bers have experience in management positions in companies
that operate globally.
Women on the Supervisory Board
The Supervisory Board shall have at least one member who
has experience in managing medium- or large-sized family-
owned companies.
Six women are currently members of the Supervisory Board
of Merck KGaA. This corresponds to 37.5% of the Supervisory
Board. When nominating candidates for election to the Super-
visory Board or making proposals for delegation, the Supervi-
sory Board shall examine whether the percentage of women
can be increased by suitable candidates.
well as court appointments of replacement members if these
become necessary. All Supervisory Board members will corre-
spondingly influence those eligible to elect or delegate. Taking
into consideration the aforementioned criteria and in accord-
ance with its duties under German stock corporation law, the
Supervisory Board proposes to the General Meeting the candi-
dates it believes to be best suited in each case and will con-
tinue to do so in the future.
The achievement of the aforementioned objectives shall be
pursued initially until 2017, taking into account applicable law
within the scope of elections and re-elections, delegations as
An age limit or a regular limit on the length of membership for
Supervisory Board members is not specified since age and
length of membership are not criteria for qualifications and
expertise. Moreover, we do not wish to forego the many years
of experience of Supervisory Board members. Crucial to the
successful work of the Supervisory Board is a good balance
among Supervisory Board members in terms of age and length
of membership.
No age limit or maximum length of membership
Corporate Governance Objectives of the Supervisory Board with respect to its composition
168
Merck is currently meeting this objective for the composi-
tion of the Supervisory Board. At present, the Supervisory
Board has more than four members who have in-depth knowl-
edge and experience of the Healthcare and Life Science/
Performance Materials sectors. More than four Supervisory
Board members also have executive experience in companies
that also or specifically operate in the Healthcare and Life
Science/Performance Materials sectors.
Moreover, no one shall be proposed for election to the
Supervisory Board who simultaneously serves on a body of
or advises a major competitor of the company, or owing to
another function, e.g. advisor to major contract partners of
the company, could potentially become involved in a conflict
of interest. No Supervisory Board member serves on a body
of or advises a major competitor. No Supervisory Board mem-
ber performs a function that could lead to a lasting conflict of
interest.
The Supervisory Board shall have an adequate number of
independent members. Assuming that the status of being an
employee representative per se does not justify doubts with
respect to the independence criteria within the meaning of
section 5.4.2 of the German Corporate Governance Code,
normally all employee representatives should be independent
within the meaning of the Code. In any case, at least four of
the shareholder representatives on the Supervisory Board
should be independent. According to the Articles of Associa-
tion of Merck KGaA, six members representing the share-
holders are to be elected by the General Meeting and two
members are to be delegated. Taking this into account, the
Supervisory Board considers four shareholder representatives
to be an appropriate number of independent members. In the
Supervisory Board's estimation, the objectives concerning
independent members are currently met. In particular, the
Supervisory Board does not believe that membership of the
Board of Partners of E. Merck KG conflicts with independence.
The Board of Partners exists complementary to the competen-
cies and the activities of the Supervisory Board. It is not to be
expected that this will lead to material and not merely tempo-
rary conflicts of interest. It should also be taken into account
that due to its substantial capital investment and unlimited
personal liability, E. Merck KG has a strong interest in the busi-
nesses of Merck KGaA operating efficiently and in compliance
with procedures, counteracting from the outset conflicts of
interest between E. Merck KG and Merck KGaA and thus also
corresponding conflicts of interest between the members of the
respective corporate bodies.
Number of independent members/no material conflicts
of interest
The Supervisory Board currently consists of 37.5% women,
which it considers a satisfactory percentage. This is based on
both the percentage of women in management positions at
Merck, as well as the fact that the supervisory boards of other
companies have a comparable percentage of women.
→ 19
2,990.4
4,009.1
→ 18
Other non-current assets
11,395.5
25,339.0
→ 17
Dec. 31, 2014
Non-current financial assets
Note
Deferred tax assets
Property, plant and equipment
131.5
Dec. 31, 2015
Inventories
- 20
→ 22
2,738.3
Non-current assets
Intangible assets
Trade accounts receivable²
1,659.7
2,619.8
→ 21
Current assets
15,529.7
30,657.0
992.9
1,049.6
→ 15
56.5
127.8
94.4
€ million
-568.2
174 Consolidated Financial Statements Consolidated Balance Sheet
682.4
971.8
Changes taken directly to equity
348.5
-20.2
15.6
Reclassification to profit or loss
-1,380.3
71.0
411.7
725.5
-1.1
2,219.5
5.1
-43.0
0.1
Changes recognized in equity
971.8
13.3
12.1
→ 25
of which attributable to non-controlling interests
1,469.1
1,635.9
of which attributable to Merck KGaA shareholders
1,482.4
317.6
523.9
1,648.0
Comprehensive income
Other comprehensive income
1,029.9
408.7
682.5
Consolidated Balance Sheet¹
Current financial assets
→ 15
227.0
Deferred tax liabilities
782.0
608.5
→ 29
Other non-current liabilities
626.1
3,561.1
2,852.7
15,768.9
1,820.1
→ 27
-28
Non-current financial liabilities
Other non-current provisions
→ 26
Provisions for pensions and other post-employment benefits
Non-current liabilities
1,836.1
855.3
9,616.3
11,801.0
818.4
Current liabilities
0.4
2,075.9
4,096.6
→ 28
561.7
535.4
7,607.7
→ 27
Liabilities directly related to assets held for sale
Other current liabilities
Income tax liabilities
Trade accounts payable
Current financial liabilities
Current provisions
Total equity and liabilities
59.4
11,741.6
12,787.5
67.8
12,855.3
2,878.5
832.2
→ 24
297.0
391.0
→ 23
→ 4
Assets held for sale
Income tax receivables
1,226.3
496.2
- 20
Other current assets²
2,199.4
Cash and cash equivalents
45.7
7,350.2
10,480.4
Total assets
2,137.5
2,543.4
9,038.9
9,678.9
565.2
565.2
Non-controlling interests
Equity attributable to Merck KGaA shareholders
Gains/losses recognized in equity
Reserves
Equity capital
25
Total equity
26,010.1
38,007.2
→ 19
-2.5
-4,049.5
- 10.9
Operating result (EBIT)
Other operating expenses
Other operating income
(of which: amortization of intangible assets)²
Research and development costs
Administration expenses
→ 11
(of which: amortization of intangible assets)²
-1,703.7
(-2.7)
- 1,709.2
-608.6
-719.9
(-719.0)
(-3.8)
(-778.9)
Financial result
Income tax
-205.0
-356.7
→ 14
1,762.0
1,843.2
-737.4
Profit before income tax
-917.3
564.4
470.7
12
-
Profit after tax from discontinued operations
Profit after tax
Profit after tax from continuing operations
13
-3,589.1
- 30
→ 10
172 Consolidated Financial Statements Consolidated Income Statement
ar2015.merckgroup.com/downloads
use the following link:
financial statements as Excel files, please
To download the tables in the consolidated
Consolidated Statement of Changes in Net Equity
Notes to the Group Accounts
Consolidated Income Statement¹
178
175 Consolidated Cash Flow Statement
174 Consolidated Balance Sheet
173 Consolidated Statement of Comprehensive Income
172 Consolidated Income Statement
consolidated
Financial
statements
pages 169-257
pages 169-257
176
€ million
Net sales
Cost of sales
7,836.4
8,768.4
(-94.0)
(-166.6)
-3,526.4
-4,076.3
11,362.8
12,844.7
8 -
6-
2014
2015
Note
Marketing and selling expenses
(of which: amortization of intangible assets)²
Gross profit
1,486.5
1,557.0
→ 15
-368.0
Reclassification to profit or loss
Fair value adjustments
Derivative financial instruments
Changes recognized in equity
Tax effect
Reclassification to profit or loss
Reclassification to assets
Fair value adjustments
to profit or loss in subsequent periods:
Items of other comprehensive income that may be reclassified
Changes recognized in equity
Remeasurement of the net defined benefit liability
Tax effect
Changes in remeasurement
Available-for-sale financial assets
Tax effect
Changes recognized in equity
Exchange differences on translating foreign operations
-1.4
18.5
-712.3
115.2
-712.3
115.2
149.2
-861.5
160.5
-45.3
→ 26
1,164.8
1,124.1
2014
2015
Note
to profit or loss in subsequent periods:
-0.1
Items of other comprehensive income that will not be reclassified
€ million
- thereof from continuing operations
basic
Earnings per share (in €)
7.5
9.3
→ 25
- thereof from discontinued operations
of which: attributable to non-controlling interests
1,114.8
of which: attributable to Merck KGaA shareholders (net income)
1,164.8
1,164.8
1,118.5
5.6
1,124.1
-392.2
1,157.3
diluted
- thereof from continuing operations
- thereof from discontinued operations
Consolidated Statement of Comprehensive Income
Consolidated Statement of Comprehensive Income Consolidated Financial Statements 173
0.01
2.66
2.55
2.66
2.56
0.01
2.66
2.55
2.66
2.56
→ 16
2 Excluding amortization of internally generated or separately acquired software.
1 The reporting structure has changed, see "Changes to accounting and measurement principles and disclosure changes".
Profit after tax
1,921.2
Cash and cash equivalents as of December 31
→ 31
-1.1
1,164.8
11,069.2
7.5
49.2
Total equity
348.5
Non-controlling
interests
1,068.5
44.2
1.0
instruments
financial assets
Available-for-sale
Equity attributable
to Merck KGaA
shareholders
11,020.0
1,157.3
Currency
translation
difference
-1.1
676.4
676.4
-351.3
-161.9
- 189.4
-435.0
-435.0
-125.9
348.5
-3.1
1,482.4
13.3
1,469.1
317.6
5.8
311.8
-122.8
Derivative
financial
Gains/losses recognized in equity
Consolidated Statement of Changes in Net Equity Consolidated Financial Statements 177
3,813.7
168.0
397.2
- 189.4
-435.0
-122.8
-0.3
6,499.9
-712.0
-712.0
1,157.3
-562.7
6,090.1
of defined
benefit plans
(share premium) Retained earnings/
Merck KGaA Net retained profit
3,813.7
1,157.3
-1,274.7
397.2
168.0
-1,159.5
7,024.7
3,813.7
168.0
397.2
0.2
-461.0
- 129.2
115.2
1,114.8
115.2
1,114.8
-1,274.7
6,499.9
3,813.7
-0.1
Remeasurement
392.7
-0.3
11,741.6
•⚫ Amendments to IAS 16 "Property, Plant and Equipment"
Amendment to IAS 19 "Employee Benefits"
• Amendment to IAS 1 "Presentation of Financial Statements"
The following rules take effect as of fiscal 2016:
These new rules did not have any material effects on the con-
solidated financial statements.
• IFRIC 21 "Levies"
• Annual Improvements to IFRSS 2011 - 2013 Cycle
•
The following rules took effect as of fiscal 2015:
(2) Reporting principles
The accompanying consolidated financial statements as of
December 31, 2015 have been prepared with MERCK Kom-
manditgesellschaft auf Aktien (Merck KGaA), Frankfurter
Strasse 250, 64293 Darmstadt, which manages the operations
of the Merck Group, as parent company. In accordance with
the provisions of the German financial reporting disclosure law
(Publizitätsgesetz), consolidated financial statements are also
prepared for E. Merck Kommanditgesellschaft (E. Merck KG),
the ultimate parent company and general partner of
Merck KGaA with an equity interest of 70.274% as of Decem-
ber 31, 2015. These consolidated financial statements include
Merck KGaA and its subsidiaries. The authoritative German
versions of these financial statements are filed with the Ger-
man Federal Gazette (Bundesanzeiger) and can be accessed
at www.bundesanzeiger.de.
(1) Company information
General
NOTES TO THE GROUP ACCOUNTS
178 Consolidated Financial Statements Notes to the Group Accounts
These consolidated financial statements have been prepared
in accordance with the International Financial Reporting
Standards in force on the balance sheet date and adopted by
the European Union as issued by the International Accounting
Standards Board and the IFRS Interpretations Committee
(IFRS and IAS, as well as IFRIC and SIC) as well as the addi-
tionally applicable provisions of section 315a of the German
Commercial Code (HGB). The fiscal year corresponds to the
calendar year. These financial statements have been prepared
in euros, the reporting currency. The figures reported in the
consolidated financial statements have been rounded, which
may lead to individual values not adding up to the totals pre-
sented.
12,855.3
Amendment to IAS 27 "Separate Financial Statements"
• Amendment to IAS 41 "Agriculture"
The impact of IFRS 9 and IFRS 15, which will become effective
as of 2018 (subject to a corresponding endorsement by the
European Union), on the consolidated financial statements is
currently being examined. Based on the results of a prelimi-
nary study, Merck currently does not expect that the first-time
application of IFRS 15 will have any significant effects on the
amount and timing of revenue recognition. According to the
present state of knowledge, certain changes will result with
respect to outlicensing as well as to a smaller extent with
respect to the multiple-element arrangements within the Life
Science business sector. From today's perspective, the other
new rules are not expected to have any material effects on the
consolidated financial statements.
Amendment to IFRS 15 "Revenue from Contracts with Cus-
tomers"
•
• Amendments to IFRS 10 "Consolidated Financial Statements"
• Amendment to IFRS 12 "Disclosure of Interests in Other
Entities"
• Amendments to IAS 28 "Investments in Associates and Joint
Ventures"
• IFRS 15 "Revenue from Contracts with Customers"
• Amendment to IAS 38 "Intangible Assets"
• IFRS 14 "Regulatory Deferral Accounts”
As of the balance sheet date, the following standards were
published by the International Accounting Standards Board,
but not yet adopted by the European Union:
• Annual Improvements to IFRSS 2012-2014 Cycle
Merck currently does not expect the new rules to have any
material effects on the consolidated financial statements.
Annual Improvements to IFRSS 2010-2012 Cycle
Amendment to IFRS 11 "Joint Arrangements"
•
•
• IFRS 9 "Financial Instruments"
67.8
12,787.5
2,713.9
-568.2
5.1
5.1
1,124.1
9.3
11,801.0
59.4
969.0
11,741.6
392.7
-0.1
11,801.0
59.4
161.6
161.9
1,744.9
521.1
2.8
523.9
-175.5
5.0
0.1
-0.1
0.2
-461.0
-461.0
-132.8
-3.6
- 129.2
1,648.0
12.1
1,635.9
969.0
-568.2
1,744.9
Capital reserves
Retained earnings
Balance as of December 31, 2015
1,124.1
2014
2015
Note
Cash and cash equivalents as of January 1
Changes in cash and cash equivalents due to currency translation
1,164.8
Changes in cash and cash equivalents
Net cash flows from financing activities
Repayments of other current and non-current financial debt liabilities
Payments from new borrowings of other current and non-current financial liabilities
Payments from issuance of bonds
Payments for the acquisition of non-controlling interests
Repayments of bonds
thereof: from discontinued operations
Repayments of financial liabilities to E. Merck KG
1,510.9
-90.0
→ 34
18.7
31.8
-9.3
-42.0
533.1
1,360.9
-636.3
214.7
52.8
166.5
-94.8
-84.5
20.9
-341.6
Payments from new borrowings of financial liabilities from E. Merck KG
Dividend payments to non-controlling interests
Dividend payments to E. Merck KG
Profit after tax
€ million
Consolidated Cash Flow Statement
Consolidated Cash Flow Statement Consolidated Financial Statements 175
1 Since January 1, 2015, the consolidated balance sheet of the Merck Group has been structured in descending order of maturity.
2 Previous year's figures have been adjusted, see "Changes to accounting and measurement principles and disclosure changes".
26,010.1
Depreciation/amortization/impairment losses/reversals of impairments
6,601.4
→ 4
1,574.6
1,818.5
→ 29
849.8
1,011.3
9,383.0
38,007.2
Changes in inventories
Changes in trade accounts receivable¹
Changes in trade accounts payable
Dividend payments to Merck KGaA shareholders
Net cash flows from investing activities
thereof: from discontinued operations
Payments from the divestment of assets held for sale
Payments from the disposal of other financial assets
Payments for acquisitions less acquired cash and cash equivalents
Payments from the disposal of property, plant and equipment
Payments for investments in financial assets
Payments for investments in property, plant and equipment
Payments from the disposal of intangible assets
Payments for investments in intangible assets
thereof: from discontinued operations
Net cash flows from operating activities
Other non-cash income and expenses
Neutralization of gains/losses on disposal of assets
Changes in other assets and liabilities¹
Changes in provisions
2,195.2
2,705.5
5.6
-179.1
27.4
-513.9
Profit after tax
Balance as of January 1, 2014
€ million
General
Equity capital
For details see Note [25] "Equity".
Other comprehensive income
Consolidated Statement of Changes in Net Equity
1 Previous year's figures have been adjusted, see Notes to the consolidated cash flow statement.
2,878.5
832.2
→ 24
Cash and cash equivalents as of December 31 (consolidated balance sheet)
Plus cash and cash equivalents included in assets held for sale
176 Consolidated Financial Statements Consolidated Statement of Changes in Net Equity
Comprehensive income
Dividend payments
Profit transfer to/from E. Merck KG
Changes in scope of consolidation/Other
Transactions with no change of control
including changes in reserves
Profit transfer to/from E. Merck KG
Dividend payments
Comprehensive income
Other comprehensive income
Profit after tax
Balance as of January 1, 2015
Balance as of December 31, 2014
Changes in scope of consolidation/Other
Transactions with no change of control
including changes in reserves
397.2
partner's equity Subscribed capital
Merck KGaA
Merck KGaA
168.0
consolidated
Financial
statements
1,539.4
2,878.5
1,824.8
84.4
-1,641.2
-11,935.8
→ 35
20.9
3,508.6
-129.2
-3.6
-435.0
3,858.0
86.0
-13,482.3
14.0
-3,143.3
-1,740.8
8.9
-480.9
-143.3
2.1
-1,419.3
-122.8
-3.1
-382.7
560.0
-2,576.8
530.5
2,878.5
832.2
760.5
7,163.8
→ 35
-324.5
-469.9
322.6
4,106.5
1,482.9
5,756.3
-1,737.7
-351.3
-470.6
-483.6
610.0
72.9
980.8
04
1,114.8
%
(of which: amortization of intangible assets)¹
Gross profit
(-94.0)
(-)
(-94.0)
7,974.4
-138.0
7,836.4
Marketing and selling expenses
-3,104.9
-484.2
-3,589.1
(of which: amortization of intangible assets)¹
(-719.0)
(-)
(-719.0)
-3,526.4
-3,526.4
11,500.8
11,362.8
Since January 1, 2015, royalty, license and commission income
has no longer been disclosed in a separate line in the consoli-
dated income statement. While commission income is now
recorded as part of net sales, royalty and license income is
included under other operating income.
Functional allocation of royalty, license and commission
expenses
Effective January 1, 2015, royalty, license and commission
expenses, which were previously disclosed in a separate line,
were allocated to the corresponding functional costs.
The previous year's figures in the consolidated income
statement have been adjusted accordingly and are presented
in the following table:
MERCK GROUP
Adjustment
€ million
Net sales
Royalty, license and commission expenses
Royalty, license and commission income
Cost of sales
2014 old structure
11,291.5
2014 adjustment
209.3
71.3
-209.3
2014 adjusted
Total revenues
-537.5
537.5
Administration expenses
15.6
3,122.9
-0.1
27.7
-0.2
1,762.0
15.5
3,122.9
27.5
3,387.7
3,387.7
1,762.0
Margin (% of net sales)
-0.2
29.8
1 Excluding amortization of internally generated or separately acquired software.
186 Consolidated Financial Statements Notes to the Group Accounts
Consolidated Balance Sheet
Balance sheet structure
Since January 1, 2015, the consolidated balance sheet of the
Merck Group has been structured in descending order of
maturity. The previous year's figures have been adjusted
accordingly.
30.0
New composition of net sales
-737.4
-684.1
-608.6
Research and development costs
-1,703.7
-608.6
-1,703.7
(of which: amortization of intangible assets)¹
(-3.8)
(-)
-53.3
(-3.8)
426.4
138.0
564.4
Other operating expenses
Operating result (EBIT)
Margin (% of net sales)
EBITDA
Margin (% of net sales)
EBITDA pre exceptionals
Other operating income
Disclosure of receivables from royalties and licenses
Consolidated Income Statement
(6) Changes to accounting and
measurement principles and
disclosure changes
104.0
5,872.6
8,613.4
14,486.0
indefinite
Valuation method for determining the fair values
multi-period excess earnings method
relief from royalty method
relief from royalty method, reproduction cost method
A major factor for the measurement of customer relationships
was the assumption regarding long-term customer retention.
If the annual loss of customers was one percentage point
higher, the fair value of customer relationships would be
€ 529.2 million lower and the amortization period would have
to be reduced by two years. The most significant assumption
for the measurement of trademarks and brands concerned the
underlying royalty rates. These were derived from available
market information. In case of a reduction of the royalty rates
by 0.5 percentage points, the fair value would have been
€ 113.6 million lower.
The preliminary positive difference of € 8,613.4 million was
recognized as goodwill. This comprised anticipated synergies
from the integration of Sigma-Aldrich into the Merck Group
as well as intangible assets that are not recognizable, such
as the expertise of the workforce. Synergies are primarily
expected in the areas of administration, production and pur-
chasing. Apart from these cost synergies, earnings synergies
are expected particularly through the use of the e-commerce
platform of Sigma-Aldrich for products from the legacy life
science business. The goodwill was allocated on a preliminary
basis to the two business sectors Life Science (€ 8,260.2 mil-
lion) and Performance Materials (€ 353.2 million). Goodwill is
not expected to be deductible for tax purposes.
Within the scope of the acquisition, no contingent consid-
eration was agreed upon which Merck would possibly have to
pay in the future. The selling shareholders did not contrac-
tually indemnify Merck for the outcome of a contingency or
uncertainty related to the acquired assets or liabilities. Costs
of € 76.6 million related to the acquisition of the company
were recorded under other operating expenses in 2015 (€ 60.0
million) and in 2014 (€ 16.6 million).
The development of goodwill, which is carried in U.S. dol-
lars, during the period from first-time recognition and Decem-
ber 31, 2015 was as follows:
€ million
Goodwill on November 18, 2015
Exchange rate effects
Goodwill on December 31, 2015
Development of
goodwill
8,613.4
10-15
129.5
12
963.6
5,980.1
14,593.5
8,613.4
182 Consolidated Financial Statements Notes to the Group Accounts
The most significant impact of the purchase price allocation
resulted from the remeasurement of intangible assets, property,
plant and equipment as well as finished and unfinished goods
within inventories at fair value, and from the recognition of
deferred taxes. The intangible assets identified during the
preliminary purchase price allocation and recognized on the
date of first-time consolidation as well as the measurement
methods applied are presented in the following overview:
Customer relationships
-219.9
Trademarks and brands
Other
Total
Goodwill
Total
Fair values on the
acquisition date
(preliminary)
€ million
4,675.5
Useful lives
in years
(preliminary)
22-24
Technologies (patented and non-patented)
8,393.5
No material contingent liabilities were identified in the course
of the preliminary purchase price allocation. The gross amounts
of the acquired receivables on the acquisition date were € 456.5
million. The best possible estimate of the irrecoverable receiv-
ables amounted to € 5.0 million.
Further acquisitions in 2015
This includes Sigma-Aldrich Laborchemikalien GmbH, Seelze,
where most of the solvents and inorganics sold by Sigma-
Aldrich in Europe were manufactured. The agreement further
concerns those solvents and inorganics sold by Sigma-Aldrich
in Europe under the Sigma-Aldrich brand and globally under
the Fluka® brand, as well as the global rights to the HydranalⓇ
and Chromasolv® trademarks. A corresponding agreement on
the sale of these businesses was entered into with Honeywell
Specialty Chemicals Seelze GmbH, Seelze, on October 19/20,
2015. Since the obtainment of control, the provisions of
IFRS 5 in relation to discontinued operations have applied to
the corresponding assets and liabilities, which are thus dis-
closed as "assets held for sale" in the overview of fair values
as of the Sigma-Aldrich acquisition date. The transaction with
Honeywell closed on December 15, 2015. Consequently, as of
year-end, the corresponding assets and liabilities were no
longer reported in the consolidated balance sheet of the Merck
Group. Profit after tax of € 5.6 million was recorded in the
income statement, based on net sales of € 13.1 million and
expenses of € -7.5 million.
184 Consolidated Financial Statements Notes to the Group Accounts
(5) Joint arrangements of material
significance
Strategic alliance with Pfizer Inc., USA, to co-develop and
co-commercialize active ingredients in immunooncology
On November 17, 2014 Merck formed a global strategic alli-
ance with Pfizer Inc., USA, (Pfizer) to co-develop and co-
commercialize the anti-PD-L1 antibody avelumab (also known
as MSB0010718C). This antibody is currently being studied in
multiple clinical trials as a potential treatment for further
tumor types. The active ingredient is to be developed as a
single agent as well as in various combinations with Pfizer's
and Merck's broad portfolio of approved and investigational
pipeline candidates. As part of the strategic alliance, the two
companies will combine resources and expertise to also co-
develop and co-market Pfizer's anti-PD-1 antibody. The over-
riding objective of the strategic alliance is share the risks of
development and to accelerate the two companies' presence
in immuno-oncology.
According to the collaboration agreement, during the
development period each partner will bear one-half of the
development expenses. In a potentially later commercializa-
tion phase, Merck will realize the vast majority of sales from
the commercialization of avelumab while Merck and Pfizer will
split defined income and expense components.
The execution of the collaboration agreement is not being
structured through a separate vehicle. This means that the
assets and liabilities attributable to the contractual arrange-
ment are owned by the two contract partners. Decisions about
the relevant activities require unanimous consent in accordance
with the collaboration agreement. Therefore, the accounting
rules governing joint operations pursuant to IFRS 11 are
applied and Merck records the assets, liabilities, revenues and
expenses attributable to the collaboration in accordance with
the respectively valid IFRS.
Under the terms of the agreement, in 2014 Pfizer made an
upfront cash payment of US$ 850 million (€ 678.3 million) to
Merck after the closing. Pfizer also committed to make further
payments of up to US$ 2 billion to Merck subject to the
achievement of defined regulatory and commercial mile-
stones. Based on the collaboration agreement, Merck addi-
tionally received the right to co-market for multiple years
XalkoriⓇ (crizotinib), a drug for the treatment of non-small-cell
lung cancer, in the United States and certain other major mar-
kets. During co-commercialization of the product, Merck will
receive from Pfizer compensation for marketing activities and
a share of the profits. The fair value of the right was deter-
mined by an independent external expert using the multi-
period excess earnings method. The entitlement to the right
On June 15, 2015, before control of the Sigma-Aldrich Corpo-
ration, USA, was obtained, Merck received conditional antitrust
approval from the European Commission for the acquisition of
Sigma-Aldrich. As a consequence of the EU commitments,
Merck and Sigma-Aldrich had agreed to sell parts of Sigma-
Aldrich's solvents and inorganics business in Europe.
was capitalized when it was granted and will be amortized over
the term of the agreement. The residual book value of these
assets as of December 31, 2015 was € 261.7 million (2014:
€ 294.4 million).
Agreement with Threshold Pharmaceuticals, Inc., USA,
to co-develop and co-market evofosfamide
In February 2012, Merck entered into a global agreement
with Threshold Pharmaceuticals, Inc., USA (Threshold), to co-
develop and co-commercialize evofosfamide (also known as
TH-302), a chemical molecule for use in cancer treatment.
Under the terms of the agreement, Merck received co-
development rights as well as exclusive global commerciali-
zation rights. Threshold had the option to co-commercialize
the therapeutic in the United States.
On December 7, 2015, Merck announced that it will not
submit evofosfamide for approval in locally advanced inoper-
able or metastatic soft-tissue sarcoma as well as advanced
pancreatic cancer after two Phase III studies had failed to meet
their primary endpoints in these indications. Consequently,
the upfront and milestone payments that had been capitalized
as intangible assets with indefinite useful lives as well as cap-
italized borrowing costs amounting to € 84.4 million were
impaired in full in December 2015.
Agreement with Eli Lilly and Company, USA and
Bristol-Myers Squibb Company, USA for the
co-commercialization of ErbituxⓇ in Japan
Until its termination, which took effect on May 1, 2015, an
agreement was in place between Merck, ImClone Systems Inc.,
USA (which has now merged into Eli Lilly and Company, USA)
and Bristol-Myers Squibb Company, USA, for the co-develop-
ment and co-commercialization of Erbitux® (cetuximab), a drug
indicated for the treatment of metastatic colorectal cancer, as
well as for other cancers, in Japan. Since the collaboration
ended, Merck has been marketing the aforementioned activities
itself in Japan, bearing exclusive overall responsibility.
Up until the end of the agreement, Merck recorded sales of
€ 36.7 million from the commercialization of Erbitux® in Japan
(2014 in full: € 113.2 million).
Notes to the Group Accounts Consolidated Financial Statements 185
Agreement with Bristol-Myers Squibb Company, USA,
for the co-commercialization of GlucophageⓇ in China
In March 2013, Merck established an agreement with Bristol-
Myers Squibb Company, USA, for the co-commercialization of
the antidiabetic agent Glucophage® (active ingredient: met-
formin hydrochloride) for the treatment of type 2 diabetes in
China. In 2015, Merck recorded sales of € 84.3 million from
co-commercialization (2014: € 59.3 million).
On the date of the closing of the collaboration agreement,
both the upfront payment received and the value of the right
to co-market XalkoriⓇ were recognized in the balance sheet as
deferred revenues under other liabilities. Both amounts are
being recognized over the expected period during which Merck
is to meet certain obligations and will be disclosed under other
operating income. More information on the exercise of man-
agement judgments and estimation uncertainties in this regard
can be found in Note [7] "Management judgments and sources
of estimation uncertainty."
In comparison with the previous year, there were no material
changes to accounting and measurement principles. Only the
disclosure changes described in the following were made in
order to ensure improved comparability of the income state-
ment and the balance sheet of the Merck Group with other
companies.
Business activities of Sigma-Aldrich acquired with a
view to resale
In addition, an agreement was also reached on October 1,
2015 under which Merck will return its option to develop and
commercialize Peg-Pal to BioMarin. Peg-Pal is an investiga-
tional drug that is also designed for the treatment of PKU.
At the end of July 2015, Merck acquired the remaining 52.3%
interest in the start-up Qlight Nanotech Ltd., Israel (Qlight).
Since then, Merck has held 100% of the company. Qlight
conducts research in the field of quantum materials and was
integrated into the Performance Materials business sector.
The purchase price comprised fixed consideration amounting
to US$ 3 million (€ 2.7 million), conditional purchase price
Notes to the Group Accounts Consolidated Financial Statements 183
components of up to US$ 4 million (€ 3.6 million) as well as
further license remuneration provided that certain precondi-
tions are met. Expenses of € 0.5 million were recorded from
the remeasurement of the interests in Qlight prior to the
obtainment of control. The intangible assets identified were
attributable to technology-related assets amounting to € 6.1
million. Deferred tax liabilities amounting to € 1.6 million and
goodwill of € 1.1 million were recognized. The purchase price
allocation had not yet been completed on December 31, 2015.
In December 2015, Merck acquired the outstanding shares
(89.7%) in Ormet Circuits, Inc., USA (Ormet) to enhance its
position as a semiconductor materials supplier. Ormet will be
integrated into the Performance Materials business sector. The
purchase price for 100% of the shares amounts to US$ 32.0
million (€ 29.2 million). Income of € 0.6 million was recorded
from the remeasurement of the interests in Ormet prior to
the obtainment of control. The purchase price allocation had
not been completed by December 31, 2015; therefore, the
preliminary difference was fully reported as goodwill.
Acquisition of AZ Electronic Materials S.A. in 2014
Within the scope of a public takeover offer, on May 2, 2014
Merck had received valid acceptances of the offer in respect of
81.3% of the share capital and thus obtained control of the
publicly listed company AZ Electronic Materials S.A., Luxem-
bourg (AZ). By June 27, 2014, Merck had increased its share-
holding in AZ to 99.8% and was then able to initiate a squeeze-
out, which was completed on July 2, 2014 with the acquisition
of the remaining shareholding of 0.2%.
AZ is a manufacturer of ultrapure specialty chemicals and
materials for use in integrated circuits (semiconductors) and
equipment, in flat-panel displays, and for photolithographic
printing.
Within the scope of the acquisition, no conditional consid-
eration was agreed upon which Merck would possibly have to
pay in the future. The purchase price allocation was completed
on December 31, 2014.
Both agreements became effective at the beginning of
January 2016. Based on the agreements, in January 2016
Merck received an upfront payment of € 340 million for the
sale of the rights to KuvanⓇ. Moreover, Merck is entitled to up
to € 185 million for the achievement of certain milestones.
The development of goodwill recognized within the frame-
work of the acquisition and carried in U.S. dollars was as fol-
lows:
Goodwill on December 31, 2014
Exchange rate effects
Goodwill on December 31, 2015
Development of
goodwill
104.1
1,034.1
Divestment of the rights to KuvanⓇ and Peg-Pal
On October 1, 2015, Merck entered into an agreement with
BioMarin Pharmaceutical Inc., USA (BioMarin), to return the
rights to KuvanⓇ (sapropterin dihydrochloride), a drug used to
treat phenylketonuria (PKU), a rare metabolic disorder, and
the related business activities. These business activities, which
were allocated to the Healthcare business sector, were
reported as a disposal group and include an intangible asset of
€ 23.9 million, allocable goodwill of € 21.6 million, as well as
an immaterial amount of inventories.
€ million
3,555.8
As a result of the disclosure of royalty and license income
under other operating income, in the consolidated balance
sheet dated December 31, 2014, receivables from royalties
and licenses, which amounted to € 16.1 million and were pre-
viously included under trade accounts receivable, were reclas-
sified to other current assets.
On January 1, 2015, the Merck Group changed its segment
reporting structure to report on the three segments Health-
care, Life Science and Performance Materials. The Healthcare
business sector comprises the businesses that were reported
separately as the Merck Serono and Consumer Health seg-
ments in the previous year. The Life Science business sector
comprises the Merck Millipore business as well as the acquired
life science business of the Sigma-Aldrich Corporation, USA.
The Performance Materials business sector corresponds to the
segment of the same name in the previous year as well as the
acquired SAFC Hitech business of Sigma-Aldrich. More infor-
mation on the new segmentation as well as reconciliation of
the previous year's figures by business sector can be found in
Note [33] "Information on segment reporting".
7.5
7.8
0.50
1.00
6.6
6.3
8.6
7.8
1The disclosures for 2015 relate to the impairment test performed before the acquisition of the Sigma-Aldrich Corporation, USA.
The cost of capital before tax is iteratively calculated based on
the discounted cash flows determined using cost of capital
after tax.
All of the aforementioned assumptions are considered a
source of estimation uncertainty due to their inherent uncer-
tainty.
In all the impairment tests performed, the recoverable
amount was more than 10% higher than the carrying amount of
the respective cash-generating unit or group of cash-generating
units. Irrespective of this, sensitivity analyses of the key
assumptions were performed as part of the impairment tests.
Overall, no change of a significant assumption deemed possible
by the management would have resulted in an impairment.
The following table presents the amount by which the key
assumptions would have to change before an impairment
would need to be recognized within the scope of an impair-
ment test:
Biopharma
Consumer Health
6.8
6.1
2.00
1.75
2015
2014
2015
2014
0.00
0.00
6.2
Life Science¹
7.2
9.3
2.00
2.00
6.2
6.9
7.6
8.4
8.0
Performance Materials¹
Decrease in long-term
growth rate
Increase in cost
of capital after tax
> 5
> 2
> 2
> 2
> 2
> 5
> 5
> 5
> 2
> 2
> 2
> 5
> 5
1The disclosures for 2015 relate to the impairment test performed before the acquisition of the Sigma-Aldrich Corporation, USA.
Based on the preliminary purchase price allocation for the
acquisition of the Sigma-Aldrich Corporation, USA, which was
completed in November 2015, goodwill amounting to € 8,613.4
million was attributable to this acquisition. Based on a prelim-
inary determination, € 8,260.2 million of this goodwill would
have been allocated to Life Science and € 353.2 million to
Performance Materials. Since the purchase price allocation had
not yet been completed on the balance sheet date, a final
allocation was not yet possible. An indicative test of the related
goodwill as of November 30, 2015, on the basis of the prelim-
inary planning used in the context of the purchase price allo-
cation did not lead to an impairment requirement, neither with
respect to the value in use nor the fair value less costs of dis-
posal (based on non-observable input factors). The difference
between the recoverable amount and the carrying amount for
Life Science decreased due to the allocation of significant
intangible assets and goodwill, however the difference was
still more than 10%. Within the scope of these indicative
impairment tests, costs of capital after tax of 6.1% (Life
Science) and 6.5% (Performance Materials) were used. The
assumption regarding long-term growth rates is identical to
the assumption shown above. Based on the indicative test,
a reduction of the long-term growth rate by around one per-
centage point in the Life Science business sector would have
resulted in a situation where the recoverable amount would
have been identical with the carrying amount. The recoverable
amount would have also been identical with the carrying
amount in the Life Science business sector if the cost of capital
after tax (WACC) had been increased by around one percent-
age point. In the Performance Materials business sector, no
change of a significant assumption deemed possible by the
management would have resulted in an impairment.
> 2
2014
> 2
> 2
Decrease in
net cash flow
2015
2014
2015
2014
2015
2014
> 2
percentage points
> 2
> 2
> 2
> 2
> 5
> 5
> 2
percentage points
Segment Reporting
2015
Cost of capital after tax
as of Dec. 31,
as of Dec. 31,
2015
1,579.8
2014
1,601.5
243.1
243.1
11,130.4
2,911.1
1,416.8
938.2
14,370.1
5,693.9
The internal reorganization and changes to the reporting
structure of the Merck Group on January 1, 2015 did not result
in any changes to the level at which the impairment tests
are conducted. Subsequent to the reorganization, the cash-
generating units or groups of cash-generating units continue
to represent the lowest level at which goodwill is monitored for
internal purposes by management.
As in 2014, no impairment losses for goodwill were
recorded in the year under review. Owing to the termination
of development projects in the Healthcare business sector,
Goodwill
Notes to the Group Accounts Consolidated Financial Statements 187
Total
Performance Materials
As regards segment reporting by country and region, the
composition of regions was adjusted and the corresponding
comparative year-earlier figures are presented. The regional
reporting structure now comprises five regions: Europe, North
America, Asia-Pacific, Latin America as well as Middle East and
Africa.
(7) Management judgments and
sources of estimation uncertainty
The preparation of the consolidated financial statements
requires management to make discretionary decisions and
assumptions as well as estimates to a certain extent. The dis-
cretionary decisions, assumptions relating to the future and
sources of estimation uncertainty described below are associ-
ated with the greatest potential effects on these consolidated
financial statements.
Recognition and measurement of assets, liabilities and
contingent liabilities acquired in the context of business
combinations
The recognition and measurement of assets, liabilities and
contingent liabilities at fair value during purchase price alloca-
tions involve the use of estimates. The expertise of external
valuation experts is obtained here. The fair values of the
assets and liabilities recognized as part of the purchase price
allocation of the Sigma-Aldrich Corporation and further infor-
mation on this acquisition, which closed in the reporting period,
can be found in Note [4] "Acquisitions, assets held for sale and
disposal groups".
Sales deductions
in 2015 impairment losses of other intangible assets with
indefinite useful lives were recorded in the amount of
€ 108.5 million (2014: € 84.8 million).
Merck grants its customers various kinds of rebates and dis-
counts. In addition, expected returns, state compulsory
charges and rebates from health plans and programs are also
deducted from sales.
Insofar as sales deductions were not already made on pay-
ments received, Merck determines the level of sales deduc-
tions on the basis of current experience and recognizes them
as a liability. The sales deductions reduce gross sales revenues.
Adjustments of liabilities can lead to increases or reductions of
income in later periods.
Impairment tests of goodwill and other intangible assets
with indefinite useful lives
The goodwill (carrying amount as of December 31, 2015:
€ 14,370.1 million/2014: € 5,693.9 million) and other intan-
gible assets with indefinite useful lives (carrying amount as of
December 31, 2015: € 183.6 million/2014: € 168.7 million)
reported in the consolidated financial statements are tested
for impairment at least once a year or when a triggering event
arises. The carrying amounts of goodwill are allocated to the
following cash-generating units or groups of cash-generating
units on which level the impairment tests were performed:
€ million
Biopharma
Consumer Health
Life Science
The most significant portion of these deductions from sales
is attributable to the Healthcare business sector. The most
substantial sales deductions in this business sector relate to
government rebate programs in North America such as the
"U.S. Federal Medicare Program" and the "U.S. Medicaid Drug
Rebate Program". Other significant sales deductions in the
business sector result from compulsory government rebate
programs in individual European countries.
Owing to a change in the planning process, the detailed
planning period was shortened by one year to four years, and
the date of the goodwill impairment test was changed, com-
plying with the one-year time period stipulated by IAS 36.
When conducting the impairment tests the following
parameters were used:
Measurement basis
Impairment test level
Planning basis
Discount rate after tax (Weighted average cost of capital after tax - WACC)
⚫ Cost of equity
Risk-free interest rate: Derived from the returns of long-term German government
bonds
Beta factor:
Market risk premium:
Derived from respective peer group
Range as recommended by the Technical Committee for
Business Valuation and Commerce of the Institute of Public
Auditors in Germany (Institut der Wirtschaftsprüfer e.V. –
IDW)
⚫ Cost of debt and capital structure
Based on long-term inflation expectations and expected long-term sector growth
Derived from respective peer group
The long-term growth rates and weighted average cost of
capital (WACC) used to conduct the goodwill impairment tests
were as follows:
in %
Biopharma
Consumer Health
Life Science¹
Performance Materials¹
Long-term growth rate
188 Consolidated Financial Statements Notes to the Group Accounts
Cost of capital before tax
Long-term growth rate after the detailed planning period
⚫ Profit margins
Detailed planning period
Key assumptions
Determination of the value of the key assumptions
Value in use
Biopharma (including Allergopharma and Biosimilars)
Consumer Health
Life Science
Based on past experiences, adjusted for expected changes
Performance Materials
4 years (2014: 5 years)
Net cash flows
Long-term growth rate after the detailed planning period
Discount rate after tax (Weighted average cost of capital after tax - WACC)
Net cash flows
Sales growth
Based on internal planning, taking into consideration internal and external market
information and market estimations, i.e. regarding market shares, excluding
approvals of new compounds from the development pipeline and other expansion
investments
Most recent financial medium-term planning approved by the Executive Board
and used for internal purposes
963.7
930.0
425.1
Overall, the impact of subsidiaries not consolidated due to
immateriality on sales, profit after tax, assets and equity was
less than 1% relative to the entire Merck Group. The interests
in subsidiaries not consolidated due to immateriality were
classified as available-for-sale financial assets and presented
under non-current financial assets. The list of shareholdings
presents all of the companies included in the consolidated
financial statements as well as all of the shareholdings of
Merck KGaA (see Note [67] "List of shareholdings").
(4) Acquisitions, assets held for sale
and disposal groups
Acquisition of Sigma-Aldrich Corporation, USA
On November 18, 2015, Merck obtained control of the Sigma-
Aldrich Corporation, a life science enterprise headquartered in
St. Louis, USA (Sigma-Aldrich). Prior to that, on September
22, 2014, Merck and Sigma-Aldrich entered into an agreement
under which Merck would acquire Sigma-Aldrich for US$ 140
per share in cash. Afterwards, Merck received the approval of
Sigma-Aldrich shareholders as well as clearance from various
antitrust authorities regarding the acquisition. Due to the
commitments imposed by the European antitrust authorities,
Merck and Sigma-Aldrich had agreed to sell parts of Sigma-
Aldrich's solvents and inorganics business in Europe. This
business was reported under “assets held for sale” in the over-
view of fair values as of the acquisition date. Further informa-
tion can be found in the section entitled "Business activities of
Sigma-Aldrich acquired with a view to resale".
The purchase price as well as the payments for the acquisi-
tions of 100% of the shares in Sigma-Aldrich were as follows:
€ million
Purchase price for 100% of shares (US$ 17,015 million) at the closing rate on November 18, 2015
Reclassification of hedging gains from other comprehensive income to assets
Purchase price according to IFRS 3
Acquired cash and cash equivalents
Payments for 100% of the interests less acquired cash and cash equivalents
15,973.8
-1,380.3
14,593.5
1,235.1
13,358.4
180
Consolidated Financial Statements Notes to the Group Accounts
The vast majority of the currency risk stemming from the pur-
chase price payment for Sigma-Aldrich in U.S. dollars was
hedged within the scope of a rolling hedging strategy using
derivatives (forward exchange transactions and currency
options) in line with the requirements for cash flow hedge
accounting. The resulting income amounting to € 1,380.3 mil-
lion was taken into consideration during the determination of
the purchase price in accordance with IFRS 3.
Acquisition financing
The purchase price was financed through cash on Merck's
balance sheet, bank loans and bonds. Following the issuance
of a hybrid bond (€ 1.5 billion) in December 2014, Merck
issued a further bond with a volume of US$ 4 billion in the
United States on March 17, 2015. On August 27, 2015, Merck
issued a euro bond amounting to € 2.1 billion. The bond issues
comprised various tranches along with various maturities and
interest rates. An overview of the outstanding bonds can be
found in Note [28] "Financial liabilities/Capital management".
Due to the acquisition of the Sigma-Aldrich Corporation, USA,
and its subsidiaries, the number of fully consolidated compa-
nies of the Merck Group increased by 100; the number of com-
panies not consolidated due to immateriality increased by 40.
63
28
316
538.6
Notes to the Group Accounts Consolidated Financial Statements 179
The scope of consolidation changed as follows in the reporting
period:
Fully consolidated companies as of December 31, 2014
Additions
Retirements
Establishment
Acquisitions
Materiality
Business activities as well as sales and earnings contribu-
tion of Sigma-Aldrich
Liquidations/Mergers
Immateriality
Fully consolidated companies as of December 31, 2015
Non-consolidated subsidiaries as of December 31, 2014
Non-consolidated subsidiaries as of December 31, 2015
218
2
102
4
-7
0
-3
Divestments
Sigma-Aldrich manufactures and distributes more than
250,000 chemicals, biochemicals and other essential prod-
ucts to customers in research and applied labs as well as in
industrial and commercial markets. Sigma-Aldrich operates in
37 countries, has approximately 9,300 employees and, under
U.S. Generally Accepted Accounting Principles (U.S. GAAP),
generated sales of US$ 2,785 million (€ 2,102 million) and net
(3) Changes in the scope of consolidation
Following the transaction closing, Merck started to inte-
grate the life science business of Sigma-Aldrich into the Life
Science business sector and the SAFC Hitech business into the
Performance Materials business sector. The aim of the acquisi-
tion is to offer customers a wider range of products, greater
geographic reach and a broad combination of industry-leading
capabilities.
Other current liabilities and provisions
Liabilities directly related to assets held for sale
Liabilities
Acquired net assets
Purchase price for the acquisition of shares
Positive difference (goodwill)
Fair values on the
acquisition date
income of US$ 500 million (€ 377 million) in 2014. In 2013,
the corresponding values under U.S. GAAP were US$ 2,704
million (€ 2,033 million) for sales and US$ 491 million (€ 369
million) for net income.
124.7
6,837.6
Current financial liabilities
1,235.1
451.5
36.0
123.8
2,698.3
9,535.9
0.2
150.1
2,441.8
2,592.1
851.9
Current liabilities
5,872.6
840.3
Other non-current liabilities and provisions
Assuming the first-time consolidation of Sigma-Aldrich had
already taken place as of January 1, 2015, sales of the Merck
Group for the period from January 1 to December 31, 2015
would have amounted to € 14,926.8 million (compared with
reported sales of € 12,844.7 million) and net income after
taxes would have been € 1,150.3 million (compared with
reported net income of € 1,124.1 million). The determination
of these figures assumed that the adjustments of the book
values as a result of the purchase price allocation would have
been identical.
Deferred tax liabilities
Notes to the Group Accounts Consolidated Financial Statements 181
Purchase price allocation
Since the obtainment of control over Sigma-Aldrich did not
take place until November 18, 2015, and material information
for the purchase price allocation was only obtained after that
date for legal reasons, the purchase price allocation for all
assets and liabilities as of December 31, 2015 has not yet
been completed. The preliminary fair values as of the acquisi-
tion date were as follows:
Non-current assets
Intangible assets (excluding goodwill)
Property, plant and equipment
€ million
Current assets
Non-current financial liabilities
Other non-current assets
Assets
Assets held for sale
Other current assets
Non-current liabilities
Inventories
Cash and cash equivalents
Receivables
The impact of the consolidation of Sigma-Aldrich on sales
between November 18, 2015 and December 31, 2015 as well
as net income after taxes amounted to € 289.5 million and
€ -5.8 million, respectively. This result also includes higher
cost of sales due to the step-up of the acquired inventories
to preliminary fair values as well as the amortization of assets
identified and remeasured during the purchase price alloca-
tion.
It's a melting pot of a broad assortment of ideas. At the
Innovation Center in Darmstadt, interdisciplinary teams from
all three Merck business sectors are passionately pursuing
promising developments. In order to intensively work on
their discoveries inside the modern, newly constructed light-
gray building with its wide window façade, most of the teams
were the winners of company-internal competitions. They have
thus already cleared the first hurdle on the road to success.
Prof. Dr. Lutz Hesse, Director of the Ophthalmology Clinic,
SLK-Kliniken Heilbronn
The focal point: Merck's liquid crystal expertise
The LicriEye project team, which comprises experts from
Performance Materials and Healthcare working hand in hand,
is pursuing a clear view in two senses. The project, which is
still in the early stages of development, is focusing on a novel
way of treating cataracts, a widespread eye disorder. A cata-
ract is a clouding of the lens in the eye, which commonly
occurs in people over the age of 65. People with cataracts
increasingly have problems with blurry and distorted vision
and they have trouble seeing contrasts or bright colors. In
most cases, this is a process that advances slowly and, if left
untreated, could lead to blindness. Cataracts are treated by
having them surgically removed in an outpatient procedure
that usually takes around 15 minutes. Cataract surgery ranks
among the most frequently performed operations worldwide.
During surgery, an incision is made to remove the patient's
clouded lens, which is then replaced by an intraocular artificial
lens. The post-operative result depends on the precision of
the implanted lens.
"An improperly measured artificial lens
can only be subsequently corrected
by surgically replacing the lens. Addi-
tional research is definitely required
and development potential exists.”
"If the refractive index of the artificial lens has not been
perfectly selected, the currently available intraocular lenses
will not offer the patient precise vision after surgery," said
Professor Lutz Hesse, Director of the Ophthalmology Clinic at
SLK-Kliniken in Heilbronn, Germany. "An improperly meas-
ured artificial lens can only be subsequently corrected by
surgically replacing the lens. Additional research is definitely
required and development potential exists." The possible
consequences are severe, for instance, poor eyesight with
a refractive error of up to three diopters, which currently can
only be corrected by eyeglasses.
"LicriEye has the potential to
restore the vision of patients
after cataract surgery."
Martin Schraub, Head of the LicriEye project
This is where the work of the LicriEye team comes in. The aim
is to develop, in collaboration with a partner, an intelligent
lens whose focal point(s) can be adjusted to the patient's
needs after implantation. "Although lens implants have been
standard medical practice for around 60 years now, there has
not been very much development on the materials side,"
explains project head Martin Schraub. Whereas most manu-
facturers have been using plexiglass and its derivatives,
Merck is conducting research on an innovative material that
is photochemically targeted to the specific requirements and
standards of this future medicinal product. It has to be trans-
parent, flexible and biocompatible. Schraub and his colleagues
are drawing on Merck's wealth of liquid crystals experience
normally used to produce 3D displays. After the lens has
been implanted, the ophthalmologist could use a laser to
non-invasively rework the material in order to individually
adjust the optical properties of the lens, thus obviating the
need for eyeglasses. Schraub, who is very optimistic about
the market opportunities of the future medicinal product
after potential regulatory approval, says, "LicriEye has the
potential to restore the proper vision of patients after cata-
ract surgery." Negotiations on manufacturing and marketing
the product with a large partner company have already made
very good progress.
Retina
A clear view Magazine 11
What makes LicriEye unique
LicriEye would enable ophthalmologists to change the focus of the artificial lens after cataract
surgery non-invasively using a laser, thus correcting potentially poor vision. Merck's liquid
crystals expertise is playing a key role here.
Iris
Posterior chamber
Cornea
The artificial lens
replaces the patient's
clouded lens.
Haptics:
=
10 Magazine A clear view
18
A CLEAR
VIEW
Magazine Ready for printing
Serve to center and
Ready for printing Magazine 17
Merck OLED researchers (from left)
Herwig Buchholz, Leticia Garcia Diez,
Remi Anemian and Anja Jatsch
during a project meeting.
Herwig Buchholz, Global Head of R&D OLED
Chemistry and Strategic Developments
"Different cultures and working
methods come together in
our international and interdis-
ciplinary teams. This creates
a highly innovative and stimu-
lating environment. Coupled
with our enthusiasm for devel-
oping new technologies, this
contributes significantly to the
success of our products."
OLED test substrate
The key to future success is an innova-
tive printing technology that Merck has
been developing intensively for several
years. The pioneering achievement com-
bines the advantages of two different
classes of materials - printing solutions
of small molecules and semiconducting
polymers. Small soluble molecules sig-
nificantly increase the coating efficiency,
while the printing process makes it pos-
sible to coat large surfaces with high
homogeneity and low material consump-
tion. "The use of inkjet technology brings
the mass production of large OLED
television screens within reach," says
Jatsch.
Both mass and class
Unlocking a spirit of curiosity and inquiry: Innovative
strength has always been a firm part of Merck's
DNA. The new Innovation Center in Darmstadt offers
researchers an ideal environment to work on the
products and solutions for tomorrow, for example, the
ingenious LicriEye lens.
So why haven't OLEDs become the global
standard yet? On the one hand, liquid
crystals, a well-established field in which
Merck is the market and technology
leader, continue to meet increasing qual-
ity requirements. On the other hand,
OLED production poses a challenge as
it is still very complex and costly. For
each diode, several ultrathin layers of
material must be deposited with pin-
point precision in very small portions
onto a glass plate. The closer the diodes
are to one another, the higher the res-
olution of the display. In the currently
prevailing coating process, a metal mask
is used to evaporate and deposit the
OLED materials. This process is repeated
several times with different materials
and masks. High costs and low material
utilization are major disadvantages of
this process. More than half of the OLED
materials are lost during deposition.
And last but not least, the energy and
environmental footprint of this method is
rather modest. "For technical and finan-
cial reasons, the evaporation method
has limitations in the mass production
of large-area OLED displays," says Anja
Jatsch, Project Manager OLED Formula-
tion. "For television screens, our cus-
tomers are currently using a process
that combines white OLEDs with color
filters. This is yielding very good results
for televisions with very large screens."
But what makes OLEDS so promising
for the future? "A major advantage is
the fact that semiconducting organic
materials light up on their own when
an electric voltage is applied," explains
Herwig Buchholz, Global Head of R&D
OLED Chemistry & Strategic Develop-
ments at Merck. "In contrast to liquid
crystal displays, OLEDS do not need
any backlighting, so the displays can be
extremely thin." Every single one of
the millions of pixels in a high-resolution
TV screen consists of one light-emitting
diode each in red, green and blue.
Whereas liquid crystals (LCs) act as a
switchable filter and still transmit some
light even if they are switched to dark,
OLEDS only emit colored light when
activated. From every viewing angle,
this produces extremely high-contrast,
sharp, colorful images with very fast
response times. Other advantages of
organic light-emitting diodes are their
long lifetime and high energy efficiency.
A shining example
What was still the future yesterday is
now history today in the fast-paced and
highly innovative electronics industry.
But now comes the next "big thing"
in display technology, which experts
predict will have enormous potential.
Organic light-emitting diodes, or OLEDS
for short, are likely to capture the mar-
kets in a wide variety of applications
soon. They are already lighting up the
displays of many mobile phones. And
they are also starting to be used in
televisions to provide a colorful and
contrast-rich viewing experience. There
are hardly any limits to the imagination
as far as the future use of OLED displays
in multimedia is concerned. Transparent
screens as well as houses, façades and
windows with an enchanting shine, huge
display panels and traffic control sys-
tems, as well as flexible displays that can
be bent, folded and rolled up. Designers
are already enthusiastic about the
diverse possibilities of filigree illumi-
nated tiles. And the automotive indus-
try is also showing a keen interest in
using OLEDs, for example as rear lights.
Printing OLEDs: The OLED substances (polymers, small molecules) are
dissolved and the resulting inks are applied to a glass substrate by a printer
head. Embedded between anode and cathode, the organic molecules are
electrically excited, thus producing light.
Metal cathode
Polymeric bank
structure
OLED ink
Printer heads
16 Magazine Ready for printing
Costly vapor
position the intraocular lens
receive additional support from Merck coaches
and experienced managers, who serve as mentors
and networkers. Not least, the aim is also to test
the marketability and competitiveness of their
ideas. "As a company with a global footprint, inter-
national exchanges are especially important to
us," Gamber emphasizes. Practical training, work-
shops, lectures, and online tutorials supplement
the range of offers for the project teams in the
modular Innovation Center.
Central optics:
The Innovation Center
offers young talent
scope for creativity.
A simple rapid test for clinical diagnostics
The research work of a further interdisciplinary project
team from the Healthcare, Life Science and Performance
Materials business sectors in the modular Innovation Center
is dedicated to a postage stamp-sized test strip for clinical
diagnostics and quality assurance. Thanks to its special
surface properties, the test strips can be used to investi-
gate multiple parameters in just a few drops of liquid, all
at the same time. A further major advantage of this test
is its ease of use. It requires neither trained experts nor
complex sample preparation or special laboratory equip-
ment. Theoretically, non-experts could also conduct these
rapid and uncomplicated diagnostics. The test can be used
in a wide variety of healthcare and life science applica-
tions. From immunoassays to biochemical assays, several
reactions can be adapted to the platform to generate
a simple, fast and cost-effective diagnostic test. The pro-
ject aims to make diagnostics available to everyone,
anywhere they're needed.
A high success rate for in vitro fertilization
Merck is the leading supplier of hormones for fertility treat-
ment. The Fertility Technology team led by Jan Kirsten is
aiming to further strengthen Merck's position in this thera-
peutic area and to improve treatment outcomes. For
example, it has in-licensed and further developed new in
vitro fertilization (IVF) technologies. The team is currently
working on an innovative incubation system that is capable
of simultaneously imaging embryonal development using
a fully automated embryo and oocyte freezing system
along with the EevaⓇ test. The aim of Eeva® (Early Embryo
Viability Assessment) is to provide important information
to assess in vitro fertilized embryos for transfer into the
uterus. With these new technologies, fertility clinics can
make more reliable decisions, for example when selecting
the best embryo for transfer or freezing. Clinical trials
show that the success rate of IVF treatments can be
increased with the support of Eeva® in addition to tradi-
tional methods.
Efficient solutions for lab work
Analytical laboratories are confronted simultaneously by
considerably growing numbers of samples and increasing
pressure on costs. This situation requires new, rapid and
economical forms of active ingredient analysis in many
application fields. The Smart TLC project is conducting
research in the modular Innovation Center on advanced
solutions and methods designed to make laboratory work
easier, application-friendlier and more efficient, as well as
significantly increasing sample throughput. The objective is
to considerably reduce analysis times while improving the
quality of results and achieving greater reproducibility.
IMPLANTATION
RATE*
% (2014)
35
25
The Eeva® test +
traditional
methods
Traditional
methods
* The EevaⓇ test used together
with traditional methods
improves the success of
implanting the blastocyst
by 10 percentage points,
compared to traditional
methods alone. 1,2
1. Adamson D, et al. Accepted for
presentation at the American
Society of Reproductive Medicine
(ASRM) Annual Conference,
(2014).
2. VerMilyea MD, et al. Computer-
automated time-lapse analysis
test results correlate to clinical
pregnancy and embryo implan-
tation:
A prospective, blinded, multi-
center study. Reprod BioMed
Online. 2014; 29(6):729-736.
Leticia Garcia Diez, responsible for
technology development of OLED inks.
14 Magazine Ready for printing
C. A
READY FOR
PRINTING
Realizing ideas:
MERC
Further Innovation Center projects
A clear view Magazine 13
Replace the optical
properties of the
natural lens.
Fovea:
Point of
sharpest
vision
EA
During cataract surgery, the
patient's clouded lens is replaced
by an intraocular artificial lens.
However, if the focal point of the
artificial lens is not perfectly
positioned, the patient will not
have precise vision afterwards.
It is not possible to correct this
post-operatively. The patient thus
needs glasses or would have to
undergo surgery again.
The LicriEye lens
replaces the patient's
clouded lens.
in the posterior chamber.
Laser:
-A
With the use of a LicriEye lens,
the possibility of the patient not
having perfect vision after sur-
gery also exists. But now the
ophthalmologist might be able
to adjust the lens using a laser
and restore the patient's proper
eyesight. The LicriEye project
team is applying Merck's exper-
tise in reactive mesogens, a sub-
stance class produced by Merck
Performance Materials and used
along with other substances in
3D displays.
12 Magazine A clear view
"As a company with a global
footprint, international
exchanges are especially
important to us."
Michael Gamber, Head of the Innovation Center
Project head
Martin Schraub (left)
talking to members
of his team.
Scope for creativity
For a research-driven company such as Merck,
innovations are a key success factor. Yet progress
is hardly ever the outcome of a process that can
be precisely planned. By contrast, in order to allow
visionary ideas to become reality, unconventional
thinking, courage to take risks, and a pioneering
spirit are required. Inaugurated in October 2015,
the modular Innovation Center at Merck head-
quarters in Darmstadt offers the required scope
for creativity. "On the one hand, the center is
a springboard for young talent to develop and real-
ize their concepts," says Michael Gamber, Head of
the Innovation Center. "On the other hand, it
offers an attractive infrastructure for professional
project work, which ideally will lead to future-
oriented innovations." These could be new prod-
ucts or services, as well as new business models
or processes. The teams working in the Innovation
Center took part in company selection processes,
where they were able to convince a jury of experts
from all the business sectors. External start-ups
also have the opportunity to realize their ideas
in the modular Innovation Center and are given
a suitable budget to do so. The project teams
Being open to new things is the guiding principle
of the work in the two-story building, which has
a surface area of nearly 4,000 square meters. The
welcoming architecture also signals openness.
There are no permanent offices, but rather flexible
work spaces. The different wings of the building,
which have been constructed as modules, are
grouped around a spacious courtyard. The build-
ing is a trial run for the future Innovation Center,
which is scheduled for completion by the end of
2017 and will form the heart of the new global
headquarters. It is a key element of the "Fit for
2018" transformation program and is intended to
further boost Merck's innovative strength.
With the help of a laser, the LicriEye
lens is individually adjusted post-
operatively and non-invasively.
Anja Jatsch, Head of the formulation laboratory,
preparing an OLED printing ink.
Ready for printing Magazine 15
Brilliant colors, excellent image quality, high efficiency: OLED
displays offer captivating advantages, whether for smartphones
or large televisions. So far, producing OLED displays has been
complex and costly. However, innovative printing processes, which
Merck has been intensively developing for several years, are set
to open up a "shining new era" soon.
125.8
Classification as held for sale
or transfer to a disposal group
Currency translation
285.3
December 31, 2014
12,325.0
0.6
633.7
292.3
5,693.9
10.8
354.0
37.0
589.0
19,043.6
Accumulated amortization and impairment losses
January 1, 2014
-5,992.6
-441.1
Changes in scope of consolidation
Amortization
Impairment losses
Disposals
-6,651.3
-841.6
-35.6
Transfers
1.7
-45.5
47.0
Total
Finite
useful life
Indefinite
useful life
10,932.7
656.0
4,583.2
304.3
42.3
1,049.5
818.4
-877.2
1.6
62.1
38.6
2.2
40.4
143.3
-4.8
-61.5
-11.9
-0.2
-78.4
0.2
16,518.5
1,869.5
- 84.8
-5.1
-0.2
354.0
37.0
19,043.6
Changes in scope of consolidation
5,774.8
8,643.6
36.0
68.0
14,522.4
Additions
-37.8
36.5
-2.0
8.2
Transfers
-12.9
-9.2
-0.4
-3.3
Disposals
473.5
43.3
1.7
5,693.9
302.7
633.7
Cost at January 1, 2014
4.7
61.5
10.1
76.3
-217.6
Transfers
Reversals of impairment losses
Classification as held for sale or transfer to a disposal group
Currency translation
December 31, 2014
-96.6
-6,926.1
5,398.9
-0.6
-465.0
168.7
-8.6
-105.8
-256.8
-0.2
5,693.9
97.2
36.8
-7,648.1
11,395.5
Net carrying amount as of December 31, 2014
12,325.0
-90.1
Tax rate
-368.0
8.7
12.1
0.2
-3.9
Reversals of impairment losses
Classification as held for sale or transfer to a disposal group
Currency translation
December 31, 2015
Net carrying amount as of December 31, 2015
736.2
37.5
37.5
- 104.2
-7,947.7
10,539.1
-0.5
-573.9
183.6
-4.8
-109.5
14,370.1
-289.1
135.8
-0.2
110.4
-8,810.9
25,339.0
295.6
292.5
3.1
452.9
447.5
5.4
Including deferred tax asset
thereof:
Tax loss carryforwards
0.1
Total
956.4
- 114.8
-36.0
-0.4
payments and
software in
development
Classification as held for sale or transfer to a disposal group
-61.4
Currency translation
140.8
December 31, 2015
18,486.8
0.4
757.5
-21.6
54.2
-83.0
14,370.1
5.9
424.9
0.1
110.6
201.4
34,149.9
Accumulated amortization and impairment losses
January 1, 2015
-6,926.1
-465.0
-256.8
-0.2
-7,648.1
Changes in scope of consolidation
Amortization
Impairment losses
Disposals
Transfers
-948.2
-5.9
3.3
-4.1
- 108.5
-984.2
4.9
Abroad
948.4
Germany
16.1
23.2
520.7
Tax ratio according to consolidated income statement
Tax expense according to consolidated income statement
Tax effect of non-deductible expenses/Tax-free income/Other tax effects
Tax effect on tax loss carryforwards
Tax credits
-21.9
-95.1
-15.8
- 22.0
Tax effect of companies with a negative contribution to consolidated profit
Tax for other periods
100.8
151.1
Tax rate differences
-478.0
-456.4
Theoretical tax expense
30.7%
30.7%
1,557.0
1,486.5
2014
2015
Profit before income tax
€ million
196 Consolidated Financial Statements Notes to the Group Accounts
-392.2
18.5
8.0
-482.4
-368.0
Total
1,206.0
Abroad
1,183.7
22.3
Germany
Dec. 31, 2014
Dec. 31, 2015
222.1
431.7
295.9
2,367.9
-177.4
41.4
-152.9
-2,034.3
256.5
2014
2015
56.7
€ million
Tax loss carryforwards were structured as follows:
Changes in scope of consolidation/currency translation/other changes
Deferred taxes (consolidated income statement)
Change in deferred tax assets (balance sheet)
Change in deferred tax liabilities (balance sheet)
Deferred taxes credited/debited to equity
€ million
The reconciliation between deferred taxes in the consoli-
dated balance sheet and deferred taxes in the consolidated
income statement is presented in the following table:
"Tax effect of non-deductible expenses/Tax-free income/Other
tax effects." The change in the item “Tax for other periods"
results, among other things, from the addition to provisions
for tax audits.
The higher tax credits arose primarily in the United States
due to the consideration of dividend income from high-tax
countries. However, this dividend income is also taxable in the
United States; the related tax expense is included in the item
The tax expense consisted of corporation and trade taxes for
the companies domiciled in Germany as well as comparable
income taxes for foreign companies.
25.2%
24.8%
-392.2
-19.0
Software
753.1
Advance
2014
261.7
138.0
52.4
3.7
40.2
41.8
2015
35.3
53.3
21.7
26.4
59.4
40.9
470.7
564.4
260.3
1 Previous year's figure has been adjusted. It comprises Income from investments.
2The composition of Other operating income has been changed, see "Changes to accounting and measurement principles and disclosure changes".
Notes to the Group Accounts Consolidated Financial Statements 193
Total other operating income²
Amortization of intangible assets was mainly attributable to
marketing approvals, customer relationships, brands, trade-
marks and other, which could be functionally allocated to
Marketing and Selling.
Royalty and license expenses arose mainly in connection
with the commercialization of ErbituxⓇ outside the United States
and Canada amounting to € 93.5 million (2014: € 84.7 million)
as well as for the commercialization of RebifⓇ in the United
States amounting to € 333.6 million (2014: € 314.6 million).
(11) Research and development
costs
Research and development costs totaled € 1,709.2 million in
2015 (2014: € 1,703.7 million).
Reimbursements for research and development amounting
to € 88.0 million (2014: € 18.4 million) were offset against
research and development costs. This figure also included
government subsidies of € 3.4 million (2014: € 5.9 million).
The increase was mainly due to reimbursements from the
strategic alliance with Pfizer Inc., USA.
The breakdown of research and development costs by
region is presented in the Segment Reporting (see Note [32]
"Information by business sector/country and region").
(12) Other operating income
Other operating income was as follows:
OTHER OPERATING INCOME
€ million
Income from milestone payments, rights and royalties
Gains on disposal of non-current assets
Release of allowances for receivables
Gains from the release of provisions for litigation
Goodwill
Income from miscellaneous services
Other operating income¹
In 2015, € 191.4 million (2014: € 15.9 million) of the income
from milestone payments, rights and royalties amounting to
€ 261.7 million (2014: € 138.0 million) was attributable to the
collaboration agreement entered into with Pfizer Inc., USA, in
2014 in the field of immuno-oncology. This related to the pro
rata recognition of deferred income from the upfront payment
as well as the value of the right to co-promote XalkoriⓇ (see
Note [5] "Joint arrangements of material significance"). Royalty
and license income was mainly due to the products ViibrydⓇ
(Allergan, Inc., Ireland) and Puregon® (Merck & Co. Inc., USA).
Gains on disposal of non-current assets in the amount of
€ 52.4 million (2014: € 3.7 million) were primarily attributable
to the disposal of marketing authorizations and distribution
rights as well as other investments carried at amortized cost.
Income from the release of provisions for litigation amount-
ing to € 35.3 million (2014: € 260.3 million) resulted primarily
from the adjustment of the provision in connection with the
paroxetine legal dispute (see Note [27] "Provisions"). In 2014,
income related mainly to the resolution of the legal dispute with
Israel Bio-Engineering Project Limited Partnership ("IBEP").
- 128.4
- 101.6
2014
-100.2
- 24.5
-85.1
-95.5
-84.1
-41.9
-77.6
-87.2
-56.8
-55.2
-48.8
-47.5
-83.9
-44.5
2015
2The composition of Marketing and selling expenses has been changed, see "Changes to accounting and measurement principles and disclosure changes".
Total other operating expenses²
Project costs
There was no income from investments in fiscal 2015; in the
prior year, income from investments amounted to € 1.5 million
and was reported as other operating income.
194 Consolidated Financial Statements Notes to the Group Accounts
(13) Other operating expenses
The breakdown of other operating expenses was as follows:
OTHER OPERATING EXPENSES
€ million
Impairment losses
Acquisition costs
Litigation
Allowances for receivables
Integration costs/IT costs
Premiums, fees and contributions
Exchange rate differences from operating activities (net)
Restructuring costs
Non-income related taxes
Profit share expenses
Expenses for miscellaneous services
Other operating expenses¹
1 Excluding amortization of internally generated or separately acquired software.
-81.0
-3,589.1
-4,049.5
benefits
Merck maintains several defined benefit pension plans, par-
ticularly in Germany, Switzerland and the United Kingdom.
The determination of the present value of the obligation from
these defined benefit pension plans primarily requires esti-
mates of the discount rate, future salary increases, future
pension increases and future cost increases for medical care.
Detailed information on the existing pension obligations
and a sensitivity analysis of the parameters named above are
provided in Note [26] "Provisions for pensions and other
post-employment benefits" and under "Accounting and meas-
urement principles" in Note [64] "Provisions for pensions and
other post-employment benefits". As of the balance sheet
date, the amount recorded in the consolidated balance sheet
for provisions for pensions and other post-employment bene-
fits was € 1,836.1 million (2014: € 1,820.1 million). The
present value of the defined benefit pension obligation was
€ 4,152.7 million as of December 31, 2015 (2014: € 3,812.7
million).
Income taxes
The calculation of the reported assets and liabilities from
current and deferred income taxes requires extensive discre-
tionary judgments, assumptions and estimates. Income tax
liabilities were € 1,011.3 million as of December 31, 2015
(2014: € 849.8 million). The carrying amounts of deferred tax
assets and liabilities amounted to € 1,049.6 million and
€ 2,852.7 million, respectively, as of the balance sheet date
(2014: € 992.9 million and € 818.4 million, respectively).
The recognized income tax liabilities and provisions are
partially based on estimates and interpretations of tax laws
and ordinances in different jurisdictions.
With regard to deferred tax items, there are degrees of
uncertainty concerning the date on which an asset is realized
or a liability settled and concerning the tax rate applicable on
this date. This particularly relates to deferred tax liabilities
recognized in the context of the acquisitions of the Sigma-
Aldrich Corporation, the Millipore Corporation, Serono SA,
and AZ Electronic Materials S.A. The recognition of deferred
tax assets from loss carryforwards requires an estimate of the
probability of the future realizability of loss carryforwards.
Factors considered in this estimate are results history, results
planning and any tax planning strategy of the respective Group
company.
Assets held for sale, disposal groups and discontinued
operations
The assessment as to when a non-current asset, disposal group
or discontinued operation meets the prerequisites for a classi-
fication as "held for sale" is subject to significant discretionary
judgment. Even in the case of an existing management decision
to review a disposal, an assessment subject to uncertainties
has to be made as to the probability that a corresponding dis-
posal will occur during the year or not.
Notes to the Group Accounts Consolidated Financial Statements 191
Applicable foreign exchange mechanism in Venezuela
Through subsidiaries, the Merck Group imports and distributes
products in Venezuela. The translation of the local financial
statements from Venezuelan bolivars as the functional currency
to euros as the reporting currency must proceed in analogous
application of IAS 21.26 using the exchange rate at which the
future cash flows represented by the transaction or balance
could have been settled if those cash flows had occurred at the
measurement date.
The Venezuelan bolivar is not a freely convertible currency,
meaning that its exchange into other currencies requires
authorization and must take place at official exchange rates
set by the government. As of December 31, 2015, the three
following exchange rate mechanisms were in place:
• "CENCOEX" (6.3 bolivars per U.S. dollar): Official privileged
exchange rate mechanism allowed only for imports of high-
priority essential goods such as food and medicines;
• "SICAD" (13.5 bolivars per U.S. dollar): Official exchange rate
mechanism whereby exchange rates are set based on the
conducted auctions.
• "SIMADI" (Marginal Currency System) (198.7 bolivars per
U.S. dollar): Official exchange rate mechanism that permits
individuals and entities to buy and sell foreign currency with
fewer restrictions than other exchange rate mechanisms in
Venezuela.
In the past, Merck applied the privileged exchange rate mech-
anism CENCOEX for the translation of local financial state-
ments prepared in Venezuelan bolivars, the functional currency,
into euros, the reporting currency. In 2015, the Venezuelan
authorities have been increasingly limiting authorizations to
pay for imports using the privileged exchange rate. Against
this background and owing to the development of payments
received as well as the growing uncertainty since the last bal-
ance sheet date regarding the extent to which the privileged
CENCOEX exchange rate mechanism will be available in the
future, the Executive Board of Merck came to the conclusion
that for the translation as of July 1, 2015 of local financial
statements reported in Venezuelan bolivars, the functional cur-
rency, into euros as the reporting currency, it will be necessary
to apply the SIMADI exchange rate mechanism.
Provisions for pensions and other post-employment
This estimate is discretionary. Merck continues to closely
monitor the development of payments received and the
exchange rate mechanism. Should the payment rates improve
or if it can no longer be assumed that the SIMADI exchange
rate is the relevant exchange rate for the translation from local
currency into the reporting currency, euros, this could lead to
an amended estimate, which in turn could trigger an amended
currency translation.
Apart from provisions, contingent liabilities are also sub-
ject to estimation uncertainties and discretionary judgment.
Accordingly, contingent liabilities from legal and tax disputes
are subject to the same estimation uncertainties and discre-
tionary judgment as provisions for litigation. Therefore, the
existence and the amount of the outflow of resources, which is
not unlikely, is subject to estimation uncertainties similarly to
the date on which a potential obligation arises.
The calculation of the present value of the future settle-
ment amount requires, among other things, estimates of the
future settlement date, the actual severity of the identified
contamination, the applicable remediation methods, the asso-
ciated future costs, and the discount rate. The measurement
is carried out regularly in consultation with independent
experts. In spite of this, the determination of the future settle-
ment amount of the provisions for environmental protection
measures is subject to a considerable degree of uncertainty.
Notes to the Group Accounts Consolidated Financial Statements 189
Determination of the amortization of intangible assets
with finite useful lives
In addition to goodwill and other intangible assets with indefi-
nite useful lives, Merck has a significant amount of intangi-
ble assets with finite useful lives (carrying amount as of
December 31, 2015: € 10,674.9 million/December 31, 2014:
€ 5,496.1 million). Substantial assumptions and estimates are
required to determine the appropriate level of amortization of
these intangible assets. This relates in particular to the deter-
mination of the underlying remaining useful life. The para-
meter is reviewed regularly by Merck and adjusted if neces-
sary. Merck considers factors including the typical product life
cycles for each asset and publicly available information about
the estimated useful lives of similar assets.
If the amortization of intangible assets from customer
relationships, market authorizations, patents, licenses and
similar rights, capitalized brand names and trademarks had
been 10% higher, for example due to shortened remaining
useful lives, earnings before taxes would have been € 94.8
million lower in fiscal 2015 (2014: reduction of € 84.2 million).
In fiscal 2015, a reduction of the useful lives of the intangible
asset reported in connection with the drug RebifⓇ by one year
would have lowered earnings before taxes by € 92.0 million
(2014: € 73.6 million).
Research and development collaborations as well as
in- and out-licensing of intangible assets
Merck is regularly a partner of research and development col-
laborations with research institutions, biotechnology compa-
nies and other contract parties. These collaborations are aimed
at developing marketable products. Merck also enters into in-
licensing agreements regarding intellectual property of contract
partners. Such agreements typically involve making upfront
payments and payments for the achievement of certain mile-
stones related to development and marketing progress. In this
context, Merck has to judge to what extent upfront or mile-
stone payments represent remuneration for services received
(research and development expense) or whether such pay-
ments result in an in-licensing of an intangible asset that has
to be capitalized. This assessment is normally subject to judg-
ment.
Merck regularly receives upfront and milestone payments
as part of research and development collaborations or out-
licensing agreements. In this context, income may only be
recognized if Merck has transferred all material risks and
rewards of an intangible asset to the acquirer, has no interest
in the remaining business activities and has no material con-
tinuing commitment. If these criteria are not deemed to be
met, the received payments are deferred and recognized over
the period in which Merck is expected to fulfill its performance
obligations. Both the assessment of the revenue recognition
criteria and the determination of the appropriate period during
which revenue is recognized are subject to judgment.
If the consideration that was received as part of the strategic
alliance with Pfizer Inc., USA, in November 2014 and deferred
as a liability had been recognized in the income statement
over a shorter period reduced by one year, in 2015 this would
have increased other operating income and thus profit before
income tax would have increased by € 47.8 million (2014:
€ 3.9 million). Recognition over a period extended by one year
would have lowered other operating income and profit before
tax by € 31.9 million (2014: € 2.6 million).
Identification of impairment of non-financial assets
Discretionary decisions are required in the identification of
existing indications of impairment of intangible assets and
property, plant and equipment. As of December 31, 2015, the
carrying amounts of these assets totaled € 29,348.1 million
(December 31, 2014: € 14,385.9 million). External and inter-
nal information is used to identify indications of impairment.
For example, the approval of a competing product in the
Healthcare business sector or the closure of a site can be
an indicator of impairment. Nevertheless, Merck's analysis
of indications of impairment can prove too optimistic or too
pessimistic in hindsight due to the high degree of uncertainty.
In October 2015, Merck relaunched its branding and funda-
mentally revamped its visual appearance. Outside the United
States and Canada, the Group will operate uniformly as
"Merck" in the future and has eliminated the previously inde-
pendent divisional brands "Merck Serono" and "Merck Millipore".
Owing to this, the "Millipore" brand, which is recognized as an
intangible asset in the balance sheet, was subjected to an
impairment test. As a result of this impairment test, a need to
record an impairment loss was not identified since the value
added from the continued use of the brand for Merck filtration
products and as part of the name the Life Science business
operates under in the U.S. and Canadian markets exceeded
the residual book value of the brand. The intangible assets for
the "Serono" brand recognized within the scope of the purchase
price allocation for Serono SA had already been fully amortized
when the new branding was launched.
Impairment of financial assets
On every balance sheet date, Merck reviews whether there is
any objective evidence that a financial asset is impaired and,
if this is the case, carries out the impairment to the extent
estimated as necessary. Particularly important in this context
are impairment losses on trade accounts receivable whose
carrying amount was € 2,738.3 million as of December 31,
2015 (2014: € 2,219.5 million).
Significant indicators for the identification of impaired
receivables and the subsequent impairment tests are, in par-
ticular, payment default or delay in the payment of interest or
principal, negative changes in economic or regional economic
framework conditions as well as considerable financial difficul-
ties of a debtor. These estimates are discretionary.
190 Consolidated Financial Statements Notes to the Group Accounts
Other provisions and contingent liabilities
As a global company for high-tech products, Merck is exposed
to a multitude of litigation risks. In particular, these include
risks from product liability, competition and antitrust law,
pharmaceutical law, patent law, tax law and environmental
protection. Merck is engaged in legal proceedings and official
investigations, the outcomes of which are uncertain. A detailed
description of the most important legal matters as of the bal-
ance sheet date can be found in Notes [27] "Provisions" and
[39] "Contingent liabilities". The provisions recognized for
legal disputes mainly relate to the Healthcare business sector
and amounted to € 490.6 million as of the balance sheet date
(2014: € 393.1 million).
To assess the existence of a reporting obligation in relation
to provisions and to quantify pending outflows of resources,
Merck draws on the knowledge of the legal department as well
as any other outside counsel. In spite of this, both the assess-
ment of the existence of a present obligation and the estimate
of the probability of a future outflow of resources are highly
subject to uncertainty. Equally, the evaluation of a possible
payment obligation is to be considered a major source of esti-
mation uncertainty. Accordingly, the date of utilization may be
determined reliably not earlier than after an out-of-court settle-
ment is reached or upon the termination of judicial proceed-
ings.
To a certain extent, Merck is obliged to take measures to
protect the environment and reported provisions for environ-
mental protection of € 126.9 million as of December 31, 2015
(2014: € 123.7 million). The underlying obligations were
located mainly in Germany, Latin America and the United
States. Provisions were recognized primarily for obligations
from soil remediation and groundwater protection in connec-
tion with the discontinued crop protection business.
In the event of the discontinuation of clinical development
projects, Merck is regularly required to bear unavoidable sub-
sequent costs for a certain future period of time. The meas-
urement of these provisions requires estimates regarding the
length of time and the amount of the subsequent costs.
-35.5
On this basis, in fiscal 2015 Merck generated sales of
€ 175.1 million, € 168.3 million of which was attributable to
the first half of 2015. Net sales using the CENCOEX exchange
rate amounted to € 221.1 million in 2014. Cash and cash equiv-
alents in Venezuela, translated using the SIMADI exchange rate
as of December 31, 2015, amounted to € 8.2 million. They were
classified as restricted.
Merck makes other judgments, assumptions and estimates in
the following areas:
Other marketing and selling expenses
Marketing and selling expenses²
2015
2014
-913.1
-809.3
- 740.0
-613.6
-521.9
-469.4
-471.2
-412.6
-778.9
-719.0
-512.8
-484.2
- 111.6
Royalty and license expenses
Other judgments, assumptions and sources of estimation
uncertainty
Amortization of intangible assets¹
Sales promotion
• Classification of financial assets and financial liabilities
• Cash flow hedging for highly probable forecast transactions
• Determination of the fair value of financial instruments clas-
sified as available-for-sale and of derivative financial instru-
ments
•
Determination of the fair value of the liability for share-
based compensation
⚫ Determination of the fair value of plan assets
192 Consolidated Financial Statements Notes to the Group Accounts
Notes to the Consolidated Income Statement
(8) Net sales
Net sales were generated primarily from the sale of goods
and to a limited degree also included revenues from services
rendered and commission income. Since January 1, 2015,
commission income has been disclosed as part of sales. In
2014, royalty, license and commission income was disclosed
in a separate line in the consolidated income statement. More
information in Note [6] "Changes to accounting and measure-
ment principles and disclosure changes".
Merck Group net sales totaled € 12,844.7 million in 2015
(2014: € 11,362.8 million), which represented an increase of
13.0% compared with 2014 (increase of 5.5% in 2014). The
breakdown of net sales is presented in the Segment Reporting
in Note [32] "Information by business sector/countries and
regions".
(9) Cost of sales
Cost of sales primarily included the cost of manufactured
products sold as well as merchandise sold. Cost comprises
overheads and, if necessary, inventory write-downs, in addition
to directly attributable costs, such as the cost of materials,
personnel and energy, as well as depreciation/amortization.
(10) Marketing and selling expenses
Marketing and selling expenses comprised the following:
€ million
Sales force
Internal sales services
Logistics
-26.3
Exchange rate differences from operating activities (net)
-20.3
0.1
3.6
Inventories
627.0
28.7
507.6
10.2
Current and non-current receivables/Other assets
25.9
10.8
57.5
7.4
Provisions for pensions and other post-employment benefits
351.3
69.6
338.0
47.2
11.8
Current and non-current other provisions
10.4
69.8
Deferred tax assets and liabilities correspond to the follow-
ing balance sheet items:
Dec. 31, 2015
Dec. 31, 2014
€ million
Intangible assets
Property, plant and equipment
Assets
Liabilities
Assets
Liabilities
80.1
2,859.9
72.2
1,047.5
23.4
169.3
16.1
Current and non-current financial assets
In 2015, the income tax expense was reduced by € 16.1
million (2014: € 18.5 million) due to the utilization of tax loss
carryforwards from prior years for which no deferred tax asset
had been recognized in prior periods.
308.2
308.1
-517.4
818.4
-53.3
As of the balance sheet date, deferred taxes for temporary
differences for interests in subsidiaries were recognized to the
extent that these related to planned dividend payments and,
in this context, the reversal of these differences was foresee-
able. Deferred tax liabilities in a total amount of € 391.2 mil-
lion (2014: € 31.0 million) were recognized for the higher or
lower tax expense attributable to dividend payments. The
increase resulted from the planned dividend payments of com-
panies acquired in connection with the Sigma-Aldrich acquisi-
tion. Temporary differences relating to the retained earnings
of subsidiaries amounted to € 5,247.7 million (2014: € 5,194.3
million).
(16) Earnings per share
Basic earnings per share are calculated by dividing the profit
after tax attributable to the shareholders of Merck KGaA by
the weighted average number of theoretical shares outstand-
ing. The use of a theoretical number of shares takes into
account the fact that the general partner's capital is not repre-
sented by shares.
The share capital of € 168.0 million was divided into
129,242,252 shares. Accordingly, the general partner's capital
of € 397.2 million was divided into 305,535,626 theoretical
shares. Overall, the total capital thus amounted to € 565.2 mil-
lion or 434,777,878 theoretical shares outstanding. The weighted
average number of shares in 2015 was likewise 434,777,878.
Earnings per share from discontinued operations resulted
from the business operations acquired with a view to resale in
connection with the acquisition of the Sigma-Aldrich Corpora-
tion, USA (see Note [4] "Acquisitions, assets held for sale and
disposal groups").
As of December 31, 2015 there were no potentially dilutive
shares. Diluted earnings per share were equivalent to basic
earnings per share.
198 Consolidated Financial Statements Notes to the Group Accounts
Notes to the Consolidated Balance Sheet
(17) Intangible assets
€ million
Cost at January 1, 2014
Changes in scope of consolidation
Additions
Disposals
Customer relationships,
marketing authorizations,
patents, licenses and
similar rights, brands,
trademarks and other
992.9
35.8
2,852.7
-517.4
72.5
Current and non-current liabilities
124.9
19.7
120.0
36.0
Tax loss carryforwards
Tax refund claims/Other
Offset deferred tax assets and liabilities
Deferred taxes (consolidated balance sheet)
114.3
72.0
163.5
426.5
18.7
41.6
-779.4
-779.4
1,049.6
The additional theoretically possible deferred tax assets
amounted to € 188.5 million (2014: € 107.3 million).
The increase in deferred tax liabilities on assets is largely due
to their recognition at fair value within the scope of the pur-
chase price allocation of the Sigma-Aldrich Corporation, USA.
In addition to deferred tax assets on tax loss carryforwards
amounting to € 114.3 million (2014: € 72.0 million), deferred
tax assets of € 935.3 million were recognized for temporary
differences (2014: € 920.9 million).
€ 5.0 million realization of the related tax benefits is probable
within one year, and for tax loss carryforwards of more than
€ 5.0 million realization of the related tax benefits is probable
within the next three years.
2015
2014
32.0
-291.6
30.6
-159.8
- 11.4
-2.6
-271.0
-5.1
-136.9
Interest component of the additions to pension provisions and other non-current provisions
Currency differences from financing activities
Result from financial investments
-45.8
-55.2
-39.9
-13.0
0.1
-356.7
-205.0
Higher interest expenses year-on-year were mainly the result
of expenses for the hybrid bond issued in December 2014, the
U.S. bond issued in March 2015, as well as the euro bond
placed in August 2015. All the bonds are part of the financing
of the acquisition of the Sigma-Aldrich Corporation, USA. More
information about Merck bonds can be found in Note [28]
"Financial liabilities/Capital management".
Notes to the Group Accounts Consolidated Financial Statements 195
Currency differences from financing activities were mainly
the result of expenses for hedging intragroup transactions in
Interest result
Interest expenses from interest rate derivatives
The vast majority of the tax loss carryforwards either has
no expiry date or can be carried forward for up to 20 years.
The tax loss carryforwards accumulated in Germany for
corporation and trade tax amounted to € 22.3 million (2014:
€ 8.0 million).
-21.8
- 16.2
-4.4
- 180.1
- 134.0
-917.3
1The figure for 2014 was adjusted and now includes losses on the divestment of businesses.
2The composition of Other operating expenses has been changed, see "Changes to accounting and measurement principles and disclosure changes".
Impairment losses totaled € 128.4 million (2014: € 100.2 mil-
lion) and related in the amount of € 120.9 million (2014:
€ 84.9 million) to assets which were assigned to research and
development, in the amount of € 6.9 million (2014: € 5.7 mil-
lion) to administration, and in the amount of € 0.3 million
(2014: € 0.1 million) to sales-related assets. Impairment
losses on production plants amounted to € 0.3 million (2014:
€ 5.1 million). No impairments were recognized for non-con-
solidated investments and other financial instruments which
were classified to the category "available-for-sale" (2014:
€ 4.4 million). Further information on impairments can be
found in Note [17] "Intangible assets".
Acquisition costs amounting to € 101.6 million (2014:
€ 24.5 million) were incurred in 2015 in connection with the
acquisition and the integration of the Sigma-Aldrich Corpora-
tion, USA. In 2014, the expenses were largely attributable to
the acquisition of AZ Electronic Materials S.A., Luxembourg.
Integration and IT costs of € 77.6 million (2014: € 87.2 million)
were incurred primarily for the global harmonization of the IT
landscape and in connection with the integration of acquired
and existing businesses.
The restructuring charges incurred in fiscal 2015 amount-
ing to € 47.5 million (2014: € 83.9 million) arose completely in
connection with the "Fit for 2018" transformation and growth
program (2014: € 79.5 million). As in the previous year, these
charges largely related to personnel measures, for instance the
elimination of positions in order to create a leaner and more
efficient organization. Of the recognized impairment losses, an
amount of € 6.9 million (2014: € 4.5 million) was attributable
to the program, which resulted in total expenses of € 54.4 mil-
lion (2014: € 84.0 million) for the "Fit for 2018" program.
Other operating expenses also included special environ-
mental protection costs as well as personnel expenses not
allocable to the functional areas.
(14) Financial result
€ million
Interest income and similar income
Interest expenses and similar expenses
Interest component from currency hedging transactions
foreign currency. These expenses result from hedging at for-
ward rates while intragroup transactions are measured at spot
rates. The increase over 2014 is mainly attributable to lower
interest rates in Europe as well as a higher hedging volume.
-737.4
(15) Income tax
113.9
0.4
Deferred tax asset
4.9
655.9
660.8
Theoretical deferred tax asset
2.5
186.0
188.5
0.8
106.5
The increase in non-German tax loss carryforwards was mainly
due to the recognition of loss carryforwards in Luxembourg as
well as the acquisition vehicle Mario Finance Corp., USA. The
interest expenses incurred in connection with the financing of
the acquisition of the Sigma-Aldrich Corporation, USA, led to a
negative tax result and to a higher deferred tax asset.
Deferred tax assets are recognized for tax loss and interest
carryforwards only if for tax loss carryforwards of less than
The decline in the interest component of the additions to
pension provisions and other non-current provisions resulted
largely from lower interest expenses in connection with non-
current provisions.
Notes to the Group Accounts Consolidated Financial Statements 197
114.3
0.5
107.3
72.0
71.5
€ million
Taxes for previous periods
Deferred taxes in the period
2015
2014
-704.6
-592.4
The following table presents the tax reconciliation from theoreti-
cal tax expense to tax expense according to the consolidated
income statement. The theoretical tax expense is determined
by applying the statutory tax rate of 30.7% of a corporation
headquartered in Darmstadt.
Current taxes in the period
-21.9
431.7
222.1
16.9
Excluding deferred tax asset
-95.1
thereof:
14,370.1
5,693.9
1 Carrying amounts of the intangible assets acquired within the scope of the acquisition of the Sigma-Aldrich Corporation, USA, are preliminary.
Information on impairment tests of intangible assets with
indefinite useful lives
In 2015, goodwill was not impaired. The assumptions used
in the goodwill impairment test are presented in Note [7]
"Management judgments and sources of estimation uncer-
tainty".
€ million
soft-tissue sarcoma as well as advanced pancreatic cancer,
evofosfamide failed to meet the primary endpoints in two cor-
responding Phase III clinical trials. Merck therefore decided
not to pursue evofosfamide further and not to submit it for
approval. Moreover, four development projects were discon-
tinued and their carrying amounts of € 22.3 million was recog-
nized in full as an impairment loss.
All of these items were allocated in the consolidated
income statement to the Biopharma business and recorded
in impairment losses under operating expenses. In 2015, no
intangible assets were pledged as security for liabilities.
Notes to the Group Accounts Consolidated Financial Statements 201
Cost at January 1, 2014
1,416.8
Land, land rights
In 2015, impairment losses on intangible assets with
indefinite useful lives totaled € 108.5 million (2014: € 84.8 mil-
lion). Of this amount, an impairment loss of € 84.4 million was
attributable to the capitalized upfront and milestone payments
for evofosfamide. The reason for this impairment loss was that
in the indications locally advanced inoperable or metastatic
(18) Property, plant and equipment
Indefinite useful life
183.6
1,003.5
31.5
316.7
4.0
1,515.7
Changes in the scope of consolidation
1,462.7
1,192.3
269.7
168.7
5,559.3
43.6
91.3
Goodwill
183.2
0.4
1,822.9
11,130.4
1,097.0
Additions
185.8
Plant and
machinery
132.9
39.6
69.6
Transfers
-113.2
-2.9
-46.8
-49.2
-14.3
Disposals
486.2
410.9
30.9
23.9
and buildings,
including buildings
on third-party land
20.5
33.5
58.9
89.8
6,801.8
Total
263.5
contractors
to vendors and
progress and
advance payments
Construction in
925.0
3,200.8
2,412.5
Other facilities,
operating and
office equipment
3.6
2.3-18.5
Finite useful life
1,154.2
5,240.7
1,355.7
6,907.1
2,276.3
Customer relationships, marketing authorizations, patents,
licenses and similar rights, brands, trademarks and other
2014
2015
Materials¹
Life Science¹
Healthcare
years
Total
Dec. 31,
Dec. 31,
Performance
Total
10,539.1
Remaining
useful life in
The carrying amounts of "Customer relationships, marketing
authorizations, patents, licenses and similar rights, brands,
trademarks and other" as well as goodwill were attributable to
the business sectors as follows:
Consolidated Financial Statements Notes to the Group Accounts
200
Goodwill was incurred mainly in connection with the acquisi-
tion of the Sigma-Aldrich Corporation, AZ Electronic Materials
S.A., the Millipore Corporation, and Serono SA. The changes in
goodwill caused by foreign exchange rates resulted almost
exclusively from translating the goodwill from the acquisitions
of the Sigma-Aldrich Corporation, AZ Electronic Materials S.A.
and the Millipore Corporation, part of which is carried in U.S.
dollars, into the reporting currency. More information on the
acquisition of the Sigma-Aldrich Corporation can be found in
Note [4] "Acquisitions, assets held for sale and disposal
groups".
Goodwill
In 2015, borrowing costs of € 3.4 million directly allocable
to intangible assets were capitalized.
Intangible assets with definite useful lives amounting to
€ 23.9 million (historical acquisition and manufacturing costs
of € 61.4 million and accumulated amortization of € 37.5 mil-
lion) as well as allocable goodwill of € 21.6 million were reclas-
sified to "assets held for sale". Details of this transaction are
presented in Note [4] "Acquisitions, assets held for sale and
disposal groups".
In 2015, additions to intangible assets with indefinite useful
lives amounted to € 125.8 million (2014: € 38.6 million) and
were almost exclusively attributable to the Healthcare busi-
ness sector with € 125.4 million. The vast majority was attrib-
utable to a capitalized upfront payment of € 103.8 million
(US$ 115 million) made to the Intrexon Corporation, USA, in
connection with the strategic collaboration and license agree-
ment to develop and commercialize Chimeric Antigen Receptor
T-cell (CAR-T) cancer therapies. For the first two targets of
interest selected by the Healthcare business sector, Intrexon
will receive research funding and is eligible to receive up to
US$ 826 million (€ 755.6 million, translated at the closing
rate) for development, regulatory and commercial milestones,
as well as tiered royalties on product sales.
The item "Customer relationships, marketing authoriza-
tions, patents, licenses and similar rights, brand names, trade-
marks and other" with indefinite useful lives primarily related
to rights that Merck had acquired for active ingredients, prod-
ucts or technologies that were still in the research and devel-
opment stage. Owing to the uncertainty as to the extent to
which these projects will ultimately lead to the marketing of
marketable products, the period for which the resulting capi-
talized assets would generate an economic benefit for the
company could not yet be determined. Amortization will only
begin once the products receive marketing approval and is
carried out on a straight-line basis over the shorter period of
the patent or contract term or the expected useful life.
The additions to intangible assets with finite useful lives
amounted to € 302.7 million in 2015 (2014: € 62.1 million).
The Healthcare business sector accounted for € 295.6 million
of this figure. Most of this amount, or € 294.4 million, was
attributable to the co-marketing right for the product XalkoriⓇ
with Pfizer Inc., USA (see Note [5] "Joint arrangements of
material significance").
The net carrying amount of "Customer relationships, mar-
keting authorizations, patents, licenses and similar rights,
brands, trademarks and other" with finite useful lives amount-
ing to € 10,539.1 million (2014: € 5,398.9 million) mainly
included the identified and capitalized assets from the pur-
chase price allocations for the acquisition of the Sigma-Aldrich
Corporation, AZ Electronic Materials S.A., the Millipore Corpo-
ration, and Serono SA. The vast majority was attributable to
customer relationships. The remaining useful lives of these
assets ranged between 0.3 and 23.9 years.
Customer relationships, marketing authorizations, patents,
licenses and similar rights, brands, trademarks and other
The changes in the scope of consolidation mainly include
additions to intangible assets resulting from the acquisition of
the Sigma-Aldrich Corporation, USA. A detailed presentation
of this acquisition can be found in Note [4] "Acquisitions,
assets held for sale and disposal groups".
Notes to the Group Accounts Consolidated Financial Statements 199
58.4
€ million
5,398.9
Rebif®
4.0
1.9
0.5-23.9
Customer relationships
6.6
0.5-11.9
Brands
512.2
0.3-12.0
Technologies
103.7
85.8
85.8
4.0-6.3
Other marketing authorizations
153.7
122.9
122.9
1,472.9
1,472.9
1,841.0
Gonal-fⓇ
3.0
284.9
Others
284.9
XalkoriⓇ
6.0
261.7
261.7
SaizenⓇ
4.0
379.8
-253.2
-399.2
Classification as held for sale or transfer to
(25) Equity
Equity capital
The total capital of the company consists of the share capital
composed of shares and the equity interest held by the gen-
eral partner E. Merck KG. As of the balance sheet date, the
company's share capital amounting to € 168.0 million was
divided into 129,242,251 no-par value bearer shares plus one
registered share and is disclosed as subscribed capital. The
amount resulting from the issue of shares by Merck KGaA
exceeding the nominal amount was recognized in the capital
reserves. The equity interest held by the general partner
amounted to € 397.2 million.
E. Merck KG's share of net profit
E. Merck KG and Merck KGaA engage in reciprocal net profit
transfers. This makes it possible for E. Merck KG, the general
partner of Merck KGaA, and the shareholders to participate in
the net profit/loss of Merck KGaA in accordance with the ratio
of the general partner's equity interest and the share capital
(70.274% or 29.726% of the total capital).
The maximum default risk is equivalent to the carrying
value of the cash and cash equivalents.
The allocation of net profit/loss is based on the net income of
E. Merck KG determined in accordance with the provisions of
the German Commercial Code as well as the income/loss from
ordinary activities and the extraordinary result of Merck KGaA.
These results are adjusted for trade tax and create the basis
for the allocation of net profit/loss.
The reciprocal net profit/loss transfer between E. Merck KG
and Merck KGaA as stipulated by the Articles of Association
I was as follows:
€ million
Result of E. Merck KG
Result of ordinary activities of Merck KGaA
Extraordinary result
Adjustment for trade tax in accordance with
206 Consolidated Financial Statements Notes to the Group Accounts
Art. 27 (1) Articles of Association of Merck KGaA
Cash and cash equivalents include restricted cash amount-
ing to € 326.6 million (2014: € 254.4 million). Restricted cash
relates mainly to cash and cash equivalents with subsidiaries
which the Group only has restricted access to owing to foreign
exchange controls.
2,878.5
(24) Cash and cash equivalents
This item comprised:
€ million
Cash, bank balances and cheques
Short-term cash investments (up to 3 months)
Notes to the Group Accounts Consolidated Financial Statements
Changes in cash and cash equivalents as defined by IAS 7 are
presented in the consolidated cash flow statement.
205
Dec. 31, 2014
577.5
546.7
254.7
2,331.8
832.2
Dec. 31, 2015
Income tax receivables amounted to € 391.0 million (2014:
€ 297.0 million). The increase largely resulted from higher tax
credits in the United States due to the inclusion of dividend
income from high-tax countries. In addition, tax receivables
above all resulted from tax prepayments that exceeded the
actual amount of tax payable for 2015 and prior fiscal years,
and from refund claims for prior years.
2015
Merck KGaA
(70.274%)
366.8
-366.8
419.5
-419.5
Profit transfer from E. Merck KG
Ratio of general partner's capital to total capital
Ratio of share capital to total capital
Trade tax
Net income
(29.726%)
5.8
- 5.8
6.3
-6.3
Corporation tax
2014
Profit transfer to E. Merck KG
-21.0
E. Merck KG
-17.9
Merck KGaA
E. Merck KG
- 19.6
609.2
-3.1
597.0
651.2
-87.2
-54.2
Basis for appropriation of profits
(100%)
-19.6
522.0
Trade tax in accordance with Art. 30 (1)
Articles of Association of Merck KGaA
3.1
(23) Income tax receivables
In the period from January 1 to December 31, 2015 trade
accounts receivable in Italy with a nominal value of € 130.8
million were sold for € 128.5 million. Previous impairments in
2,619.8
58.9
1,659.7
Write-downs of inventories in 2015 amounted to € 133.3 million
(2014: € 99.5 million). In 2015, reversals of inventory write-
downs of € 47.3 million were recorded (2014: € 45.3 million).
As of the balance sheet date, no inventories were pledged as
security for liabilities. The increase in finished goods is largely
due to inventories acquired from the Sigma-Aldrich Corpora-
tion, USA, which were recognized at their fair values.
(22) Trade accounts receivable
Trade accounts receivable amounting to € 2,738.3 million
(2014: 2,219.5 million) exclusively existed vis-à-vis third
parties.
The maturity structure of trade accounts receivable was as
follows:
41.5
€ million
up to 3 months
up to 6 months
up to 12 months
up to 24 months
over 2 years
Impaired
Past due, but not impaired
Carrying amount¹
726.9
679.1
1,405.9
168.5
204
Consolidated Financial Statements Notes to the Group Accounts
(21) Inventories
This item comprised:
€ million
496.6
Raw materials and supplies
Finished goods
Goods for resale
Dec. 31, 2015
493.3
Dec. 31, 2014
377.3
Work in progress
this context amounting to € 3.9 million were reversed and dis-
closed under other operating income. The sold receivables do
not involve any further rights of recovery against Merck.
1 Previous year's figures have been adjusted, see "Changes to accounting and measurement principles and disclosure changes".
€ million
257.9
2,738.3
2,219.5
2015
2014
-126.2
-84.1
40.2
162.3
-136.8
41.8
8.8
9.7
-4.2
-165.5
0.6
-126.2
-41.5
The corresponding allowances developed as follows:
0.5
5.1
January 1
Additions
Reversals
Utilizations
Currency translation and other changes
December 31
Dec. 31, 2015
2,320.6
0.4
Dec. 31, 2014
1,793.4
143.3
14.2
13.5
4.7
5.8
2.0
234.1
353.0
-28.7
120.7
407.9
1.00
3.86
3.66
3.72
4.16
2.52
0.70
1.80
2.42
2.10
3.80
4.53
1.75
3.07
1.96
3.06
2.00
2015
Germany
Switzerland
United Kingdom
Other countries
2015
2.40
2014
2.50
5688
2014
2015
2014
2015
2014
1.75
1,820.1
1.91
5.06
577.1
103.3
1.3
2,923.4
103.3
1.3
205.8
834.9
42.1
1,040.7
2,346.3
42.1
6.8
35.1
35.1
2,560.2
1,592.5
4,152.7
6.8
1.58
Merck Group
Dec. 31, 2015
Germany
Dec. 31, 2015
5.10
These are average values weighted by the present value of the
respective benefit obligation.
The defined benefit obligations of the Merck Group were based
on the following types of benefits provided by the respective
plan:
Present value of defined benefit obligations in € million
Benefit based on final salary
Other countries
Dec. 31, 2015
Annuity
Installments
Benefit not based on final salary
Annuity
Lump sum
Installments
Medical plan
Lump sum
1,836.1
1.8
6.3
E. Merck KG
353.0
71.9
30.4
26.3
11.2
151.1
Merck KGaA
148.4
159.6
-362.3
-135.7
36.5
15.4
71.9
-129.2
30.4
-388.4
For 2014, a dividend of € 1.00 per share was distributed. The
dividend proposal for fiscal 2015 will be € 1.05 per share,
corresponding to a total dividend payment of € 135.7 million
(2014: € 129.2 million) to shareholders. The amount with-
drawn by E. Merck KG would amount to € 388.4 million (2014:
€ 362.3 million).
E. Merck KG
407.9
2014
-22.8
148.4
The result of E. Merck KG on which the appropriation of profits
adjusted for trade tax is based amounted to € - 19.6 million
(2014: € 21.0 million). This resulted in a result transfer
to Merck KGaA of € -5.8 million (2014: € -6.3 million).
Merck KGaA's result from ordinary activities adjusted for trade
tax and extraordinary result, on which the appropriation
of its profit is based, amounted to € 522.0 million (2014:
€ 597.0 million). Merck KGaA transferred € 366.8 million of its
profit to E. Merck KG (2014: € 419.5 million). In addition, an
expense from corporation tax charges amounting to € 28.7
million resulted (2014: expense of € 22.8 million). Corporation
tax is only calculated on the income received by shareholders.
Its equivalent is the income tax applicable to E. Merck KG.
However, this must be paid by the partners of E. Merck KG
directly and is not disclosed in the annual financial statements.
Appropriation of profits
The profit distribution to be resolved upon by shareholders
also defines the amount of that portion of net profit/loss freely
available to E. Merck KG. If the shareholders resolve to carry
forward or to allocate to retained earnings a portion of
Merck KGaA's net retained profit to which they are entitled,
then E. Merck KG is obligated to allocate to the profit brought
forward/retained earnings of Merck KGaA a comparable sum
determined in accordance with the ratio of share capital to
general partner's capital. This ensures that the retained earn-
ings and the profit carried forward of Merck KGaA correspond
to the ownership ratios of the shareholders on the one hand
and E. Merck KG on the other hand. Consequently, for distri-
butions to E. Merck KG, only the amount is available that
results after netting the profit transfer of Merck KGaA with the
amount either allocated or withdrawn by E. Merck KG from
retained earnings/profit carried forward. This amount corre-
sponds to the amount that is paid as a dividend to the share-
holders, and reflects their pro rata shareholding in the com-
pany.
€ million
Net income/loss
Merck KGaA
120.7
Profit carried forward from previous year
Transfer to revenue reserves
Retained earnings Merck KGaA
Withdrawal by E. Merck KG
Dividend proposal
Profit carried forward
Notes to the Group Accounts Consolidated Financial Statements 207
2015
Withdrawal from revenue reserves
Changes in reserves
For 2015 the profit transfer to E. Merck KG including changes
in reserves amounted to € 461.0 million. This consists of the
profit transfer to E. Merck KG (€ - 366.8 million), the result
transfer from E. Merck KG to Merck KGaA (€ -5.8 million), the
change in profit carried forward of E. Merck KG (€ -35.4 mil-
lion) as well as the profit transfer from Merck & Cie to
E. Merck KG (€ -53.0 million). Merck & Cie is a partnership
under Swiss law that is controlled by Merck KGaA, but distrib-
utes its operating result directly to E. Merck KG. This distribu-
tion is a payment to shareholders and is therefore also pre-
sented under changes in equity.
Non-controlling interests
in %
Discount rate
Future salary increases
Future pension increases
Future cost increases for health care benefits
Dec. 31, 2015
The calculation of the defined benefit obligations as well as
the relevant plan assets was based on the following actuarial
parameters:
4,152.7
3,812.7
-2,322.9
1,829.8
-1,994.4
1,818.3
1,829.8
1,818.3
Dec. 31, 2014
Provisions for pensions and other post-employment benefits
Assets from defined benefit plans
Net defined benefit liability recognized in the balance sheet
The disclosure of non-controlling interests was based on the
stated equity of the subsidiaries concerned after any adjust-
ment required to ensure compliance with the accounting poli-
cies of the Merck Group, as well as pro rata consolidation
entries.
The net equity and profit attributable to non-controlling
interests mainly related to the minority interests in the pub-
licly traded companies Merck Ltd., India, and P.T. Merck Tbk,
Indonesia, as well as Merck Ltd., Thailand and Merck (Pvt.)
Ltd., Pakistan.
In 2014, for an interim period, non-controlling interests of
€ 161.9 million also existed in the course of the acquisition
of AZ Electronic Materials S.A., Luxembourg. The acquisition of
these interests after May 2, 2014 was recognized in equity
as a transaction without a change of control. This lowered
retained earnings by € 189.4 million. This amount represents
the difference between the purchase price of € 351.3 million
paid for the remaining shares and the disposal of non-con-
trolling interests in the amount of € 161.9 million.
(26) Provisions for pensions and
other post-employment benefits
Depending on the legal, economic and fiscal circumstances
prevailing in each country, different retirement benefit sys-
tems are provided for the employees of the Merck Group. Gen-
erally these systems are based on the years of service and
salaries of the employees. Pension obligations of the Merck
Group include both defined benefit and defined contribution
plans and comprise both obligations from current pensions
and accrued benefits for pensions payable in the future. In the
Merck Group, defined benefit plans are funded and unfunded.
Provisions also contain other post-employment benefits, such
as accrued future health care costs for retirees in the United
States.
In order to limit the risks of changing capital market con-
ditions and demographic developments, for many years now
Merck has been offering newly hired employees plans that are
largely structured as defined contribution systems.
208
Consolidated Financial Statements Notes to the Group Accounts
The value recognized in the consolidated balance sheet for
pensions and other post-employment benefits was derived as
follows:
€ million
Present value of all defined benefit obligations
Fair value of the plan assets
Funded status
Effects of asset ceilings
155.1
7.7
0.6
0.1
a disposal group
Currency translation
December 31, 2015
48.4
3,291.5
37.5
3,879.5
13.4
1,084.0
Classification as held for sale or transfer to
1.0
592.2
Accumulated depreciation and impairment losses
January 1, 2015
-1,186.8
-2,548.2
-766.8
-0.9
-4,502.7
100.3
8,847.2
Changes in the scope of consolidation
3.9
68.7
841.1
27.5
28.2
502.4
564.0
Disposals
-417.4
-44.8
-54.1
-4.3
-155.2
Transfers
129.5
223.1
- 52.0
80.0
Depreciation
Disposals
-4.6
0.9
0.9
Classification as held for sale or transfer to
a disposal group
Currency translation
3.9
December 31, 2015
- 30.0
-2,731.6
Net carrying amount as of December 31, 2015
2,002.5
-9.9
-817.3
1,147.9
266.7
-22.2
-1,289.0
Impairment losses
- 5.0
143.3
Transfers
Reversals of impairment losses
- 109.8
-196.6
-92.8
-7.7
-3.5
-2.2
-0.1
-13.6
41.0
49.5
51.9
0.9
-3.6
10.3
233.7
517.1
5.9
-104.3
- 189.8
-90.4
-384.5
Impairment losses
-0.4
Depreciation
-4.7
Disposals
10.7
46.1
44.9
0.1
- 5.7
101.8
-0.6
Transfers
Changes in the scope of consolidation
-0.9
a disposal group
Currency translation
57.3
December 31, 2014
2,635.4
42.4
3,409.7
-4,154.6
16.5
1,017.5
124.8
7,493.1
Accumulated depreciation and impairment losses
January 1, 2014
-1,069.8
-2,374.5
-709.4
8.6
430.5
-4.1
-0.1
0.1
Net carrying amount as of December 31, 2014
1,448.6
861.5
250.7
429.6
-4,502.7
2,990.4
-0.9
Cost at January 1, 2015
3,409.7
1,017.5
430.5
7,493.1
Changes in the scope of consolidation
Additions
2,635.4
-766.8
-2,548.2
-1,186.8
Reversals of impairment losses
0.1
0.4
0.2
-4.1
0.7
Classification as held for sale or transfer to
a disposal group
Currency translation
-19.0
-25.6
-11.6
-0.1
-56.3
December 31, 2014
-0.1
-0.2
592.0
0.2
-62.2
-4,838.1
202
53.8
17.1
70.9
Assets from defined benefit plans
6.3
6.3
81.0
1.8
Other assets
92.9
69.5
162.4
339.3
6.6
1.8
345.9
19.9
Prepaid expenses
471.4
159.6
9.3
168.9
631.6
8.3
61.1
639.9
176.3
29.1
205.4
199.8
24.5
224.3
Receivables from non-income related taxes
2.9
Non-financial items
118.5
over 2 years
Impaired
Carrying amount¹
1 Previous year's figures have been adjusted, see "Changes to accounting and measurement principles and disclosure changes".
In 2015, no allowances for other receivables from third parties
were necessary (2014: € 0.4 million). There were no reversals
of allowances in this connection in 2015 or in 2014.
Dec. 31, 2015
152.5
up to 24 months
Dec. 31, 2014
0.7
2.2
0.7
0.2
0.9
0.9
164.6
336.6
up to 12 months
up to 3 months
455.1
496.2
127.8
624.0
594.7
1,226.3
48.2
56.5
up to 6 months
642.9
1 Previous year's figures have been adjusted, see "Changes to accounting and measurement principles and disclosure changes".
Other receivables included current receivables from related
parties amounting to € 35.4 million (2014: € 76.5 million) as
well as current receivables from affiliates amounting to € 6.3
million (2014: € 0.9 million). Moreover, this includes license
receivables amounting to € 11.5 million (2014: € 16.1 mil-
lion). Interest receivables amounted to € 1.4 million (2014:
€ 12.5 million). In addition, other prepayments were reported
under this item. Owing to the completion of the acquisition of
the Sigma-Aldrich Corporation, USA, and the realization of
hedging transactions in this connection, derivative assets
declined. The increase in other non-current assets is largely
the result of the inclusion of Sigma-Aldrich. In 2014, other
current assets included the entitlement to the joint marketing
right for Xalkori® (crizotinib) with Pfizer Inc., USA, in the amount
of € 294.4 million, which was reclassified to intangible assets
in 2015.
Other receivables from third parties were as follows:
€ million
Neither past due nor impaired
Past due, but not impaired
1,282.8
4,009.1
468.5
6.2
Dec. 31, 2015
6.4
Dec. 31, 2014
6.8
1.2
1.1
1.3
Total
1.5
9.4
Dec. 31,
current non-current
2015
29.8
29.8
8.9
161.6
Derivative assets (financial transactions)
Available-for-sale financial assets
Consolidated Financial Statements Notes to the Group Accounts
Changes in the scope of consolidation mainly included the
additions to property, plant and equipment from the acquisi-
tion of the Sigma-Aldrich Corporation, USA. A detailed presenta-
tion of this acquisition can be found in Note [4] "Acquisitions,
assets held for sale and disposal groups".
Material additions to construction in progress are attribut-
able to the expansion of global headquarters as well as the
construction of a new modular Innovation Center and a second
energy station at the Darmstadt site. Further investments at
the Darmstadt site were made in a new OLED production plant
and a new laboratory building. In addition, investments were
made in a new pharmaceutical production plant in Nantong,
China, as well as at the production sites in Bari, Italy, and
Reinbek, Germany. Furthermore, construction work on a new
packaging site in Aubonne, Switzerland, started, and invest-
ments were made to expand the production site. Transfers
relating to construction in progress mainly include completed
subprojects at Group headquarters in Darmstadt as well as
investments in the United States, Ireland and Switzerland.
In 2015, impairment losses in the amount of € 13.6 million
(2014: € 5.7 million) were recognized. These related mainly to
assets allocated to the Healthcare business sector as well as
central Group functions.
The total amount of property, plant and equipment used to
secure financial liabilities as well as government grants and
subsidies was immaterial.
Directly allocable borrowing costs on qualified assets in the
amount of € 6.1 million (2014: € 3.2 million) were capitalized.
Property, plant and equipment also included assets that
were leased. The total value of capitalized leased assets
amounted to € 8.9 million (2014: € 9.4 million) and the corre-
sponding obligations amounted to € 4.8 million (2014: € 6.5 mil-
lion) (see Note [40] "Other financial obligations").
Loans and receivables
The carrying amounts of assets classified as finance leases
were as follows:
Land and buildings
Vehicles
Other property, plant and equipment
(19) Financial assets
€ million
Held to maturity investments
€ million
110.4
2.9
16.5
Other receivables¹
Derivative assets (operational)
Financial items
Notes to the Group Accounts Consolidated Financial Statements 203
current
152.0
non-current Dec. 31, 2015
€ million
current
3.1
155.1
163.1
5.4
168.5
7.6
non-current Dec. 31, 2014
13.8
Other assets comprised:
Non-current available-for-sale financial assets mainly include
unconsolidated investments amounting to € 22.0 million (2014:
€ 21.5 million) and investments in associates and other com-
panies amounting to € 87.5 million (2014: € 57.9 million). In
2015, no impairment losses were recognized for unconsolidated
investments or for other available-for-sale non-current finan-
cial assets. The prior year's impairment losses amounting to
€ 4.4 million were recorded in the consolidated income state-
ment under other operating expenses.
32.7
4.6
227.0
131.5
272.0
19.4
37.3
358.5
current
21.7
2,135.0
2.9
39.8
2,199.4
non-current
Dec. 31,
2014
21.7
80.7
13.7
2,215.7
16.6
94.4
39.8
2,293.8
Current financial assets primarily include available-for-sale
financial assets amounting to € 161.6 million (2014: € 2,135.0
million). As of December 31, 2015 this item mainly included
bonds amounting to € 143.0 million (2014: € 1,178.6 million).
There were no investments in commercial paper in 2015 (2014:
€ 956.4 million). The decrease results from the liquidation of
available-for-sale financial assets to make the purchase price
payment for the acquisition of the Sigma-Aldrich Corporation,
USA (see Note [4] "Acquisitions, assets held for sale and dis-
posal groups").
The loans and receivables contained in current financial
assets are neither past due nor impaired.
(20) Other assets
Neither past due nor impaired
Funded benefit
obligations
Benefit obliga-
non-current
987.7
496.8
3,561.1
9,616.3
Total non-current financial liabilities
3.7
2.8
Finance lease liabilities
117.0
103.9
Liabilities from derivatives (financial transactions)
65.9
8,577.8
62.6
Liabilities to related parties
Loans to banks
Total bonds (non-current)
Hybrid bond 2014/2074
USD
1,600.0
3.250
March 2025
1,448.4
Hybrid bond 2014/2074
U.S. bond 2015/2025
Loans from third parties and other financial liabilities
€
986.2
496.7
3,174.5
2.625
3.375
The financial liabilities of the Merck Group are not secured
by liens or similar forms of collateral. The loan agreements do
not contain any financial covenants. The Merck Group's aver-
age borrowing cost as of the balance sheet date was 2.0%
(2014: 3.3%).
For the hybrid bond 2014/2074 issued by Merck KGaA in
two tranches, the two rating agencies Standard & Poor's and
Moody's have given equity credit treatment to half of the issu-
ance, thus making the issuance more favorable to Merck's
credit rating than a classic bond issue. The bond is recognized
in full as financial liabilities in the balance sheet. In addition to
the issued bonds, to finance the purchase price payment for
the acquisition of Sigma-Aldrich, Merck utilized a credit line of
€ 1.6 billion from a banking syndicate, as well as bilateral
credit agreements amounting to € 1.35 billion.
Merck issued a U.S. bond with a five-tranche structure in
March 2015, and a further euro bond with a three-tranche
structure in August 2015. Both issuances are part of the
financing of the acquisition of the Sigma-Aldrich Corporation,
USA. Merck issued a bond with a volume of € 1.35 billion in
March 2015, and repaid a further bond with a volume of € 100
million in December 2015. On December 18, 2015, Merck also
repaid early a bond acquired within the scope of the acquisi-
tion of Sigma-Aldrich with a nominal volume of US$ 300 mil-
lion.
216 Consolidated Financial Statements Notes to the Group Accounts
4 Merck has the right to prematurely repay this tranche of the hybrid bond issued in December 2014 for the first time in December 2024.
3 Merck has the right to prematurely repay this tranche of the hybrid bond issued in December 2014 for the first time in June 2021.
2 Interest rate: 0.23% spread over 3-month EURIBOR.
1 Interest rate: 0.35% spread over 3-month U.S. dollar LIBOR.
2,878.5
2,199.4
559.1
12,653.7
832.2
227.0
Dec. 2074³
Dec. 20744
5,637.0
Net financial debt
Current financial assets
Cash and cash equivalents
less:
Total financial liabilities
200.0
869.2
€
500.0
€
1,000.0
13,712.9
Information on liabilities to related parties can be found in
Note [46] "Related-party disclosures".
550.0
Sept. 2022
4.250
Dec. 2019
69.1
69.3
Eurobond 2009/2019
USD
400.0
1.700
€
700.0
USD
70.0
250.0
60.0
4.000
variable¹
variable²
Nov. 2016
March 2017
Sept. 2017
March 2018
365.5
U.S. bond 2015/2018
699.0
Eurobond 2015/2017
228.5
U.S. bond 2015/2017
€
250.0
€
1.375
€
797.3
546.8
Eurobond 2015/2022
USD
1,000.0
2.950
March 2022
909.6
U.S. bond 2015/2022
€
1,350.0
4.500
Eurobond 2015/2019
1,344.1 March 2020
Eurobond 2010/2020
USD
750.0
2.400
March 2020
683.8
U.S. bond 2015/2020
€
800.0
0.750
Sept. 2019
1,345.1
5.875
Capital management
Traditionally, the capital market represents a major source
of financing for Merck, for instance via bond issues. In addi-
tion, Merck has a € 2 billion multi-currency revolving credit
facility, which was renewed in fiscal 2013 ("Syndicated Loan
2013"). The credit line was underwritten by an international
group of banks and has a remaining term until March 2020.
This credit line had not been utilized as of December 31, 2015.
Merck still had access to a commercial paper program to meet
short-term capital requirements with a volume of € 2 billion,
of which € 1 billion had been utilized as of December 31, 2015
(2014: no utilization). Moreover, Merck utilized an amount of
€ 3.53 billion (2014: € 2.93 billion) of the debt issuance pro-
gram with a volume of € 15.0 billion (2014: € 15.0 billion) as
of December 31, 2015. As of December 31, 2015, further bank
lines of € 206.5 million were available (2014: € 11,544.8 mil-
lion). In 2014, these credit lines were available especially for
the acquisition of Sigma-Aldrich. There are no indications that
the availability of credit lines already extended was restricted.
On the balance sheet date, the bank financing commit-
ments vis-à-vis the Merck Group were as follows:
Advance payments received
989.5
768.6
220.9
802.1
576.0
226.1
Deferred income
474.3
474.3
535.5
from customers
535.5
731.5
9.6
721.9
965.1
28.8
936.3
Financial items
35.4
6.4
29.0
60.8
Accruals for personnel expenses
14.4
15.1
15.1
€ million
Trade accounts payable consisted of the following:
(30) Trade accounts payable
tually agreed payment obligations vis-à-vis other companies.
The deferred income results mainly from the collaboration
agreement with Pfizer Inc., USA, in immuno-oncology and was
released as planned on a pro rata basis in 2015 (see Note [5]
"Joint arrangements of material significance").
As of December 31, 2015, other financial liabilities included
liabilities to related companies amounting to € 453.6 million
(2014: € 425.6 million). These are mainly profit entitlements
of E. Merck KG. Moreover, this item contained liabilities to
investments amounting to € 8.5 million (2014: € 3.1 million),
interest accruals of € 97.4 million (2014: € 85.9 million) as
well as payroll liabilities of € 179.5 million (2014: € 65.9 mil-
lion). The remaining amount of € 165.3 million (2014: € 115.6
million) recorded under other financial liabilities included
among other things liabilities to insurers as well as contrac-
2,356.6
146.3
1,625.1
772.4
782.0
1,574.6
852.7
3.8
Interest expense
142.5
608.5
1,818.5
579.7
882.2
3.7
105.5
Non-financial items
related taxes
Liabilities from non-income
15.0
15.0
109.2
1,461.9
2,427.0
The objective of capital management is to secure financial
flexibility in order to maintain long-term business operations
and to realize strategic options. Maintaining a stable invest-
ment grade rating, ensuring liquidity, limiting financial risks as
well as optimizing the cost of capital are the objectives of our
financial policy and set important framework conditions for
capital management. The responsible committees decide on the
capital structure of the balance sheet, the appropriation of net
retained profit and the dividend level. In this context, net finan-
cial debt is one of the leading capital management indicators.
46.4
Liabilities from derivatives
700.0
1111
2020
2019
2018
variable
2020
variable
Maturity of
financing
commitments
Interest
1,600.0
700.0
400.0
Dec. 31, 2015
Utilization
1,600.0
2,000.0
from banks
Financing
commitments
Bilateral credit agreement with banks
Various bank credit lines
Bilateral credit agreement with banks
Bilateral credit agreement with banks
Loan agreement with banking syndicate for acquisition financing
Syndicated loan 2013
€ million
as of
(operational)
250.0
5,156.5
Dec. 31, 2014
696.1
3.2
692.9
non-current
current
Dec. 31, 2015
904.3
14.4
volume
million
current
889.9
Other financial liabilities
€ million
206.5
Notes to the Group Accounts Consolidated Financial Statements 217
(29) Other liabilities
< 1 year
2022
3,006.0
variable
56.0
variable
250.0
variable
variable
400.0
This item comprised:
June 2016
218.4
60.0
Eurobond 2009/2016
Reference price of Merck shares in €
2013 tranche
Jan. 1, 2013-
Dec. 31, 2015
2014 tranche
Jan. 1, 2014-
Dec. 31, 2016
2015 tranche
Jan. 1, 2015-
Dec. 31, 2017
3 years
3 years
3 years
(60-day average Merck share price prior to the start
Term
of the performance cycle)
122.84¹
74.53
DAX® value
(60-day average of the DAX® prior to the start
of the performance cycle)
7,350.64
9,065.08
9,403.99
Potential number of MSUS
Potential number offered for the first time in 2013
389,658
100.11¹
Expired
Performance cycle
Provisions for employee benefits/Share-based payment
Provisions for employee benefits include obligations from
long-term variable compensation programs. More information
on these compensation programs can be found in Note [66]
54.3
242.2
24.1
102.8
342.0
298.7
80.0
1,390.7
535.4
43.3
855.3
Notes to the Group Accounts Consolidated Financial Statements 213
Litigation
As of December 31, 2015, the provisions for legal disputes
amounted to € 490.6 million (2014: € 393.1 million). The legal
matters described below represent the most significant legal
risks.
"Share-based compensation programs". The following table
presents the key parameters as well as the development of
the potential number of Merck Share Units ("MSUS") for the
individual tranches:
Product-related and patent disputes
In the Performance Materials business sector, Merck is in
negotiations with a competitor regarding potential patent
infringements. Merck maintains that the competitor's patent
infringement assertion is invalid owing to relevant prior art
and has filed the corresponding nullity actions. In the mean-
time, the competitor has filed two patent infringement law-
suits. Merck is prepared for this issue and has taken appro-
priate accounting measures. Merck anticipates that a final
decision will be made only within the next two to five years,
leading to a potential outflow of resources.
Antitrust proceedings
RaptivaⓇ: In December 2011, the Brazilian federal state of São
Paulo sued Merck for damages because of alleged collusion
between various pharmaceutical companies and an associa-
tion of patients suffering from psoriasis and vitiligo. The collu-
sion is alleged to have aimed at an increase in the sales of
the involved companies' drugs to the detriment of patients
and state coffers. Moreover, in connection with the product
RaptivaⓇ, patients have filed suit to receive compensatory
damages. Merck has taken appropriate accounting measures
for these legal disputes. These are different legal disputes,
and an outflow of cash in fiscal year 2016 cannot be ruled out.
Paroxetine: In connection with the divested generics business,
the Group is subject to antitrust investigations by the British
Competition and Market Authority ("CMA") in the United King-
dom. In March 2013, the CMA informed Merck of the assump-
tion that a settlement agreement entered into in 2002 between
Generics (UK) Ltd. and several GlaxoSmithKline companies in
connection with the antidepressant drug paroxetine violates
British and European competition law. As the owner of Gener-
ics (UK) Ltd. at the time, Merck was allegedly involved in the
settlement negotiations and is therefore liable. The investi-
gations into Generics (UK) Ltd. started in 2011, without Merck
being aware of this. On February 11, 2016, the CMA imposed
a fine in this matter. Merck intends to take legal action against
this decision. Merck has recognized appropriate provisions in
this connection; in 2015, the provision was released in part
based on a re-assessment of the risk. A decision and an out-
flow of resources, if any, is expected for 2016.
Foreign exchange transfer restrictions
In one jurisdiction, Merck and other companies are subject to
a government investigation regarding compliance with foreign
exchange transfer restrictions. In this connection, the respon-
sible authorities are investigating whether import prices led to
impermissibly high foreign exchange transfers. Appropriate
accounting measures have been taken for repayments and
fines that are estimated to be probable due to the uncertain
legal situation in the affected country. A cash outflow is not
expected for 2016.
In addition to provisions for the mentioned litigation, provisions
existed as of the balance sheet date for various smaller pend-
ing legal disputes. An outflow of cash is not expected to occur
in fiscal year 2016.
Restructuring
Provisions for restructuring mainly include commitments to
employees in connection with restructuring projects and pro-
visions for onerous contracts. These were recognized once
detailed restructuring plans had been prepared and communi-
cated.
In 2012, the "Fit for 2018" transformation and growth pro-
gram was established. The aim of this program is to secure the
competitiveness and the growth of the Merck Group over the
long term. The provisions of € 92.0 million as of December 31,
2015 (2014: € 136.5 million) in this connection mainly consist
of commitments to employees from partial and early retire-
ment arrangements. The payments made in 2015 in the
amount of € 72.8 million are primarily due to severance or
early retirement payments to employees. Cash flows owing to
provisions for restructuring are for the most part expected
within a period of up to 2019.
214 Consolidated Financial Statements Notes to the Group Accounts
Rebif®: Merck is involved in a patent dispute with Biogen Inc.,
USA, (Biogen) in the United States. Biogen claims that the
sale of RebifⓇ in the United States infringes on a Biogen patent.
The disputed patent was granted to Biogen in 2009 in the
United States. Subsequently, Biogen sued Merck and other
pharmaceutical companies for infringement of this patent.
Merck defended itself against all allegations and brought a
countersuit claiming that the patent was invalid and not
infringed on by Merck's actions. A Markman hearing was held
in January 2012; a decision has not yet been announced. The
parties are currently engaged in court-ordered mediation pro-
ceedings that have not yet officially ended. It is currently not
clear when a first-instance decision will be made. Merck has
taken appropriate accounting measures. Cash outflow is not
expected to occur within the next twelve months.
412.7
11,938
377,720
Other provisions
Other provisions mainly include provisions for purchase com-
mitments, subsequent contract costs stemming from discon-
tinued research projects, other guarantees, and provisions for
uncertain commitments from contributions, duties and fees.
Provisions were recognized in 2015 for expected subse-
quent costs due to the discontinuation of the evofosfamide
development program. In addition, provisions were recog-
nized for interest and penalties resulting from tax audits.
Releases and utilizations mainly related to provisions recog-
nized in previous years for subsequent costs in relation to dis-
continued development programs in the Healthcare business
sector.
(28) Financial liabilities/
Capital management
The composition of financial liabilities as well as a reconciliation
to net financial debt are presented in the following table:
Notes to the Group Accounts Consolidated Financial Statements 215
Book value
Dec. 31, 2015
€ million
Book value
Dec. 31, 2014
Nominal
Provisions for environmental protection mainly existed in
Germany, Latin America and the United States and were set
up particularly for obligations from soil remediation and
groundwater protection in connection with the crop protection
business that was discontinued in 1987.
Interest rate
Maturity
3.615
Dec. 2015
100.0
€
1,350.0
3.375
1,349.7 March 2015
Eurobond 2009/2015
Eurobond 2010/2015
Currency
€ million
Status as on Dec. 31, 2013
Environmental protection
Provisions for employee benefits also include obligations
for the partial retirement program and other severance pay
that were not set up in connection with the "Fit for 2018"
transformation and growth program as well as obligations in
connection with long-term working hour accounts and anni-
versary bonuses.
Potential number offered for the first time in 2014
355,164
Expired
38,179
21,247
MSUS granted to employees of the
AZ Electronic Materials Group on May 2, 2014
22,865
Status as on Dec. 31, 2014
339,541
356,782
With respect to provisions for defined-benefit pensions and
other post-employment benefits, see Note [26] "Provisions for
pensions and other post-employment benefits".
Potential number offered for the first time in 2015
Expired
20,885
23,541
21,447
Further additional granted MSUS
Status as on Dec. 31, 2015
318,656
2,167
335,408
588,352
1 Price of shares before share split in 2014.
The value of the provision for the vesting period already com-
pleted was € 123.9 million as of December 31, 2015 (2014:
€ 144.8 million). The net expense for fiscal 2015 was € 64.3
million (2014: € 81.3 million). The three-year tranche issued
in 2012 ended at the end of 2014 and was paid out in 2015 in
the amount of € 85.9 million.
609,799
thereof non-current
97.0
37.7
€
250.0
5.875
June 2016
214.4
60.0
Eurobond 2009/2016
Eurobond 2006/2016
€
-4.3
-1.1
-3.2
Nov. 2016
-1.1
on settlement
Gains (-) or losses (+)
-2.5
-0.5
-2.0
0.1
-0.1
0.2
Past service cost
83.5
10.5
- 1.1
73.0
4.000
€
Eurobond 2006/2016
2,075.9
4,096.6
Total current financial liabilities
2.8
2.0
Finance lease liabilities
36.0
79.8
Liabilities from derivatives (financial transactions)
18.6
60.0
26.6
501.4
577.8
Liabilities to related parties
67.4
2,136.8
Loans to banks
999.2
Commercial paper
1,449.7
274.4
Total bonds (current)
Loans from third parties and other financial liabilities
134.4
15.4
119.0
1.0
2.5
100.0
0.1
Currency translation
-1.3
1.9
2.7
0.5
2.7
11.0
6.5
tions funded
by provisions
Changes in scope of
18.4
41.0
2.0
18.6
December 31, 2015
490.6
92.0
339.2
126.9
thereof current
77.9
consolidation/Other
Funded benefit
2015
obligations
Current service cost
5.5
5.5
37.7
37.7
recognized in income
Currency translation differences
36.8
3.1
33.7
35.8
-3.2
39.0
recognized in equity
Currency translation differences
2,736.8
203.8
2,533.0
3,812.7
309.1
3,503.6
benefit obligations on January 1
2014
funded by
provisions
Benefit obligations
Liabilities to third parties
Liabilities to investments
Trade accounts payable included an accrued amount of € 906.4
million (2014: € 831.0 million) for outstanding invoices and
sales deductions.
%
Tax liabilities and provisions for tax liabilities resulted in total
income tax liabilities of € 1,011.3 million as of December 31,
2015 (2014: € 849.8 million). The increase in tax liabilities
was primarily due to the acquisition of the Sigma-Aldrich
Corporation, USA, higher income tax expenses in fiscal 2015
(see Note [15] “Income taxes") as well as provisions for
potential tax obligations.
Remeasurements of defined benefit obligations
Cumulative actuarial gains (+)/losses (-) recognized in equity on January 1
Currency translation differences
€ million
The development of cumulative actuarial gains (+) and
losses (-) was as follows:
lion as interest expenses. In both years, there were no effects
from the asset ceiling.
In 2015, there were no changes in the effects of the asset
ceilings in accordance with IAS 19.64. In the previous year,
€ 10.8 million was recognized as actuarial gains and € 0.3 mil-
The actual return on plan assets amounted to € 16.0 million in
2015 (2014: € 117.9 million).
1,994.4
-0.3
-3.4
2,322.9
0.2
0.1
-1.9
-2.4
3.0
293.3
-32.8
-84.5
7.2
10.6
27.2
Actuarial gains (+)/losses (-) arising from changes in demographic assumptions
Actuarial gains (+)/losses (-) arising from changes in financial assumptions
2015
2014
-1,568.4
flows, which occur in some countries (e.g. Switzerland and the
United Kingdom) on the basis of legal requirements and in
other countries (e.g. Germany) on a voluntary basis.
The plan assets serve exclusively to meet the defined ben-
efit obligations. Covering the benefit obligations with financial
assets represents a means of providing for future cash out-
Plan assets for funded defined benefit obligations primarily
comprised fixed-income securities, stocks, and investment
funds. They did not directly include financial instruments
issued by Merck Group companies or real estate used by
Group companies.
-1,568.4
-1,420.4
10.8
50.7
- 28.8
Cumulative actuarial gains (+)/losses (-) recognized in equity on December 31
Reclassification within retained earnings
30.0
Actuarial gains (+)/losses (-)
Actuarial gains (+)/losses (-) arising from experience adjustments
Actuarial gains (+)/losses (-) arising from experience adjustments
Remeasurements of plan assets
-26.9
9.8
19.1
-915.2
-37.8
217.3
-12.1
- 12.5
-694.8
Effects of the asset ceilings
The ratio of the fair value of the plan assets to the present
value of the defined benefit obligations is referred to as the
degree of pension plan funding. If the benefit obligations
exceed the plan assets, this represents underfunding of the
pension fund.
50.7
67.2
3,976.9
4,386.6
4,040.9
4,278.3
4,597.0
3,779.9
Dec. 31, 2015
the expected rate of future pension increases is 50 basis points lower
the medical cost trend rate is 50 basis points higher
the medical cost trend rate is 50 basis points lower
the expected rate of future salary increases is 50 basis points higher
the expected rate of future salary increases is 50 basis points lower
the expected rate of future pension increases is 50 basis points higher
the discount rate is 50 basis points lower
the discount rate is 50 basis points higher
Present value of all defined benefit obligations if
€ million
varied while keeping the measurement assumptions otherwise
constant. Insofar as its development of social security is com-
parable to salary trends, the amounts for social security vary
together with the salary trend.
The following overview shows how the present value of all
defined benefit obligations would have been influenced by
changes to definitive actuarial assumptions. To determine the
sensitivities, in principle each of the observed parameters was
3,812.7
309.1
3,503.6
4,152.7
343.2
3,809.5
4,154.1
4,151.5
The fair value of the plan assets changed in the reporting
period as follows:
€ million
44.8
5.5
34.4
(31) Tax liabilities
34.4
1,840.2
1,994.4
2014
2015
Fair value of the plan assets on December 31
- 28.8
Other changes
Changes in the scope of consolidation
Notes to the Group Accounts Consolidated Financial Statements 211
Pension payments from plan assets
Employee contributions
Employer contributions
Actuarial gains (+)/losses (−) arising from experience adjustments
Interest income from plan assets
Currency translation differences recognized in income
Currency translation differences recognized in equity
Fair value of the plan assets on January 1
Plan administration costs paid from the plan assets recognized in income
Other effects recognized in income
212 Consolidated Financial Statements Notes to the Group Accounts
It should be noted, however, that both the benefit obligations
as well as the plan assets fluctuate over time. This could lead
to an increase in underfunding. Depending on the statutory
regulations, it could become necessary in some countries for
the Merck Group to reduce underfunding through additions of
liquid assets. The reasons for such fluctuations could include
changes in market interest rates and thus the discount rate as
well as adjustments to other actuarial assumptions (e.g. life
expectancy, inflation rates).
In order to minimize such fluctuations, in managing its plan
assets, the Merck Group also pays attention to potential fluc-
tuations in liabilities. In the ideal case, assets and liabilities
develop in opposite directions when exposed to exogenous
factors, creating a natural defense against these factors. In
order to achieve this effect, the corresponding use of financial
instruments is considered in respect of individual pension plans.
The fair value of the plan assets can be allocated to the
following categories:
266.8
136.5
393.1
protection
Personnel
Restructuring
Litigation
Additions
January 1, 2015
€ million
Environmental
Provisions developed as follows:
(27) Provisions
German statutory pension insurance system and € 34.9 mil-
lion (2014: € 28.5 million) to statutory pension insurance sys-
tems abroad.
The cost of ongoing contributions for defined contribution
plans that are financed exclusively by external funds and for
which the companies of the Merck Group are only obliged
to pay the contributions amounted to € 46.8 million (2014:
€ 38.7 million). In addition, employer contributions amounting
to € 62.9 million (2014: € 57.2 million) were transferred to the
Employer contributions to plan assets and direct payments to
beneficiaries will probably amount to around € 99.2 million in
2016. The weighted duration amounted to 20 years.
1,994.4
160.5
1,833.9
2,322.9
177.4
123.7
Other
267.7
Total
1,187.8
7.4
Interest portion
- 139.3
-59.2
- 2.0
-36.2
-6.6
-35.3
Release
-277.0
2,145.5
-72.0
- 116.1
-72.8
-6.4
Utilizations
521.7
184.1
9.9
180.0
33.0
114.7
-9.7
Fair value of the plan assets
89.1
0.9
740.3
740.3
Equity instruments
167.0
167.0
27.3
27.3
Cash and cash equivalents
Total
an active market
544.9
market price in
Total
No quoted
Quoted market
No quoted
market price in
an active market
active market
€ million
price in an
Quoted market
Dec. 31, 2014
Dec. 31, 2015
price in an
active market
on December 31
544.9
957.5
88.2
50.5
50.5
Other
74.9
74.9
79.2
79.2
Insurance contracts
371.3
Debt instruments
371.3
369.9
Investment funds
84.7
84.7
98.2
98.2
Direct investments in real estate
662.5
662.5
957.5
369.9
benefit obligations
28.2
658.6
8.2
6.5
Net cash flows from operating activities
Business free cash flow
1,682.8
1,581.0
2,287.3
706.2
580.0
1,701.2
130.6
675.6
1The composition of net sales has been changed, see "Changes to accounting and measurement principles and disclosure changes".
2 According to the consolidated cash flow statement.
INFORMATION BY COUNTRY AND REGION
Europe
thereof Germany
thereof Switzerland
North America
€ million
Net sales by customer location¹
Net sales by company location¹
Intangible assets
2015
419.0
-434.6
-909.6
133.4
225.1
114.1
Past service cost
Other effects recognized in income
Interest expense
Interest income
2,000.3
856.1
EBITDA margin pre exceptionals (in % of net sales)
28.9
Net operating assets
5,813.1
Segment liabilities
-2,479.0
30.2
6,041.0
-2,507.9
25.5
24.6
21,441.3
6,196.3
Investments in property, plant and equipment²
232.3
Investments in intangible assets²
145.9
2014
4,102.7
4,016.7
2015
850.8
210 Consolidated Financial Statements Notes to the Group Accounts
areas.
relevant expenses for defined benefit and defined contribution
pension systems are allocated to the individual functional
With the exception of the net balance of interest expense on
the defined benefit obligations and interest income from the
plan assets, which is recorded under the financial result, the
113.2
176.9
-67.2
-44.8
101.9
82.8
1.8
5.5
-4.3
-1.1
-2.5
0.1
83.5
134.4
2014
2015
Total amount recognized in income
During the reporting period, the present value of the defined
benefit obligations changed as follows:
Current service cost
€ million
1The composition of net sales has been changed, see "Changes to accounting and measurement principles and disclosure changes".
2014
845.5
Property, plant and equipment
Research and development costs
Number of employees
4,735.2 4,580.7 1,563.5 1,592.3
8,427.6 7,966.3 595.2 448.9
2,401.2 2,163.1 1,104.2 1,032.8
- 1,509.7 -1,550.7 -835.0 -816.0
23,429 20,537 11,938 11,191
2015
159.6
176.7
4,235.6
527.5
-529.6
2014
149.3
182.5
4,151.4
498.2
-604.8
2015
2014
2,722.9
2,152.3
2,718.7
2,142.4
15,959.7
2,522.5
1,027.0
416.2
-123.5
-90.4
1,946
1,347
9,794
5,092
Present value of the defined
€ million
Gains (-) or losses (+) on settlement
Pension plans in the United Kingdom accounted for € 500.0
million of the defined benefit obligations (2014: € 390.0 mil-
lion; due to the acquisition of Sigma-Aldrich, the obligations
increased by € 103.9 million in 2015) as well as for € 465.8
million of the plan assets (2014: € 357.5 million; due to the
acquisition of Sigma-Aldrich, the plan assets increased by
€ 93.6 million in 2015). These obligations result primarily from
benefit plans which are based on years of service and final
salary and were closed to newly hired employees in 2006. The
agreed benefits comprise old-age, disability and surviving
dependent benefits. The employer and the employees make
contributions to the plans. Statutory minimum funding obliga-
tions exist.
121.5
90.8
2.0
1.6
Reversals of impairment losses
-0.1
EBITDA
1,970.4
1,946.4
674.3
598.9
Exceptionals
31.3
53.9
181.8
59.7
EBITDA pre exceptionals (Segment result)
Present value of the defined
0.1
-0.8
In the reporting period, the following items were recog-
nized in income:
0.3
Impairment losses
308.1
371.6
749.2
Dec. 31, 2015
1,920.9
0.3
1,921.2
Dec. 31, 2014
1,539.3
0.1
1,539.4
218 Consolidated Financial Statements Notes to the Group Accounts
Segment Reporting
(32) Information by business sector/
country and region
INFORMATION BY BUSINESS SECTOR
Healthcare
€ million
2015
2014
-3.7
Net sales¹
6,933.8
1,096.7
6,620.5
1,106.4
Life Science
2015
3,355.3
300.8
2014
2,682.5
289.2
Depreciation and amortization
752.2
Operating result (EBIT)
1.1
0.1
-1.1
Other changes
Contributions by plan participants
-4.8
73.8
849.2
- 189.3
-22.9
-166.4
Actuarial gains (-)/losses (+)
101.6
10.6
9.0
82.8
7.3
75.5
Notes to the Group Accounts Consolidated Financial Statements
209
The main benefit rules are as follows:
Merck Group companies in Germany accounted for
€ 2,560.2 million of the defined benefit obligations (2014:
€ 2,692.5 million; due to the acquisition of the Sigma-Aldrich
Corporation, USA, the obligations increased by € 21.4 million
in 2015) as well as for € 1,103.9 million of the plan assets
(2014: € 1,100.4 million). Of these amounts the vast majority
in each case were attributable to plans that encompass old-
age, disability and surviving dependent pensions. On the one
hand, these obligations are based on benefit rules comprising
benefit commitments dependent upon years of service and
final salary from which newly hired employees have been
excluded. On the other hand, the benefit rules applicable
to employees newly hired since January 1, 2005 comprise a
direct commitment basically in the form of a defined contribu-
tion pension plan. The benefit entitlement results from the
cumulative total of annually determined pension components
that are calculated on the basis of a defined benefit expense
and an age-dependent annuity table. Statutory minimum
funding obligations do not exist.
Pension plans in Switzerland accounted for € 767.9 million
of the defined benefit obligations (2014: € 439.8 million; due
to the acquisition of the Sigma-Aldrich Corporation the obliga-
tions increased by € 188.3 million in 2015) as well as for
€ 599.8 million of the plan assets (2014: € 391.7 million; due
to the acquisition of the Sigma-Aldrich Corporation, the plan
assets increased by € 146.5 million in 2015). These obliga-
tions are largely based on the granting of old-age, disability
and surviving dependent benefits, which include the legally
required benefits. Both employer and employee contributions
are paid into the pension funds. Statutory minimum funding
obligations exist.
92.6
10.6
923.0
7.2
-0.1
-0.2
0.1
in income
Other effects recognized
25.7
17.4
7.2
8.3
385.7
43.2
2,001.7
of consolidation
Changes in the scope
- 99.9
-5.9
-94.0
- 152.9
-6.5
-146.4
Pension payments
342.5
123.7
58.1
314.8
116.9
415.1
1,025.0
93.0
443.4
88.4
-2,083.3
-120.8
-88.7
-45.1
-37.8
-12.4
-7.0
- 24.0
138.3
6.0
44.5
2.4
480.9
1,256.5
2014
2015
2014
2015
2014
2015
Group
Corporate and Other
Performance Materials
Notes to the Group Accounts Consolidated Financial Statements
Equity
-0.1
-1,370.5
(-)
5,373.4
2,555.6
2,059.8
12,844.7
11,362.8
5.1
3.4
2.7
1.5
1,261.6
1,383.4
14.3
(-)
-123.3
17.9
241.7
1,762.0
1,843.2
-245.1
-432.3
611.5
878.0
190.0
128.4
(-)
29.7
(-1.0)
(of which: amortization of intangible assets)¹
−1,366.0
Research and development costs
-246.9
Administration expenses
520.9
-520.9
Royalty, license and commission expenses
(-555.4)
(-)
(-555.4)
(of which: amortization of intangible assets)¹
-2,550.8
-467.5
(-)
-246.9
-1,366.0
(-1.0)
Other operating income
324.6
1,946.4
16.7
-0.2
16.9
1,946.4
1,106.4
1,106.4
-427.7
-0.3
-53.3
EBITDA pre exceptionals
Margin (% of net sales)
Margin (% of net sales)
EBITDA
Operating result (EBIT)
Other operating expenses
447.8
123.2
-374.4
100.2
-0.8
-0.6
2015
Middle East and Africa
Latin America
thereof China
Asia-Pacific
thereof USA
2,705.5
2,605.1
143.3
5,250.0
513.9
179.1
2,195.2
2,766.2
-214.7
-421.2
699.6
930.8
15.2
-1,062.2
2014
2015
2014
2015
2014
465.8
2015
513.0
1,285.1
1,265.3
1,238.1
2014
2015
2014
805.7
472.3
54.3
33.6
52.2
940.7
668.7
1,104.7
3,442.9
4,240.8
2,022.3 4,014.4 3,266.3
2,586.7
15,959.6 2,522.3
2,566.5 2,009.9
904.0
45.3
15.3
-1,332.7
900.4
1,138.9
275.7
60.0
50.9
-360.1
894.8
1,132.1
91.2
11.7
264.8
3,122.9
-226.0
-411.0
803.6
1,120.4
-0.9
-0.9
-0.3
3,354.1
5.0
-166.0
3,387.7
7.5
9.7
91.5
102.9
-3,354.4
15,712.0
29.8
3,629.8
28.3
31,645.4
-3,739.3
112.4
-61.2
-355.4
-289.5
3,348.6
4,278.6
43.4
44.3
126.1
-56.5
0.1
-28.5
Margin (% of net sales)
Depreciation and amortization/impairment losses/reversals of impairments
3,387.7
3,629.8
EBITDA pre exceptionals of the Merck Group
-166.0
-360.1
3,553.7
3,989.9
2014
2015
Corporate and Other
Total EBITDA pre exceptionals of the operating businesses
€ million
The following table presents the reconciliation of EBITDA
pre exceptionals of all operating businesses to the profit before
income tax of the Merck Group:
Neither in 2015 nor in 2014 did any single customer
account for more than 10% of Group sales.
Transfer prices for intragroup sales are determined on an
arm's-length basis.
Apart from sales, the success of a segment is mainly
determined by EBITDA pre exceptionals (segment result) and
business free cash flow. EBITDA pre exceptionals and business
free cash flow are performance indicators not defined by Inter-
national Financial Reporting Standards. However, they repre-
sent important variables used to steer the Merck Group. To
permit a better understanding of operational performance,
EBITDA pre exceptionals excludes depreciation and amortiza-
tion, impairment losses, and reversals of impairment losses as
well as specific income and expenses of a one-time nature
presented in the following. Among other things, business free
cash flow is also used for internal target agreements.
and income as well as cash flows attributable to the financial
result and income taxes are also presented under Corporate
and Other.
Corporate and Other includes income and expenses, assets
and liabilities as well as cash flows that cannot be directly
allocated to the reportable segments presented. This relates
mainly to central Group functions. Moreover, the column
serves the reconciliation to the Group numbers. The expenses
The Healthcare business sector comprises the businesses
with prescription and over-the-counter pharmaceuticals and
biopharmaceuticals as well as allergy products. The Life Science
business sector offers solutions to research and analytical lab-
oratories in the pharmaceutical/biotechnology industry or in
academic institutions, and customers manufacturing large- and
small-molecule drugs. The Performance Materials business sec-
tor consists of the entire specialty chemicals business. The
fields of activity of the individual segments are described in
detail in the sections about the business sectors in the com-
bined management report.
Segmentation was performed in accordance with the organi-
zational and reporting structure of the Merck Group that
applied during 2015.
(33) Information on segment
reporting
Consolidated Financial Statements Notes to the Group Accounts
220
0.3 25,339.0 11,395.5
7.9 4,009.1 2,990.4
-4.1 -1,709.2 -1,703.7
639 49,613 39,639
12,844.7
12,844.7 11,362.8
11,362.8
2014
2015
- 1,510.9
219
-1,360.9
-275.7
-83.9
-47.5
-87.2
-77.6
-85.0
- 132.7
2014
2015
Exceptionals (total)
Reversals of impairments
Impairment losses
Exceptionals before impairment losses/reversals of impairments
Other exceptionals
Gains/losses on the divestment of businesses
Restructuring costs
Integration costs/IT costs
Acquisition-related exceptionals
€ million
Exceptionals comprised the following:
1,557.0
1,486.5
Profit before income tax
-205.0
-356.7
Financial result
1,762.0
1,843.2
Operating result (EBIT)
-264.8
Exceptionals
Group
942
3,883
CNY
202.9
-265.3
2,000.3
Net exposure Dec. 31, 2014
Net exposure Dec. 31, 2015
€ million
The following table presents the net exposure of the Merck
Group in relation to exchange rate fluctuations of the major
currencies against the euro:
The Merck Group is exposed to currency translation risks since
many Merck companies are located outside the eurozone.
The financial statements of these companies are translated
into euros. Exchange differences resulting from currency
translation of the assets and liabilities of these companies are
recognized in equity. These effects are not taken into consid-
eration in the following tables.
Owing to its international business focus, Merck is exposed to
foreign exchange-related transaction risks within the scope
of both ordinary business and financing activities. Different
strategies are used to limit or eliminate these risks. Foreign
exchange risks from transactions already recognized on the
balance sheet are eliminated as far as possible through the
use of forward exchange contracts. Foreign exchange risks
arising from forecast transactions are analyzed regularly and
reduced if necessary through forward exchange contracts or
currency options by applying the hedge accounting rules.
Foreign exchange risks
228 Consolidated Financial Statements Notes to the Group Accounts
Market fluctuations with respect to foreign exchange and
interest rates represent significant profit and cash flow risks
for Merck. Merck aggregates these Group-wide risks and steers
them centrally also by using derivatives. Merck uses scenario
analyses to estimate existing risks of foreign exchange and
interest rate fluctuations. Merck is not subject to any material
risk concentration from financial transactions. The Report on
Risks and Opportunities included in the combined manage-
ment report provides further information on the management
of financial risks.
(37) Management of financial risks
In 2015, the ineffective portion from hedge accounting
amounted to € - 2.6 million. In the previous year, there was no
ineffectiveness.
were entered into with a nominal volume of € 550.0 million
and interest payments from 2015 to 2022. Up until May 2015,
these interest hedging relationships represented cash flow
hedges. With entry into offsetting transactions in May 2015,
the hedging relationship was terminated voluntarily. The orig-
inal transactions as well as the offsetting transactions are now
classified as "held for trading". The changes in fair value are
reflected in the income statement.
To fix the interest rate level of a bond issued in August
2015 for refinancing purposes with a volume of € 550 million,
in 2012 and 2013 forward starting payer interest rate swaps
Intragroup financing as well as receivables and payables in
non-functional currency are hedged exclusively using forward
exchange contracts. Overall, balance sheet items amounting
to € 4,608.3 million (2014: € 4,029.8 million) were hedged. In
this context, the hedging transactions are largely purely eco-
nomic hedges for which hedge accounting is not applied.
All hedging transactions for forecast transactions and firm
purchase commitments in non-functional currency represent
cash flow hedges.
Forecast transactions and firm purchase commitments in non-
functional currency are hedged using forward exchange con-
tracts and currency options which are due within the next
36 months. Overall, forecast transactions and firm purchase
commitments in non-functional currency were hedged in the
amount of € 1,920.8 million (2014: € 9,044.6 million). In
2014, a major portion related to the hedging of the U.S. dollar-
denominated purchase price payment made for the acquisition
of the Sigma-Aldrich Corporation, USA in 2015. The nominal
amount of the forward exchange and currency option contracts
for this purpose was US$ 9,900 million (€ 7,689 million). Based
on the translation of the purchase price into euros at the
exchange rate on the acquisition date, the hedge lowered the
purchase price by € 1,380.3 billion.
383.6
311.6
255.5
343.2
431.2
401.9
920.8
458.3
480.2
Dec. 31, 2014
10,233.5
JPY
135.0
TWD
USD
214.7
4,352
2,172
2,619
9,488
11,096
4,939
9,629
-6.9
Equity
0.0
0.0
9.2
9.1
-681.7
-2.0
-20.7
€ million
The following table shows the effects of exchange rate move-
ments of the key currencies against the euro in relation to the
net income and equity of the Group on the balance sheet date.
The effects of planned cash flows of the next 12 months are
not taken into consideration here. By contrast, the effects of
cash flow hedges are taken into consideration in the equity of
the Group and are included in the following table.
• Derivatives to hedge these planned cash flows. Usually, the
hedging ratio is 30%-70%.
Planned cash flows in the next 12 months in the respective
currency as well as
Balance sheet items in the respective currency to the extent
that these do not correspond to the functional currency of a
company, as well as the derivative items used for hedging.
Normally, balance sheet items not in functional currency are
economically hedged in full.
•
•
The net exposure by currency consists of the following compo-
nents:
753.0
260.0
121.6
355.8
-246.6
1,406.9
Dec. 31, 2015
Dec. 31, 2015
3,673.8
1.9
-10.6
0.0
Consolidated income
statement
Exchange rate +10%
(Appreciation vs. €)
USD
TWD
JPY
CNY
CHF
0.0
0.0
-14.2
0.0
-10.8
0.0
844.1
Consolidated income
statement
0.0
0.0
32.1
0.0
0.0
-1,370.4
6,743.8
-194.4
6,620.5
2014 adjusted
71.2
2014 adjustment
194.4
6,549.4
0.0
2014 old structure
0.0
12.0
0.0
0.0
Consolidated income
statement
USD
TWD
JPY
CNY
CHF
Exchange rate -10%
(Depreciation vs. €)
Exchange rate +10%
(Appreciation vs. €)
Dec. 31, 2014
€ million
0.0
132.9
25.1
16.9
18.9
- 14.7
0.0
0.0
0.0
0.0
Equity
statement
Exchange rate -10%
(Depreciation vs. €)
Consolidated income
0.0
-108.7
0.0
-20.5
- 15.3
- 15.4
Equity
Marketing and selling expenses
Gross profit
(of which: amortization of intangible assets)¹
2,766.2
144.6
1,219.7
Adjustment first-time consolidation of the Sigma-Aldrich Corporation
Adjustment first-time consolidation of AZ Electronic Materials S.A.
Business free cash flow
-214.2
-514.2
Changes in trade accounts receivable and receivables from royalties and licenses
as reported in the consolidated balance sheet
-185.5
-960.1
Changes in inventories as reported in the consolidated balance sheet
-527.5
-609.0
3,387.7
3,629.8
2014
2015
software as well as advance payments for intangible assets
Investments in property, plant and equipment,
EBITDA pre exceptionals
€ million
Business free cash flow was determined as follows:
attributable to integration planning activities; further expenses
of € 60.0 million were incurred directly for the acquisition of
the company. Both amounts were recorded under other oper-
ating expenses. A further amount of € 31.1 million was related
to cost of sales and disclosed accordingly.
Exceptionals are included in the consolidated income state-
ment under cost of sales as well as under other operating
expenses. The costs of € 132.7 million reported under acquisi-
tion-related exceptionals (2014: € 85.0 million) were largely
incurred in connection with the acquisition of the Sigma-
Aldrich Corporation, USA. Of this amount, € 41.6 million was
Notes to the Group Accounts Consolidated Financial Statements 221
-274.6
-367.2
-9.8
-264.8
-275.7
-91.5
2,605.1
The reconciliation of operating assets presented in the Seg-
ment Reporting to the total assets of the Merck Group was as
follows:
€ million
Assets
Cost of sales
Total revenues
Royalty, license and commission income
Net sales
€ million
2014 Adjustment
HEALTHCARE
Notes to the Group Accounts
Consolidated Financial Statements
222
as royalty, license and commission income (see Note [6]
"Changes to accounting and measurement principles and dis-
closure changes").
The following tables present the adjustments to the previous
year's figures of the three business sectors owing to disclosure
changes to royalty, license and commission expenses as well
15,712.0
31,645.4
- 15.9
-3,354.4
-1,815.0
- 1,818.1
-1,539.4
- 1,921.2
19,066.4
−1,380.6
- 1,483.8
-45.7
35,384.7
Dec. 31, 2014
26,010.1
-5,563.1
Dec. 31, 2015
38,007.2
-1,093.0
Operating assets (net)
Other operating liabilities
Segment liabilities
Trade accounts payable
Operating assets (gross)
Monetary assets (cash and cash equivalents, current financial assets, loans and securities)
Non-operating receivables, income tax receivables, deferred taxes and net defined benefit assets
Assets held for sale
-3,739.3
TWD
GBP
CHF
(-11.7)
611.5
-66.6
-66.6
Margin (% of net sales)
EBITDA pre exceptionals
Margin (% of net sales)
EBITDA
Margin (% of net sales)
Operating result (EBIT)
Other operating expenses
7.0
0.6
6.4
Other operating income
(-2.8)
611.5
(-)
(of which: amortization of intangible assets)¹
-170.6
-170.6
Research and development costs
-56.1
-56.1
Administration expenses
1.1
-1.1
Royalty, license and commission expenses
(-11.7)
(-)
(-)
(-2.8)
29.7
29.7
803.6
Acquisitions
Other
Sigma-Aldrich
-15,973.8
1,380.3
-14,593.5
Thereof: cash income from hedges already received in fiscal 2014
Purchase price in accordance with IFRS 3 less acquired cash and cash equivalents
Acquired cash and cash equivalents
Purchase price in accordance with IFRS 3
Cash income from hedges in fiscal 2014 and 2015
Purchase price payment
€ million
The payments for the major acquisitions in fiscal 2015 were as
follows:
investing activities and
financing activities
(35) Net cash flows from
In 2014, the changes in provisions were affected by the
payment following the written settlement reached with Israel
Bio-Engineering Project Limited Partnership (IBEP). In 2014,
the changes in other assets and liabilities included the upfront
payment in the amount of US$ 850 million (€ 678.3 million)
paid in cash by Pfizer Inc., USA, after the agreement had been
entered into. The non-cash income from the pro rata reversal
of the deferred item from the collaboration agreement with
Pfizer was corrected in the reporting period.
In 2015, tax payments totaled € 865.5 million (2014: € 667.8
million). Tax refunds totaled € 161.0 million (2014: € 54.9 mil-
lion). Interest paid totaled € 297.4 million (2014: € 191.1 mil-
lion). Interest received amounted to € 54.5 million (2014:
€ 89.4 million).
(34) Net cash flows from operating
activities
Within net cash flows from operating activities, the figures
for 2014 were adjusted in connection with the disclosure
changes to license receivables (see Note [6] "Changes to
accounting and measurement principles and disclosure
changes").
The cash flows reported by Group companies in non-
functional currencies are in principle translated at average
exchange rates. Cash and cash equivalents are translated at
the closing rates. The impact of foreign exchange rate changes
is disclosed separately under changes in cash and cash equiv-
alents.
The consolidated cash flow statement presents the changes
in cash and cash equivalents as a result of cash inflows and
outflows from operating, investing and financing activities.
Further information on cash flows can be found in the expla-
nation of cash and cash equivalents (see Note [24] "Cash and
cash equivalents"). The amount of undrawn borrowing facili-
ties that could be tapped for future operating activities and
to meet obligations is disclosed in Note [28] "Financial liabili-
ties/Capital management".
Notes to the Consolidated Cash Flow Statement
224 Consolidated Financial Statements Notes to the Group Accounts
1 Excluding amortization of internally generated or separately acquired software.
43.4
43.4
894.8
894.8
39.0
39.0
803.6
(of which: amortization of intangible assets)¹
-178.8
-1.1
-177.8
598.9
598.9
10.8
10.8
289.2
289.2
EBITDA pre exceptionals
Margin (% of net sales)
Margin (% of net sales)
EBITDA
Operating result (EBIT)
- 117.4
-117.4
(-151.8)
Royalty, license and commission expenses
-15.6
15.6
Administration expenses
-110.4
Research and development costs
-162.6
-110.4
-162.6
(of which: amortization of intangible assets)¹
(-)
(-)
Other operating income
11.5
14.1
(-)
25.6
Other operating expenses
22.3
Total
22.3
658.6
Marketing and selling expenses
1,076.6
-0.6
1,077.3
(-46.4)
(-46.4)
-983.2
-983.2
2,060.5
2,059.8
2014 adjusted
-0.9
0.2
2,059.6
0.9
2014 old structure 2014 adjustment
Gross profit
(of which: amortization of intangible assets)¹
Cost of sales
Total revenues
Royalty, license and commission income
Net sales
€ million
Notes to the Group Accounts Consolidated Financial Statements 223
2014 Adjustment
PERFORMANCE MATERIALS
1 Excluding amortization of internally generated or separately acquired software.
24.6
24.6
Margin (% of net sales)
658.6
-15,973.8
Net cash flows from operating activities include € 5.6 mil-
lion from discontinued operations. This amount relates to the
operating result of those business activities of the Sigma-
Aldrich Corporation, USA, that were acquired with a view to
resale (see Note [4] "Acquisitions, assets held for sale and
disposal groups".
1,380.3
-14,622.8
-15.6
-859.8
(of which: amortization of intangible assets)¹
CHF
JPY
CNY
USD
Nominal volume € million
Intragroup financing in non-functional currency as well as
Receivables and liabilities in non-functional currency
Exchange rate fluctuations of mainly the following currencies
against the euro were hedged:
-29.3
•
• Off-balance sheet firm purchase commitments of the next
36 months in non-functional currency,
• Forecast transactions in non-functional currency, the expected
probability of which is very high for the next 36 months,
Currency hedging serves to economically protect the company
from the foreign exchange risks of the following types of
transaction:
Notes to the Group Accounts Consolidated Financial Statements 227
13,724.4
650.0
Dec. 31, 2014
12,376.5
697.9
Total
Remaining
maturity
more than 1 year
433.9
44.8
550.0
1,028.7
Remaining
maturity
less than 1 year
11,942.6
653.1
100.0
12,695.7
Dec. 31, 2015
6,479.7
49.4
1,100.0
7,629.1
more than 1 year
765.2
9.2
1,100.0
1,874.4
5,754.7
less than 1 year
5,714.5
40.2
Total
Remaining
maturity
-844.1
Remaining
maturity
Marketing and selling expenses
-14.1
30.5
-0.3
29.4
2,000.3
30.2
1 Excluding amortization of internally generated or separately acquired software.
LIFE SCIENCE
2014 Adjustment
€ million
Net sales
2014 old structure
2014 adjustment
2014 adjusted
2,682.5
2,682.5
Royalty, license and commission income
14.0
-14.0
Total revenues
2,696.5
Cost of sales
-1,168.7
-1,168.7
(of which: amortization of intangible assets)¹
(-47.6)
(-)
(-47.6)
Gross profit
1,527.8
1,513.8
Interest rate swaps
•
Forward exchange contracts
Fair value hedge
Currency
Interest
Cash flow hedge
€ million
set by a Merck Group risk committee, which meets on a regu-
lar basis. Extensive guidelines regulate the use of derivatives.
There is a ban on speculation. Derivative transactions are
subject to continuous risk management procedures. Trading,
settlement and control functions are strictly separated. Deriv-
atives are only entered into with banks that have a good credit
rating. Related default risks are continuously monitored.
The following derivatives were held as of the balance sheet
date:
Merck uses derivative financial instruments (hereinafter "deriv-
atives") to hedge and reduce risks from currency and interest
rate positions. Merck uses marketable forward exchange
contracts, options and interest rate swaps as hedging instru-
ments. Depending on the nature of the hedged item, changes
in the fair values of derivatives are recorded in the consoli-
dated income statement either in the operating result or in the
financial result. The strategy to hedge interest rate and foreign
exchange rate fluctuations arising from forecast transactions
and transactions already recognized in the balance sheet is
(36) Derivative financial instruments
Other Disclosures
226 Consolidated Financial Statements Notes to the Group Accounts
The cash flows from financing activities included the payments
from new borrowings and the repayment of bonds as well as the
repayment of the bond acquired in the context of the Sigma-
Aldrich acquisition with a nominal volume of US$ 300 million.
Further information on the bonds can be found in Note [28]
"Financial liabilities/Capital management".
Cash inflows from investing activities include € 84.4 million
from discontinued operations in relation to those business
activities of Sigma-Aldrich that were acquired with a view to
resale (see Note [4] "Acquisitions, assets held for sale and
disposal groups").
Interest
Net cash outflows from investments in current and non-
current assets amounting to € 1,740.8 million (2014: € 3,143.3
million) mainly resulted from the purchase of short-term invest-
ments in securities not classified as cash and cash equivalents.
Notes to the Group Accounts Consolidated Financial Statements 225
-13,482.3
Currency options
-13,453.8
Payments for acquisitions less acquired cash and cash equivalents as reported in the
consolidated cash flow statement in 2015
-95.4
-95.4
1,235.9
-13,386.9
(-151.8)
-13,358.4
0.8
1,235.1
In 2014, a hedging gain of € 95.4 million in connection with
the acquisition of the Sigma-Aldrich Corporation, USA, had
already been reclassified from other comprehensive income to
financial assets. Consequently, the payment for 100% of
the shares less acquired cash and cash equivalents totaled
€ 13,453.8 million for 2014 and 2015. The figures for 2014
reflected the acquisition of AZ Electronic Materials S.A., Lux-
embourg, in the amount of € 1,419.3 million.
Currency
- 28.5
Interest
Currency
No hedge accounting
€ million
The maturities of the derivatives (nominal volume) were
as follows as of the balance sheet date:
euros) as well as all the nominal values of interest rate hedges.
The fair value results from the actuarial valuation of the deriv-
atives on the basis of quoted prices or current market data as
of the balance sheet date provided by a recognized informa-
tion service and the application of a discount for own credit
risk or counterparty credit risk. Any offsetting effects from
hedged items are not taken into account in the derivatives' fair
value.
The nominal volume corresponds to the total of all nominal
values of currency hedges (translated at the closing rate into
Cash flow hedges include currency hedges in a nominal volume
of € 1,386.6 million (2014: € 8,913.1 million) with a remaining
term of up to one year and hedges in a nominal volume of
€ 774.4 million (2014: € 478.7 million) with a remaining term
of more than one year. Of the interest rate hedges held in the
prior year in the context of cash flow hedges in a total amount
of € 650.0 million, € 100.0 million had a remaining term of up
to one year and € 550.0 million had a remaining term of more
than one year.
9.4
-3.8
-193.4
3,682.6
13,724.4
4,368.1
7,629.1
-99.3
1,100.0
9.4
- 103.1
322.8
3,682.6
Nominal volume
Fair value
Dec. 31, 2015
2,161.0
Dec. 31, 2015
-90.3
Dec. 31, 2014
313.4
Dec. 31, 2014
10,041.8
650.0
2,161.0
9,391.8
-90.3
413.3
5,468.1
-99.9
904.3
Other liabilities
60.8
1,461.9
Derivatives without a hedging relationship
3.5
3.5
904.3
1,461.9
Derivatives with a hedging relationship
57.3
57.3
Non-financial items
Carrying
1,461.9
1 Some of the figures as of Dec. 31, 2014 have been adjusted.
2,427.0
904.3
Current and non-current other liabilities
234 Consolidated Financial Statements Notes to the Group Accounts
1,921.2
Fair value,
5.7
696.1
29.7
1,625.1
29.7
29.7
1,625.1
Net gains and losses on financial instruments mainly include
measurement results from currency translation, fair value
adjustments, impairments and reversals of impairments, dis-
posal gains/losses as well as the recognition of premiums and
discounts. Dividends and interest are not recognized in the net
gains and losses on financial instruments, except for dividends
and interest in the category "held for trading". At Merck, the
category "held for trading" only includes derivatives not in a
hedging relationship.
1,921.2
The net gains or losses on financial instruments by cate-
gory were as follows:
Finance lease liabilities
45.2
4.8
45.2
4.8
Trade accounts payable
1,921.2
1,921.2
Other liabilities
Derivatives with a hedging relationship
amount
Dec. 31, 2015 Dec. 31, 2014
16.5
Subsequent measurement according to IAS 39
35.4
1,539.4
1,625.1
3.5
904.3
57.3
5.7
5.7
696.1
696.1
61
696.1
13.8
13.7
94.4
642.9
642.9
0.7
168.5
470.7
470.7
470.7
12.2
€ million
66.9
4.6
2,356.6
127.6
6.5
13.7
13.7
28.4
80.7
66.9
13.8
13.7
13.8
138.5
13,705.5
45.2
4.8
1,539.4
1,539.4
5,637.0
25.4
5,477.5
153.0
6.5
25.4
5,477.5
1,921.2
127.6
6.5
1,539.4
1,539.4
127.6
6.5
25.4
5,835.6
5,477.5
Notes to the Group Accounts Consolidated Financial Statements 233
168.5
155.1
21.7
29.8
39.8
39.8
32.7
2,174.8
24.6
2,878.5
2,878.5
2,199.4
21.7
832.2
IAS 17
Fair value
At cost
cost
Non-financial
according to
Amortized
amount
Carrying
Fair value
items Dec. 31, 2014
168.5
2.9
2.9
0.7
0.7
1.6
642.9
471.4
168.5
1,282.8
2,219.5
2,219.5
2,219.5
2.9
2,219.5
2,219.5
2,135.0
2.9
21.7
39.8
2,878.5
2,135.0
2,135.0
161.6
2,738.3
2015
13,524.4
Held for trading
At cost
cost
Dec. 31, 2015
Non-financial
Carrying
amount
according to
Amortized
Carrying
amount
Subsequent measurement according to IAS 39
Assets
€ million
The following table presents the reconciliation of the balance
sheet items to categories of financial instruments pursuant to
the disclosures required by IFRS 7 and provides information
on the measurement of fair value:
(38) Other disclosures on financial
instruments
Consolidated Financial Statements Notes to the Group Accounts
Fair value
232
tinuously analyzing the age structure of trade accounts receiv-
able. Merck continuously reviews and monitors open positions
of all trading partners in the affected countries and takes risk-
mitigating measures if necessary. If there is objective evidence
that particular accounts receivable are fully or partially impaired,
respective impairment losses are recognized to provide for
credit defaults. On the balance sheet date, the theoretically
maximum default risk corresponded to the net carrying
amounts less any compensation from credit insurance.
The credit risk with customers is monitored using estab-
lished credit management processes that take the individual
customer risks into account. This is done in particular by con-
Merck is only subject to a relatively low credit risk. On the one
hand, financial contracts are only entered into with banks and
industrial companies with good credit ratings, and on the other
hand, the broad-based business structure with a large number
of different customers results in a diversification of credit risks
within the Merck Group. The credit risk from financial con-
tracts is monitored daily on the basis of rating information as
well as market information on credit default swap rates.
Credit risks
231
Notes to the Group Accounts Consolidated Financial Statements
2,854.3
238.3
624.7
520.8
2,076.2
186.1
5,637.0
There were no indications of impairment for financial assets
neither past due nor impaired on the balance sheet date.
IAS 17
items
832.2
624.0
1.6
Derivatives without a hedging relationship
Other current and non-current other assets¹
2,738.3
2,738.3
Loans and receivables¹
2,738.3
2,738.3
Trade accounts receivable¹
Derivatives with a hedging relationship
161.6
161.6
Available for sale
2.9
2.9
Loans and receivables
29.8
29.8
Held to maturity
32.7
32.7
Derivatives without a hedging relationship
Held for trading (non-derivatives)
Current financial assets
Cash and cash equivalents
194.3
32.7
227.0
832.2
3.7
155.1
0.2
0.2
Bonds and commercial paper
Repayment
Interest
amount
Dec. 31, 2014
Carrying
€ million
> 5 years
Cash flows
Cash flows
1-5 years
< 1 year
Cash flows
4,681.7
4,624.2
428.4
940.9
4,093.8
279.0
13,712.9
2.8
0.1
2.0
0.2
4.8
Financing leasing liabilities
26.0
65.2
79.9
4,882.3
170.9
1,450.0
Liabilities to banks
6.5
Financing leasing liabilities
40.7
17.3
63.7
36.0
2.5
153.0
(financial transactions)
Liabilities from derivatives
4.3
61.6
11.8
5.8
84.5
other financial liabilities
Loans from third parties and
501.4
1.6
501.4
Liabilities to related parties
Repayment
2,850.0
197.6
Interest
Repayment
342.1
200.0
Interest
442.3
2.8
67.4
5.1
267.4
2.8
13.8
455.1
1.6
within 1 year
1-5 years more than 5 years
Total
Present value of future payments from finance leases
2.0
2.8
4.8
Interest component of finance leases
0.2
0.1
0.3
Future finance lease payments
2.2
Dec. 31, 2015
2.9
Future operating lease payments
€ million
Dec. 31, 2014
Present value of future payments from finance leases
Interest component of finance leases
Future finance lease payments
Future operating lease payments
98.5
207.2
38.0
343.7
within 1 year
2.8
5.1
€ million
The maturities of liabilities from lease agreements were as
follows:
Other financial obligations were recognized at nominal value.
Financial instrument of the category
199.7
383.6
138.4
34.7
3,892.0
30.8
17,296.8
In connection with the offer to acquire the Sigma-Aldrich
Corporation, USA, which was announced by Merck on Septem-
ber 22, 2014, a contingent financial obligation amounting
to € 13,975.0 million (US$ 16,985.2 million; based on the
exchange rate on December 31, 2014) existed in 2014 to
acquire the entire share capital of Sigma-Aldrich for a cash
consideration.
Since the acquisition of Sigma-Aldrich was successfully
completed on November 18, 2015, the obligation no longer
existed on December 31, 2015.
Obligations to acquire intangible assets existed in particu-
lar owing to conditional purchase price components and within
the scope of research and development collaborations. Here
Merck has obligations to make milestone payments when cer-
tain objectives are reached. In the unlikely event that all con-
tract partners achieve all milestones, Merck would be obli-
gated to pay up to € 1,543.8 million (2014: € 1,494.8 million)
for the acquisition of intangible assets.
Moreover, within the scope of collaboration agreements,
individual research and development or commercialization
budgets were contractually set upon the basis of which collab-
oration partners can commit Merck to make payments in the
amount of up to € 1,447.4 million (2014: € 1,402.8 million).
238 Consolidated Financial Statements Notes to the Group Accounts
The expected maturities of these obligations were as follows:
Dec. 31, 2015
Dec. 31, 2014
€ million
Obligations to acquire intangible assets and to pay due to collaboration agreements
within one year
in 1-5 years
more than 5 years
258.3
135.2
1,218.7
1,081.3
1,544.2
1,681.1
3,021.2
2,897.6
1-5 years more than 5 years
3.7
Total
6.5
0.2
13,712.9
Current and non-current financial liabilities
Liabilities
Derivatives with a hedging relationship
28.4
82.0
110.4
Available for sale¹
16.5
16.5
Loans and receivables
Held to maturity
4.6
4.6
Derivatives without a hedging relationship
33.0
82.0
16.5
131.5
Non-current financial assets
455.1
455.1
Non-financial items
12.2
12.2
Derivatives with a hedging relationship
155.1
155.1
Loans and receivables¹
13,524.4
17.3
Derivatives without a hedging relationship
183.7
138.5
0.2
0.4
3.0
3.9
6.9
83.7
108.7
7.3
199.7
Operating leasing agreements related mainly to leasing
arrangements to lease real estate, company fleet vehicles as
well as operating and office equipment. The payments result-
ing from operating leasing agreements amounted to € 112.5
million (2014: € 91.8 million) and were recorded as an expense
in the reporting period.
(41) Personnel expenses/Headcount
Personnel expenses comprised the following:
€ million
2015
2014
Wages and salaries
2,992.8
2,630.9
Compulsory social security contributions and special financial assistance
431.6
376.6
Pension expenses
209.8
157.4
3,634.2
3,164.9
13,524.4
Other liabilities
4.8
138.5
183.7
18.6
Liabilities from derivatives
157.3
470.7
thereof derivatives with a hedging relationship
958.9
thereof available-for-sale
1,053.8
1,470.1
Fair value determined using inputs observable in the market (Level 2)
4,970.2
thereof other liabilities
1,178.6
thereof available-for-sale
4,970.2
thereof derivatives without a hedging relationship
1,178.6
(financial transactions)
Assets
Dec. 31, 2014
€ million
0.9
thereof other liabilities
11.9
0.9
11.9
Fair value determined using inputs unobservable in the market (Level 3)
thereof available-for-sale
4,683.7
thereof other liabilities
142.0
Fair value determined by official prices and quoted market values (Level 1)
40.5
31.1
thereof other liabilities
Dec. 31, 2015
€ million
The following table presents the potential netting volume
of the reported derivative financial assets and liabilities:
Balance sheet netting is not possible. From an economic per-
spective, netting is only possible for derivatives. This possi-
bility results from the framework agreements on derivatives
trading which Merck enters into with commercial banks. Merck
does not offset financial assets and financial liabilities in its
balance sheet.
Gains and losses from Level 3 assets are reported in other
comprehensive income in the consolidated statement of com-
prehensive income under the item "fair value adjustments"
related to "available-for-sale financial assets". If the discount
rate used for the determination of the fair value of the non-
controlling interests in a partnership had been one percentage
point higher, other comprehensive income would have
decreased by € 2.3 million. By contrast, a decline in the dis-
count rate by one percentage point would have increased
other comprehensive income by € 3.1 million.
11.3
11.0
0.5
0.6
10.8
-0.9
11.3
2014
2015
Transfers out of Level 3 into Level 1/Level 2
Net book values as of December 31
Gains (+)/losses (-) recognized in consolidated statement of comprehensive income
Sales
Gains (+)/losses (-) recognized in consolidated income statement
Fair value changes
Transfers into Level 3 out of Level 1/Level 2
Additions due to acquisitions
Net book values as of January 1
€ million
The changes in financial assets allocated to Level 3 and meas-
ured at fair value were as follows:
Consolidated Financial Statements Notes to the Group Accounts
236
11.3
11.3
Fair value determined using inputs unobservable in the market (Level 3)
thereof available-for-sale
865.4
38.9
thereof derivatives without a hedging relationship
102.5
12.2
Impairments
Interest
Net gains or losses
17.5
- 14.9
- 314.1
40.2
7.2
10.9
-84.1
18.4
2.7
Disposal
gains/losses
Fair value
adjustments
Reversals of
impairment
Net gains or losses
Impairments
Interest
Other liabilities
Available-for-sale
Loans and receivables
Held to maturity
Held for trading
Financial instrument of the category
2014
€ million
Other liabilities
Available-for-sale
Loans and receivables
Held to maturity
Reversals of
impairment
Derivative financial assets
Fair value
adjustments
1.4
thereof derivatives with a hedging relationship
4,928.2
51.1
9,021.8
9,021.8
178.1
178.1
Liabilities
Assets
Fair value determined using inputs observable in the market (Level 2)
thereof available-for-sale
thereof other liabilities
Fair value determined by official prices and quoted market values (Level 1)
thereof available-for-sale
Dec. 31, 2015
€ million
The financial instruments recognized for at fair value in the
balance sheet and the additionally disclosed fair values for
financial instruments were determined as follows:
currently no intention to sell these financial instruments. The
Merck Group has no information on a market for these finan-
cial instruments.
The fair value of available-for-sale investments in equity
instruments with a carrying amount of € 82.0 million (2014:
€ 66.9 million) could not be reliably determined since there is
no quoted price for an identical instrument in an active market
and it is not possible to make a reliable estimate of fair value.
They were measured at cost. Financial investments primarily
include equity investments in various companies. There is
Notes to the Group Accounts Consolidated Financial Statements 235
Counterparty credit risk is taken into consideration for all
valuations. In the case of non-derivative financial instruments,
such as other liabilities or interest-bearing securities, this is
reflected using risk-adequate premiums on the discount rate,
while discounts on market value (so-called credit valuation
adjustments and debit valuation adjustments) are used for
derivatives.
Level 3 liabilities consist of contingent purchase price com-
ponents from the acquisition of Qlight Nanotech Ltd., Israel.
These are reported as "other liabilities" and amounted to € 0.9
million as of the balance sheet date.
Level 3 assets comprise investments in equity instruments
classified as "available-for-sale". These relate to non-con-
trolling interests in a partnership. The fair value of these inter-
ests was determined through an internally performed valua-
tion using the discounted cash flow method. Expected future
cash flows based on the company's latest medium-term plan-
ning were taken into account. The planning relates to a period
of five years. Cash flows for periods beyond this are included
by calculating the terminal value using a long-term growth
rate of 0.5%. The discount rate used (after tax) was 7.0%.
applying recognized mathematical principles. The fair value
of interest rate swaps is determined with standard market
valuation models using interest rate curves available in the
market.
The fair value of financial assets and liabilities is based on
the official market prices and market values quoted on the
balance sheet date (Level 1 assets and liabilities) as well as
mathematical calculation models with inputs observable in the
market on the balance sheet date (Level 2 assets and liabili-
ties). Level 1 assets comprise stocks and bonds and are clas-
sified as "available-for-sale", Level 1 liabilities comprise issued
bonds and are classified as "other liabilities". Level 2 assets
and liabilities are primarily liabilities to banks classified as
"other liabilities", interest-bearing securities classified as
"available-for-sale" as well as derivatives with and without
hedging relationships. The fair value of interest-bearing secu-
rities as well as of the liabilities classified as "other liabilities"
is determined by discounting future cash flows using market
interest rates. The calculation of the fair value of forward
exchange contracts and currency options uses market spot
and forward rates as well as foreign exchange volatilities
In 2015, foreign exchange losses of € -48.8 million resulting
from receivables and payables in operating business, their
economic hedging, as well as hedging of forecast transactions
in operating business were recorded (2014: gains of € 53.3
million). Foreign exchange losses of € -39.9 million resulting
from financial balance sheet items, their economic hedging as
well as fair value fluctuations of option contracts to hedge
forecast transactions were recorded (2014: losses of € −13.0
million).
0.2
-90.8
-141.4
41.8
-41.9
-4.4
18.2
10.0
Disposal
gains/losses
Derivative financial liabilities
Liabilities
Gross
Cash flows
> 5 years
Cash flows
1-5 years
< 1 year
Cash flows
Trade payables amounting to € 1,921.2 million (2014:
€ 1,539.4 million) had a remaining term of less than one year.
The following tables present the contractual cash flows
such as repayments and interest on financial liabilities and
derivative financial instruments with a negative fair value:
Liquidity risks are monitored and reported to management on
a regular basis.
The liquidity risk, meaning the risk that Merck cannot meet its
payment obligations resulting from financial liabilities, is lim-
ited by establishing the required financial flexibility and by
effective cash management. Information on bonds issued by
the Merck Group and other sources of financing can be found
in Note [28] "Financial liabilities/Capital management".
Liquidity risks
Consolidated Financial Statements Notes to the Group Accounts
230
The shares in publicly listed companies amounting to € 15.6
million (2014: € 1.3 million) are generally exposed to a risk of
fluctuations in fair value. A 10% change in the value of the
stock market would impact equity by € 1.6 million (2014:
€ 0.1 million). This change in value would initially be recog-
nized in equity and then in profit or loss at the time of dis-
posal.
Share price risks
Changes in market interest rates did not have effects on
equity since an interest rate hedge for a bond issued in August
2015 for refinancing purposes was voluntarily terminated in the
reporting period with the entry into an offsetting transaction.
Additionally, the level of interest-bearing securities declined
significantly in comparison with 2014 and was immaterial as of
the balance sheet date.
€ million
The scenario calculations here assumed that for material vari-
able interest-bearing loan agreements, the risk-free interest
rate component (EURIBOR) cannot fall below 0%.
-47.4
0.0
+100 basis points -100 basis points +100 basis points -100 basis points
23.4
21.3
0.0
40.5
2014
2015
Effects on consolidated income statement
Effects on equity
Change in market interest rate
€ million
balance sheet items, all securities classified as "available for
sale" as well as all derivatives are presented in the following
table.
The effects of a parallel shift in the yield curve by +100 or
-100 basis points on the consolidated income statement as
well as on equity relative to all current or variable interest rate
Dec. 31, 2014
5,131.9
-2,169.0
2,962.9
Dec. 31, 2015
1,059.2
-5,799.7
-4,740.5
229
Notes to the Group Accounts Consolidated Financial Statements
-1.3
-22.9
Carrying
Dec. 31, 2015
amount
3.1
59.5
10.6
26.6
5.7
89.2
other financial liabilities
Loans from third parties and
577.8
0.2
577.8
Liabilities to related parties
4,428.6
250.0
Potential netting volume
Repayment
Interest
400.7
Repayment
4,200.8
619.2
852.0
13.0
2,135.4
18.8
3,006.0
Liabilities to banks
1,272.1
236.8
9,851.4
Bonds and commercial paper
Interest
Repayment
Interest
Short-term or variable interest rate monetary deposits
Short-term or variable interest rate monetary borrowings
Net interest rate exposure
€ million
1.7
Interest rate risks
70.5
511.2
-188.4
-188.4
Derivative financial liabilities
511.2
Derivative financial assets
collateral
agreements
Net presentation
Netting
presentation
Dec. 31, 2014
due to financial
due to
master netting
Gross
€ million
Potential netting volume
5.4
-198.8
-45.7
45.7
51.1
-244.5
amount
Potential net
due to financial
collateral
due to
master netting
agreements
Net presentation
Netting
presentation
The Merck Group's exposure to interest rate changes com-
prises the following:
Potential net
amount
440.7
-70.5
51.1
-244.5
(39) Contingent liabilities
343.7
-117.9
55.3
108.8
2,897.6
13,975.0
thereof affiliates
Dec. 31, 2014
Dec. 31, 2015 thereof affiliates
Long-term purchase commitments
Other financial obligations
Future operating lease payments
Obligations to acquire property, plant and equipment
Obligations to acquire intangible assets and to pay due to
collaboration agreements
Obligation to purchase the entire share capital of
Sigma-Aldrich Corporation
3,021.2
Other financial obligations comprised the following:
Notes to the Group Accounts Consolidated Financial Statements 237
€ million
Dec. 31, 2015
64.0
€ million
Dec. 31, 2014
thereof affiliates
54.3
thereof affiliates
0.8
0.2
17.1
0.5
Contingent liabilities from legal disputes included potential
obligations, for which the probability of an outflow of resources
did not suffice to recognize a provision as of the balance sheet
date. These mainly related to obligations under civil law as
well as under antitrust and environmental law. The potential
civil law obligations primarily related to potential liabilities to
pay damages due to a legal dispute under antitrust law. It was
possible that Merck would be subject to claims for compensa-
tion for damages asserted by health insurance companies due
to excessively high drug prices in case of a valid judgment
under antitrust law.
Contingent liabilities pertaining to tax matters included vari-
ous non-German income and non-income related tax matters
that mainly related to intragroup business transfers as well as
legal disputes attributable to the determination of earnings
under tax law, customs regulations and transfer pricing adjust-
ments.
(40) Other financial obligations
Contingent liabilities from legal disputes and tax matters
Guarantees
Warranties
(44) Corporate governance
Litec-LLL GmbH, Greifswald
Chemitra GmbH, Darmstadt
Biochrom GmbH, Berlin
Allergopharma GmbH & Co. KG, Reinbek
Allergopharma Verwaltungs GmbH, Darmstadt
The following companies, which have been consolidated in
these financial statements, have opted for exemption:
(45) Companies opting for exemption
under section 264 (3) HGB or
section 264 b HGB
Merck Chemicals GmbH, Darmstadt
The Statement of Compliance in accordance with section 161
of the German Stock Corporation Act (Aktiengesetz) was pub-
lished in the corporate governance section of the website
www.merckgroup.com/investors -> corporate governance in
March 2015 and thus made permanently available.
Merck Accounting Solutions & Services Europe GmbH,
Darmstadt
0.2
6.9
4.4
11.0
0.3
0.9
1.2
0.3
0.6
Merck Consumer Health Holding GmbH, Darmstadt
Merck Export GmbH, Darmstadt
0.5
0.9
2.6
Merck Life Science GmbH, Eppelheim
The compensation of the Supervisory Board amounting to
€ 881.0 thousand (2014: € 882.1 thousand) consisted of a
fixed portion of € 822.5 thousand (2014: € 823.6 thousand)
and meeting attendance compensation of € 58.5 thousand
(2014: € 58.5 thousand).
Merck Versicherungsvermittlung GmbH, Darmstadt
Consolidated Financial Statements Notes to the Group Accounts
0.5
242
241
Notes to the Group Accounts Consolidated Financial Statements
Subsequent to the balance sheet date, no further events of
special importance occurred that could have a material impact
on the net assets, financial position and results of operations
of the Merck Group.
At the beginning of January 2016, two contracts entered into
with BioMarin Pharmaceutical Inc., USA (BioMarin), became
effective. Firstly, the sale of the rights to KuvanⓇ, a drug used
to treat the metabolic disorder known as phenylketonuria
(PKU) was agreed. And secondly, Merck returned its option to
develop and commercialize Peg-Pal to BioMarin. Based on
these two agreements, in January 2016 Merck received an
upfront payment of € 340 million for the sale of the rights to
KuvanⓇ as well as an entitlement to milestone payments of
up to € 185 million. More information can be found in Note [4]
"Acquisitions, assets held for sale and disposal groups".
(49) Subsequent events
The Executive Board of Merck KGaA prepared the consolidated
financial statements on February 18, 2016 and approved them
for forwarding to the Supervisory Board. The Supervisory
Board has the responsibility to examine the consolidated
financial statements and to declare whether it approves them.
(48) Information on preparation and
approval
Merck Selbstmedikation GmbH, Darmstadt
Merck Serono GmbH, Darmstadt
Further individualized information and details can be found
in the Compensation Report on pages 150 et seq.
(47) Executive Board and Supervisory
Board compensation
There were no material transactions such as, for example,
the provision of services or the granting of loans, between
companies of the Merck Group and members of the Executive
Board or the Supervisory Board of Merck KGaA, the Executive
Board or the Board of Partners of E. Merck KG or members of
their immediate families.
As was the case in 2014, there were no transactions between
companies of the Merck Group and associates from January
to December 2015. As in the previous year, companies of the
Merck Group had no receivables or liabilities vis-à-vis associ-
ates as of December 31, 2015.
Business transactions with major subsidiaries were elimi-
nated during consolidation. Information on pension funds that
are classified as funded defined benefit plans in accordance
with IAS 19 can be found in Note [26] "Provisions for pensions
and other post-employment benefits". There were no further
material transactions with these pension funds.
Moreover, as of December 31, 2015 Merck Serono SA,
Switzerland, had a receivable from Calypso Biotech SA, Switzer-
land, amounting to € 1.2 million (2014: € 0.0 million) stem-
ming from a convertible bond with a volume of CHF 1,350,000
and an annual coupon of 8% maturing on December 31, 2016.
From January to December 2015, Merck KGaA performed
services for E. Merck KG with a value of € 0.9 million (2014:
€ 1.2 million), for E. Merck Beteiligungen KG with a value of
€ 0.3 million (2014: € 0.3 million), and for Emanuel-Merck-
Vermögens-KG with a value of € 0.2 million (2014: € 0.3 mil-
lion). During the same period, E. Merck KG performed services
for Merck KGaA with a value of € 0.5 million (2014: € 0.5 mil-
lion).
As of December 31, 2015, there were liabilities by Merck
Financial Services GmbH, Merck KGaA and Merck & Cie,
Switzerland, to E. Merck KG in the amount of € 1,031.2 million
(2014: € 926.9 million). Merck Financial Services GmbH had
liabilities vis-à-vis Merck Capital Asset Management, Malta,
amounting to € 0.1 million (2014: € 0.1 million). Moreover,
as of December 31, 2015, Merck KGaA had receivables from
E. Merck Beteiligungen KG in the amount of € 35.4 million
(2014: € 76.5 million). The balances result mainly from the
profit transfers by Merck & Cie, Switzerland, to E. Merck KG as
well as the reciprocal profit transfers between Merck KGaA and
E. Merck KG. They included financial payables of € 577.8 mil-
lion (2014: € 501.4 million) which were subject to standard
market interest rates. Neither collateral nor guarantees existed
for any of the balances either in favor or to the disadvantage
of Merck.
Related parties in respect of the Merck Group are E. Merck KG,
Emanuel-Merck-Vermögens-KG and E. Merck Beteiligungen KG.
In principle, direct or indirect subsidiaries of Merck KGaA,
associates of the Merck Group, jointly controlled companies
where the Merck Group is involved, as well as pension funds
that are classified as funded defined benefit plans in accord-
ance with IAS 19 are also related parties within the meaning
of IAS 24. Members of the Executive Board and the Supervi-
sory Board of Merck KGaA, the Executive Board and the Board
of Partners of E. Merck KG as well as close members of their
families are also related parties.
(46) Related-party disclosures
Consolidated Financial Statements Notes to the Group Accounts
240
The compensation of the Executive Board of Merck KGaA is
paid by the general partner, E. Merck KG, and recorded as an
expense in its income statement. For the period from January
to December 2015, fixed salaries of € 6.5 million (2014: € 5.3
million), variable compensation of € 22.3 million (2014: € 18.3
million), and additional benefits of € 0.3 million (2014: € 0.2
million) were recorded for members of the Executive Board.
Furthermore, additions to the provisions of E. Merck KG for the
Long-Term Incentive Plan totaled € 9.9 million (2014: € 12.7
million), and additions to the pension provisions of E. Merck KG
include current service costs of € 4.2 million (2014: € 2.1 mil-
lion) for members of the Executive Board of Merck KGaA.
0.6
Other audit-related services
1.0
Other services
Tax consultancy services
Audits of financial statements
€ million
The costs of the auditors (KPMG) of the financial statements of
the Merck Group consisted of the following:
(43) Auditors' fees
€ 1,516.8 million) and were reported under cost of sales.
Material costs in 2015 amounted to € 1,736.8 million (2014:
(42) Material costs
Infrastructure and Other
2015
Research and Development
Marketing and Sales
Logistics
Production
Average number of employees
The breakdown of personnel by function was as follows:
mainly due to the acquisition of the Sigma-Aldrich Corporation,
USA, which was completed on November 18, 2015.
As of December 31, 2015, the Merck Group had 49,613
employees (2014: 39,639). The average number of employees
during the year was 41,511 (2014: 38,930). The increase was
239
Notes to the Group Accounts Consolidated Financial Statements
Accounting and Measurement Policies
Administration
2014
11,563
10,176
1.6
5.4
2.2
7.9
Germany
Merck Group
thereof KPMG
thereof KPMG
Germany
Merck Group
2014
2015
38,930
41,511
3,354
2,636
4,738
5,097
6,342
6,763
12,113
12,871
2,207
2,581
0.8
(50) Measurement policies
(subsequent measurement impairment-only approach)
Amortized cost
Balance sheet item
Dec. 31, 2014
0.781
Dec. 31, 2015
0.737
7.183
8.167
7.003
Measurement is based on the settlement amount with the
highest probability or, if the probabilities are equivalent and a
high number of similar cases exist, it is based on the expected
value of the settlement amounts. Long-term provisions are
discounted and carried at their present value as of the balance
sheet date. To the extent that reimbursement claims exist as
defined in IAS 37, they are recognized separately as an asset
if their realization is virtually certain and the asset recognition
criteria have been met.
0.728
2015
Closing rate
Average annual rate
7.534
Taiwan dollar (TWD)
U.S. dollar (USD)
Japanese yen (JPY)
Chinese renminbi (CNY)
British pound (GBP)
€ 1 =
Currency translation was based on the following key
exchange rates:
consolidated companies prepared in the functional currency
are translated at the respective closing rates. Exchange differ-
ences from the translation of monetary items are recognized
in the income statement with the exception of net investments
in a foreign operation. Hedged items are likewise carried at
the closing rate. The resulting gains or losses are eliminated in
the consolidated income statement against offsetting amounts
from the fair value measurement of derivatives.
Group companies are taken directly to equity. If Group compa-
nies are deconsolidated, existing currency differences are
reversed and reclassified to profit or loss. The local currency is
not the functional currency at only a few subsidiaries. When
the financial statements of consolidated companies are pre-
pared, business transactions that are conducted in currencies
other than the functional currency are recorded using the cur-
rent exchange rate on the date of the transaction. Foreign
currency monetary items (cash and cash equivalents, receiva-
bles and payables) in the year-end financial statements of the
Consolidated Financial Statements Notes to the Group Accounts
Consolidated Financial Statements Notes to the Group Accounts
Swiss franc (CHF)
Available-for-sale financial assets
134.431
131.576
Dividend income is recognized when the shareholders'
right to receive the dividend is established. This is normally
the date of the dividend resolution.
Royalty and license income is recognized when the con-
tractual obligation has been met.
In addition to revenue from the sale of goods, sales also
include commission income, and in the Life Science business
sector revenue from services, but the volume involved is insig-
nificant. In the case of long-term service agreements, Merck
records the sales revenues on a pro rata basis over the term
of the agreement or in accordance with the degree to which
the services have been rendered.
In the Healthcare business sector, products are often sold
to pharmaceutical wholesalers and to a lesser extent directly to
pharmacies or hospitals. In the Life Science and Performance
Materials business sectors, products are largely sold to business
customers, and to a lesser extent to distributors.
The vast majority of Group sales are generated by the sale
of goods.
Net sales are recognized net of sales-related taxes and
sales deductions. When sales are recognized, estimated
amounts are taken into account for expected sales deductions,
for example rebates, discounts and returns.
Net sales are deemed realized once the goods are deliv-
ered or the services have been rendered and the significant
risks and rewards of ownership have been transferred to the
purchaser. In the case of sales of equipment in the Life Science
business sector, these preconditions are only met after instal-
lation has been successfully completed to the extent that the
installation requires specialized knowledge, does not repre-
sent a clear ancillary service and the relevant equipment can
only be used by the customer once successfully set up.
Net sales and revenues are recognized when the amount of
revenue can be measured reliably, it is probable that the
economic benefits will flow to the entity as well as when the
following preconditions have been met.
(53) Recognition of net sales and
other revenue items
140.594
1.215
1.325
38.448
35.831
40.172
1.203
1.081
1.214
1.075
35.337
1.112
145.392
1.093
"Available-for-sale financial assets" are those non-derivative
financial assets that are not assigned to the measurement cat-
egories "financial assets and financial liabilities at fair value
through profit or loss", "held-to-maturity investments" or
"loans and receivables". Financial assets in this category are
subsequently measured at fair value. Changes in fair value are
recognized immediately in equity and are only transferred to
the consolidated income statement when the financial asset is
derecognized.
If there is substantial evidence of an asset impairment, the
accumulated loss recognized immediately in equity is to be
reclassified to the consolidated income statement, even if the
financial asset has not been derecognized. Reversals of impair-
ment losses on previously impaired equity instruments are
recognized immediately in equity. Reversals of impairment
losses on previously impaired debt instruments are recognized
in profit or loss up to the amount of the impairment loss. Any
amount in excess of this is recognized directly in equity. Finan-
cial assets in this category for which no fair value is available
or fair value cannot be reliably determined are measured at
cost less any accumulated impairment losses. Impairment
losses on financial assets carried at cost may not be reversed.
At Merck, this measurement category is used in particular
for interest-bearing securities, financial assets, and financial
investments in equity instruments as well as interests in sub-
sidiaries that are not consolidated due to secondary impor-
tance (affiliates). Both interests in non-consolidated subsidiar-
ies as well as to some extent financial investments in equity
instruments are measured at cost.
Other liabilities
The useful lives of the assets are reviewed regularly and
adjusted if necessary. If indications of a decline in value exist,
an impairment test is performed. The determination of the
possible need to recognize impairments proceeds in the same
way as for intangible assets. If the reasons for an impairment
loss no longer exist, a reversal of the impairment loss recog-
nized in prior periods is recorded.
(60) Leasing
Where non-current assets are leased and economic ownership
lies with Merck (finance lease), the asset is recognized at the
present value of the minimum lease payments or the lower fair
value in accordance with IAS 17 and depreciated over its use-
ful life. The corresponding payment obligations from future
lease payments are recorded as liabilities. If an operating
lease is concerned, the associated expenses are recognized in
the period in which they are incurred.
248
Consolidated Financial Statements Notes to the Group Accounts
(61) Other non-financial assets and
liabilities
Other non-financial assets are carried at amortized cost.
Allowances are recognized for any credit risks. Long-term
non-interest-bearing and low-interest receivables and liabili-
ties are carried at their present value. Other non-financial
liabilities are carried at the amount to be repaid.
(62) Deferred taxes
Deferred tax assets and liabilities result from temporary differ-
ences between the carrying amount of an asset or liability in
the IFRS and tax balance sheets of consolidated companies as
well as from consolidation activities, insofar as the reversal of
these differences will occur in the future. In addition, deferred
tax assets are recorded in particular for tax loss carryforwards
if and insofar as their utilization is probable in the foreseeable
future. In accordance with the liability method, the tax rates
enacted and published as of the balance sheet date are used.
Deferred tax assets and liabilities are only offset on the
balance sheet date if they meet the requirements of IAS 12.
6 to 25 years
3 to 10 years
as health care cost increases, which were used to calculate the
benefit obligation, were determined on a country-by-country
basis in line with the economic conditions prevailing in each
country; the latest country-specific actuarial mortality table
was used in each case. The respective discount rates are gen-
erally determined on the basis of the returns on high-quality
corporate bonds issued with adequate maturities and curren-
cies. For euro-denominated obligations, bonds with ratings of
at least "AA" from one of the three major rating agencies
(Standard & Poor's, Moody's or Fitch), and a euro swap rate of
adequate duration served as the basis for the data. Actuarial
gains and losses resulting from changes in actuarial assump-
tions and/or experience adjustments (the effects of differ-
ences between the previous actuarial assumptions and what
has actually occurred) are recognized immediately in equity as
soon as they are incurred, taking deferred taxes into account.
Consequently, the consolidated balance sheet discloses - after
deduction of the plan assets - the full scope of the obligations
while avoiding the fluctuations in expenses that can result
especially when the calculation parameters change. The actu-
arial gains and losses recorded in the respective reporting
period are presented separately in the Statement of Compre-
hensive Income.
(63) Inventories
Inventories are carried at the lower of cost or net realizable
value. When determining cost, the "first-in, first-out" (FIFO)
and weighted average cost formulas are used.
In addition to directly attributable unit costs, manufactur-
ing costs also include overheads attributable to the production
process, which are determined on the basis of normal capacity
utilization of the production facilities.
Inventories are written down if the net realizable value is
lower than the acquisition or manufacturing cost carried in the
balance sheet.
Since the inventories are not manufactured within the
scope of long-term production processes, the manufacturing
cost does not include any borrowing cost.
(64) Provisions for pensions and
other post-employment benefits
Provisions for pensions and other post-employment benefits
are recorded in the balance sheet in accordance with IAS 19.
The obligations under defined benefit plans are measured
using the projected unit credit method. Under the projected
unit credit method, dynamic parameters are taken into account
in calculating the expected benefit payments after an insured
event occurs; these payments are spread over the entire period
of service of the participating employees. Annual actuarial
opinions are prepared for this purpose. The actuarial assump-
tions, e.g. for discount rates, salary and pension trends, as well
Contingent liabilities comprise not only possible obligations
arising from past events and whose existence is subject to the
occurrence of uncertain future events, but also present obliga-
tions arising from past events where an outflow of resources
embodying economic benefits is not probable or where the
amount of the obligation cannot be measured with reliability.
Contingent liabilities that were not assumed within the context
of a business combination are not recognized in the consoli-
dated balance sheet. Unless the possibility of an outflow of
resources embodying economic benefits is remote, informa-
tion on the relevant contingent liabilities is disclosed in the
notes.
(65) Provisions and contingent
liabilities
maximum of 33 years
maximum of 40 years
Useful life
Operating and office equipment; other facilities
Other liabilities are non-derivative financial liabilities that
are subsequently measured at amortized cost. Differences
between the amount received and the amount to be repaid are
amortized to profit or loss over the maturity of the instrument.
Merck primarily assigns financial liabilities such as issued
bonds and liabilities due to banks, trade payables, and miscel-
laneous other non-derivative current and non-current liabili-
ties to this category.
(57) Financial instruments:
Derivatives and hedge
accounting
Merck uses derivatives solely to economically hedge recog-
nized assets or liabilities and forecast transactions. The hedge
accounting rules in accordance with IFRS are applied to some
of these hedges. A distinction is made between fair value
hedge accounting and cash flow hedge accounting. Designa-
tion of a hedging relationship requires a hedged item and a
hedging instrument. Merck currently only uses derivatives as
hedging instruments.
The hedging relationship must be effective at all times, i.e.
the change in fair value of the hedging instrument almost fully
offsets changes in the fair value of the hedged item. Merck
uses the dollar offset method as well as regression analyses to
measure hedge effectiveness. Derivatives that do not or no
longer meet the documentation or effectiveness requirements
for hedge accounting, whose hedged item no longer exists, or
for which hedge accounting rules are not applied are classified
as "financial assets and liabilities at fair value through profit or
loss". Changes in fair value are then recognized in profit or
loss.
At Merck, cash flow hedges normally relate to highly prob-
able forecast transactions in foreign currency and to future
interest payments. In cash flow hedges, the effective portion
of the gains and losses on the hedging instrument taking
deferred taxes into consideration is recognized in equity until
the hedged expected cash flows affect profit or loss. This is
also the case if the hedging instrument expires, is sold, or is
terminated before the hedged transaction occurs and the
occurrence of the hedged item remains likely. The ineffective
portion of a cash flow hedge is recognized directly in profit or
loss.
(58) Intangible assets
Acquired intangible assets are recognized at cost and are clas-
sified as assets with finite and indefinite useful lives. Self-
developed intangible assets are only capitalized if the require-
ments specified by IAS 38 have been met. Intangible assets
acquired in the course of business combinations are recog-
nized at fair value on the acquisition date. If the development
of intangible assets takes a substantial period of time, the
directly attributable borrowing costs incurred up until comple-
tion are capitalized as part of the costs.
The main assets and liabilities disclosed in the consolidated
balance sheet are measured as follows:
Notes to the Group Accounts Consolidated Financial Statements 247
Intangible assets with indefinite useful lives
Intangible assets with indefinite useful lives are not amor-
tized; however they are tested for impairment when a trigger-
ing event arises or at least once a year. Here, the respective
carrying amounts are compared with the recoverable amount
and impairments are recognized as required. Impairment
losses recognized on indefinite-life intangible assets other
than goodwill are reversed if the original reasons for impair-
ment no longer apply.
Goodwill is allocated to cash-generating units or groups of
cash-generating units and tested for impairment either annu-
ally or if there are indications of impairment. The carrying
amounts of the cash-generating units or groups of cash-gen-
erating units are compared with their recoverable amounts
and impairment losses are recognized where the recoverable
amount is lower than the carrying amount. The recoverable
amount of a cash-generating unit is determined as the higher
of fair value less costs of disposal and value in use estimated
using the discounted cash flow method.
Intangible assets with finite useful lives
Intangible assets with a finite useful life are amortized using
the straight-line method. The useful lives of customer relation-
ships, marketing authorizations, acquired patents, licenses
and similar rights, brand names, trademarks and software are
between three and 24 years. Amortization of intangible assets
and software is allocated to the functional costs in the consol-
idated income statement. An impairment test is performed if
there are indications of impairment. Impairment losses are
determined using the same methodology as for indefinite-life
intangible assets. Impairment losses are reversed if the origi-
nal reasons for impairment no longer apply.
(59) Property, plant and equipment
Property, plant and equipment is measured at cost less depre-
ciation and impairments plus reversals of impairments. The
component approach is applied here in accordance with
IAS 16. Subsequent costs are only capitalized if it is probable
that future economic benefits will arise for the Group and the
cost of the asset can be measured reliably. The cost of self-con-
structed property, plant and equipment is calculated on the
basis of the directly attributable unit costs and an appropriate
share of overheads. If the construction of property, plant and
equipment takes a substantial period of time, the directly
attributable borrowing costs incurred up until completion are
capitalized as part of the costs. In accordance with IAS 20,
costs are reduced by the amount of government grants in
those cases where government grants or subsidies have been
paid for the acquisition or manufacture of assets (grants
related to assets). Grants related to expenses which no longer
offset future expenses are recognized in profit or loss. Prop-
erty, plant and equipment is depreciated by the straight-line
method over the useful life of the asset concerned. Deprecia-
tion of property, plant and equipment is based on the following
useful lives:
USEFUL LIFE OF PROPERTY, PLANT AND EQUIPMENT
Production buildings
Administration buildings
Plant and machinery
Interest income is recognized in the period in which it is
earned.
2014
0.805
Research and development costs comprise the costs of
research departments and process development, the expenses
incurred as a result of research and development collabora-
tions as well as the costs of clinical trials (both before and after
approval is granted).
Amortized cost
Amortized cost
Undiscounted measurement based on tax rates that are expected
to apply to the period when the asset is realized or the liability is
settled
Lower of cost and net realizable value
Amortized cost
Expected tax refunds based on tax rates that have been enacted or
substantively enacted by the end of the reporting period
Nominal value
Lower of carrying amount and fair value less costs to sell
Notes to the Group Accounts Consolidated Financial Statements 243
Balance sheet item
Fair value
Equity and liabilities
Provisions (current/non-current)
Financial liabilities (current/non-current)
Bonds
Liabilities to related parties
Loans to banks
Liabilities from derivatives (financial transactions)
Finance lease liabilities
Other liabilities (current/non-current)
Liabilities from derivatives (operational)
Liabilities from non-income related taxes
Other liabilities
Measurement principle
Provisions for pensions and other post-employment benefits
Fair value
Amortized cost
Fair value
Assets
Intangible assets
With finite useful life
Measurement principle
With indefinite useful life
Property, plant and equipment
Financial assets (current/non-current)
Held to maturity investments
Available-for-sale financial assets
Loans and receivables
Derivative assets (financial transactions)
Other assets
Derivative assets (operational)
Receivables from non-income related taxes
Other receivables
Deferred tax assets
Inventories
Trade accounts receivable
Income tax receivables
Cash and cash equivalents
Assets held for sale
Amortized cost
Amortized cost
Amortized cost
Projected unit credit method
(54) Research and development
costs
Provisions are recognized in the balance sheet if it is more
likely than not that a cash outflow will be required to settle the
obligation and the amount of the obligation can be measured
reliably. The carrying amount of provisions takes into account
the amounts required to cover future payment obligations,
recognizable risks and uncertain obligations of the Merck
Group to third parties.
When additional shares in non-controlling interests are
acquired, the purchase price amount that exceeds the carrying
amount of this interest is recognized immediately in equity.
In cases where a company was not acquired in full,
non-controlling interests are measured using the fair value of
the proportionate share of net assets. The option to measure
non-controlling interests at fair value on the date of their
acquisition (full goodwill method) was not utilized.
Acquisitions are accounted for using the purchase method
in accordance with IFRS 3. Subsidiaries acquired and consoli-
dated for the first time were measured at the carrying values
at the time of acquisition. Differences resulting in this connec-
tion are recognized as assets and liabilities to the extent that
their fair values differ from the values carried in the financial
statements. Any remaining - and usually - positive difference
is recognized as goodwill within intangible assets.
The consolidated financial statements are based on the single-
entity financial statements of the consolidated companies as
of the balance sheet date, which were prepared applying con-
sistent accounting policies in accordance with IFRS.
(51) Consolidation methods
Expected tax payments based on tax rates that have been enacted
or substantively enacted by the end of the reporting period
Fair value
Amortized cost
Undiscounted measurement based on tax rates that are expected
to apply to the period when the asset is realized or the liability is
settled
Settlement amount
Settlement amount
Fair value
Liabilities directly related to assets held for sale
Income tax liabilities
Deferred tax liabilities
Trade accounts payable
Amortized cost
Fair value
Amortized cost
Amortized cost
Amortized cost
Present value of the expenditures expected to be required to settle
the obligation
IFRS 11 is applied for joint arrangements. A joint arrange-
ment exists when, on the basis of a contractual arrangement,
Merck and third parties jointly control business activities. Joint
control means that decisions about the relevant activities
require unanimous consent. Joint arrangements are either
Intragroup sales, expenses and income, as well as all
receivables and payables between the consolidated compa-
nies, were eliminated. The effects of intragroup deliveries
reported under non-current assets and inventories were
adjusted by eliminating any intragroup profits. In accordance
with IAS 12, deferred taxes are applied to these consolidation
measures.
joint operations or joint ventures. Revenues and expenses as
well as assets and liabilities from joint operations are included
in the consolidated financial statements on a pro rata basis in
accordance with Merck's rights and obligations. By contrast,
interests in joint ventures as well as in material associates
over which Merck has significant influence are included in
accordance with IAS 28 using the equity method of accounting.
Financial assets and liabilities are classified into the following
IAS 39 measurement categories and IFRS 7 classes. The
classes required to be disclosed in accordance with IFRS 7
consist of the measurement categories set out here. Addition-
ally, cash and cash equivalents with an original maturity of up
to 90 days, finance lease liabilities, and derivatives designated
as hedging instruments are also classes in accordance with
IFRS 7.
Reimbursements for R&D are offset against research and
development costs.
(55) Financial instruments: Principles
A financial instrument is a contractual arrangement that gives
rise to a financial asset of one entity and a financial liability or
an equity instrument of another entity. A distinction is made
between non-derivative and derivative financial instruments.
Merck accounts for regular way purchases or sales of non-
derivative financial instruments at the settlement date and of
derivatives at the trade date.
Upon initial recognition, financial assets and financial lia-
bilities are measured at fair value, taking into account any
transaction costs, if necessary.
Financial assets are derecognized in part or in full if the
contractual rights to the cash flows from the financial asset
have expired or have been fulfilled or if control and substan-
tially all the risks and rewards of ownership of the financial
asset have been transferred to a third party. Financial liabili-
ties are derecognized if the contractual obligations have been
discharged, cancelled, or expired. Cash and cash equivalents
are carried at nominal value.
(56) Financial instruments:
Categories and classes of
financial instruments
(52) Currency translation
generated intangible asset can be reliably determined and the
asset can be expected to lead to future economic benefits. The
condition for this is that the necessary resources are available
for the development of the asset, technical feasibility of the
asset is given, its completion and use are intended, and mar-
ketability is given. Owing to the high risks up to the time that
pharmaceutical products are approved, these criteria are not
met in the Healthcare business sector. Costs incurred after
regulatory approval are usually insignificant and are therefore
not recognized as intangible assets. Owing to the risks existing
up until market launch, development expenses in the Life
Science and Performance Materials business sectors can like-
wise not be capitalized.
Financial assets and financial liabilities at fair value
through profit or loss
Held to maturity investments
"Held to maturity investments" are non-derivative financial
assets with fixed or determinable payments and a fixed matu-
rity that are quoted in an active market. To be able to assign a
financial asset to this measurement category, the entity must
have the positive intention and ability to hold it to maturity.
These investments are subsequently measured at amortized
cost using the effective rate method. If there is objective evi-
dence that such an asset is impaired, an impairment loss is
recognized in profit or loss. Subsequent reversals of impair-
ment losses are also recognized in profit or loss up to the
amount of the amortized cost. At Merck, this measurement
category is used for current financial assets.
Loans and receivables
"Loans and receivables" are non-derivative financial assets
with fixed or determinable payments that are not quoted in an
active market. They are subsequently measured at amortized
cost using the effective rate method. If there is objective evi-
dence that such assets are impaired, an impairment loss is
recognized in profit or loss. Subsequent reversals of impair-
ment losses are also recognized in profit or loss up to the
amount of amortized cost. Long-term non-interest-bearing
and low-interest receivables are measured at their present
value. Merck primarily assigns trade receivables, loans, and
miscellaneous other current and non-current receivables to
this measurement category. Merck always uses a separate
allowance account for impairment losses on trade and other
receivables. Amounts from the allowance account are recog-
nized in the carrying amount of the corresponding receivable
as soon as this is derecognized due to irrecoverability.
246
244
The costs of research cannot be capitalized and are
expensed in full in the period in which they are incurred. As
internally generated intangible assets, it is necessary to capi-
talize development expenses if the cost of the internally
The functional currency concept applies to the translation of
financial statements of consolidated companies prepared in
foreign currencies. The subsidiaries of the Merck Group gener-
ally conduct their operations independently. The functional
currency of these companies is normally the respective local
currency. Assets and liabilities are measured at the closing
rate, and income and expenses are measured at weighted
average annual rates in euros, the reporting currency. Any
currency translation differences arising during consolidation of
"Financial assets and financial liabilities at fair value through
profit or loss" can be both non-derivative and derivative finan-
cial instruments. Financial instruments in this category are
subsequently measured at fair value. Gains and losses on
financial instruments in this measurement category are recog-
nized directly in the consolidated income statement. This
measurement category includes an option to designate
non-derivative financial instruments as "at fair value through
profit or loss" on initial recognition (fair value option) or as
"financial instruments held for trading". The fair value option
was applied neither during the fiscal year nor the previous
year. Merck only assigns derivatives to the "held for trading"
measurement category. Special accounting rules apply to
derivatives that are designated as hedging instruments in a
hedging relationship.
Notes to the Group Accounts Consolidated Financial Statements 245
Poland
100.00
Sigma-Aldrich Sp.z.o.o.
100.00
100.00
Warsaw
Posen
Poland
100.00
Ridgefield Acquisition S.a.r.l.
Merck Holding Netherlands B.V.
Schiphol-Rijk
100.00
100.00
Netherlands
Netherlands
Serono Tri Holdings B.V.
Sigma-Aldrich B.V.
Schiphol-Rijk
100.00
Zwijndrecht
Netherlands
100.00
Sigma-Aldrich Chemie B.V.
Zwijndrecht
100.00
Norway
Merck Life Science AS
Oslo
100.00
Norway
Sigma-Aldrich Norway AS
Oslo
Netherlands
100.00
Merck Sp.z o.0.
Merck Chemicals B.V.
Luxembourg
100.00
Luxembourg
Ridgefield Holdco S.a.r.l.
Luxembourg
100.00
Luxembourg
Sigma-Aldrich S.a.r.l.
Luxembourg
100.00
Malta
Merck Capital Holding Ltd.
Pietà
100.00
Malta
Merck Capital Ltd.
Pietà
100.00
Netherlands
Merck B.V.
Schiphol-Rijk
100.00
Netherlands
Luxembourg
Amsterdam Zuidoost
100.00
Millipore International Holdings, S.a.r.l.
Carrigtwohill
Millipore Cork
Ireland
100.00
Dublin
Merck Serono (Ireland) Ltd.
Ireland
100.00
100.00
Carrigtwohill
Ireland
100.00
Budapest
Sigma-Aldrich Kft.
Hungary
100.00
Budapest
Merck Kft.
Merck Millipore Ltd.
Hungary
Ireland
Arklow
Italy
100.00
Rome
Allergopharma S.p.A.
Italy
100.00
Arklow
Silverberry Limited
Shrawdine Limited
Ireland
Arklow
Sigma-Aldrich Ireland Ltd.
Ireland
100.00
Dublin
Sigma-Aldrich Financial Services Limited
Ireland
100.00
100.00
Istituto di Ricerche Biomediche Antoine Marxer RBM S.p.A.
100.00
Merck A.E.
Merck Santé S.A.S.
France
99.84
Lyon
Merck S.A.
France
100.00
Trosly Breuil
Lyon
Merck Performance Materials S.A.S.
100.00
Lyon
Merck Médication Familiale S.A.S.
France
100.00
Fontenay s/Bois
Merck Chimie S.A.S.
France
France
Maroussi, Athens
France
Lyon
Greece
100.00
St. Quentin Fallavier
Sigma-Aldrich Holding S.a.r.l.
France
100.00
St. Quentin Fallavier
Sigma-Aldrich Chimie SNC Partnership
Merck Serono S.A.S.
France
St. Quentin Fallavier
Sigma-Aldrich Chimie S.a.r.l.
France
100.00
Molsheim
Millipore S.A.S.
France
100.00
100.00
Luxembourg
Colleretto Giacosa
Italy
100.00
Luxembourg
Merck Finanz S.a.r.l.
Luxembourg
100.00
Luxembourg
Merck Finance S.a.r.l.
Luxembourg
100.00
100.00
Merck Chemicals Holding S.a.r.l.
Luxembourg
Merck KGaA (%)
Thereof:
(%)
Equity interest
Registered Office
Luxembourg
Mats Finance S.a.r.l.
Luxembourg
Luxembourg
Luxembourg
Luxembourg
Luxembourg
100.00
Luxembourg
Millipart S.a.r.l.
Luxembourg
100.00
Luxembourg
Millilux S.a.r.l.
Merck Holding S.a.r.l.
Luxembourg
Luxembourg
Merck Re S.A.
Luxembourg
100.00
Luxembourg
Merck Invest SCS
Luxembourg
100.00
100.00
100.00
Company
Notes to the Group Accounts
Riga
Merck Serono SIA
Latvia
100.00
Milan
Sigma-Aldrich S.r.l.
Italy
100.00
100.00
Milan
Italy
99.74
Rome
Merck Serono S.p.A.
Italy
100.00
Vimodrone
Merck S.p.A.
Sigma-Aldrich Italia S.r.l.
Country
Lithuania
Vilnius
252 Consolidated Financial Statements
100.00
Luxembourg
AZ Electronic Materials TopCo S.a.r.l.
Luxembourg
100.00
Luxembourg
AZ Electronic Materials S.a.r.l.
Merck Serono, UAB
Luxembourg
Luxembourg
AZ Electronic Materials Group S.a.r.l.
Luxembourg
100.00
Luxembourg
AZ Electronic Materials (Luxembourg) S.a.r.l.
Luxembourg
100.00
100.00
100.00
Merck, S.A.
100.00
Yavne
100.00
Israel
Merck Serono Ltd.
Herzliya Pituach
100.00
Israel
Qlight Nanotech Ltd.
Jerusalem
100.00
Israel
Sigma-Aldrich Israel Ltd.
Rehovot
100.00
Mauritius
Millipore Mauritius Ltd.
Cyber City
InterPharm Laboratories Ltd.
100.00
Israel
Yavne
Montevideo
100.00
Caracas
100.00
Caracas
100.00
MEA
Egypt
Merck Ltd.
Cairo
100.00
Israel
Inter-Lab Ltd.
Yavne
100.00
Israel
InterPharm Industries Ltd.
100.00
256 Consolidated Financial Statements Notes to the Group Accounts
Equity interest
Country
South Africa
United Arab
Emirates
Merck Serono Middle East FZ-LLC
Dubai
100.00
II. Companies not consolidated due to secondary importance
Thereof:
Merck KGaA (%)
Germany
Germany
AB Pensionsverwaltung GmbH
Zossen
100.00
100.00
Germany
Germany
Germany
100.00
Tunis
Merck SARL
Tunisia
Company
Registered Office
(%)
Merck (Pty) Ltd.
Halfway House
100.00
South Africa
Merck Pharmaceutical Manufacturing (Pty) Ltd.
100.00
Wadeville
South Africa
Sigma-Aldrich (Pty) Ltd.
Kempton Park
100.00
Tunisia
Merck Promotion SARL
Tunis
100.00
100.00
Germany
Lima
Panama City
45.11
Vietnam
Merck Vietnam Ltd.
Ho Chi Minh City
100.00
Latin America
Argentina
Merck S.A.
Argentina
Sigma-Aldrich de Argentina S.r.l.
Brazil
Merck S.A.
Brazil
Sigma-Aldrich Brasil Ltda.
Chile
Merck S.A.
Chile
Bangkok
Sigma-Aldrich Quimica Ltda.
Merck Ltd.
100.00
Taipei
100.00
Taiwan
Taiwan
Merck Display Technologies Ltd.
Merck Ltd.
Taipei
100.00
Taipei
100.00
Taiwan
Merck Performance Materials Co., Ltd.
Taipei
100.00
100.00
Taiwan
SAFC Hitech Taiwan Co. Ltd.
Kaohsuing
Thailand
Colombia
Merck S.A.
Ecuador
100.00
São Paulo
100.00
Santiago de Chile
100.00
Providencia
100.00
Bogota
100.00
Quito
100.00
Guatemala City
100.00
Mexico City
100.00
Toluca
100.00
Rio de Janeiro
100.00
Buenos Aires
100.00
Merck C.A.
Guatemala
Merck, S.A.
Mexico
Mexico
Panama
Merck, S.A. de C.V.
Sigma-Aldrich Quimica, S. de R.L. de C.V.
100.00
Mesofarma Corporation
Merck Peruana S.A.
Uruguay
ARES Trading Uruguay S.A.
Venezuela
Merck S.A.
Venezuela
Representaciones MEPRO S.A.
Buenos Aires
Peru
100.00
Germany
Darmstadt
Sigma Entity One Limited
UFC Ltd.
Ultrafine Limited
Webnest Ltd.
Gillingham
100.00
Gillingham
100.00
Gillingham
100.00
Gillingham
100.00
United Kingdom
Wessex Biochemicals Ltd.
Poole
100.00
North America
United States
United Kingdom
Aldrich-Boranes, Inc.
United Kingdom
United Kingdom
100.00
100.00
Merck Cross Border Trustees Ltd.
Hull
100.00
Merck Ltd.
Hull
100.00
Merck Pension Trustees Ltd.
Hull
100.00
United Kingdom
Nature's Best Health Products Ltd.
Tunbridge Wells
100.00
United Kingdom
Sigma Chemical Co. Ltd.
Poole
United Kingdom
Milwaukee
100.00
United States
United States
Sigma Chemical Corp.
United States
Midwest Consultants Co.
Research Organics Foreign Trade Corporation
S and F Properties, Inc.
Second President Properties Company
Sigma-Aldrich China, Inc.
United States
Sigma-Aldrich Subsidiary I Corp.
United States
Techcare Systems, Inc.
United States
TocopheRx, Inc.
Notes to the Group Accounts Consolidated Financial Statements 257
Equity interest
Thereof:
United States
United States
United States
GLM Holdings, Inc.
Barton Real Estate Holdings, Inc.
St. Louis
100.00
United States
Barton/Second Streets Redevelopment Corp.
St. Louis
100.00
United States
Gillingham
Fluka Chemical Corp.
100.00
United States
FMI Holdings, Inc.
St. Louis
100.00
Country
Company
United States
United States
St. Louis
Merck 16. Allgemeine Beteiligungs-GmbH
Merck 17. Allgemeine Beteiligungs-GmbH
Merck 18. Allgemeine Beteiligungs-GmbH
Merck 19. Allgemeine Beteiligungs-GmbH
Merck 20. Allgemeine Beteiligungs-GmbH
Fluka Chemical Company, Ltd.
100.00
100.00
Germany
Merck Wohnungs- und Grundstücksverwaltungsgesellschaft
mbH
Darmstadt
100.00
Wilmington
Other European
countries
Switzerland
United Kingdom
United Kingdom
Greece
Sigma-Aldrich (OM) Ltd.
Ireland
SAFC Arklow Ltd.
Luxembourg
Sigma-Aldrich Global S.a.r.l.
Darmstadt
Netherlands
100.00
Darmstadt
100.00
100.00
Darmstadt
100.00
100.00
Darmstadt
100.00
100.00
Darmstadt
100.00
100.00
Darmstadt
100.00
100.00
Germany
Germany
Merck 21. Allgemeine Beteiligungs-GmbH
Merck Patent GmbH
100.00
Merck Window Technologies B.V.
Netherlands
MS Ventures B.V.
Amsterdam
100.00
Algés
100.00
Moscow
100.00
Moscow
100.00
Moscow
100.00
Lausanne
80.00
Plan-les-Ouates
75.00
Gillingham
100.00
Gillingham
100.00
100.00
Eindhoven
100.00
Portugal
Laquifa Laboratorios S.A.
Russia
Chemical Trade Limited
Russia
Russia
Switzerland
MedChem Limited
United Kingdom
United Kingdom
United Kingdom
United Kingdom
SAF-LAB
Calypso Biotech SA
B-Line Systems Limited
Bristol Organics Ltd.
Athens
100.00
Arklow
100.00
Luxembourg
Asceneuron SA
Registered Office
Yongin City
Yongin City
The Woodlands
100.00
United States
Supelco, Inc.
Bellefonte
100.00
APAC
Australia
Merck Pty. Ltd.
Bayswater
100.00
Australia
Merck Serono Australia Pty. Ltd.
Sydney
100.00
Australia
SAFC Biosciences Pty. Ltd.
Sigma-Genosys of Texas LLC
Castle Hill
United States
St. Louis
Sigma-Aldrich Manufacturing LLC
St. Louis
100.00
United States
Sigma-Aldrich Missouri Insurance Company
St. Louis
100.00
United States
Sigma-Aldrich Research Biochemicals, Inc.
Natick
100.00
United States
Sigma-Aldrich RTC, Inc.
Laramie
100.00
United States
Sigma-Aldrich, Inc.
100.00
100.00
Australia
Sigma-Aldrich Oceania Pty. Ltd.
China
Merck Electronic Materials (Suzhou) Ltd.
Suzhou
100.00
China
Merck Holding (China) Co., Ltd.
Shanghai
100.00
China
Merck Ltd.
Hong Kong
100.00
China
Merck Millipore Lab Equipment (Shanghai) Co., Ltd.
Shanghai
100.00
China
100.00
Shanghai
Merck Display Materials (Shanghai) Co., Ltd.
China
Castle Hill
100.00
Australia
Sigma-Aldrich Pty. Ltd.
Castle Hill
100.00
China
AZ Electronic Materials (Hong Kong) Finance Ltd.
United States
Hong Kong
China
Beijing Skywing Technology Co., Ltd.
Beijing
100.00
China
Merck Chemicals (Shanghai) Co., Ltd.
Shanghai
100.00
100.00
Merck Performance Materials Hong Kong Ltd.
100.00
Sigma-Aldrich Lancaster, Inc.
Cleveland
100.00
Lenexa
100.00
Carlsbad
100.00
Haverhill
100.00
Madison
100.00
254 Consolidated Financial Statements Notes to the Group Accounts
Equity interest
Country
United States
United States
Company
SAFC-JRH Holding Company, Inc.
100.00
Serono Laboratories Inc.
San Diego
St. Louis
United States
Millipore UK Holdings I, LLC
United States
Millipore UK Holdings II, LLC
United States
United States
United States
United States
United States
United States
United States
Ormet Circuits, Inc.
SAFC Biosciences, Inc.
Wilmington
100.00
Wilmington
100.00
Wilmington
100.00
Olive/Ewing/Laclede Redevelopment Corporation
Research Organics, LLC
SAFC Carlsbad, Inc.
SAFC Hitech, Inc.
SAFC, Inc.
100.00
Registered Office
Lenexa
(%)
100.00
United States
Sigma-Aldrich Corporation
St. Louis
100.00
United States
Sigma-Aldrich Finance Co.
St. Louis
100.00
United States
Sigma-Aldrich Foreign Holding Co.
St. Louis
100.00
United States
Sigma-Aldrich Holding LLC
St. Louis
100.00
United States
100.00
St. Louis
Sigma-Aldrich Co. LLC
United States
Rockland
100.00
United States
Sigma Chemical Foreign Holding LLC
St. Louis
100.00
United States
Sigma Redevelopment Corporation
St. Louis
St. Louis
United States
Sigma Second Street Redevelopment Corporation
St. Louis
100.00
United States
Sigma-Aldrich Business Holdings, Inc.
St. Louis
100.00
100.00
100.00
Hong Kong
China
100.00
Malaysia
Sigma-Aldrich (M) Sdn Bhd
Subang Jaya
100.00
New Zealand
Merck Ltd.
Palmerston North
100.00
Pakistan
Merck (Pvt.) Ltd.
Karachi
75.00
26.00
Pakistan
Merck Pharmaceuticals (Pvt.) Ltd.
Karachi
Petaling Jaya
75.00
Merck Sdn Bhd
100.00
(%)
Merck KGaA (%)
Japan
Merck Performance Materials IP G.K.
Tokyo
100.00
Japan
Merck Performance Materials Manufacturing G.K.
Tokyo
100.00
Japan
Merck Serono Co., Ltd.
Tokyo
100.00
Japan
Sigma-Aldrich Japan G.K.
Tokyo
Malaysia
Pakistan
Merck Specialities (Pvt.) Ltd.
Karachi
Merck Electronic Materials Ltd.
Seoul
100.00
South Korea
Merck Ltd.
Seoul
100.00
South Korea
Merck Performance Materials Ltd.
Pyungtaek-shi
100.00
South Korea
South Korea
Taiwan
Sigma-Aldrich Holding Ltd.
Sigma-Aldrich Korea Ltd.
AZ EM Taiwan Holding Co. Ltd.
South Korea
100.00
Seoul
AZ Chem Korea Ltd.
100.00
Philippines
Merck Inc.
Makati City
100.00
Singapore
Merck Performance Materials Pte. Ltd.
Singapore
Registered Office
100.00
Merck Pte. Ltd.
Singapore
100.00
Singapore
Sigma-Aldrich Pte. Ltd.
Singapore
100.00
South Korea
Singapore
100.00
Company
Thereof:
Beijing
100.00
China
SAFC Hitech (Shanghai) Co., Ltd.
Shanghai
100.00
China
China
China
Sigma-Aldrich (Shanghai) Trading Co., Ltd.
Sigma-Aldrich (Wuxi) Life Science & Technology Co., Ltd.
Sigma-Aldrich Hong Kong Holding Ltd.
Shanghai
100.00
Wuxi
100.00
Hong Kong
Merck Serono Co., Ltd.
100.00
China
Beijing
Merck Performance Materials Hong Kong Services Ltd.
Hong Kong
100.00
China
Merck Pharmaceutical (HK) Ltd.
Hong Kong
100.00
China
Merck Pharmaceutical Manufacturing (Jiangsu) Co., Ltd.
Nantong
100.00
China
Merck Serono (Beijing) Pharmaceutical Distribution Co., Ltd.
Beijing
100.00
China
Merck Serono (Beijing) Pharmaceutical R&D Co., Ltd.
100.00
China
Suzhou Taizhu Technology Development Co., Ltd.
Taicang
Bangalore
Jakarta
100.00
100.00
Jakarta
86.65
Japan
Merck Ltd.
Tokyo
100.00
Japan
Merck Performance Materials G.K.
Tokyo
100.00
Thereof:
Merck KGaA (%)
Notes to the Group Accounts Consolidated Financial Statements 255
Equity interest
P.T. Merck Chemicals and Life Sciences
P.T. Merck Tbk.
Indonesia
Indonesia
100.00
100.00
India
Merck Life Science Pvt. Ltd.
Mumbai
100.00
India
Merck Ltd.
Mumbai
Country
51.80
Merck Performance Materials Pvt. Ltd.
Sanpada New Mumbai
100.00
India
India
Merck Specialities Pvt. Ltd.
Sigma-Aldrich Chemicals Private Limited
Mumbai
India
Millipore Pacific Ltd.
St. Louis
Merck KGaA (%)
Merck Consumer Health Holding GmbH
Darmstadt
100.00
100.00
Germany
Merck Export GmbH
Darmstadt
100.00
100.00
Germany
Merck Financial Services GmbH
Darmstadt
100.00
100.00
Germany
Merck Financial Trading GmbH
Gernsheim
Germany
100.00
100.00
Merck China Chemicals Holding GmbH
Merck 13. Allgemeine Beteiligungs-GmbH
Darmstadt
100.00
Germany
Merck 15. Allgemeine Beteiligungs-GmbH
Darmstadt
100.00
Germany
Merck Accounting Solutions & Services Europe GmbH
Darmstadt
100.00
100.00
Germany
Merck Chemicals GmbH
Darmstadt
100.00
Germany
Darmstadt
100.00
Germany
Merck Holding GmbH
Merck Schuchardt OHG
Hohenbrunn
100.00
100.00
Germany
Merck Selbstmedikation GmbH
Darmstadt
100.00
Germany
Merck Serono GmbH
Darmstadt
100.00
100.00
Germany
Merck Versicherungsvermittlung GmbH
Darmstadt
100.00
Germany
100.00
Wiesbaden
Merck Performance Materials GmbH
Gernsheim
100.00
100.00
Germany
Merck International GmbH
Darmstadt
100.00
100.00
Germany
Germany
Darmstadt
100.00
Germany
Merck Life Science GmbH
Eppelheim
100.00
100.00
Germany
Merck Internationale Beteiligungen GmbH
100.00
100.00
Darmstadt
Notes to the Group Accounts Consolidated Financial Statements
249
In this context, the present value of the future settlement
amount is used as the basis for measurement. The settlement
amount is determined in accordance with the rules set out in
IAS 37 and is based on the best estimate.
(66) Share-based compensation
programs
Provisions have been set up for obligations from share-based
compensation programs. These share-based compensation
programs with cash settlement are aligned not only with tar-
get achievement based on key performance indicators, but
above all also with the long-term performance of Merck shares.
Certain executives and employees could be eligible to receive
a certain number of virtual shares - Merck Share Units (MSUS) -
at the end of a three-year performance cycle. The number of
MSUS that could be received depends on the total value
defined for the respective person and the average closing price
of Merck shares in Xetra® trading during the last 60 trading
days prior to January 1 of the respective fiscal year (reference
price). In order for members of top management to receive
payment, they must personally own an investment in Merck
shares dependent on their respective fixed annual compen-
sation. When the three-year performance cycle ends, the
number of MSUS to then be granted is determined based on
the development of two key performance indicators (KPIs).
These are on the one hand the performance of the Merck
share price compared to the performance of the DAX® with a
weighting of 70%, and on the other hand the development of
the EBITDA pre margin during the performance cycle as a pro-
portion of a defined target value with a weighting of 30%.
Depending on the development of the KPIs, at the end of
the respective performance cycle the eligible participants are
granted between 0% and 150% of the MSUS they could be
eligible to receive.
Based on the MSUS granted, the eligible participants
receive a cash payment at a specified point in time in the year
after the three-year performance cycle has ended. The value
of a granted MSU, which is relevant for payment, corresponds
to the average closing price of Merck shares in XetraⓇ trading
during the last 60 trading days prior to January 1 after the
performance cycle. The payment amount is limited to three
times the reference price. The fair value of the obligations is
recalculated on each balance sheet date using a Monte Carlo
simulation based on the previously described KPIs. The expected
volatilities are based on the implicit volatility of Merck shares
and the DAX® in accordance with the remaining term of the
respective tranche. The dividend payments incorporated into
the valuation model orient towards medium-term dividend
expectations.
The Executive Board members have their own Long-Term
Incentive Plan, the conditions of which largely correspond to
the Long-Term Incentive Plan described here. A description of
the plan for the Executive Board can be found in the compen-
sation report, which is part of the Statement on Corporate
Governance.
250 Consolidated Financial Statements Notes to the Group Accounts
List of Shareholdings
(67) List of shareholdings
The shareholdings of Merck KGaA as of December 31, 2015 are
presented in the following table:
Country
Company
I. Fully consolidated companies
Registered Office
Equity interest
(%)
Madrid
Thereof:
100.00
100.00
Switzerland
100.00
Stockholm
Sigma-Aldrich Sweden AB
Sweden
100.00
Solna
Merck Chemicals and Life Science AB
Sweden
100.00
Solna
Merck AB
Sweden
100.00
Tres Cantos
Sigma-Aldrich Quimica S.L.
Spain
Madrid
Merck KGaA (%)
Germany
Germany
Darmstadt
100.00
100.00
Germany
Emedia Export Company mbH
Gernsheim
100.00
Germany
Germany
IHS Intelligent Healthcare Solutions GmbH
Litec-LLL GmbH
Frankfurt-Main
100.00
Greifswald
100.00
100.00
Germany
Merck 12. Allgemeine Beteiligungs-GmbH
Chemitra GmbH
Germany
100.00
Berlin
Merck KGaA
Darmstadt
Parent
Company
Germany
Germany
AB Allgemeine Pensions GmbH & Co. KG
Allergopharma GmbH & Co. KG
Zossen
100.00
100.00
100.00
100.00
Germany
Allergopharma Verwaltungs GmbH
Darmstadt
100.00
100.00
Germany
Biochrom GmbH
Reinbek
Allergopharma AG
Germany
Gernsheim
Survac ApS
Frederiksberg
100.00
100.00
Estonia
Merck Serono OÜ
Tallinn
100.00
Finland
Merck Life Science OY
Espoo
100.00
Finland
Merck OY
Espoo
100.00
Finland
Denmark
Sigma-Aldrich Finland OY
100.00
Sigma-Aldrich Denmark ApS
Zagreb
100.00
Prague
100.00
Czech Republic
Sigma-Aldrich spol.s.r.o.
Prague
100.00
Denmark
Merck A/S
Hellerup
100.00
Denmark
Merck Life Science A/S
Hellerup
100.00
Denmark
Broendby
Helsinki
100.00
France
100.00
Belgrade
Merck d.o.o. Beograd
Serbia
100.00
Moscow
Sigma-Aldrich Rus
Russia
100.00
Moscow
Merck LLC
Russia
100.00
Bucharest
Merck Romania S.R.L.
Romania
100.00
Slovakia
Merck spol.s.r.o.
Bratislava
100.00
Gonnon S.A.S.
Lyon
100.00
France
Laboratoire Médiflor S.A.S.
Lyon
100.00
France
Merck spol.s.r.o.
Merck Biodevelopment S.A.S.
100.00
Merck Chemicals and Life Science S.A.
Merck, S.L.U.
Spain
Spain
100.00
Ljubljana
Merck d.o.o.
Slovenia
Lyon
Merck Vierte Allgemeine Beteiligungsgesellschaft mbH
Merck d.o.o.
Croatia
Germany
Sigma-Aldrich Produktions GmbH
Steinheim
100.00
Germany
Sigma-Aldrich Verwaltungs GmbH
Steinheim
100.00
100.00
Other European
countries
Austria
Allergopharma Vertriebsgesellschaft m.b.H.
Vienna
100.00
Notes to the Group Accounts Consolidated Financial Statements 251
Equity interest
100.00
Thereof:
Steinheim
Germany
100.00
Germany
Sigma-Aldrich Biochemie GmbH
Steinheim
100.00
Germany
Sigma-Aldrich Chemie GmbH
Steinheim
100.00
Germany
Sigma-Aldrich Chemie Holding GmbH
Taufkirchen
100.00
Germany
Sigma-Aldrich Grundstücks GmbH & Co. KG
Steinheim
100.00
Sigma-Aldrich Logistik GmbH
Country
Company
Registered Office
100.00
Belgium
Merck Consumer Healthcare N.V.-S.A.
Overijse
100.00
Belgium
Merck N.V.-S.A.
Overijse
100.00
Belgium
Sigma-Aldrich BVBA/SPRL
Diegem
100.00
Bulgaria
Merck Bulgaria EAD
Sofia
100.00
Overijse
Merck Chemicals N.V./S.A.
Belgium
100.00
(%)
Merck KGaA (%)
Austria
Merck Chemicals and Life Science GesmbH
Vienna
100.00
Austria
Merck Gesellschaft mbH
Czech Republic
Vienna
Austria
Merck KGaA & Co. Werk Spittal
Spittal
100.00
99.00
Austria
Sigma-Aldrich Handels GmbH
Vienna
100.00
(%)
Therwil
Switzerland
Marcus Kuhnert
Bernd Reckmann
100.00
Wilmington
100.00
St. Louis
KL Acquisition Corp.
Mario Finance Corp.
Millipore Asia Ltd.
United States
United States
United States
United States
100.00
Rockland
EMD Serono, Inc.
United States
100.00
Billerica
EMD Serono Research & Development Institute, Inc.
United States
100.00
Belén Garijo Lopez
Rockland
Kai Beckmann
farms
7.75
S.
Stefan Oschmann
раста викова В.Воя
Kai Beckmann
Belén Garijo Lopez
Marcus Kuhnert
Bernd Reckmann
258 Responsibility Statement
RESPONSIBILITY STATEMENT
To the best of our knowledge, and in accordance with the applicable reporting principles, the consolidated financial statements
of the Merck Group give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group, and the
combined management report includes a fair review of the development and performance of the business and the position of
the Group, together with a description of the material opportunities and risks associated with the expected development of the
Group.
Darmstadt, February 18, 2016
4.1.my
Karl-Ludwig Kley
Bohum
S.
Stefan Oschmann
benkenst B. Redh
EMD Serono Holding Inc.
United States
100.00
United States
100.00
Rocklin
Cell Marque Corporation
United States
100.00
Rockville
BioReliance Intermediate, Inc.
United States
100.00
Rockville
BioReliance Holdings, Inc.
100.00
Rockville
100.00
Seattle
100.00
Cerilliant Corporation
Round Rock
100.00
United States
Philadelphia
EMD Performance Materials Corp.
United States
100.00
Billerica
EMD Millipore Corporation
United States
100.00
69.00
Rockland
United States
100.00
Wilmington
EMD Finance LLC
United States
100.00
Quincy
EMD Accounting Solutions & Services America, Inc.
EMD Holding Corp.
Urbana
Yavne
Karl-Ludwig Kley
Japan
New Zealand
Biochrom Australia Pty. Ltd.
Proligo Australia Pty. Ltd.
BioReliance KK
Bayswater
100.00
Castle Hill
100.00
Tokyo
100.00
Sigma-Aldrich New Zealand Co.
Christchurch
100.00
South Korea
SAFC Hitech Korea Ltd.
Yongin City
100.00
Australia
Thailand
Australia
65.78
100.00
St. Louis
Cleveland
100.00
100.00
Cleveland
100.00
St. Louis
100.00
St. Louis
100.00
St. Louis
100.00
St. Louis
100.00
St. Louis
100.00
Groton
APAC
Sigma-Aldrich (Thailand) Co., Ltd.
Bangkok
100.00
Switzerland
Switzerland
Prexton Therapeutics SA
Vaximm AG
Plan-les-Ouates
31.51
Basel
24.66
APAC
South Korea
Soulbrain Sigma-Aldrich Ltd.
Gongju-Si
50.00
MEA
Israel
Neviah Genomics Ltd.
Darmstadt, February 18, 2016
4.1.my
countries
Other European
III. Associates not included at equity due to secondary importance
100.00
Latin America
Dominican
Republic
Merck Dominicana, S.R.L.
Santo Domingo
100.00
MEA
Morocco
Bilm
Merck Maroc S.A.R.L.
100.00
Nigeria
Merck Pharmaceutical and Life Sciences Ltd.
Lagos
100.00
South Africa
Serono South Africa Ltd.
Johannesburg
Casablanca
100.00
BioReliance Corporation
United States
United States
Aberdeen
100.00
Stockley Park
100.00
Gillingham
100.00
Istanbul
London
BioReliance U.K. Acquisition Limited
AZ Electronic Materials (UK) Ltd.
BioReliance Limited
Merck Ilac Ecza ve Kimya Ticaret AS
Aldrich Chemical Co. Ltd.
United Kingdom
United Kingdom
United Kingdom
United Kingdom
100.00
Buchs
100.00
Algés
100.00
253
100.00
Nottingham
100.00
Tunbridge Wells
100.00
Bromborough
Thereof:
Merck KGaA (%)
(%)
Registered Office
Merck Chemicals Ltd.
Lamberts Healthcare Ltd.
Epichem Group Limited
Company
United Kingdom
United Kingdom
Country
United Kingdom
Equity interest
Notes to the Group Accounts Consolidated Financial Statements
Sigma-Aldrich Production GmbH
Switzerland
Turkey
100.00
Switzerland
100.00
Läufelfingen
Merck Biosciences AG
Switzerland
100.00
Zug
Merck (Schweiz) AG
Switzerland
51.63
51.63
Altdorf
Merck & Cie
Switzerland
100.00
Aubonne
Ares Trading SA
Merck Performance Materials (Suisse) SA
Coinsins
100.00
Switzerland
St. Gallen
Sigma-Aldrich International GmbH
Switzerland
100.00
Buchs
Sigma-Aldrich Chemie GmbH
Switzerland
100.00
United Kingdom
Buchs
Switzerland
100.00
Chéserex
SeroMer Holding SA
Switzerland
100.00
Coinsins
Merck Serono SA
Sigma-Aldrich (Switzerland) Holding AG
Aldrich-APL, LLC
Merck Consumer Health Care Ltd.
100.00
Toronto
Millipore (Canada) Ltd.
Canada
100.00
Mississauga
EMD Inc.
Canada
100.00
Toronto
EMD Crop BioScience Canada Inc.
Canada
100.00
Toronto
EMD Chemicals Canada Inc.
Canada
North America
100.00
100.00
Gillingham
Canada
Oakville
Amnis Corp.
United States
United States
100.00
St. Louis
Aldrich Chemical Foreign Holding LLC
United States
100.00
Milwaukee
Aldrich Chemical Co. LLC
United States
100.00
St. Louis
Portugal
3506 South Broadway Redevelopment Corp.
United States
100.00
Sigma-Aldrich Canada Co.
100.00
Gillingham
100.00
United Kingdom
100.00
London
Merck Serono Europe Ltd.
United Kingdom
100.00
Stockley Park
Merck Performance Materials Services UK Ltd.
United Kingdom
100.00
Hull
Merck Investments Ltd.
United Kingdom
100.00
Feltham
Merck Holding Ltd.
United Kingdom
Merck Serono Ltd.
Feltham
100.00
United Kingdom
Gillingham
100.00
Hull
100.00
Bromborough
100.00
Gillingham
100.00
Hull
London
Millipore UK Holdings LLP
SAFC Biosciences Limited
SAFC Hitech Limited
Seven Seas Limited
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
100.00
Feltham
Millipore (U.K.) Ltd.
Sigma-Aldrich Company Limited
Sigma-Aldrich Holdings Ltd.
Sigma-Genosys Limited
100.00
Tuesday, November 15, 2016
Report on the third quarter
AUDITOR'S REPORT
4,454
3,698
5,637
13,713
143.3
1,394
1,091
440
2,076
4,097
97.3
4,145
3,362
3,257
3,561
9,616
170.0
329
366
25.0
179
143
110
5,539
144
8.9
12,855
11,801
11,069
10,415
10,494
80
407
57.8
1,660
9,867
11,396
25,339
122.4
3,113
2,954
2,647
2,990
4,009
34.1
6,399
6,626
7,385
10,480
7,350
-29.9
938
1,474
1,534
1,691
23.4
2,738
2,220
2,620
2,021
2,328
-71.1
832
2,879
981
730
2,115
481
514
6.9
More information about Merck can be found on the Web at
www.merckgroup.com and in the brochure "Merck - Who we are",
which you may read or order at www.merckgroup.com/publications.
You can order all publications from Group Communications,
Merck KGaA, 64271 Darmstadt, comms@merckgroup.com.
Published on March 8, 2016 by
Merck KGaA, Group Communications
Frankfurter Strasse 250,
64293 Darmstadt, Germany
Telephone: +49 6151 72-0
Fax: +49 6151 72-5577
E-Mail: comms@merckgroup.com
Website: www.merckgroup.com
Concept and design
3st kommunikation GmbH, Mainz
www.3st.de
Photos
Getty (pages 20-22)
Hartmut Nägele (pages 34, 38-39)
Urban Zintel (pages 12, 14-19)
Shutterstock (pages 8-9)
Merck
Printing
November
Thursday, May 19, 2016
Report on the first quarter
May
Thursday, August 4, 2016
Report on the second quarter
August
Friday, April 29, 2016
Annual General Meeting
The Annual Report for 2015 was published in German and
English. A fully navigable online version of the report along with
the consolidated financial statements is available on the Web at
ar2015.merckgroup.com. It has been optimized for mobile devices.
April
March
Financial Calendar for 2016
W840589
Druckfein
Paper
gutenberg beuys feindruckerei gmbh
Tuesday, March 8, 2016
Annual Press Conference
Information and Service
262 Information and Service
261
53.2
48.1
47.4
12,654
559
307
1,514
1,926
6.2
2,766
2,605
2,960
2,969
2,262
3,484
10,945
1,511
45.4
1,704
25.2
49,613
5.0
1.056
1.00
39,639
38,154
1,507
38,847
1.90
1.70
1.50
0.3
1,709
33.8
40,676
www.merckgroup.com
11,764
30,657
of which:
Cash and cash equivalents
Trade accounts receivable³
Inventories
Financial liabilities
Current
Non-current
Net equity
Liquidity
Investments in intangible assets4
Investments in property, plant and equipment4
Business free cash flow
Net financial debt
Other key data
Equity ratio (in %)
Research and development costs
Dividend per share before share split (in €) 5
Business Development 2011-2015
2015
2014
2013
2012
2011
Current assets
6 Proposal on the appropriation of profits for 2015.
4 According to the consolidated cash flow statement.
3The composition of trade accounts receivable has changed, see "Changes to accounting and measurement principles and
disclosure changes" in the Notes to the Group accounts; fiscal 2014 has been adjusted accordingly.
2 Taking into account the share split in 2014; fiscal 2011 to 2013 have been adjusted accordingly.
1The composition of net sales has changed, see "Changes accounting and measurement principles and disclosure changes"
in the Notes to the Group accounts; fiscal 2011 to 2014 have been adjusted accordingly.
Employees (number as of December 31)
Dividend per share after share split (in €)5
5 In fiscal 2014, a 2:1 share split took place.
Change
in %
Property, plant and equipment
of which:
Auditor's Report
259
We have audited the consolidated financial statements prepared by MERCK Kommanditgesellschaft auf Aktien, Darmstadt, com-
prising the Consolidated Income Statement, the Consolidated Statement of Comprehensive Income, the Consolidated Balance
Sheet, the Consolidated Cash Flow Statement, the Consolidated Statement of Changes in Net Equity, and the Notes to the Group
accounts, together with the Combined Management Report for the business year from January 1 to December 31, 2015. The
preparation of the consolidated financial statements and the Combined Management Report in accordance with IFRSS, as adopt-
ed by the EU, and the additional requirements of German commercial law pursuant to § 315a (1) HGB [Handelsgesetzbuch
"German Commercial Code"] and supplementary provisions of the articles of association are the responsibility of the parent
company's management. Our responsibility is to express an opinion on the consolidated financial statements and on the
Combined Management Report based on our audit.
We conducted our audit of the consolidated financial statements in accordance with § 317 HGB [Handelsgesetzbuch "German
Commercial Code"] and German generally accepted standards for the audit of financial statements promulgated by the Institut
der Wirtschaftsprüfer [Institute of Public Auditors in Germany] (IDW). Those standards require that we plan and perform the
audit such that misstatements materially affecting the presentation of the net assets, financial position and results of operations
in the consolidated financial statements in accordance with the applicable financial reporting framework and in the Combined
Management Report are detected with reasonable assurance. Knowledge of the business activities and the economic and legal
environment of the Group and expectations as to possible misstatements are taken into account in the determination of audit
procedures. The effectiveness of the accounting related internal control system and the evidence supporting the disclosures in
the consolidated financial statements and the Combined Management Report are examined primarily on a test basis within the
framework of the audit. The audit includes assessing the annual financial statements of those entities included in consolidation,
the determination of entities to be included in consolidation, the accounting and consolidation principles used and significant
estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements and
Combined Management Report. We believe that our audit provides a reasonable basis for our opinion.
Our audit has not led to any reservations.
In our opinion, based on the findings of our audit, the consolidated financial statements comply with IFRSS, as adopted by the
EU, the additional requirements of German commercial law pursuant to § 315a (1) HGB and supplementary provisions of the
articles of association and give a true and fair view of the net assets, financial position and results of operations of the Group in
accordance with these requirements. The Combined Management Report is consistent with the consolidated financial statements
and as a whole provides a suitable view of the Group's position and suitably presents the opportunities and risks of future
development.
Frankfurt/Main, February 19, 2016
KPMG AG
Wirtschaftsprüfungsgesellschaft
Original German version signed by
Braun
Wirtschaftsprüfer
Rackwitz
Wirtschaftsprüfer
260
Business Development 2011-2015
BUSINESS DEVELOPMENT 2011-2015
Non-current assets
Total assets
Assets and liabilities
Earnings per share (in €)²
Profit after tax
Profit before income tax
Intangible assets (incl. goodwill)
Margin (% of net sales)¹
Margin (% of net sales)¹
EBITDA
Operating result (EBIT)
Net sales¹
Earnings performance
€ million
This overview may include historically adjusted values in order to ensure comparability with 2015.
EBITDA pre exceptionals
9,922
10,756
1,132
30.3
29.8
28.3
839
709
1,389
1,557
1,487
-4.5
618
579
1,209
1,165
1,124
-3.5
1.39
1.30
15,530
13,434
15,017
15,723
46.1
38,007
27.6
26,010
21,643
22,122
-3.8
2.56
2.66
2.77
20,819
27.5
7.1
3,630
3,069
2,360
2,731
14.3
15.5
15.0
3,123
9.0
4.6
1,843
12,845
11,363
1,762
10,735
1,611
964
11.4
97.4
3,354
27.5
3,388
3,253
2,965
2,724
4.1
-276
7.4
-265
-605
7
26.1
27.5
28.6
21.9
-184
Margin (% of net sales)¹
Exceptionals
13.0
But that's far off the mark, especially since the incidence of
non-communicable diseases such as diabetes, cardiovascular
disorders and cancer is rapidly growing. Around 12 million
people in Africa suffer from diabetes today. According to the
International Diabetes Federation (IDF), the number of people
with diabetes in Africa is expected to double by 2035. The IDF
has determined that in Africa, 76% of deaths due to diabetes
are in people under the age of 60. Economic progress is the
main reason for the spread of the disease. A significantly
growing middle class is giving rise to new eating habits and
an unhealthy lifestyle. Zena Ali also says, "I used to eat a lot
of junk food and after my diagnosis I had to completely
change my diet." Paradoxically, around 70% of people world-
wide classified as poor live in emerging economies, mainly in
Africa and Asia. The population has little knowledge of the
causes of and therapies for diseases, especially in rural areas.
avelumab
PD-1
ligand
The immunotherapy avelumab
is thought to prevent the T-cell
from binding to the cancer cell.
The cancer cell can thus no longer
suppress the immune reaction.
Avelumab binds to the PD-1
ligands of the tumor cell and
is thought to give the natural
killer cell the command to
attack the cancer cell.
A camouflaged attack
So why are scientists excited about anti-
PD-L1 antibodies? In order to explain
the relatively complex functions of anti-
PD-L1 and anti-PD-1, we need to consider
the purpose of the immune system. Its
capability as a successful defense against
invaders that cause disease (patho-
gens) depends on a collective effort by
organs, tissues and the immune cells,
commonly known as white blood cells.
Immune cells first scan the tissue for
any sign of injury, infection and general
malfunction, including signs of uncon-
trolled cell division that could poten-
tially form a malignant tumor. T-cells
(so-called because they mature in the
thymus) comprise a key subtype of
immune cells that are able to recognize
and eliminate hostile attacks by patho-
gens, in concert with other immune cells.
Microorganisms have specific structures
on their cell surface, called antigens,
which T-cells are able to recognize
using very specific receptors, and stim-
ulate the destruction of the pathogens.
The memory of this specific antigen is
then retained by the immune system to
prevent a repeat infection. This process
is highly effective at eliminating patho-
genic invaders, but it can also damage
local tissues - the reason for the hot,
red, painful area associated with inflam-
mation. Once the infection has been
resolved, local tissues release so-called
"checkpoint-inhibitor" molecules, such as
PD-L1, which act to switch off the T-cell
response. Unfortunately, cancer cells
exploit this mechanism they cleverly
camouflage themselves using the PD-L1
and other inhibitors. The consequences
are disastrous: They are no longer rec-
ognized as enemies by the immune cells.
-
The power of antibodies
It is at this precise point where the anti-
bodies anti-PD-L1 and anti-PD-1 come
in. Their job is to turn off the mecha-
nism that masks the spread of cancer
cells. Avelumab is a molecule that binds
to the PD-L1 used by cancer cells to
camouflage themselves and is believed
to serve as a giant red flag to the
immune system, encouraging a multi-
faceted cell-mediated offensive against
the cancer cells.
Avelumab has not yet been approved.
Nevertheless, the extensive clinical
development program is making tremen-
dous progress (see interview). In the
words of Kevin Chin, Executive Medical
Director Immuno-Oncology at Merck:
"Our early clinical safety and efficacy
data for avelumab point to encouraging
therapeutic benefit for patients across
multiple types of cancer. We look for-
ward to seeing the full potential of this
therapy unfold." Moreover, the profes-
sional medical community is also follow-
ing the research activities of Merck and
Pfizer with close interest, and with opti-
mism. Dr. Mary "Nora" L. Disis, Profes-
sor, Department of Medicine, Division of
Oncology, University of Washington, says,
"The response to avelumab in patients
with previously treated, recurrent or
refractory ovarian cancer has been
promising. The data presented at ASCO
2015 are the most exciting I've seen in
ovarian cancer for this patient popula-
tion in the last ten years." Avelumab
could well emerge as a leading and sig-
nificant addition to the pharmacological
armory in the war against cancer.
Progress Magazine 23
"We're combining our resources
and expertise"
Interview with Andrew Schiermeier, Head of the Merck-Pfizer Alliance
"The data presented
at ASCO 2015 are
the most exciting
I've seen in ovarian
cancer for this
patient population in
the last ten years."
Dr. Mary "Nora" L. Disis,
Professor, Department of
Medicine, Division of Oncology,
University of Washington
What are the key strategic drivers
of the Merck-Pfizer alliance?
Andrew Schiermeier: We are combining
our resources and expertise because we
share a vision of making a real differ-
ence to patients with cancer. Our focus
is on jointly investigating avelumab* in
different cancer indications: We will
explore its potential as a single agent
and in various combinations with our
collective portfolio of approved and
investigational oncology therapies. The
alliance enables the companies to quickly
Imove into the first wave of potential
immuno-oncology-based monotherapy
treatment regimens and to potentially
take a leadership position in the next
wave of immuno-oncology combination
therapies.
Where does the main potential of
immuno-oncology and specifically
of avelumab lie?
Andrew Schiermeier: Cancer immu-
notherapies work by harnessing the
body's own immune system to attack
a tumor, either by restoring or boosting
an immune response to a malignant
tumor. Avelumab is thought to enable
the activation of T-cells and the adap-
tive immune system, while leaving other
PD-1 interactions intact. Early data also
suggest avelumab may possess unique
features, including the possible engage-
ment of the innate immune system.
Through clinical trials, we want to iden-
tify whether this effect may benefit
patients.
What are the biggest challenges
in the clinical development
program of avelumab?
Andrew Schiermeier: With the JAVELIN
program, we aim to evaluate the poten-
tial for PD-L1 inhibition with avelumab to
treat multiple types of cancer. With more
killer cell
Andrew Schiermeier, General Manager
of the Merck-Pfizer Immuno-Oncology
Alliance and Head of Global Oncology at
Merck.
Natural
Immune reaction
Ready for printing Magazine 19
In order to advance the innovation process using
inkjet printing inks, Merck has been collaborating
closely with Seiko Epson since October 2012. The
Japanese company is among the world's leading
printer manufacturers. "We are working together
on transforming our high-quality OLED materials
into printing inks that can be applied by inkjet
printing systems," says Leticia Garcia Diez, Project
Manager OLED Ink Technology at Merck. Very high
requirements are placed on these inks. After for-
mulating the OLED materials, they must be rapidly
printable in error-free superior quality - in huge
printers with a large number of print heads.
Endless team spirit
Step by step, scientists are optimizing OLED inks
with regard to their electro-optical properties, drop
and film formation, printing of stacks of different
layers, and adaptation to the print heads. A global
team of chemists, physicists, engineers and ma-
terials scientists are mastering these challenges.
Last but not least, marketing experts at Merck are
also using the close contacts they have to their
customers, namely display manufacturers from the
liquid crystals business. After all, the OLED inks,
delivered in special cartridges, are soon to be mar-
keted worldwide. "Different cultures and working
methods come together in our international and
interdisciplinary teams," says Herwig Buchholz.
"This creates a highly innovative and stimulating
environment. Coupled with our enthusiasm for
developing new technologies, this contributes
significantly to the success of our products."
Organic growth
Merck is already very well-positioned in the OLED
materials market. The high investments Merck is
making at several locations underscore the com-
pany's confidence in the future success of organic
light-emitting diodes. "In our new R&D and appli-
cation laboratory in Korea, for example, we are
collaborating closely with key customers. In addi-
tion to the continuous development of materials for
today's coating processes, we are running exciting
pilot projects to test the printing processes in large-
scale production. The first market launches of
printed OLED displays could be possible in 2017,"
says Remi Anemian, Head of Global Technical
Marketing OLED. And in Darmstadt, Merck laid the
cornerstone for a new production plant in June 2015.
Production of high-purity OLED materials for use
in displays and lighting systems is scheduled to
start in the approximately 2,000 square meter
building in summer 2016. By investing around
€ 30 million, the company is further strengthening
its position in this promising business. It's an
ambitious goal: By 2018, Merck also aims to be
the world's leading supplier of printable OLED
materials.
Remi Anemian in
front of an interactive
OLED mirror.
20 Magazine Progress
PROGRESS
Immuno-oncology therapies activate the body's own immune system to
fight tumors and they represent a new era in cancer treatment. Through
a strategic alliance, Merck and Pfizer are combining their strengths in
order to quickly capture the potential of this promising research area.
Progress Magazine 21
The immune system is the body's defense force. It
recognizes and fights bacteria, viruses and other
foreign organisms that invade the human body.
However, in this form of biological warfare, cancer
cells have long been formidable enemies the body
has struggled to defend itself against. After a can-
cer diagnosis, physicians traditionally focus on
attacking the tumor using classic methods such as
radiation, chemotherapy or surgery. Now, along with
other potentially promising treatments, immuno-
oncology is opening up new prospects in cancer
therapy because it harnesses the body's own
immune system to fight tumor cells. Innovative
immunotherapies could enhance the prospects for
patients' survival in different forms of cancer, and
therefore represent a promising opportunity for
research-based pharmaceutical companies such
as Merck.
Joining forces to fight cancer
The ace that Merck has in its hands is tiny, but
a potential game-changer in the fight against can-
cer. Its anti-programmed death-ligand (anti-PD-L1)
antibody (the proposed international non-proprietary
name is 'avelumab') could be the basis for devel-
opment of a new type of cancer drug. Merck's
view is shared by the international pharmaceutical
company Pfizer, so experts from both companies
got together on this basis, with far-reaching con-
sequences. In the spirit of the concept 'Together
we are stronger', in November 2014 this culminated
in the announcement that Merck and Pfizer had
formed an alliance to pursue what they see as
a joint objective: developing anti-cancer strategies
based on a shared understanding of the important
biological role of checkpoint inhibitors, a move
widely regarded as an exciting one within the
industry. Avelumab was discovered and initially
developed in Merck laboratories, and is one of the
company's highest-priority programs.
"The alliance with Pfizer has enabled us to quickly
accelerate the clinical development program for
avelumab, and we're on track to meet several
important milestones in the near term. Our efforts
in immuno-oncology and R&D more broadly remain
centered on making a meaningful difference in the
lives of patients around the world," says Luciano
Rossetti, Head of Global Research and Develop-
ment within Merck's Biopharma business. From
Merck's viewpoint, the alliance is also financially
worthwhile: as part of the agreement, Pfizer has
paid Merck US$ 850 million in order to jointly
develop and commercialize the anti-PD-L1 anti-
body. The two companies will share the costs and
revenues, apart from a potential bonus for Merck.
If certain milestones are achieved, Merck is eligi-
ble to receive an additional total amount of up to
US$ 2 billion from Pfizer. Another outcome of the
deal is the move by both companies to co-market
Pfizer's cancer drug XalkoriⓇ in the United States
and in further key markets. As a result, Merck has
built up its own U.S. oncology sales force, which it
previously did not have and which, ultimately, could
be used to market avelumab and other cancer
drugs. Through this alliance, Merck is thereby also
gaining faster access to the U.S. oncology market -
the world's largest. In addition, both companies will
be further developing a potential therapy of Pfizer's
with an almost identical designation: anti-PD-1.
22 Magazine Progress
T-cell
PD-1
receptor
PD-1
ligand
avelumab
Cancer cell
Anja Jatsch, Project Manager OLED Formulation
than 1,500 patients treated to date, it is
among the largest exploratory study
programs in immuno-oncology. In 2015,
more than 20 clinical programs were
initiated, six of which are pivotal trials.
Avelumab is currently being studied in
over 15 tumor types.
* Avelumab is the proposed International Nonproprietary
Name (INN) for the anti-PD-L1 monoclonal antibody
(previously known as MSB0010718C).
Fighting cancer
Merck is also focusing on the fight
against cancer. Today, developing coun-
tries account for around one-half of all
cases of cancer worldwide. And the trend
is growing sharply. Here too, the disease
distinguishes neither between rich and
poor nor between old and young. The
medical infrastructure of many African
countries is hardly prepared for this
tremendous challenge. The survival rate
of cancer patients is much lower than in
western industrialized countries. This
is a situation that the Merck Cancer
Control Program (MCCP), which was set
up in 2015, wants to change, likewise
under the umbrella of CAP. With the help
of internationally renowned oncologists,
the aim is to improve the training of
medical students in the prevention and
early detection of cancer. In addition,
Merck's E-Health initiative in coopera-
tion with the Kenyan Ministry of Health
is improving access to cancer therapies
in rural regions by using the possibili-
ties of telemedicine. "The majority of
the poor population lives in rural areas
with inadequate health facilities. Video
conferencing can help to overcome this
barrier," says James Macharia, Kenya's
Cabinet Secretary for Health.
In addition, in order to increase the
limited number of medical oncologists
in Africa, Merck is supporting a medical
oncology fellowship program. It will start
in Kenya and be rolled out across Africa.
The Merck Capacity
Advancement Program is
supporting Zena Ali, a diabetes patient
who lives in a slum outside Nairobi.
Awareness Magazine 27
Students at
With the launch of the Merck Africa
Diabetes Days, Merck is taking action
against the significant increase in the
number of diabetes patients in Africa.
The "Every Day is a Diabetes Day"
initiative aims to educate people on
the dangers of diabetes. Free diabetes
screening and medical education on
the disease is planned for more than
300,000 people throughout Africa by
the end of 2016. "Merck is thus doing
valuable prevention work. Patients with
diabetes can receive proper treatment
after being diagnosed and those at
risk can protect themselves by chang-
ing their lifestyle," says Professor C.F.
Fredrick Otieno from the University of
Nairobi School of Medicine.
Makerere University
in Uganda discussing clinical
diabetes management.
A further CAP initiative is addressing the discrim-
ination of childless or infertile women. In some
cultures, the private problem of infertility can
escalate into a public stigma with serious conse-
quences. Childless women are often isolated and
suffer from physical and mental abuse. The "More
than a Mother" campaign launched by Merck
together with the Kenya Women Parliamentary
Association (KEWOPA) and the University of Nairobi
is tackling this problem.
The program will not only provide medical educa-
tion and awareness for medical students and
healthcare providers, but it will also help govern-
ments to define policies to improve access to safe
and effective fertility care and address the need
for interventions. Joyce Lay, Kenyan Member of
Parliament and "More than a Mother" ambassador,
says, "This initiative will define several interven-
tions to reduce the social suffering and stigmati-
zation of infertile women and raise awareness
about infertility prevention, male infertility and
the necessity for a team approach to family building
among couples."
The "More than a Mother" initiative is being accom-
panied by a social media campaign in order to
enable the affected women to share their stories
of stigma.
28 Magazine Growth
GROWTH
One plus one equals three - that's the objective when two major players
within an industry join forces. Having completed the acquisition of the
laboratory supply company Sigma-Aldrich, Merck is now one of the leaders
in the global life science industry. Customers will benefit from a superb
e-commerce platform, among other things.
72 Million
visits to sigmaaldrich.com
18 Million
packages are shipped annually
The stigma of infertility
What is the current status and
when do you expect the market
launch of avelumab?
Andrew Schiermeier: By the 2016
Annual Meeting of the American Society
of Clinical Oncology (ASCO), the JAVELIN
program is expected to include up to
25 trials studying avelumab as a single-
agent and combination therapy. We
expect the first potential market launch
in 2017, with the alliance working toward
at least one additional launch per year
until 2022.
Free screening
This training program is also underway
under the auspices of CAP at Asian uni-
versities such as Maharashtra University
in India and the University of Indonesia.
By the end of 2018, Merck plans to reach
more than 25,000 students and expand
the program to further countries in Africa,
Asia, Latin America and the Middle East.
CAP also includes initiatives designed to
boost research capacities and promote
24 Magazine Awareness
AWARE
NE
A young woman participating in
a free diabetes screening offered
through Merck's CAP initiative.
FreeStyle Coriunt
Awareness Magazine 25
With its multi-year Capacity Advance-
ment Program, Merck wants to
strengthen its education and preven-
tion efforts among people living in
emerging economies and developing
countries. The focus is on diseases
such as diabetes and cancer, as well
as on fertility treatment.
Kibera is a massive slum in southwest Nairobi, the capital of
Kenya. Zena Ali is sitting on the side of a dusty street in front
of a green corrugated-iron hut selling vegetables. She tells
her story calmly, “It started around three years ago. I felt
weak, needed to urinate frequently and had a fever. A doctor
gave me some malaria drugs, but my condition did not
improve." Not until she was examined in a hospital in Nairobi
did she receive the correct diagnosis: diabetes. Zena Ali is
confused. She was born and raised in a slum. And she still
lives there today, together with her husband in very modest
circumstances. "I asked myself how could I have a disease
that otherwise only rich people get," Zena Ali recalls.
Diabetes is indeed still generally considered a disease of the
wealthy, namely overweight, elderly people living in western
industrialized countries. Africa, by contrast, is usually asso-
ciated with the fight against infectious diseases such as AIDS.
the work of young researchers in the
healthcare field, for instance the UNESCO
Merck Africa Research Summit (MARS).
The annual summit aims to help build
research capacity in Africa with a special
focus on Ebola and emergent infectious
diseases and pave the way for Africa's
development as an international hub
for research excellence and scientific
innovation.
New clinical pictures
in Africa from now through 2020
1,000
400
- 2020
⚫ 2015
Merck in Africa
Merck has been providing health-
care services in Africa since 1897.
The company currently has around
400 employees across ten African
countries and plans to increase this
number to around 1,000 by 2020.
Merck wants to more than dou-
ble its sales in Africa to € 500 mil-
lion by 2020. In November 2015,
Merck signed an agreement on the
local production of the diabetes
treatment GlucophageⓇ in Algeria,
opened a new office in Nigeria and
launched the cell counter Muse® for
the detection of HIV. In addition,
Merck supports a wide range of initi-
atives within the health field, one of
its Corporate Responsibility strate-
gic spheres of activity. An important
goal is to eliminate the worm dis-
ease schistosomiasis in cooperation
with the World Health Organization
(WHO).
26 Magazine Awareness
Deepening training
Many physicians still do not have suffi-
cient knowledge either. This is a chal-
lenge that Merck would like to actively
tackle. The five-year Capacity Advance-
ment Program (CAP) aims, among other
things, to deepen the professional
training of medical students as well as
to develop awareness and educate the
local population in emerging economies
and developing countries. "In partner-
ship with African universities - such as
the University of Nairobi, Makerere
University in Uganda, and the Univer-
sities of Namibia, Ghana, as well as
Addis Abeba in Ethiopia - 7,000 medical
students are already benefiting from
a European-accredited clinical training
program on the treatment of chronic
diseases," explains Rasha Kelej, Head
of Global Business Social Responsibility
and Market Development, responsible
for CAP at Merck.
"In partnership with
African universities
7,000 medical students
are already benefiting
from a European-
accredited clinical train-
ing program on the
treatment of chronic
diseases."
Rasha Kelej, Head of Global Business Social
Responsibility and Market Development
PLANNED HEADCOUNT
DEVELOPMENT OF MERCK
"The use of inkjet technology
brings the mass production of
large OLED televisions within
reach."
US$ 17,000,000,000: An impressive sum
that Merck paid for the U.S. life science
company Sigma-Aldrich. It was a mega
deal that attracted attention beyond
the industry. The Merck managers are
firmly convinced that it was worth every
cent. They see this as a significant mile-
stone in a long-term strategy to invest
in life science. The first major step was
the acquisition of Millipore in 2010. The
U.S. company was combined with Merck's
existing laboratory business, which was
too small to command a leading posi-
tion in the sector on its own. And with
Sigma-Aldrich, the next step, which was
actually a leap, followed. That's because
as a result of the combination, Merck is
now playing in the top league of the
gigantic life science market worth more
than € 100 billion.
More than 300,000 innovative
products
• The launch of our new branding attracted attention well beyond our
company. It is vibrant and bold and suits us splendidly. Merck has
changed considerably in recent years. We are no longer a traditional
supplier of chemicals and pharmaceuticals, but rather a leading
science and technology company with global reach. With the new
brand, we can present Merck the way it is today. The fascinating world
seen through a microscope gave us inspiration for the design of the
visual elements.
To Our Shareholders Letter from Karl-Ludwig Kley
36
• Once again, Performance Materials proved to be a reliable source of
strength and innovative ability in 2015. We clearly defended our
global market leadership in liquid crystals, particularly thanks to
continuous new developments. For example, UB-FFS technology
represented a breakthrough in the energy efficiency of displays for
mobile devices. We won the German Innovation Award for this in 2015.
The OLED (organic light-emitting diodes) business has exceeded our
own expectations. It has grown rapidly and we have gained numerous
new customers. By investing in research and production in Korea and
Darmstadt, we are paving the way for further success in this future
market.
The results so far are promising and have been recognized by the
regulatory authorities in Europe and the United States. We are
convinced that Merck can make an important contribution in immuno-
oncology and sustainably improve the lives of patients. We want to
become a leader in this highly promising market.
•In 2015, our immuno-oncology research made good progress. Its aim
is to harness the human immune system to fight cancer cells. As of
the end of 2015, we had commenced 20 clinical trials designed to test
the efficacy of our active ingredient avelumab. Lung, ovarian, gastric,
and bladder cancer are the most important indications.
With this move, we have not only considerably expanded our Life
Science business, but also completed the realignment of our portfolio
for now. Since 2007, we have been repositioning Merck through
acquisitions and divestments. This has fundamentally changed the
company and secured its future viability. Today, Merck has three
strong pillars: Healthcare, Life Science and Performance Materials.
Each business sector can now further develop and grow its busi-
nesses, both with its own resources and in synergy with the other
business sectors.
• The acquisition of the life science company Sigma-Aldrich is the big-
gest takeover in our company's history of nearly 350 years. Merck has
thus become one of the world's largest players in the life science
industry. We can now offer our customers a broader product portfolio
than any other company and we now have the leading e-commerce
platform in the sector.
Five changes that took place in 2015 were particularly important to
Merck's strategic development:
35
To Our Shareholders
Letter from Karl-Ludwig Kley
M
ARMA
Chairman of the Executive Board
Karl-Ludwig Kley
To Our Shareholders Letter from Karl-Ludwig Kley
34
We want the dividend to reflect the positive development of the com-
pany. Therefore, we will propose to the Annual General Meeting to
increase the dividend by € 0.05 to € 1.05 per share.
The soaring stock markets at the beginning of 2015 also fueled Merck
shares. On April 10, our share price hit a new all-time high of € 111.25.
At the same time, our shares proved to be more resilient than other
equities in the second half of the year. For the year as a whole, the
Merck share price rose by 14%, outperforming the DAX® by nearly five
percentage points.
Once again, our focus on global growth markets paid off in 2015. At
33%, Asia-Pacific not only generated the largest proportion of Group
sales, but also achieved the highest sales growth. More than half our
overall sales growth was achieved in this region.
Business free cash flow was € 2.8 billion, which was markedly higher
than in 2014. In the first ten months of the year, we completely elim-
inated our net financial debt. However, owing to the acquisition of
Sigma-Aldrich, it increased as expected to € 12.7 billion as of year-end.
As was the case following major acquisitions in the past, our aim is to
quickly reduce our debt.
• We want to become even more innovative and pursue opportunities
beyond our existing businesses. This is why we are building
an Innovation Center at the heart of our global headquarters in
Darmstadt. The construction work is making good progress.
In addition to acquisition-related effects, organic sales growth of 2.6%
contributed to our good performance in 2015. Contrary to 2014, we
additionally benefited from currency tailwinds in 2015.
In 2015, a modular Innovation Center was inaugurated. Internal
project teams and selected start-ups moved in to start work on inter-
disciplinary approaches and pursue new ideas. The businesses will
still be responsible for product innovations and developing existing
technologies further. But with the Innovation Center, we are creating
scope to move beyond this. That's because we not only want to be
part of technological trends, we want to shape them.
As you can see, a lot changed at Merck in 2015. At the same time, we
remained true to our entrepreneurial values. We are resolutely focused
on what customers and patients want and need. Our commitment
to quality and our passion for discoveries are unabated. We are aiming
for long-term, sustainable growth in line with our six company values
courage, achievement, responsibility, respect, integrity, and transpar-
ency - as the yardstick for our work.
Vice Chairman of the Executive Board
Responsibility for Group functions:
Group Strategy; Patents & Scientific
Information; Public Affairs & Corporate
Responsibility
Stefan Oschmann
Responsibility for Group functions:
Environment, Health, Safety, Security,
Quality
Bernd Reckmann
Member of the Executive Board
CEO Life Science and
Performance Materials
Me
from left to right
Bernd Reckmann, Stefan Oschmann, Karl-Ludwig Kley,
Marcus Kuhnert, Belén Garijo, Kai Beckmann
THE EXECUTIVE BOARD
ну
Chairman of the Executive Board
Karl-Ludwig Kley
kaul-molly key
Indly
My years at Merck were challenging, exciting and fulfilling. It was a priv-
ilege to lead this great company through major changes and to set the
course for a successful future. I thank you for your trust and support
during this time. Please remain loyal to Merck and look forward to the
next chapter of this company's nearly 350-year success story.
As already announced in October 2015, I will resign as Chairman of the
Executive Board at the end of April 2016. Over the past several years,
my successor Stefan Oschmann and I have cooperated superbly. He
has significantly helped to make Merck fit for the future. I know that
the company is in good hands with him.
Our nearly 50,000 employees make all of this possible. Across the globe,
they seek new solutions and the best answers for our customers. Through
their passion for discovery, creativity and personal commitment, they
build Merck's success each and every day. I owe my thanks to every
single one of them.
37
To Our Shareholders
Letter from Karl-Ludwig Kley
Merck is better positioned than ever before. We can be proud of what
Merck is today: a leading science and technology company whose ideas
and products can really make a difference in the world. With our three
business sectors Healthcare, Life Science and Performance Materials, we
are not only successful, but also improve the lives of patients, customers
and partners around the world.
-
This combination of a strong identity and a willingness to embrace
change is what makes Merck successful and always will.
We're showing that we are a strong, unified company, which is why we
stopped using the independent divisional brands. Merck Serono and
Merck Millipore are now simply called Merck. Unfortunately, nothing has
changed in terms of the fact that we need to operate under different
names in the United States and Canada. However, the new brand
gives us creative possibilities to show on both sides of the Atlantic that
we are one. And it strongly differentiates us from the competition. We
are now universally unmistakable.
Karl-Ludwig Kley
But even more importantly, we again achieved profitable growth. In 2015,
our net sales rose by 13% to € 12.8 billion. EBITDA pre exceptionals,
our key earnings indicator, grew by 7.1% to € 3.6 billion. Profit after
tax declined by 3.5% to € 1.1 billion.
Dear Shareholders and
Friends of nerch,
Efficient e-commerce platform
When it comes to winning over cus-
tomers from the scientific community,
an efficient e-commerce platform is
another important factor. And that's
where Merck is well ahead of the game.
By acquiring Sigma-Aldrich, the com-
pany has the leading e-commerce plat-
form in the life science industry, which
In order to solve the toughest problems
in the industry, the new team is inten-
sifying its collaboration with the global
scientific community, in other words
customers. In the dynamically growing
international life science market, it's
clear that customer needs are growing.
They want top quality, global solutions,
a broad range of possibilities and first-
rate services. So the aim is to perfectly
fulfill these needs in order to further
raise competitiveness. After all, what's
good for customers is also good for
business and employees. In research,
development and along the entire bio-
tech production chain, Merck wants to
offer scientists the best possible sup-
port-through professional competence
in applications technology and process
planning. In order to be close to cus-
tomers, independent commercial areas
are organized into regions. The chief
aims are to further and launch innova-
tions that are aligned with industry
needs.
Close to customers
in the life science market," says Silji
Abraham, Chief Information Officer for
Life Science. "And I can easily imagine
a future where our products and services
are found in every lab around the world."
30 Magazine Growth
Performance
Materials
Life
Science
Healthcare
Growth Magazine 29
Life Science employees around the world
19,000
Life Science products
More than
300,000
Life Science customers worldwide
over
1 Million
* This sales breakdown would have resulted had the first-time consolidation
of Sigma-Aldrich already taken place on January 1, 2015. Therefore,
they are not identical to the sales percentages actually reported for 2015.
2015 pro forma*
2014
BY BUSINESS SECTOR
SALES BREAKDOWN
Life Science at Merck
was also one of the key drivers of the "Our e-commerce plat-
2015 was a great year for Merck. By acquiring Sigma-Aldrich, we suc-
cessfully completed the portfolio realignment that started ten years
ago. We made research advances and future-oriented investments that
have opened the door to future success. And our new branding demon-
strates self-confidence; it shows what makes Merck unique.
acquisition. Of course Merck will utilize
the platform in order to market not only
the Sigma-Aldrich additions, but also
its legacy life science products. With
just a few clicks, millions of visitors
to the portal can search the compre-
hensive electronic catalog, select and
purchase products. Visitors find exactly
what they are looking for as well as
recommended related products based
on real-time behavioral analytics. As
a leader in online scientific content,
Merck is also able to provide the rele-
vant white papers, protocols and peer
review articles. With an order number
or credit card, customers can use the
secure platform to quickly and easily
order products, look up prices, select
rush delivery, plan the delivery date,
check invoices, and much more. "Our
e-commerce platform integrates all our
capabilities to provide customers with
easy access to all that we can offer
them," says Christos Ross, Head of
Integrated Supply Chain Operations.
Not only the e-commerce platform, but
Christos Ross, Head of Integrated Supply
Chain Operations
33
To Our Shareholders
Letter from Karl-Ludwig Kley
Our Shares
040
The Executive Board
038
Letter from Karl-Ludwig Kley
033
SHAREHOLDERS
pages 31-42
TO OUR
SHAREHOLDERS
pages 31–42
TO OUR
וס
* This net sales calculation would have resulted had the
first-time consolidation of Sigma-Aldrich already
taken place on January 1, 2015. Therefore, it is not
identical to the net sales actually reported for 2015.
in pro forma sales by the Life Science busi-
ness sector including Sigma-Aldrich in 2015*
billion
efficient. The majority of the hundreds of
thousands of products can be delivered
within 24 hours around the world. "Our
primary objective is to deliver quality
products to our customers through our
manufacturing operations and a com-
bined network of 130 global distribution
centers to get the right product to the
right place at the right time," empha-
sizes Ross. To fuel its growth strategy in
the digital age, Merck is thus counting
on e-commerce as a distribution channel
so that its billion dollar investment in
the life science sector will soon pay off.
also the entire supply chain is highly €5.4
Life Science distribution centers
130
form integrates all our
capabilities to provide
customers with easy
access to all that we
can offer them."
Chairman of the Executive Board
Responsibility for Group functions:
Group Legal & Compliance; Group
Internal Auditing; Group Communications
With the integration having started, the
Life Science business sector will oper-
ate worldwide as Merck, and for legal
reasons as MilliporeSigma in the United
States and Canada. Around the globe,
the science and technology company
Merck now has around 50,000 employ-
ees working at 72 production locations
in 66 countries. Around 9,000 of them
joined from Sigma-Aldrich. The U.S.
company manufactures and distributes
chemicals, biochemicals and other prod-
ucts for research and applied labs. Merck
now has an enormous product range of
more than 300,000 life science prod-
ucts sold under established brands, for
instance SAFC and BioReliance as well
as Millipore and Milli-Q. Globally, there's
probably hardly any drugs that do not
come into contact with Merck substances
or products in the course of their dis-
covery, development or production. The
company offers a comprehensive port-
folio along with global reach and extraor-
dinary delivery capabilities. "Our leading
e-commerce and technology platforms
assist our customers in finding the right
products to conduct their science exper-
iments through a simple search, and
then buying them easily and reliably.
This capability allows us to be a part of
every future transformational innovation
1.052
-10
Share price low 10/14/2015 → -4.47%
www
Share price high 4/10/2015-4/12/2015 41.43%
-5
0
5
10
15
20
25
30
35
10
40
45
50
• Dow Jones European Chemical Index
• DAX®
⚫ MSCI European Pharma Index
• Merck
in %
Share price development from January 1, 2015 to December 31, 2015
To Our Shareholders 41
Our Shares
MERCK SHARES
The average daily trading volume of our shares decreased by
around 12% from approximately 639,000 in 2014 to 563,000
in 2015. In 2015, North America again accounted for the largest
percentage of shares in free float. However, compared with the
previous year, this figure decreased to around 37% (2014:
47%). By investor type, GARP (growth at reasonable price)
and value investors continued to dominate. At the end of 2015,
the top five investors held around 23% of the free float (end
of 2014: 39%).
Jan.
From the capital market perspective, the Merck news flow during
the first half of the year reflected not only the continued strong
business figures, but mainly also the latest developments
leading to the completion of the Sigma-Aldrich acquisition,
which closed on November 18, 2015. Important events in the
second half of the year, which were received very positively by
market participants, included the detailed and transparent
report on the development of our pharmaceutical pipeline, which
we gave during a conference call on October 1, 2015, as well as
the successful Capital Market Day held on December 10, 2015.
Thanks to its new format, the latter event gave investors and
analysts the opportunity to get to know management repre-
sentatives from all business sectors and to engage in close
dialogue with them.
Feb.
April
Source: Bloomberg, Thomson Reuters.
5 Based on the number of shares in free float (129.2 million).
4 Based on the theoretical number of shares (434.8 million).
2 Subject to approval by the Annual General Meeting.
1 Share-price relevant figures relate to the closing price in XETRAⓇ trading on the Frankfurt Stock Exchange.
Market value of authorized shares (at year-end)
Market capitalization4 (at year-end)
Daily average number of Merck shares traded³
Year-end share price
Share price low
Share price high
The General Medicine franchise mainly includes brands
to treat cardiometabolic diseases. Although no longer patent-
protected, the excellent brand equity built over decades makes
our flagship products cornerstones for the treatment of chronic
cardiovascular or metabolic diseases. This applies, for example,
to GlucophageⓇ containing the active ingredient metformin,
the drug of choice for first-line treatment of type 2 diabetes;
to ConcorⓇ containing bisoprolol, the leading beta-blocker for
chronic cardiovascular diseases such as hypertension, coronary
artery disease and chronic heart failure, for which around
12 million patients are treated every year; and to EuthyroxⓇ
(levothyroxine), the leading treatment for hypothyroidism.
Dividend
€
Share data¹
MERCK SHARES
To Our Shareholders Our Shares
42
Source: Bloomberg (closing rates).
Dec.
Nov.
Oct.
Sept.
Aug.
July
June
May
March
3 Based on the floor trading systems of all German exchanges and the regulated market on XETRAⓇ.
Continuing the strong development of 2014 almost seam-
lessly, our shares reached their annual high of € 111.25 on
April 10, 2015, which also represented an all-time high. This
was followed by a period of significant general market weak-
ness caused by renewed uncertainty among market partici-
pants with respect to the European debt crisis, weak economic
data from China, and the imminent change in interest rates
in the United States. During this phase, which lasted until
October 2015, both the relevant comparative indices as well
as Merck shares incurred noticeable share price corrections.
Our shares hit their annual low of € 74.90 on October 14,
2015, then continually recovered to close nearly 20% higher
at € 89.57 on December 30, 2015.
At a glance
In our Consumer Health business, we manufacture and market
over-the-counter pharmaceuticals and food supplements,
focusing on a number of well-known strategic brands. These
include Neurobion®, Bion®, Seven Seas®, NasivinⓇ, Femibion®,
and Dolo-Neurobion®, as well as Floratil®, Sangobion®,
VigantolettenⓇ, ApaisylⓇ, and KyttaⓇ. Ranking 11th in the
global OTC market, we have a high market penetration in
Europe, Latin America, Asia-Pacific, and Middle East and
Africa. Our growth rates are particularly strong in Chile,
Colombia, Ecuador, India, Indonesia, Mexico, the Philippines,
and Saudi Arabia.
Global megatrends favor the future growth of the Merck
Consumer Health business. People are becoming more health-
conscious and concerned with their own physical well-being.
Preventive healthcare and as little invasive medication as
possible are becoming increasingly important - in both estab-
lished and growth markets, characterized by a growing middle
class with specific needs.
We continue to pursue the "3 x 3 strategy". The aim is to
deliberately invest in about 15 to 20 key countries in order to
be present in each with at least three leading brands and to
achieve a respective local market share of at least 3%. This
should be accomplished by organic growth, geographic expan-
sion and eventually smaller, tactical acquisitions of brands
which fit into the strategy and ideally into the existing product
categories.
For example, in 2015 we began the launch of our BionⓇ
brand in Brazil to add another potentially leading brand to the
local portfolio. In addition, the Vigantol®, Anemidox®/Confer®
and Hepabionta® brands were transferred from Biopharma to
Consumer Health to leverage them through consumerization.
Biosimilars
Our Biosimilars business is committed to providing access to
high-quality biologics to more patients all over the globe. In
addition, we are developing a biosimilars portfolio focused on
oncology and inflammatory disorders through both in-house
research and development expertise in biologics and partner-
ships with other biosimilar players. In 2015, we moved bio-
similar candidates into clinical development. The first Phase III
study for a biosimilar will be initiated in the first quarter of 2016.
Biosimilars is an attractive market in which Merck is
well-positioned since we can build on existing strengths and
capabilities across the biosimilars value chain. This includes
the ability to leverage internal assets or source capabilities
from suppliers to ensure compliance with regulatory require-
ments, secure market access across key growth markets,
leverage commercial manufacturing capabilities and flexibility,
as well as adopt a tailored go-to-market approach.
We have also established a strategic alliances with Dr. Reddy's
in India to co-develop multiple cancer drugs and with Bionovis
in Brazil to supply the Brazilian market with biological products
under the Product Development Partnership (PDP) policy of the
Brazilian Ministry of Health.
Allergopharma
Our allergy business Allergopharma is one of the leading
companies in the field of allergen immunotherapy (AIT). The
Allergopharma portfolio includes a diverse spectrum of approved
allergen products that meet high quality standards. AIT (hypo-
sensitization, desensitization, specific immunotherapy) is the
only causal therapy for treating allergies to unavoidable aller-
gens.
We manufacture products to diagnose and treat type 1
allergies such as hay fever or allergic asthma. Merck's allergy
business offers high-dose, hypoallergenic, standardized prod-
ucts for allergen immunotherapy of pollen and mite allergies.
These allergoids have a special focus in Allergopharma's
product portfolio and constitute a cornerstone in its integrated
health approach for patients suffering from these conditions. For
effective treatment, reliable diagnosis is key. Allergopharma
offers a broad range of diagnostics in the field of allergies
with more than 100 single allergens, providing physicians with
the specific tools needed to identify the substances causing an
allergy. In addition, Allergopharma provides individual aller-
gen extracts on a named patient basis, which are needed to
treat less frequent allergies - personalized medicine has been
a reality for Allergopharma for many years now. Products of
Allergopharma are available in more than 20 markets world-
wide.
The market for causal allergy therapies is a global growth
market. On the one hand, the global growth expected by
market researchers will be generated by an increasing number
of people with allergies, and on the other hand it is based on
the rising use of allergen immunotherapy in many growth
markets.
By expanding production and thus our capacities in Reinbek
as of 2017, we want to increase our global presence and help
to meet increasingly high manufacturing standards.
48 Combined Management Report Fundamental Information about the Group
Merck
Life Science
The purpose of our Life Science business sector is to solve the
world's toughest life science problems by collaborating with
the global scientific community. We have a broad product
and technology portfolio and offer innovative solutions for
scientists and engineers in the life science industry.
Life science comprises the research branches concerned
with the structure and behavior of living organisms. Our prod-
ucts and services are used in the research, development and
manufacture of biotechnological and pharmaceutical drug
therapies, as well as in research and application laboratories.
In addition, our products and services also reach adjacent
markets such as the food and beverage industry.
For the Life Science business sector, the most important
event of 2015 was the completion in autumn 2015 of the
acquisition of the Sigma-Aldrich Corporation (Sigma-Aldrich).
The takeover of this U.S. life science company was the largest
in Merck's corporate history.
In 2015, the Life Science business sector contributed 26%
to Group sales and 22% to EBITDA pre exceptionals (excluding
Corporate and Other). With the acquisition of Sigma-Aldrich and
the first-time consolidation for a full year, these percentages
are set to increase significantly in 2016, thus further raising
the importance of the Life Science business sector.
On April 13, 2015, we had already announced Udit Batra's
appointment to lead the combined Life Science business of
Merck Millipore and Sigma-Aldrich. This appointment took
effect upon the successful completion of the acquisition in
November 2015.
Following the completion of the Sigma-Aldrich acquisition,
we put in place Strategic Marketing & Innovation teams (SMIS)
to promote and deliver innovation tailored to our life science
customers' needs. These take the place of the previous busi-
ness areas (Lab Solutions, Process Solutions and Bioscience).
Going forward, our Life Science business sector will thus be
organized around three customer segments: Research Solutions
focuses on academia, Process Solutions supports biopharma-
ceutical production, and Applied Solutions serves clinical and
diagnostic testing laboratories as well as the food and environ-
mental industries. The SMI teams will be responsible for defining
customer segment strategy, product portfolio and product value
propositions. In the newly combined business, life science has
commercial areas which are managed by region and customer
segment to leverage regional and local expertise. There are
two commercial areas - one dedicated to the lab customers
between Research and Applied and one dedicated to the
Process Solution customers (including the SAFC customer
base). The commercial areas are responsible for marketing,
sales as well as customer and dealer relationships.
On this basis, our Life Science business generates recur-
ring sales and stable, attractive cash flows in an industry that
is characterized by stringent regulatory requirements. A highly
diversified and loyal customer base additionally ensures a low
risk profile. In the future, Life Science will benefit from an
even broader portfolio, a highly efficient supply chain including
a superb e-commerce platform, and a global reach.
In 2015, our Life Science business sector comprised three
business areas: Lab Solutions, Process Solutions and Bio-
science.
While Sigma-Aldrich will largely be integrated into our Life
Science business sector, we decided that the SAFC Hitech
business will be integrated into our Performance Materials
business sector and will operate as part of the Integrated
Circuit Materials business unit. SAFC Hitech and Performance
Materials offer complementary technologies, making these
two businesses a natural fit.
By acquiring Sigma-Aldrich, we have become one of the lead-
ers in the global life science industry worth more than
€ 100 billion. With this new combination we will be able to
serve life science customers around the world with a highly
attractive set of established brands such as Millipore, Sigma-
Aldrich, Milli-Q, SAFC and BioReliance. Moreover, we have
a highly efficient supply chain through which we can support
the delivery of more than 300,000 products. In the laboratory
and academia business, we offer our customers an extensive
and customized range of products across laboratory chemi-
cals, biologics and reagents. In pharma and biopharma produc-
tion, Sigma-Aldrich complements our existing products and
capabilities with additions along the entire value chain of drug
production and validation.
Consumer Health
For the stock markets, 2015 was a highly volatile year overall.
This was also reflected by the development of our share price,
which nevertheless rose by 14% during the course of 2015.
Merck shares thus again outperformed the relevant com-
parative indices. The performance of Merck shares was nearly
five percentage points better than that of the DAX®. In com-
parison with the respective industry indices for the pharma-
ceutical and chemical sectors, the development of our share
price exceeded both by around nine percentage points.
Combined Management Report 47
Merck
OUR SHARES
To Our Shareholders Our Shares
40
> Management > Executive Board
at www.merckgroup.com
More information can be found
Short biographies
Inhouse Consulting; Site Operations
Services; Group Procurement;
Group Human Resources; Group Information
Responsibility for Group functions:
Chief Administration Officer
Member of the Executive Board
Kai Beckmann
CEO Healthcare
Member of the Executive Board
Belén Garijo
Controlling; Mergers & Acquisitions;
Investor Relations; Finance Operations
Group Accounting; Group Treasury;
Group Tax; Group Controlling & Divisional
Responsibility for Group functions:
Chief Financial Officer
C
Member of the Executive Board
Marcus Kuhnert
Demand for cardiometabolic therapies is continuously ris-
ing, particularly in growth markets. This is due to both increas-
ing life expectancy and in part also to growing prosperity in
these regions, along with the resulting changes in lifestyle and
dietary habits. Beyond developing life cycle management
products to capitalize on our strong brand equity, we entered
into a long-term strategic partnership with Lupin Ltd. of India
to broaden the General Medicine portfolio in growth markets to
include affordable, high-quality medicines. The main products
of the Endocrinology franchise are SaizenⓇ (somatropin) and
KuvanⓇ (sapropterin dihydrochloride).
In October 2015, we announced that we would return the
rights for KuvanⓇ to BioMarin in order to fully focus on our core
businesses while giving patients continued support from a part-
ner dedicated to orphan diseases. We remain highly committed
to patients in the field of endocrinology, and in particular to
advancing the treatment of growth hormone-deficient patients
with SaizenⓇ. Also in October 2015, Frost & Sullivan recog-
nized Merck's growth hormone franchise with the European
Competitive Strategy Innovation and Leadership Award.
Furthermore, for several years we have been developing
award-winning novel injection devices that make injections
more user-friendly and at the same time more reliable for
patients than conventional or prefilled syringes. In addition,
these products make it easier for healthcare practitioners and
patients to ensure adherence and thus to reach their treatment
goals. Examples are the easypod™ electromechanical injection
devices, the only growth hormone injection device of its kind,
for the delivery of Saizen®, and RebiSmart™ for Rebif® (inter-
feron beta-1a). Additionally, both easypod™ and RebiSmart™
are able to wirelessly transfer data such as injection times,
dates and doses to the Web-based software systems easypod™
connect and MSdialog.
Fundamental Information about the Group
MERCK SHARES
Identified investors by region as of December 2015
in %
United States
Source: Orient Capital.
14
Growth
30
GARP (Growth at
reasonable price)
26
Value
02
combined
Management
Report
pages 43-144
combined
Management
Report
pages 43-144
045
045
052
058
Fundamental Information about the Group
Merck
Objectives and Strategies
Internal Management System
062 Corporate Responsibility
070
Research and Development
080
People at Merck
086
Report on Economic Position
36.6
086
15
Index
Europe (excl. Germany/UK)
1.00
€
111.25
80.40
€
74.90
56.55
€
89.57
78.42
units
563,370
639,067
€ million
38,943
34,095
€ million
11,576
10,135
MERCK SHARES
Identified investors by type as of December 2015
in %
14.9
Germany
8
Other
17.6
7
Hedge
Macroeconomic and Sector-Specific Environment
088
Review of Forecast against Actual Business Developments
Since January 1, 2015, Belén Garijo has been the member
of the Executive Board responsible for the Healthcare business
sector. The regions of Europe and North America generated
60% of Healthcare's net sales in 2015. In recent years, we
have steadily expanded the presence of this business sector in
growth markets. In 2015, the Asia-Pacific and Latin America
regions accounted for 34% of its sales.
Biopharma
Our Biopharma business discovers, develops, manufactures,
and markets innovative pharmaceutical and biological prescrip-
tion drugs to treat cancer, multiple sclerosis (MS), infertility
and growth disorders, as well as certain cardiovascular and
metabolic diseases. With headquarters in Darmstadt, Germany,
we offer leading brands in specialty medicine indications. We
are advancing our research and development (R&D) portfolio
across the areas of oncology, immuno-oncology and immunol-
ogy, and continue to invest in developing programs in multiple
sclerosis. With our expertise in discovery and early develop-
ment, as well as approximately 25 projects in clinical devel-
opment, we are focused on delivering differentiated new ther-
apies to patients with unmet medical needs.
Biopharma's top-selling medicine is Rebif® (interferon
beta-1a), an important product for people living with MS.
Multiple sclerosis is one of the most common neurological
diseases among young adults. We signaled our continuing
commitment to this disease area on September 11, 2015,
when we announced that we had submitted a letter of intent
to the European Medicines Agency (EMA) to file a Marketing
Authorization Application (MAA) for our investigational treat-
ment cladribine tablets. The letter initiates a process to address
pre-submission requirements. Submission plans for other parts
of the world are being further developed and executed.
ErbituxⓇ is the second best-selling drug in the portfolio of
the Biopharma business and its flagship product in oncology.
The product is a standard of care in multiple lines of metastatic
colorectal cancer (mCRC) therapy as well as of both recurrent/
metastatic and locally advanced squamous cell carcinoma of
the head & neck (SCCHN).
In November 2014, Merck entered into a global strategic
alliance with Pfizer Inc. to develop and commercialize avelumab*,
an investigational anti-PD-L1 antibody initially discovered and
developed by us and currently in co-development as a potential
treatment for multiple tumor types. The alliance is designed to
boost the two companies' presence in immuno-oncology. Both
companies have also agreed to combine resources and exper-
tise to advance Pfizer's preclinical-stage anti-PD-1 antibody
(PF-06801591) into Phase I trials. In 2015, together with Pfizer
we initiated six pivotal trials for avelumab, including first-
and second-line non-small cell lung cancer (NSLC), platinum-
resistant ovarian cancer, first- and third-line gastric cancer,
and first-line bladder cancer. Additionally, avelumab is cur-
rently being investigated in a Phase II study of patients with
metastatic Merkel cell carcinoma.
* Avelumab is the proposed International Nonproprietary Name (INN) for the anti-PD-L1 monoclonal antibody, previously known as MSB0010718C.
46 Combined Management Report Fundamental Information about the Group
Merck
As part of the strategic alliance, we are co-promoting Pfizer's
anaplastic lymphoma kinase (ALK) inhibitor Xalkori® (crizo-
tinib), a medicine to treat ALK+ metastatic non-small cell lung
cancer, in the United States and several other key markets.
Under the agreement, Xalkori® is being co-promoted in two
Iwaves, the first of which started in the second and third
quarters of 2015 in the United States, Canada, Japan and five
European Union countries (France, Germany, Italy, Spain, and
the United Kingdom). In the United States and Canada,
XalkoriⓇ is being co-promoted by EMD Serono, the brand
under which our U.S. and Canadian Biopharma business
operates. The second wave will begin in 2016 and includes
China and Turkey.
The co-promotion term will last through December 31, 2020
for Canada, France, Germany, Italy, Japan, Spain, the United
Kingdom, and the United States. It will run from January 1,
2016 through December 31, 2021 in China and Turkey. In the
first year, we will receive compensation associated with our
promotion of Xalkori®, followed by an 80% (Pfizer), 20%
(Merck) profit sharing on the product in subsequent years.
On December 7, 2015, we announced our decision not to
pursue evofosfamide (hypoxia-activated prodrug) further in soft
tissue sarcoma and pancreatic cancer since, despite signs of
activity in locally advanced and metastatic pancreatic cancer,
two Phase III studies did not meet pre-specified primary end-
points. We therefore decided not to pursue the evofosfamide
development program further.
Our Biopharma business also offers products that help cou-
ples to conceive a child. The products in our Fertility franchise
are an important growth driver for our Biopharma business
with an increasing demand in growth markets and the trend of
couples postponing childbearing until later in life when natural
fertility is in decline. As market leader and innovator, we are
the only company that has a complete and clinically proven
portfolio of fertility drugs for every stage of the reproductive
cycle, including recombinant versions of the three hormones
needed to treat infertility. We combine an over 60-year heritage
of fertility expertise and are committed to improving treatment
outcomes, as well as developing and providing innovative
products and devices. In 2015, we won the Red Dot Award:
Product Design 2015 for our fertility pens, used to inject
hormones for follicle stimulation.
To build on our strengths in fertility hormones, we are
offering an additional comprehensive portfolio of highly inno-
vative fertility technologies from incubation to freezing. This
comprises the GaviTM, Geri™ and GemsTM product lines. Gavi™M
is the world's first automated vitrification instrument, using an
automated and standardized laboratory protocol. GeriTM is an
innovative benchtop incubator with individually controlled
incubation chambers per patient to minimize disruptive events
to the early-stage embryo. GemsTM is the latest generation of
Genea Biomedx culture media allowing for high quality embryo
cultivation. Gavi™, and Geri™ received the CE mark clearance
in Europe in 2015. The three product lines have not yet been
cleared for use in the United States.
To further strengthen our offering, our Biopharma busi-
ness established the joint development hub ARTinnovations
together with Genea. Founded to develop an innovative pipeline
of fertility technologies and services, ARTinnovations helps to
support patients undergoing assisted reproductive technology
(ART) and provides healthcare professionals with innovations
to generate objective information to make important treatment
decisions. Furthermore, we formed the Global Fertility Alli-
ance, a collaboration with Illumina Inc. and Genea Limited to
advance excellence and standardization in Fertility.
Also in 2015, we launched a new version of the Eeva® Test
with the Xtend Algorithm, the advanced version of a non-invasive
test to aid embryo assessment within assisted reproductive
technology. The new version builds on the scientific and clini-
cal record of our Eeva® System.
2014
2015
Total number of shares outstanding: 129.2 million.
Source: Orient Capital.
United Kingdom
15.1
Rest of World
4.6
German Retail/Undisclosed
11.2
Our Healthcare business sector comprises the four businesses
Biopharma, Consumer Health, Biosimilars, and Allergopharma.
In 2015, the Healthcare business sector generated 54% of
Group sales and 50% of EBITDA pre exceptionals (excluding
Corporate and Other), making it the largest of our three busi-
ness sectors.
Healthcare
Merck had 49,613 employees worldwide on December 31,
2015 compared with 39,639 on December 31, 2014, which
was prior to the acquisition of Sigma-Aldrich.
Since January 1, 2015, in line with our strategic
direction, Merck has comprised three business sectors:
Healthcare, Life Science and Performance Materials. These
encompass the Group's six businesses. Our financial
reporting has also followed this structure since January 1,
2015, with five regions: Europe, North America, Asia-
Pacific (APAC), Latin America as well as Middle East and
Africa (MEA).
092 Course of Business and Economic Position
092
Merck
103
Healthcare
109
Life Science
114
Performance Materials
119
Corporate and Other
120
Report on Risks and Opportunities
Approval from Brazil's Council for Economic Defense in
August marked the final outstanding clearance after Israel and
South Korea had also granted their approvals. Following the
receipt of all the necessary antitrust approvals for the acqui-
sition of Sigma-Aldrich, we announced the transaction closing
on November 18, 2015.
131
136
Report in accordance with section 315 (4) of the German Commercial Code (HGB)
138
144
Additional information on Merck KGaA in accordance with the German Commercial Code (HGB)
Subsequent Events
Merck Fundamental Information about the Group Combined Management Report 45
FUNDAMENTAL INFORMATION ABOUT
THE GROUP
Merck
We are a global science and technology company head-
quartered in Darmstadt, Germany.
In October 2015, we repositioned our corporate brand.
The fundamental redesign of our visual appearance and
the introduction of a new logo reflect our transformation
into a global science and technology company. At the same
time, we simplified the brand architecture. We hold the
global rights to the Merck name and brand and will also
operate globally as Merck in the future - the only excep-
tions are Canada and the United States. In these countries
we operate as EMD Serono in the Biopharma business, as
MilliporeSigma following the completed acquisition of
Sigma-Aldrich - in the Life Science business, and as EMD
Performance Materials in the materials business.
With a history of nearly 350 years, we are the oldest
chemical and pharmaceutical company in the world. Our
product portfolio ranges from innovative pharmaceuticals
and biopharmaceuticals, to life science tools, specialty
chemicals, and high-tech materials.
Report on Expected Developments
In the course of 2015, the aim was to secure numerous
antitrust approvals needed for the acquisition of Sigma-
Aldrich. An important milestone here was European Commis-
sion approval, which was granted subject to certain conditions
in June. This was followed by antitrust approvals in Japan and
from the Chinese Ministry of Commerce. Prior to that we had
secured antitrust clearance from the United States, Taiwan,
South Africa, Russia, Serbia, Israel, and Ukraine. In order to
fulfill the EU commitments, Merck and Sigma-Aldrich had to
agree to sell parts of Sigma-Aldrich's solvents and inorganics
business in Europe. This included the sale of Sigma-Aldrich's
manufacturing assets in Seelze, Germany, the divestment of
solvents and inorganics sold by Sigma-Aldrich worldwide
under the Fluka, Riedel-de-Haen and Hydranal brands, as well
as a temporary license to the Sigma-Aldrich brand for the
supply of solvents and inorganics in the European Economic
Area. On October 20, 2015, we announced that an agreement
had been reached to sell the relevant businesses in Europe to
Honeywell in fulfilment of commitments made to the European
Union in order to win antitrust approval of the acquisition of
Sigma-Aldrich.
ROCE = Return on capital employed
PoS = Probability of success
The partner structure of Merck KGaA with members of the
Merck family as personally liable partners requires the Executive
Board, whose members are also personally liable partners, to
pay special attention to the long-term development of value.
Therefore, sustainability plays a special role for us. The objec-
tive is to align the long-term development of the company
with the legitimate interests of shareholders, whose engage-
ment in the company is normally of a shorter duration. That is
why our business portfolio must always be balanced so that it
reflects an optimum mix of entrepreneurial opportunities and
risks. We achieve this through diversification in the Healthcare,
Life Science and Performance Materials business sectors, as
well as through our geographic breadth with respect to growth
sources.
For us, however, the principle of sustainability applies not
only to economic aspects. Instead, it also encompasses respon-
sibility for society and environmental protection. With our
existing and our future product portfolio, we want to help
solve global challenges and shape a sustainable future. Around
50,000 employees work to further develop technologies that
improve and enhance life, from biopharmaceutical therapies
to treat cancer or multiple sclerosis, to cutting-edge systems
for scientific research and production, to liquid crystals for
smartphones and LCD televisions.
Group strategy
In 2007, we started a transformation process to secure our
future through profitable growth in today's Healthcare, Life
Science and Performance Materials business sectors. With the
completion of the acquisition of Sigma-Aldrich in Novem-
ber 2015, this transformation process achieved its aim. In
recent years, we have thus transformed from a classic chemical
and pharmaceutical group into a leading science and technology
company. This change is also reflected by the repositioning of
the Merck brand, which was launched with a revamped visual
appearance and the introduction of a new logo in October 2015.
The process started with the change program "Sustain.
Change. Grow." and the two major acquisitions of Serono SA
in 2007 and the Millipore Corporation in 2010. In 2011, we
embarked on the "Fit for 2018" transformation and growth
program with a new executive management team. In the first
phase, we created the foundation for profitable growth by
introducing a new global leadership organization and a com-
prehensive, Group-wide efficiency program. The second phase,
which started in 2014, was aimed at successively implementing
the growth options identified by establishing three strong plat-
forms for sustainable profitable growth. We are building on our
core competencies:
• Science and technology
•
Closeness to existing businesses
Customer proximity (to offer tailored solutions)
Overall, acquisitions and divestments since 2004 with a total
transaction volume of around € 38 billion have helped cement
the strategic change to a science and technology company.
These also included the acquisition of AZ Electronic Materials,
a leading supplier of high-tech materials for the electronics
industry. A milestone in our growth strategy was the successful
completion of the acquisition of Sigma-Aldrich in 2015, which
has enabled us to become a leading company in the attractive
life science industry. The aim of our strengthened Life Science
business sector is to solve the greatest challenges in the
industry globally. To this end, we now have a considerably
broader range comprising more than 300,000 products offered
via one of the industry's leading e-commerce platforms.
Objectives and Strategies Fundamental Information about the Group
Combined Management Report 53
The complete overhaul of our brand is to communicate this new
direction to our customers, partners and employees. A more
self-confident and at the same time clearer tone of voice and
the new visual appearance reflect our character as a vibrant
science and technology company, ensuring that we are recog-
nizable and remain visible as Merck. This investment in our
Merck brand is also part of the strategic "Fit for 2018" trans-
formation and growth program.
Our Group strategy is based on an almost 350-year history of
success. General principles provide stability and guidance in
all our business endeavors. They help those responsible within
the company to shape strategic plans and make decisions.
The strategic change is also indicated by the changing
composition of sales, with a growing share of high-quality
and innovative solutions in all three business sectors. The
Healthcare business sector today generates around 60% of
its sales with biopharmaceuticals. In 2006, there was only one
such product, Erbitux®, which accounted for less than 10% of
sales. The classic Chemicals business has increasingly become
a premium materials business that offers Merck customers a
wide range of value-adding products. Today, high-tech materials
and life science tools make up around 80% of sales in the Life
Science and Performance Materials business sectors. In 2006,
the share was around 30%.
With our three business sectors Healthcare, Life Science
and Performance Materials we now hold leading positions in the
corresponding markets. Our goal is to continue to generate
sustainable and profitable growth. We intend to achieve this by
growing organically and further developing our competencies,
as well as by making targeted acquisitions that complement
and expand existing strengths in meaningful ways. Building on
leading products in all our businesses, we aim to generate
income that is largely independent of the prevailing economic
cycles. With innovative products and services and our unique
combination of businesses, we have built the platforms to offer
solutions to support global megatrends triggered for example
by demographic changes or digitalization. Merck aims to drive
innovations within the businesses as well as between and
beyond the existing businesses. In order to foster innovations
across the three businesses and external partners, an Innovation
Center at Group headquarters in Darmstadt was opened in
October 2015 (see page 10 et seq. in the magazine section of
this Annual Report). The company also started a digitalization
initiative aimed at driving digitalization within the business
sectors and set up corresponding projects. A Chief Digital
Officer was appointed in December 2015.
Strategic initiatives
Capability initiatives
As Merck continues to grow in size and the business becomes
increasingly global, we want Merck to be seen as ONE com-
pany. ONE Merck stands not only for a strong brand, but also
comprises three other capability initiatives that are of strategic
importance for the Group.
The capability initiative ONE Merck brand aims to strengthen
the value of the Merck brand, to increase the company's global
visibility and reputation, and to become more attractive to
customers, partners and talent. Our new brand orientation is
a significant factor in achieving this goal: A self-confident and
expressive design with a new logo and the "Vibrant M" as a
distinguishing feature create a visual link between all our global
businesses and products. This focus on Merck as our core brand
will be supported by eliminating the former, separate division
names (with the exception of the United States and Canada).
The framework for talent development, compensation and
performance management is also to be harmonized globally
(ONE Talent Development, Rewards and Performance Manage-
ment). As part of this initiative, we established a consistent
and integrated talent and performance management process
and are proactively identifying and sourcing talent, as well as
ensuring workforce diversity.
The goal of the third capability initiative ONE Process
Harmonization, Standardization and Excellence is to better
coordinate processes and apply them consistently. This is
particularly the case with software applications. Continuous
improvement will take place through benchmarking. This will
allow us to adapt rapidly to business changes as well as to
integrate future acquisitions into the company seamlessly and
efficiently.
The importance of our headquarters in Darmstadt is also
to increase - along the lines of ONE Global Headquarters. Our
headquarters is to become a central location for creativity,
scientific exchange and innovation. With the new Innovation
Center we have created a basis that will allow us to better use
our employees' innovation potential, optimize cross-functional
and Group-wide collaboration on projects, and also give
external innovators the opportunity to develop their ideas with
support from Merck.
54 Combined Management Report Fundamental Information about the Group Objectives and Strategies
Business strategies
Healthcare business sector
Biopharma
We aim to be a preferred global biopharmaceutical partner
through an enduring commitment to transforming patients'
lives with innovative specialty medicines, leading brands and
high-value solutions. Global megatrends such as world popu-
lation growth and a general increase in life expectancy are
bolstering the demand for our products. We are well-positioned
for sustainable growth.
The first pillar of our strategy in Biopharma is to deliver
innovation globally. We have redesigned our R&D operating
model and improved the portfolio decision-making process. We
have drastically improved the quality of our pipeline by aggres-
sively pruning low probability assets and redirecting resources
to priority programs. Efficiency in R&D has been strengthened
with a focus on selected core therapeutic areas - oncology,
immuno-oncology and immunology and with the depth of
talent in the respective Translational Innovation Platforms. We
have also increased our focus on biomarker-driven programs
to improve patient outcomes. Our development programs
include avelumab, the anti-PD-L1 antibody that we are devel-
oping and will commercialize with Pfizer, and M7824, our first-
in-class bi-functional fusion protein in immuno-oncology;
tepotinib, a c-Met inhibitor in oncology; atacicept and BTKi447,
a Bruton's tyrosine kinase inhibitor, in immunology; and cladrib-
ine in multiple sclerosis.
In this context, strategic collaborations are an integral part
of delivering on our commitment to transforming the lives of
patients living with serious unmet medical needs. We recognize
the value of collaboration in the research and development of
breakthrough therapies, as well as strengthening our current
portfolio. We look for partners who share our passion for inno-
vation and whose expertise complements our existing portfolio,
and who share our mission to discover treatments that improve
patient lives.
In addition, the geographic split of sales has changed,
reflecting our mid- to long-term goal to further expand our
strong market position in growth markets. In 2015, the growth
markets of the reported regions Asia-Pacific and Latin America
contributed 43% to Group sales.
We focus on balancing the right blend of internal capabili-
ties and external partnerships, building strong collaborations
with other leaders in industry including Pfizer, Genea and Bio-
cartis, among others. Our integrated research and develop-
ment capacity is strongly supported by partnering activities to
complement our pipeline, strengthen our technology base and
enhance our scientific capabilities.
General principles
In 2015, the transformation process that we launched
back in 2007 culminated in the successful acquisition of
Sigma-Aldrich. We have transformed from a classic supplier
of chemicals and pharmaceuticals into a leading science
and technology company.
Merck Fundamental Information about the Group
Combined Management Report 49
In 2015, our Lab Solutions business covered demand for prod-
ucts for research as well as analytical and clinical laboratories
in a wide variety of industries. The business area accounted
for 36% of our Life Science sales in 2015. Laboratory water
equipment, laboratory chemicals and consumables as well as
test solutions make it possible to identify microbial contamina-
tion, for example in pharmaceutical products, food or drinking
water. For inorganic chemistry, we supply ultrapure reagents,
including salts, acids, caustic alkalis and buffering agents, and
we also manufacture reference materials for instrumental
analysis and products for inorganic trace analysis.
Adding to our industry-leading laboratory water equipment,
in 2015 we started with the introduction of our AFSⓇ water puri-
fication systems. They have been developed to provide clinical
laboratories with an economical and reliable water purification
solution for daily water volumes of up to 3,000 liters.
Later in the year we introduced a new class of spectro-
photometers in Europe for analysis of waste water, drinking
water, beverages and process water. Spectroquant® Prove is
available in three models and offers the largest choice of water
test kits and methods.
Bioscience accounted for 13% of sales in our Life Science
business sector in 2015. The main product groups of this busi-
ness area in 2015 included tools and consumables for filtration
and sample preparation, reagents and kits for cell biology
experiments, as well as small tools and consumables for cell
analysis. With these products, we support our customers in
understanding complex biological systems and identifying
new target molecules. Our applications help to make research
processes faster and more efficient.
Our new Magna ChIRPTM RNA Interactome Kits allow
researchers to more easily identify, recover and analyze
regions of chromatin that interact with chromatin-associated
RNAs such as long non-coding RNA (IncRNA). The kits simplify
the CHIRP method.
A study on our synthetic Strat-M® membrane was conducted
by researchers at Josai University in Japan and published in
the January 25, 2015 issue of the "European Journal of
Pharmaceutical Sciences". This study showed that through the
use of our Strat-M® membrane as a synthetic non-animal skin
model, it is possible to predict the skin permeation of, for
example, active pharmaceutical ingredients, cosmetic actives,
personal care products and pesticides during studies as effec-
tively as with real human or animal skin.
Our Process Solutions business area, which accounted for
43% of Life Science sales in 2015, offers a diverse range of
products to pharmaceutical and biotechnology companies that
enable customers to develop large- and small-molecule drugs
safely, effectively and cost-efficiently. In addition, the business
area's portfolio comprises more than 400 chemicals for the
synthesis of active pharmaceutical ingredients as well as drug
delivery compounds. The offering in biotech production com-
prises products supporting cell growth and gene expression,
a wide range of filtration systems, as well as salts and sugars.
The single-use solutions offered by the Process Solutions busi-
ness provide increased flexibility to biopharma customers since
they eliminate time- and cost-intensive cleaning procedures.
Moreover, these single-use solutions are compatible with various
products, thus reducing investment costs for our customers.
In 2015, we enhanced the application of our existing tan-
gential flow filtration (TFF) technology that allows concentra-
tion of process streams without the recirculation required in
traditional TFF.
A collaboration with the German company celares GmbH
to provide PEGylation services to customers developing
protein-based therapeutics and biosimilars was established.
celares GmbH is a specialist for PEGylation, a special form of
drug delivery for biopharmaceuticals. This collaboration enables
us to expand our service offering to include conjugation, further
helping our biopharmaceutical and biosimilar customers to
optimize their protein therapeutics and to reduce their time to
market.
In addition, we introduced enhancements to our industry-
leading EMPROVEⓇ portfolio of pharmaceutical raw materials
in 2015. The expanded documentation and regulatory infor-
mation facilitates drug product manufacturers' risk assess-
ment workflows and supplier qualification. The enhancements
also help drug product manufacturers meet their own internal
quality guidelines as well as those recently published by the
European Commission.
Building on our strong filtration portfolio, we introduced
Millipore Express® PHF (process protection, high-flux) hydro-
philic filters for fast, efficient and economical buffer filtration.
A highlight of 2015 for Process Solutions was a strategic
alliance with Turgut Ilaç, a leading biosimilars company based
in Turkey through which the business area will provide its
Provantage® End-to-End services for the development and
manufacturing of biologics. Phase one of the agreement will
focus on monoclonal antibody biosimilars for non-small cell
lung carcinoma and rheumatoid arthritis, the first molecules of
Turgut's biosimilar pipeline that will be supported by us under
this strategic relationship.
General principles and Group strategy
50 Combined Management Report Fundamental Information about the Group
Performance Materials
Our entire specialty chemicals business is consolidated in our
Performance Materials business sector. The portfolio includes
high-tech performance chemicals for applications in fields such
as consumer electronics, lighting, coatings, printing technol-
ogy, paints, plastics, and cosmetics. Since January 1, 2015,
Performance Materials has been organized into the following
business units: Display Materials, Pigments & Functional
Materials, Integrated Circuit Materials, and Advanced Tech-
nologies.
Performance Materials' share of Group sales was 20% and
its share of EBITDA pre exceptionals (excluding Corporate and
Other) amounted to 28%. The EBITDA margin pre exceptionals
was 44.3% of sales.
Our Liquid Crystals (LC) business, which is part of the
Display Materials business unit, generated more than half of
Performance Materials' sales in 2015. We have long been the
global market and technology leader in liquid crystal mixtures.
This market is highly consolidated; it is characterized by bar-
riers to market entry due to the technological complexity of
liquid crystals and the high quality requirements of industrial
customers and consumers. Large LC display manufacturers
are among the customers of our Liquid Crystals business. It
comprises the broadest product offering for our customers in
industry, including, for example, liquid crystals optimized for
PS-VA (televisions) and IPS (smartphones and tablets) technol-
ogies. In addition, we are continuously setting standards in new
developments. An example of this is our UB-FFS technology,
which is enabling a breakthrough in the energy efficiency of
displays for smartphones and tablets, and for which we received
the German Innovation Award in 2015.
The Display Materials business unit, which was newly formed
on January 1, 2015, benefited in 2015 from the established
Liquid Crystals business and the complementary former AZ
Electronic Materials (AZ) business (Optronics) with display
materials (for example photoresists), which was integrated
into the business unit. The demand for established liquid
crystal technologies remained robust, also benefiting from the
demand for high-end televisions, for example ultra-HD TVs
with ever larger display diagonals. In 2015, we focused on
developing new application possibilities for liquid crystals,
such as smart windows, so-called liquid crystal windows
(LCWs). Liquid crystal windows allow continuously variable
switching from light to dark in just seconds while permitting
a broad color spectrum. In 2014, Merck acquired Peer+, a Dutch
specialist for this technology; the company has meanwhile
been fully integrated. In the first half of 2015, the first LCW
panels were installed in Merck's new modular Innovation
Center in Darmstadt. Since then, the new technology has been
presented at exhibitions and a broader market launch is planned
for the coming years. The architectural opportunities offered
by these smart materials were demonstrated in October 2015
at a congress in Chicago, which Merck organized together with
Harvard University Graduate School of Design.
The Pigments & Functional Materials business unit develops
and markets a comprehensive product portfolio of decorative
effect pigments and functional materials. The effect pigments
are primarily used in automotive and industrial coatings,
plastics, printing applications, and cosmetics in order to give
products a unique shine. Functional materials include laser
marking, conductive additives, and applications for counterfeit
protection, as well as high-quality cosmetic active ingredients,
for example for use in skin care, sun protection and insect
repellants.
Merck
Fundamental Information about the Group Combined Management Report 51
M&A = Mergers and acquisitions
The Sigma-Aldrich SAFC Hitech business consisting of
high-purity materials for silicon semiconductors, compound
semiconductors and other high-tech applications is being fully
integrated into the Integrated Circuit Materials business unit.
It ideally complements our product offering as a leading global
supplier to the electronics and semiconductor industries. In
September we announced the acquisition of Ormet Circuits Inc.
to further bolster the position of Integrated Circuit Materials as
a manufacturer of semiconductor materials and to diversify
the product portfolio.
The Advanced Technologies business unit invests particularly
in future-oriented research and development in Performance
Materials. A very good example of this is our materials for
organic light-emitting diodes (OLEDS), which are used in new
lighting techniques and display technologies. They enable, for
example, foldable and rollable or transparent displays with
excellent color brilliance and image sharpness. 2015 was the
most successful year to date for our OLED materials business.
The performance of the OLED materials business was very
positive, not least thanks to the strong growth in demand from
Asian countries. In 2015, it was one of our fastest growing
businesses, with a constantly expanding customer base. Sig-
nificant investments were made in order to set the course for
further progress and success in this future-oriented business.
In May 2015, we inaugurated the OLED Application Center in
Pyeongtaek, Korea. Three weeks later, we laid the cornerstone
for a new OLED materials production unit in Darmstadt. With
a volume of more than € 30 million, the project is one of the
largest single investments we have made at the Darmstadt
site in recent years.
In June, we acquired the Israeli company Qlight Nanotech,
a leading start-up for research in quantum materials which,
among other things, can further improve the color properties
of displays.
52 Combined Management Report Fundamental Information about the Group Objectives and Strategies
Objectives and Strategies
Merck
The second pillar of our strategy is to maximize our existing
portfolio in developed markets. In the Multiple Sclerosis
franchise, the vision is to remain a leader by providing innova-
tive solutions that include drugs, devices and services to help
people living with multiple sclerosis. We plan to realize the
potential of Rebif®, our top-selling product, in an increasingly
competitive multiple sclerosis market. We now have full con-
trol of its promotion since the end of our collaboration with
Pfizer in the United States in this field. We will position Rebif®
as the best interferon-based therapeutic option for patients
who suffer from the relapsing form of the disease. We are
driving differentiation via smart injection devices and the first
comprehensive support program for patients with multiple
sclerosis including an e-health platform. In Fertility, our focus
is on expanding market leadership and on providing innovative
services and technologies beyond drugs to address patient
needs and to improve outcomes beyond stimulation. In Oncol-
ogy, we promote the value of Erbitux®, especially in Europe
and Japan, and emphasize the importance of offering patients
complete testing for RAS status in order to ensure optimal
outcomes. Through the co-promotion of Xalkori® with Pfizer,
we have entered the United States oncology market and will
prepare for the future launch of avelumab, our anti-PD-L1
antibody across the major markets.
The new Integrated Circuit Materials (ICM) business unit was
established on January 1, 2015, from the former semiconductor
business of AZ. ICM supplies products for integrated circuits.
As an important partner to leading global electronics manufac-
turers, ICM achieves more than 60% of its sales in Asia, and
generates more than three-quarters of its sales with products
that are the leaders in their respective markets. The products
offered by ICM are used, among other things, to manufacture
integrated circuits and microelectronic systems, for antireflection
coatings, and for the miniaturization of transistor structures.
The portfolio of the former AZ thus optimally complements the
range of materials offered by Performance Materials.
Objectives and Strategies Fundamental Information about the Group Combined Management Report 55
As a global company with a diverse portfolio of products and
services, we use a comprehensive framework of indicators
to manage performance. The most important KPI (key
performance indicator) to measure performance is EBITDA
pre exceptionals.
The Value Creation and Financial KPI Pyramid, which summa-
rizes the important financial performance measures of the
Merck Group, reflects the comprehensive framework of finan-
cial KPIs to steer the businesses and prioritize the allocation
of cash resources. It consists of three managerial dimensions,
which require the use of different indicators: Merck Group,
Business and Projects.
Merck Group
Net sales,
EBITDA pre
Net income, EPS,
Dividend ratio,
Credit rating
MEVA
Business
Net sales,
EBITDA pre,
BFCF
Net sales growth,
EBITDA pre margin
M&A
NPV, IRR,
Projects
EBITDA pre margin,
EPS,
ROCE, MEVA
Internal Management System
ROCE, MEVA
eNPV,
EBITDA pre margin,
Capex
NPV, IRR,
Payback period,
EBITDA pre margin,
ROCE
Abbreviations
EBITDA pre = Earnings before interest, income tax, depreciation and amortization pre exceptionals
EPS Earnings per share
MEVA = Merck value added
BFCF = Business free cash flow
NPV = Net present value
IRR
Internal rate of return
eNPV = expected Net present value
The third pillar of our Biopharma strategy is to expand fur-
ther in growth markets. With a growing middle class, extended
health care coverage, a shift towards chronic diseases, and
rising demand for biologics, growth markets are a key driver
for us. We are implementing strategic growth initiatives in our
General Medicine and specialty medicine franchises to address
specific needs. We are leveraging capabilities and local chan-
nels, for example by extending the breadth and depth of pro-
motion in China, expanding our portfolio via regional and local
licensing, and supporting market developments in Fertility. We
are also investing selectively and growing our flagship brands
with new formulations (Euthyrox® and Glucophage®), fixed-
dose combinations (Concor®) and devices (SaizenⓇ). And we
are repatriating business, for example in China and in Russia,
taking back the promotion of Merck products from industry
partners where attractive.
Licensing
Internal Management System
POS,
ROCE
We are pursuing a sustainable dividend policy. Provided that
the economic environment develops in a stable manner, the
current dividend represents the minimum level for future
dividend proposals. The dividend policy follows the business
development and earnings increase of the coming years. How-
ever, dividend growth could deviate, for example within the
scope of restructuring or in the event of significant global
economic developments. We also aim for a target corridor of
20% to 25% of EPS pre exceptionals.
Biosimilars
58 Combined Management Report Fundamental Information about the Group
Biosimilars is an attractive market in which we are well-
positioned as we can build on existing strengths and capabili-
ties across the biosimilars value chain. This comprises the
ability to leverage internal assets or source capabilities from
suppliers to ensure compliance with regulatory requirements,
secure market access across key markets including growth
markets, leverage commercial manufacturing capabilities and
flexibility, as well as adopt a tailored go-to-market approach.
In 2015, we made further progress with our biosimilars in
clinical development. The first Phase III study for a biosimilar
will start in the first quarter of 2016. We have established
strategic alliances with Dr. Reddy's in India to co-develop
multiple cancer drugs as well as Bionovis in Brazil to supply
the Brazilian market with biological products under the Product
Development Partnership (PDP) policy of the Brazilian Ministry
of Health. Moreover, we are committed to further expand the
Biosimilars business through additional collaboration agree-
ments and partnerships in the future.
Allergopharma
Allergy remains a significant global problem as millions of peo-
ple around the world suffer from allergies. Presently, the only
way to prevent a potential worsening and chronic progression
of the condition is Allergy Immunotherapy (AIT) comprising
hyposensitization, desensitization and allergy immunization.
Our Allergopharma business is a manufacturer of AIT diagnos-
tics and prescription drugs. The market for causal allergy
therapies is a global growth market. As expected by market
researchers, the drivers are an increasing prevalence of aller-
gies in a growing worldwide population as well as the growing
use of Allergy Immunotherapy (AIT) in many emerging mar-
kets. A novel state-of-the-art production facility in Reinbek
near Hamburg, will, from 2017 onwards advance global
expansion and ensure that increasingly high manufacturing
standards in the AIT industry are met. With its own research
department and in cooperation with research institutes and
other partners, Allergopharma is actively working on improving
the efficacy, convenience and safety of current therapy options
as well as on developing the next generation of drugs for
allergen immunotherapy.
Consumer Health
After strategically realigning our Consumer Health business in
2012 and 2013, we began pursuing an aggressive growth
strategy as of 2014. This growth strategy is captured by
"3x3", indicating our aim to achieve a market share of at least
3% in each of our top markets (including Brazil, France,
Germany, India, Indonesia, Mexico, Poland, and the United
Kingdom), and at least three so-called "lovebrands" in leading
positions within each respective market. An important mile-
stone within the framework of this strategy was the transfer
of the Neurobion® and Floratil® brands from Biopharma to
Consumer Health in 2014. Following their transfer, both brands
clearly demonstrated potential to focus more closely on con-
sumer wishes and needs in core markets, an approach which
we call "consumerization". For instance, the growth of FloratilⓇ
in the key market of Brazil increased more than tenfold.
Following this initial move, in 2015 further brand transfers -
such as Vigantol in Germany and Europe or smaller local vitamin
brands in Latin America and Southeast Asia - were success-
fully implemented. In 2015, the Consumer Health business
again achieved very high organic sales growth, thus contribut-
ing noticeably to the growth of the Healthcare business sector.
Further important components of implementing the "3x3"
strategy are geographic expansion of existing brands into new
markets, such as the market launch of the Bion® brand in
Brazil throughout 2015, as well as possible tactical acquisi-
tions, as long as these are in line with the strategic direction.
By adding Sigma-Aldrich to our existing Life Science business,
we are now one of the leading players in the attractive global
life science industry with a broad product range in attractive
segments.
For 2016, the two major areas of focus for our Life Science
business sector will be to execute the integration and to lever-
age the synergy potential of the acquisition. A seamless inte-
gration is of utmost importance to both customers and the
organization. At our Capital Market Day in December 2015, we
reiterated that we want to realize the announced synergies of
approximately € 260 million within the third year after closing
and that it is our ambition to be the profitability champion of
the sector.
56
Combined Management Report Fundamental Information about the Group Objectives and Strategies
We want to create sustainable value that is based on three
strong strategic levers that form the foundation for future
top-line growth in Life Science: a broad, innovative portfolio,
a balanced geographic footprint and excellent capabilities.
Firstly, as regards the portfolio, with a catalog of more than
300,000 products, we now deliver many of the most highly-
respected brands in the industry, such as Millipore, Sigma-
Aldrich, Milli-Q, SAFC and BioReliance. Our offering covers
every step of the biotech production chain, creating a com-
plete end-to-end workflow. Secondly, through the acquisition
of Sigma-Aldrich, we have significantly increased our geo-
graphic footprint, especially our presence in North America.
Our geographic reach now consists of a presence in more than
60 countries. Building on the strengths of each legacy organi-
zation, we aim to increase our access to the Asian and Latin
American processing market and the North American research
market. Thirdly, our capabilities include excellent supply chain
management able to deal with complexity, an outstanding
e-commerce platform to simplify and optimize the customer
experience and the expertise to manage regulatory barriers.
To best meet the needs of our customers and accelerate
innovation, as of 2016 the teams responsible for Life Science
innovation and product development are strategically organized
around our customers - Research Solutions, Process Solutions
and Applied Solutions. Our Research Solutions team is focused
on helping customers to better understand biological function
and disease through a complete portfolio of solutions that en-
able scientific discovery. Our Process Solutions team provides
products that meet the highest quality and purity standards
with extensive documentation and services to ensure regulatory
compliance. Our Applied Solutions team is focused on supplying
products and workflow solutions that streamline processes,
lower costs and deliver consistent, reliable results for customers.
Performance Materials business sector
The demand for high-tech products in general and innovative
display solutions in particular has seen high global growth
in recent years. This trend is not expected to weaken in the
coming years. Instead, we assume that increasing demand for
these types of consumer goods will come from an expanding
middle class in growth markets. Therefore, we aim to defend
our position as the market and technology leader for liquid
crystals and further expand it as far as possible.
Life Science business sector
Our OLED business, which is part of the Advanced Technologies
business unit, posted strong, above-average growth in 2015.
We want to further position ourselves in the OLED market and
play a leading role in this market segment in the medium
to long term. Lower production costs for OLED displays are
a precondition for this. External partnerships will also be used
in the future to ensure the required exchange of technology
and expertise. This includes for example the partnership with
Seiko Epson, which was signed in 2012. Merck and Seiko
Epson together developed a technology to print OLEDs. As we
expect OLED technology to increase in importance in the
future, we are investing in the development of a comprehen-
sive OLED portfolio. Among other things, we are investing in
a new OLED production plant at our Darmstadt site, where we
are planning to produce materials for modern flat screens and
lighting starting in summer 2016.
The rating of our creditworthiness by external rating agencies
is an important indicator of the company's financial stability.
A strong investment grade rating is an important cornerstone
of Merck's financial policy, as it safeguards access to capital
markets at attractive financial conditions. Merck currently has
a Baa1 rating from Moody's and an A rating from Standard &
Poor's (S&P), both with a negative outlook following the acqui-
sition of Sigma-Aldrich. Within the next two to three years, it
is of utmost importance to us to sharply reduce our debt and to
regain the ratings we had prior to the Sigma-Aldrich acquisi-
tion.
Since the typical life cycle of liquid crystal mixtures is less
than three years, innovation will remain the key success factor.
Our liquid crystals pipeline is well-stocked with new technolo-
gies such as SA-VA (self-aligned vertical alignment) for large-
area displays as well as UB-FFS (ultra-brightness fringe field
switching), which has already achieved commercial success in
tablets and smartphones. Apart from established applications
in displays of mobile devices and televisions, we are working
to use our expertise as the global market and technology
leader to capture new fields of use for liquid crystal technol-
ogy, for example for liquid crystal windows (LCWs) or mobile
antennas.
Strong investment grade rating
We mainly work with a well-diversified, financially stable and
reliable banking group. Due to Merck's long-term oriented
business approach, bank relationships typically last for many
years and are characterized by professionalism and trust. The
banking group consists of banks with strong capabilities and
expertise in various products and geographic regions. We
regard these banks as strategic partners. Accordingly, they
are involved in important financing transactions, for instance
the financing of the Sigma-Aldrich acquisition.
Maintaining sustainable and reliable business relations
with a core banking group
We have diversified and profitable businesses as the basis for
our strong and sustainable cash flow generation capacity. More-
over, we have several funding resources in place. A € 2 billion
syndicated loan facility maturing in 2020 exists to cover any
unexpected cash needs. The facility is a pure back-up credit
facility and has not been drawn on so far. In addition, we can
use our € 2 billion commercial paper program to issue short-
term commercial paper with a maturity of up to one year.
Furthermore, we are using bilateral bank loan agreements
with first-class banks in order to optimize the funding struc-
ture and cost. Our € 15 billion Debt Issuance Program as one
of the cornerstone financing vehicles enables us to issue bonds
in Europe at short notice and at any time if markets allow. In
addition, we issued hybrid bonds amounting to € 1.5 billion in
2014 and U.S. dollar bonds amounting to US$ 4 billion in 2015
outside the Debt Issuance Program in order to broaden the
funding basis and to address different investor groups.
Financial flexibility and a conservative funding strategy
We ensure that we meet our obligations at all times and
adhere to a conservative and proactive funding strategy that
involves the use of various financial instruments.
We are pursuing a conservative financial policy characterized
by the following aspects:
Strategic financial and dividend policy
Within our Pigments & Functional Materials business unit,
the focus of decorative effect pigments is on market and tech-
nological leadership in clearly defined markets for pearl luster
pigments, for instance in applications for high-quality auto-
motive and industrial coatings. The main focus of functional
materials is on niche applications in cosmetics, for example
UV filters, insect protection, anti-aging, as well as technical
functional materials such as laser marking and antistatic appli-
cations.
The acquisition of AZ Electronic Materials in 2014 sustain-
ably strengthened and diversified the portfolio and the market
position of our Performance Materials business sector, also
beyond the liquid crystals market. All integration measures
were successfully implemented in 2014, adding a further pre-
mium business to the existing profitable businesses. The new
Integrated Circuit Materials business unit offers ultrapure,
innovative specialty chemicals and materials for use in inte-
grated circuits (semiconductors) and equipment, in flat-panel
displays, and for photolithographic printing. Its business
model is similar to that of the other Performance Materials
business units as it is based on innovation, customer proximity,
high market share, and profitability in the growth areas of
displays, semiconductors, organic electronics, and lighting.
Additionally, the integration of the SAFC Hitech business of
Sigma-Aldrich has complemented the product offering of the
Integrated Circuit Materials business unit as a leading global
supplier to the electronics and semiconductor industries.
Objectives and Strategies Fundamental Information about the Group Combined Management Report 57
Dividend policy
813
871
98
919
933
789
Liquid fossil fuels
103
13
110
103
Biomass and self-generated renewable energy
13
15
27
135
Natural gas
Indirect energy consumption
105
1,171
2011
991
569
Climate impact mitigation and resource scarcity are central
challenges facing society in the 21st century. As a responsible
company, it is especially important to contribute to this, which
is why we have set ourselves the goal of reducing total direct
and indirect greenhouse gas emissions by 20% by 2020,
measured against the 2006 baseline.
To achieve this goal we have launched EDISON, a climate
impact mitigation program that consolidates all our climate
protection and energy efficiency activities. In 2016, as in the
four preceding years, the Executive Board will earmark funds
specifically for measures to conserve energy and reduce green-
house gas emissions. Through the more than 400 EDISON
projects that have been initiated since 2012, we aim to annu-
ally save around 90 metric kilotons of CO2 in the medium
term. In 2015, we lowered our greenhouse gas emissions by
around 8% relative to the 2006 baseline, despite growth in our
operating business.
Around 60% of the EDISON projects planned Group-wide
have already been or are being rolled out. The Life Science
business sector is making a major contribution. In 2014, we
reduced our process-related emissions per production unit
through optimizing processes by around two-thirds at our site
in Jaffrey, New Hampshire, USA, while in 2015, we launched
a project to realize additional savings. In summer 2015, we
commissioned a new photovoltaic plant with a power output of
400 kW in Shanghai, China, which will reduce the site's CO₂
emissions by around 280 metric tons per year.
ENERGY CONSUMPTION
(in GWh)
Total energy consumption
1,474
1,056
2012
1,528
2014
2015
1,549
1,602
1,720
Direct energy consumption
905
924
2013
604
348
546
2015
529
543
559
517
518
315
318
2014
321
214
225
211
196
191
Portfolio-adjusted in accordance with the Greenhouse Gas Protocol.
The figures do not include data from Sigma-Aldrich since the Sigma-Aldrich integration process is still underway. The direct and indirect CO2eq emissions (Scope 1 and 2) of the
former Sigma-Aldrich sites add up to approximately 215 kt in 2015.
(Note: The calculation model has not yet been harmonized).
Focus topics: Energy efficiency, greenhouse gas
emissions, water scarcity
327
558
2013
2011
549
Electricity
511
491
Steam, heat, cold
58
113
493
65
2012
460
86
83
Portfolio-adjusted in accordance with the Greenhouse Gas Protocol. The figures do not include the energy consumption data of Sigma-Aldrich since the Sigma-Aldrich integration
process is still underway.
CO₂EQ EMISSIONS (EQ= EQUIVALENTS)
Emissions in kt, Scope 1 and 2
Total CO2eq emissions
Direct CO2eq emissions
Indirect CO2eq emissions
466
Our spending on environmental protection, health and
safety totaled € 148 million in 2015, which also includes
investments made during the year.
MEVA gives information about the financial value created in
a period. Value is created when the return on capital employed
(ROCE) of the company or the business is higher than the
weighted average cost of capital (WACC). MEVA metrics pro-
vide us with a powerful tool to weigh investment and spending
decisions against capital requirements and investors' expecta-
tions.
In our Corporate EHS Policy, we have defined our principles and
strategies for the environment, health and safety. It is imple-
mented through internal guidelines and instruction manuals
on compliant behavior in day-to-day operations, such as the
Merck Group EHS Security and Quality Manual. At all sites, the
local EHS managers are in charge of operational environmental
protection measures. These employees continually receive
training and obtain additional qualifications.
-609.0
as well as advance payments for intangible assets
7.1
3,387.7
3,629.8
Change
2014
2015
Investments in property plant and equipment and software
EBITDA pre exceptionals 1
€ million/change in %
-527.5
Business free cash flow¹
Internal Management System
60 Combined Management Report Fundamental Information about the Group
1 Financial indicators not defined by International Financial Reporting Standards.
equipment, software, advance payments for intangible assets,
as well as the change in inventories and trade accounts receiv-
able. To manage working capital on a regional and local level,
the businesses use the two indicators days sales outstanding
and days in inventory.
Business free cash flow comprises the major cash-relevant
items that the individual businesses can influence and are
under their full control. It comprises EBITDA pre exceptionals
less the change in the opening and closing amounts reported
in the balance sheet for investments in property, plant and
Business free cash flow (BFCF)
7.1
3,387.7
47.8
10.6
56.1
MERCK GROUP
15.4
Changes in inventories as reported in the consolidated balance sheet
-960.1
1 Financial indicators not defined by International Financial Reporting Standards.
Net income and earnings per share (EPS) and earnings
per share pre exceptionals (EPS pre)
Earnings per share are calculated by dividing profit after tax
attributable to the shareholders of Merck KGaA (net income)
by the weighted average number of theoretical shares out-
standing. The use of a theoretical number of shares takes into
account the fact that the general partner's capital is not repre-
sented by shares. To provide a more comparable view, we also
publish EPS pre¹, which excludes exceptionals from impair-
ment losses, integration costs, IT costs, restructuring costs,
gains/losses on the divestment of businesses, and other
exceptionals as well as amortization of intangible assets as of
a threshold value of € 50 million and is based on the company's
underlying tax ratio.
Capital-market-related parameters
Merck value added (MEVA)
An additional parameter to prioritize investments into property,
plant and equipment is the payback period, which indicates the
time in years after which an investment will generate positive
net cash flow.
Payback period
In addition to NPV and IRR, when looking at individual account-
ing periods, ROCE is an important metric for the assessment
of investment projects. It is calculated as the operating result
(EBIT) pre exceptionals divided by the sum of property, plant
and equipment, intangible assets, trade accounts receivable
and trade accounts payable, as well as inventories.
Return on capital employed (ROCE)
The internal rate of return is a further important criterion for
the assessment of acquisition projects and investments in
property, plant and equipment. It is the discount rate that
makes the present value of all future free cash flows equal to
the initial investment or the purchase price of an acquisition.
A project adds value if the internal rate of return is higher than
the weighted cost of capital including mark-ups.
Internal rate of return (IRR)
The main criterion for the prioritization of investment opportu-
nities is net present value. It is based on the discounted cash
flow method and is calculated as the sum of the discounted
free cash flows over the projection period of a project. Consist-
ent with the definition of free cash flow, the weighted average
cost of capital (WACC), representing the weighted average of
the cost of equity and cost of debt, is used as the discount
rate. Depending on the type and location of a project different
mark-ups are applied to the WACC.
Net present value (NPV)
Sustainable value creation is essential to secure the long-term
success of the company. To optimize the allocation of financial
resources, we use a defined set of parameters as criteria for
the prioritization of investment opportunities and portfolio
decisions.
Investments and value management
6.2
2,605.1
2,766.2
144.6
1,219.7
Adjustment first-time consolidation of the Sigma-Aldrich Corporation
Adjustment first-time consolidation of AZ Electronic Materials S.A.
Business free cash flow¹
140.0
-214.2
-514.2
Changes in trade accounts receivable and receivables from royalties and licenses
as reported in the consolidated balance sheet
-185.5
85.0
Internal Management System Fundamental Information about the Group Combined Management Report
132.7
2.0
2014
2015
€ million/change in %
Reconciliation EBIT to EBITDA pre exceptionals¹
MERCK GROUP
gains/losses on the divestment of businesses, acquisition costs,
and other exceptionals. The classification of specific income
and expenses as exceptionals follows clear definitions and
underlies strict governance at Group level. Within the scope of
internal performance management, EBITDA pre exceptionals
allows for the necessary changes or restructuring without
penalizing the performance of the operating business.
EBITDA pre exceptionals is the main performance indicator
measuring ongoing operational profitability and is used inter-
nally and externally. To allow for a better understanding of the
underlying operational performance, it excludes from the oper-
ating result depreciation and amortization as well as excep-
tionals. Exceptionals are restricted to the following categories:
impairments, integration costs/IT costs, restructuring costs,
EBITDA pre exceptionals
Change
13.0
11,362.8
12,844.7
Change
2014
Net sales
€ million/change in %
Net sales
MERCK GROUP
Net sales are defined as the revenues from the sale of goods
and services rendered to external customers net of value
added tax and after sales deductions such as rebates or dis-
counts. Net sales are the main indicator of our business growth
and therefore an important parameter of external as well as
internal performance measurement. In addition, acquisition-
and currency-adjusted sales are used for internal performance
management. Since January 1, 2015, commission income has
been included in net sales.
Net sales
The three key performance indicators net sales, EBITDA pre
exceptionals¹, and business free cash flow¹ are the most
important factors for assessing operational performance.
Therefore, we refer to these KPIs in the Report on Economic
Position, the Report on Risks and Opportunities, and in the
Report on Expected Developments. As the most important
indicators of financial business performance, the KPIs are key
elements of our performance management system.
Key performance indicators of the
Group and its businesses
Combined Management Report 59
Fundamental Information about the Group
Internal Management System
2015
Operating result (EBIT)
1,843.2
1,762.0
EBITDA pre exceptionals¹
Other exceptionals
Acquisition-related exceptionals
Gains/losses on the divestment of businesses
-43.4
83.9
47.5
Restructuring costs
-11.0
87.2
77.6
Integration costs/IT costs
7.4
3,122.9
3,354.1
EBITDA¹
28.4
99.3
127.5
Impairment losses/Reversals of impairment losses
9.7
1,261.6
1,383.4
Depreciation and amortization
4.6
-1.9
Since our businesses are constantly changing, our environ-
mental management system must also remain flexible and
adaptable. For this reason, we have internal and external
audits conducted on a regular basis to determine whether the
ISO 14001 requirements are still being met. In 2015, we
received the ISO 14001 group certificate for our environmental
management system for the seventh consecutive year. This
certificate covers 57 sites. Seven sites belonging to the
recently acquired company Sigma-Aldrich are already certified
according to ISO 14001.
61
The rating of our creditworthiness by external agencies is an
important indicator with respect to our ability to raise debt
capital at attractive market conditions. The capital market
makes use of the assessments published by independent rating
agencies in order to assist debt providers in estimating the
risks associated with a financial instrument. We are currently
assessed by Moody's and Standard & Poor's (S&P). The most
important factor for the credit rating is the ability to repay
debt, which is determined in particular by the ratio of operating
cash flow to (net) financial debt.
In India, we collaborate with the Goethe-Institut Calcutta
to present the Merck Tagore Award; worth 500,000 Indian
rupees (around € 6,800), this literary prize is granted every
two years to authors who have made a distinctive contribution
For 13 years, we have been sponsoring the Premio Letter-
ario Merck in Italy. This award is worth € 10,000 and recognizes
authors who build bridges between literature and science,
thereby making them accessible to a wide audience. In 2015,
the awards went to French author Maylis de Kerangal and
American author and science writer David Quammen.
We grant and promote five literary prizes worldwide. Since
1964, we have been sponsoring the renowned Johann Heinrich
Merck Award for Literary Critique and Essay, which is presented
by the German Academy for Language and Poetry at its annual
autumn conference. The award, which comes with a € 20,000
prize, went to publicist Gabriele Goettle in 2015.
Literature can stimulate the imagination; it can alleviate fears
and give courage. Literature can also address scientific topics,
thus furthering a deeper understanding of science and research.
Through our engagement, we aim to help society better accept
science and scientific progress. In addition, as an international
company, we foster writers who further cultural exchange in
our globalized world.
Fostering literature
In addition to this, the Deutsche Philharmonie Merck regu-
larly invites international ensembles to play in Darmstadt
while itself also touring the globe. In 2015, the orchestra gave
concerts in the United Kingdom and Israel. Furthermore, the
Deutsche Philharmonie Merck went on a tour of Latin America
to mark the 85th anniversary of our presence in Mexico and
the 40th anniversary of the opening of our production facility in
Brazil, performing in Mexico City, Rio de Janeiro and São Paulo.
The Deutsche Philharmonie Merck is our musical ambassador.
We consider classical music to be the universal language that
brings people together; as such, it is an important part of our
culture. The concerts of this professional ensemble are highly
popular, with around 26,000 people attending them per year.
They represent an integral part of the cultural life in the vicinity
of our global headquarters in Darmstadt. Special events for
children and adolescents as well as collaborations with schools,
such as the orchestra workshop held once a year since 2010,
aim to make classical music more accessible to young people.
Deutsche Philharmonie Merck
Cultural promotion is a core element of our engagement in
society that reflects Merck's centuries-old tradition of support-
ing art and culture. After all, culture nurtures characteristics
that are indispensable to our business activities as a high-tech
company: creativity, enthusiasm for new discoveries, and the
courage to transcend boundaries. Our cultural engagement
focuses on music, literature and education.
Strategic sphere of activity: Culture
66 Combined Management Report Fundamental Information about the Group Corporate Responsibility
In addition, Life Science works together with customers and
recycling companies to design sustainable recycling programs.
Furthermore, we use our technical and scientific expertise
in the field of water analysis to support clean water supply and
adequate wastewater handling. A prime example of this is our
participation since August 2015 in Semizentral, a Sino-German
infrastructure project developed by the Technical University of
Darmstadt and sponsored by the German Federal Ministry
of Education and Research (BMBF). In May 2015, Semizentral
won the GreenTec Award, Europe's biggest environmental
and business prize, in the Urbanization category; in Novem-
ber 2015, the initiative ranked among the top three in the
Research category of the 2015 German Sustainability Award.
Within Life Science, the Design for Sustainability (DFS)
program aims to reduce environmental impacts, also through
customers' own use. Beginning with the concept stage, prod-
uct teams identify potential environmental impacts in various
product life cycle stages as well as opportunities to make
improvements. A scorecard is used to assess product design in
six focus categories: Materials, Energy and Emissions, Waste,
Water, and Packaging, as well as Usability and Innovation. In
2014, we completed the integration of the DFS approach into
the product development process. We set ourselves the goal of
improving sustainability criteria in at least 10% of our Life
Science product ranges, reaching this goal at the end of 2014
for our products in the former Merck Millipore business.
Within the scope of our cosmetic products business, we are
working to sustainably procure and produce cosmetic ingredi-
ents as well as optimize the related production processes. In
dialogue with our customers from the cosmetics industry, we
are also developing cosmetic formulations that meet strict
sustainability criteria and address the current trend towards
more natural cosmetics. Several of our products have been
certified by Ecocert, an independent organization that repre-
sents high international standards for environmentally sus-
tainable products.
We have developed a series of environmentally friendly
specialty chemicals and materials for the semiconductor
industry including PFOS-free antireflective and photoresist
coatings that contain no trace of dangerous chemicals.
instance, we are working with architects, glass makers and
façade manufacturers to create the windows of tomorrow. Our
ambitious goal is to use smart windows to make buildings
more energy-efficient.
We strive to continuously enhance the sustainability footprint of
our products and are working to offer our customers products
that enable them to reduce the negative impact of their own
activities, as well as to achieve their own sustainability goals.
For instance, we are developing innovative materials for energy-
efficient liquid crystal and OLED displays and are thus helping
our customers develop environmentally sustainable processes.
Thanks to our liquid crystal technology PS-VA, displays consume
approximately 20% less energy in comparison to the preceding
VA technology. The new UB-FFS technology (ultra-brightness
fringe field switching) provides displays with up to 15% more
light transmittance, thus further reducing energy consumption.
We are also developing liquid crystals for new applications. For
Developing sustainable products
Through our products we are helping to overcome global chal-
lenges such as climate impact mitigation and resource scarcity.
At the same time, we are also helping our customers achieve
their own sustainability goals.
Strategic sphere of activity:
Environment
We promote initiatives to strengthen supply chains and to
develop localized health solutions in order to deliver and reach
out efficiently at the point of care. Using heat sensors, for
example, we monitor the transportation conditions of our pri-
mary shipments from Europe to the rest of the world. Patients
can therefore be assured that our products are kept and
released under the right conditions according to registration.
Furthermore, we support the expertise and training of the
managers of our partners in Africa, Asia and Latin America to
strengthen local quality manufacturing standards. In India, we
are cooperating with the non-governmental organization River
Narmada Samagra. Our river ambulance transports health
workers and provides healthcare solutions to local populations
living in the remote region along the Narmada River. At the
beginning of 2016, we donated a new boat to River Narmada
Samagra so that even more people can be reached in the
future. Additionally, in the Jharkhand region of northeastern
India, we are financing a health center visited by approxi-
mately 150 patients per month.
Accessibility
Corporate Responsibility Fundamental Information about the Group Combined Management Report 65
We help to raise awareness by empowering health workers,
communities and patients with appropriate tools, knowledge
and skills to make informed decisions. With our Access Dialogues
series, we aim to promote information exchange and discus-
sion with numerous public and private stakeholders. In 2015,
the focus was on the topics of intellectual property and supply
chains. In India, we are supporting the Suswastha project
together with various non-governmental organizations and
the Indian Health and Family Ministry. The aim is to provide
underserved rural populations with affordable health solutions
and to engage patients through community-level meetings
as well as educative health programs. In 2015, the project
reached a total of more than 15,000 people through 717 com-
munity meetings and 43 health workshops. The non-profit
organization Global Pharma Health Fund (GPHF), which is
funded by Merck, combats counterfeit medicines in developing
and emerging countries. To date, the GPHF has supplied more
than 700 Minilabs at cost to detect counterfeit medicines in
more than 90 countries. In addition, through our Capacity
Advancement Program (CAP), we want to raise awareness and
further the prevention of non-communicable diseases such as
diabetes and cancer, as well as address the issue of infertility.
(Detailed information can be found in the story entitled
"Awareness" in the magazine section of this Annual Report,
starting on page 24).
Awareness
to the cultural exchange between Germany and India. In Japan,
we also present the Merck Kakehashi Literature Prize together
with the Goethe-Institut Tokyo. Worth a total of € 20,000, this
award is granted every two years to contemporary works by
German authors that are made accessible to a wider reader-
ship in Japan. As of 2016, we will also grant a literature prize
in Russia.
We seek to address affordability challenges through our efforts
to provide assistance to those who are unable to pay for the
health solutions they need. To tackle these challenges, we
have taken a pro-access approach through our intellectual
property initiatives and are engaging in equitable pricing strat-
egies. We are a member of WIPO Re: Search, an open innova-
tion platform, sponsored by the World Intellectual Property
Organization, to accelerate early discovery of active ingredi-
ents to treat infectious diseases through intellectual property
and knowledge sharing. In 2015, we started our first collabo-
ration with the University of Buea in Cameroon, which aims to
repurpose compounds from our library to develop a treatment
for onchocerciasis, also known as river blindness. To this end
we are strengthening the development of local skills and
research expertise. Furthermore, we are working with the
World Health Organization (WHO) to combat the worm disease
schistosomiasis in Africa. We donate Cesol® 600 tablets
containing the active ingredient praziquantel to WHO, and in
2015 we donated more than 100 million tablets. Since the
start of the program, around 74 million patients, primarily
school children, have been treated. As of 2016, we will supply
WHO with up to 250 million praziquantel tablets annually. As
a founding member of the Global Schistosomiasis Alliance, we
are helping to eliminate schistosomiasis worldwide.
Education
We view education as a key component of culture and vice
versa. Education can help us understand culture. But culture
can also build a bridge to education; it can stimulate curiosity
and nurture creativity. We therefore support educational
projects at many of our sites, by granting scholarships for
instance, or sponsoring specific classes. In order to promote
young scientists, every year since 1996 Merck has, for exam-
ple, been organizing the renowned annual "Jugend forscht"
competition for the German federal state of Hesse.
Environmental management system
In the manufacture of our products, we seek to impact the
environment as little as possible. This especially includes effi-
ciently conserving resources such as energy, water and raw
materials while also continuously reducing our emissions and
waste.
Responsibility for the environment
68 Combined Management Report Fundamental Information about the Group Corporate Responsibility
Employees are crucial to the success of a company. They
therefore play a central role in our business endeavors. In
accordance with the Merck Values, we live a culture of mutual
esteem and respect. We want to contribute to entrepreneurial
success by recruiting, developing and motivating the most
suitable employees. We therefore place a strategic focus on
the topics of talent development, compensation and perfor-
mance management. Furthermore, we want to strengthen the
diversity of our employees (Detailed information can be found
in the section entitled "People at Merck").
Responsibility for our employees
We joined the Together for Sustainability (TFS) chemical
industry initiative at the end of 2014 and since then have been
able to jointly use the results of supplier assessments and
audits with other member companies and in compliance with
all competition law restrictions. Through TfS, we currently
have access to assessments of more than 300 of our most
important suppliers. Around 100 of these were generated for
the first time in 2015 thanks to our initiative. For 2016, in
addition to further assessments, we also plan to extend local
TFS supplier audits.
Due to the growing significance of emerging markets as
sourcing markets for Merck, we reinforced our efforts to
ensure adherence to our supply chain standards.
Our Group Procurement Policy and Responsible Sourcing
Principles define our procurement practices and are integrated
into our general terms and conditions. They therefore consti-
tute the foundation of every sourcing transaction and proce-
dure.
We source raw materials, packaging materials, technical prod-
ucts, components, and services from suppliers in more than
120 countries. Our basic expectations for suppliers and service
providers include their compliance with fundamental environ-
mental and social standards, which are primarily derived from
the core labor standards of the ILO (International Labour
Organisation), from the UN Global Compact, and from the
Code of Conduct of the BME (German Federal Association for
Materials Management, Purchasing and Logistics).
Supplier management
Our goal is to provide customers and patients with high-quality
brand-name products at all times. Through our quality vision -
"Quality is embedded in everything we do!" - we remind our
employees of their responsibility - across all businesses, all
Group functions and all levels of the company.
Quality of our products
For products in our Allergopharma business, we have
developed comprehensive clinical efficacy and safety profiles
that we continuously update. For the safety of our patients, we
have established a global pharmacovigilance system that
we continuously work to enhance.
Patient and consumer safety is our number-one priority in
everything we do. During the entire life cycle of our medicines
and consumer health products, we provide patients, consum-
ers and physicians with up-to-date risk-benefit evaluations. To
this end, our experts process safety-relevant information from
various sources such as clinical trials, adverse reaction reports
and scientific literature. Ultimate responsibility for the safety
of our biopharmaceuticals is borne by our Global Chief Medical
Officer, with support from our Medical Safety and Ethics Board
(MSEB). Our Global Drug Safety unit continuously monitors
and evaluates the safety and risk-benefit ratio of our medicines
worldwide (pharmacovigilance). For our Consumer Health
products, this function is performed by the Global Product
Safety unit. Overall responsibility for the safety of our over-
the-counter products falls under the Chief Medical Officer for
the Consumer Health business, supported by the Safety &
Labelling Committee (SLC).
Safety of our healthcare products
We have successfully completed the second phase of REACH
implementation. All substances we produce or import in quan-
tities ranging from 100 to 1,000 metric tons per year - 70 dif-
ferent substances in total - were successfully registered with
the European Chemicals Agency (ECHA) by June 1, 2013. We
are currently in phase three, in which we are working to reg-
ister all substances produced or imported in quantities between
one and 100 metric tons per year by mid-2018. We are fully
on schedule with our activities.
There are numerous regulations intended to ensure that chem-
icals pose no risk to humans or the environment. Compliance
with these regulatory requirements is an important part of our
work. With our Group-wide Product Safety Chemicals policy,
we have established global processes for defining, steering
and implementing product safety, as well as the corresponding
management structures. We incorporate all relevant national
and international chemical regulations into our policies and
regulations and adhere to them. This includes for instance the
EU chemicals regulation REACH (Registration, Evaluation,
Authorisation and Restriction of Chemicals) and CLP (Classifi-
cation, Labelling and Packaging of Substances and Mixtures,
EU GHS). Furthermore, we are committed to transparency. For
instance, in line with the Global Product Strategy, an interna-
tional initiative of the chemical industry, we provide our custom-
ers with product safety summaries for hazardous materials.
Safety of our chemical products
Combined Management Report 67
Corporate Responsibility Fundamental Information about the Group
Through our compliance policies for our Biopharma and
Consumer Health businesses, we set standards for responsible
marketing activities relating to our medicines. These aim to
ensure that patients and healthcare professionals have access
to the relevant information, and that patients receive effective
treatment.
The safety of our products is at the core of our corporate
responsibility. When used properly, they should pose no risk to
customers, patients, consumers, or the environment. Our goal
is to ensure a positive benefit/risk profile for our products.
Therefore, we regularly examine safety across the entire life
cycle of our products and continuously take steps to minimize
risks. We provide our patients, consumers and customers with
extensive information material so that they can use our prod-
ucts in a responsible, safe and proper manner.
Responsibility for our products
To mark our 125th anniversary in the United States, we
launched the "Smarter, Together in the Classroom" initiative,
committing US$ 125,000 to fund 132 scientific projects at
100 schools in low-income regions in Massachusetts. To date,
nearly 18,000 pupils have benefited from the program. By
2016, we want to have reached more than 36,000 children in
Massachusetts and Missouri with the campaign. In China, we
won the 2015 Corporate Social Responsibility Award presented
by the European Union Chamber of Commerce for our School
Water project. To date, five primary schools in Shanghai and
one primary school in Sichuan Province have received drinking
water purification facilities free of charge. In addition, our
employees educate the pupils on environmental protection on
a regular basis.
-
Credit rating
Affordability
Availability
Corporate Responsibility Fundamental Information about the Group Combined Management Report 63
• UN Global Compact • Responsible Care • Merck Human Rights Charter
s to be a few
Environment
CR Strategy
Culture
Health
Entrepreneurial responsibility
Responsible conduct means looking, listening and doing
better. We respect the interests of our employees, customers,
investors, and society, and minimize ethical, economic and
social risks, thereby securing our success. It is firmly anchored
in our corporate strategy and forms the basis of our CR strategy,
enabling us to practice responsible governance every single
day. At the same time, we consolidate our resources in the areas
where we can make the biggest difference. We are engaged in
three strategic spheres of activity: health, the environment
and culture. In doing so, we always focus on securing the
future of our company and our competitiveness.
believe that we can help resolve these global challenges
through our innovative products in the Healthcare, Life Science
and Performance Materials business sectors, as well as through
responsible governance.
Mankind is confronted with global societal challenges such
as climate impact mitigation, resource scarcity and insufficient
access to health in low- and middle-income countries. We
Our corporate responsibility (CR) activities are directed by our
CR Committee, which consists of representatives from the busi-
ness sectors and relevant Group functions. Stefan Oschmann,
Vice Chairman of the Executive Board, became chairman of
this committee in January 2015.
Strategy and management
We take responsibility every day and have been doing
so for nearly 350 years. This is reflected in our corporate
strategy and values. Responsible conduct with respect
to employees, products, the environment and society is
a fundamental prerequisite for our business success.
-
Corporate Responsibility
62 Combined Management Report Fundamental Information about the Group Corporate Responsibility
Employing a highly qualified and motivated workforce is the
basis for achieving our ambitious business goals. Therefore, we
put a strong focus on establishing the processes and the envi-
ronment needed to attract and retain the right talent with the
right capabilities at the right time. To measure the success of
the related measures, we have implemented talent retention
as an important non-financial indicator.
Talent retention
Innovations are the foundation of our business and will also be
the prerequisite for future success in changing markets. We
are continuously working to develop new products and service
innovations for patients and customers. Indicators for the
degree of innovation are defined individually depending on the
specifics of the respective businesses.
Innovation
Apart from the indicators of the financial performance of the
businesses, non-financial measures also play an important
role in furthering the success of the company. From a Group
perspective, specifically innovations in the businesses as well
as the attraction and retention of highly qualified employees
are of central importance.
Other relevant/non-financial
performance measures
With the aim of ensuring an attractive return to our share-
holders, we are pursuing a reliable dividend policy with a target
payout ratio based on EPS pre exceptionals (see definition
above).
Dividend ratio
Health: In low- and middle-income countries, many people do
not have access to high-quality health solutions. We use our
expertise and work together with strong partners to develop
solutions for people locally.
Availability entails the research, development and refinement
of health solutions that address unmet needs and are tailored
to local environments. Together with our partners, we are
working to fight widespread diseases in developing countries.
One example is the Pediatric Praziquantel Consortium. Through
this public-private partnership, we are working on a pediatric
formulation of praziquantel to treat the worm disease schisto-
somiasis in children under the age of six. In 2015, the consor-
tium completed a Phase I trial with healthy subjects in South
Africa as well as a taste study with children in Tanzania. In
June 2015, the consortium was awarded a prestigious research
grant from the Japanese Global Health Innovation Technology
Fund for the second time. Another example is Merck's partner-
ship with the Medicines for Malaria Venue, a non-profit research
foundation, to develop new antimalarials. In addition, our
Healthcare and Life Science business sectors are currently
developing a malaria diagnosis kit based on the Muse cell
analysis system. The aims are to detect and determine the
malaria pathogen as well as to determine relevant immune
cells in the case of a possibly concurrent HIV infection.
Environment: We continuously work to further improve the
sustainability footprint of our products. In addition, we want to
help our customers to achieve their own sustainability goals.
We support relevant initiatives concerning responsible corpo-
rate governance. We are a member of the United Nations Global
Compact and are committed to complying with the compact's
principles regarding human rights, labor standards, environ-
mental protection, and anti-corruption. Moreover, we also live
our corporate responsibility through our commitment to follow
the guidelines of the Responsible Care Global Charter, an initia-
tive of the International Council of Chemical Associations (ICCA).
Our Access to Health strategy focuses on four areas, the
4As of Availability, Affordability, Awareness, and Accessibility.
During his presidency of the International Federation of
Pharmaceutical Manufacturers & Associations (IFPMA), Stefan
Oschmann, Vice Chairman of the Executive Board, is focusing
on the core topic of accelerating access to high-quality health
solutions for people in low- and middle-income countries.
Access to Health (A2H) is one of our strategic priorities. Through
our A2H approach, which spans all our businesses, we aim to
help improve sustainable access to high-quality health solu-
tions for underserved populations and communities in low- and
middle-income countries. Since we realize that access is a com-
plex and multifaceted challenge with no one-size-fits-all
solution, our programs and initiatives are tailored to global,
regional and local needs. We consider partnerships, collabora-
tion and dialogue to be key instruments in delivering sustain-
able access results. Our efforts are supportive of the United
Nations Sustainable Development Goals (SDGs).
Strategic sphere of activity: Health
Thanks to good performance with respect to responsible, sus-
tainable entrepreneurial conduct, we were again included in
the FTSE4Good index in 2015. To be included in this leading
international sustainability index, a company must demonstrate
socially conscientious, ecological and ethical conduct. In 2015,
we maintained our good position in other major sustainability
indices as well. For instance, we were once more included in
the STOXX Global ESG Leaders index and are also listed on the
Euronext Vigeo Eurozone 120 index.
64 Combined Management Report Fundamental Information about the Group Corporate Responsibility
Communities
Scientists
Healthcare
sector
Competitors
Customers
Culture: Culture inspires people and broadens their horizons.
Since our research and development activities benefit from
people's creativity and enthusiasm, we promote cultural and
educational projects worldwide.
NGOS
Management
and labor repre-
sentatives
Merck
Suppliers
Patients
Neighbors
Employees
Government
agencies
The Merck
family
Share-
holders
To us, corporate responsibility does not merely mean taking
action, but also listening. The dialogue with our various stake-
holder groups is therefore highly important to us. These stake-
holders include our employees, our business associates, the
Merck family, investors, regulatory agencies, and associations.
We also engage in a continuous exchange in order to create
transparency and clearly demonstrate how we live the Merck
Values.
This charter aims to continuously improve the products and
services of the chemical industry in terms of environmental
protection, health, plant safety, and security. We were among
the first companies to sign the revised version of the Respon-
sible Care Global Charter in 2014. In addition, we are a mem-
ber of the "Chemie³" initiative, a collaboration between the
German Chemical Industry Association (VCI), the German
Employers' Federation of the Chemical Industry (BAVC), and
the German Mining, Chemical and Energy Industrial Union
(IG BCE). As part of this globally unique collaboration, the part-
ners aim to make sustainability a core part of the chemical
industry's guiding principles and to jointly drive the sector's
position within the German economy as a key contributor to
sustainable development.
Associations
and politicians
15.9
3,629.8
We see ourselves as part of society, not only at our individual
locations, but also at a global level. Taking responsibility
towards society is an integral part of our entrepreneurial
approach. We believe that we can make an important contri-
bution to the community through our knowledge, our skills
and our products.
Our social responsibility activities are primarily focused
on those areas in which we have problem-solving expertise
stemming from our core businesses. We are thus engaged in
health and environmental projects and support education,
specifically in the natural sciences. We provide disaster relief
in emergency situations, especially in those regions in which
we operate. In April 2015, we signed a three-year agreement
with the German Red Cross (DRK). According to the terms of
the agreement, in the event of a catastrophe we will primarily
support the activities and projects of the German Red Cross by
donating money and supplies. In December 2015, we donated
€ 50,000 to the German Red Cross to support health projects
for refugees in Lebanon.
Phase II
APRIL
BLYS
BTK
IL
mAb
PD-L1
PK
Protein kinase B
Proliferation-inducing ligand
B-lymphocyte stimulator
Bruton's Tyrosine Kinase
Interleukin
Monoclonal antibody
Programmed cell death ligand 1
Protein kinase
Consumer Health
The Consumer Health business develops and sells over-the-
counter medicines and food supplements in Europe, in particu-
lar in France, Germany and the United Kingdom, and in growth
markets in Latin America, the Middle East and Africa, and
Southeast Asia. The focus of our research and development
activities is on the continuous improvement of existing formu-
lations as well as on the development of new products and line
extensions. We are following a consumer-centric innovation
approach based on intensive market research across all our key
markets. Since 2014, we have been establishing cooperation
agreements with independent third-party research facilities to
leverage their specific capabilities and expertise for the devel-
opment of new products that meet the specific needs of our
consumers.
76 Combined Management Report Fundamental Information about the Group Research and Development
Biosimilars
In 2015, Merck proceeded successfully with the clinical devel-
opment of biosimilars. One Phase I study was finalized and
the biosimilar was moved to Phase III in the first quarter of
2016. Further biologics were added to the pipeline to secure
an attractive biosimilars portfolio and a sustainable biosimilars
business for Merck.
Allergopharma
Allergopharma, our allergy business, is one of the leading man-
ufacturers of diagnostics and prescription drugs for allergen
immunotherapy. With its own research department and in
cooperation with research institutes and other partners, we are
helping develop a better understanding of the immunological
mechanism that underlies the development of allergies and
are actively working on the next generation of drugs for allergen
immunotherapy.
Life Science
Akt
Innovation is core to value delivery to our customers. Our
Life Science business sector has more than 650 employees
working in various R&D functions around the world. These
employees cooperate closely with our customers to address
their needs and pain points. Our ultimate objective is to solve
the toughest problems in life science by translating ideas into
product innovations. Once again, we invested significantly in
R&D in 2015.
More information on the ongoing clinical trials can be found at www.clinicaltrials.gov
Phase I
Phase III
Phase III
Avelumab (anti-PD-L1 mAb)
Merkel cell skin carcinoma
Phase II
Avelumab (anti-PD-L1 mAb)
Phase I
M9241 (NHS-IL12, cancer immunotherapy)
Solid tumors
Phase I²
M7824 (bifunctional immunotherapy)
Solid tumors
Phase I
Immunology
Atacicept (anti-BLys/anti-APRIL fusion protein)
Sprifermin (fibroblast growth factor 18)
Systemic lupus erythematosus
Osteoarthritis
Phase II
M1095 (anti-IL-17A/F nanobody)
Psoriasis
Phase I
M2951 (BTK inhibitor)
Systemic lupus erythematosus
1 As announced on September 11, 2015 Merck is preparing a regulatory submission to the European Medicines Agency.
2 Sponsored by the National Cancer Institute (USA).
Ovarian cancer platinum resistant/refractory
Bladder cancer, 1st line
The year 2015 was marked by successful innovations. Our
innovation activities are diverse and can be assigned to four
categories. We want to:
Improve and expand our portfolio
Display Materials
The latest generation of smartphones and tablets with their
brilliant touchscreens would be unimaginable without the
most recent advances in liquid crystal display technology. For
these mobile devices we developed UB-FFS technology (ultra-
brightness fringe field switching) with a new switching mode.
This has the potential to increase display light transmittance
by up to 15%. The new technology offers many advantages:
Firstly, it consumes less energy and increases the battery life
of mobile devices. Secondly, it improves mobile display quality
and supports the trend towards higher resolutions. The mar-
ket launch of UB-FFS is progressing very successfully; the new
switching mode is already used in many smartphones and
tablets. In April 2015, Merck received the German Innovation
Award for this breakthrough technology. And in June, we
received the 2015 Display Component of the Year Award in
Gold for UB-FFS at the Society for Information Display confer-
ence in San José, California.
78 Combined Management Report Fundamental Information about the Group Research and Development
With the Merck LC 2021 strategic initiative, we are combining
our future activities in liquid crystals. Firstly, our focus is on
the further development of conventional display technology.
We want to contribute to the realization of more robust, more
flexible displays and the utilization of holographic 3D technol-
ogy. Secondly, we are focusing on applications beyond displays.
These include new light management systems and smart
antennas for better satellite communication. Liquid crystal
windows (LCWs) are another field of our work. They can regu-
late both the light and heat transmittance of windows in
building façades. We are further investing in the development
of materials for such applications. Pilot production of the first
smart windows is in full swing. The first LCW panels were
already used in the construction of our new Innovation Center
in Darmstadt. Collaborations with partners in the glass and
façade technology sector are planned for broad-based market-
ing of the windows.
The future and potential of display technology have been the
topic of our annual Displaying Futures symposium for several
years now. This year's symposium took place in San Francisco,
where renowned futurologists convened with more than 100 of
our customers and business associates.
-
-
In China, Japan, Korea, and Taiwan four core markets for
Performance Materials around 700 customers attended
workshops we held in autumn 2015 under the motto "Creating
the perfect pixel through partnership". Most of the partici-
pants were researchers and engineers from various display
panel manufacturers. The aim of these very successful events
is to present our core competencies, discuss visions with
our customers, demonstrate our technology leadership, and
strengthen customer proximity.
High-quality pigments and functional materials
The Meoxal® brand is the latest development in effect pigments.
These pigments captivate with their brilliant color saturation
and exceptional performance. This is achieved by an innova-
tive layer technology and the use of aluminum flakes as the
substrate. The products are suitable for a multitude of high-
performance applications, especially for automotive and plastic
coatings.
With Xirallic® NXT, Merck is introducing a new patented
product generation of the well-known high-tech effect pigments.
These offer customers an exceptional "living-sparkle effect",
high styling potential and consistent quality. The first product
of the new generation Xirallic® NXT Panthera Silver - is a
dark-gray, metallic effect pigment.
Besides high-quality effect pigments, we also produce
functional materials for technical applications as well as fillers
and active ingredients for cosmetics. The new cosmetic active
ingredient RonaCare® SereneShield was presented in time for
the important in-cosmetics exhibition in Barcelona in 2015.
The active ingredient is intended to help the skin at any age to
reduce susceptibility to acne.
In technical applications, we developed additives for the laser
marking of plastics and conductive coatings. These additives
are also used in heat-reflective glazing for greenhouses. In
high-voltage technology, we are also working on functional
materials, with which we want to tap into new markets in the
area of energy management. Within the scope of the research
project iShield, which in view of its future potential is also
government-funded, we have been collaborating since autumn
2015 with academic and industrial partners to develop novel
materials to shield generators and engines.
Integrated Circuit Materials
In the Integrated Circuit Materials business unit, which supplies
products for integrated circuit manufacture, we have devel-
oped a range of products for Extreme UV Lithography (EUV)
applications that have already been qualified by several cus-
tomers in the semiconductor industry for their processes. The
shrink technology makes it possible to reduce lithographically
generated structures after patterning, thus circumventing
resolution limitations of existing exposure equipment in a cost-
effective manner. New products are on the verge of production
implementation. We are a leader in Directed Self Assembly
(DSA), a revolutionary technology that is crucial to all advanced
semiconductor manufacturers. In DSA, the information for the
smallest structures is already contained in the chemical
makeup of the coating material. We are collaborating with our
customers to introduce DSA as a standard integrated circuit
(IC) manufacturing method in the coming years. Additionally, we
are intensively engaged in developing thick perhydropolysila-
zane products for 3D chip technology as well as novel insulator
materials.
The further development of flat panel display technology
towards larger formats and higher operating frequencies
requires the use of transistors with feature sizes that are at
the limit of the resolution capability of the exposure tools.
We have successfully transferred from the IC sector so-called
tandem resin technology with a specific molecular weight
distribution, thus achieving a photoresist resolution near the
theoretical resolution limit. In silicon technology, new siloxane
materials are in an advanced stage of qualification as planari-
zation materials for high-resolution displays and as a thin film
barrier for organic light-emitting diode (OLED) lighting.
Ormet, a company that we acquired in September, has
developed conductive pastes based on a unique environmental
friendly technology which can solve technical challenges in
semiconductor packaging. This is particularly interesting due
to the growing demand for highly integrated devices such as
mobile phones or wearables.
Responsibility for society
In addition to energy, in 2015 we also focused on the topic
of water. We systematically examined our sites to determine
which ones have a high annual water consumption and are also
located in regions where water is scarce and thus an especially
precious resource. Based on a detailed assessment, we plan to
implement sustainable water management systems stepwise
at these sites in the coming years.
Energy management plays a key role in our efforts for sustain-
able energy efficiency and climate impact mitigation. Our pro-
duction sites in Darmstadt and Gernsheim account for around
40% of our global energy consumption. In 2012, both of these
sites qualified for ISO 50001 Energy Management System
certificates, which were reaffirmed in 2015. Currently, nine of
our production sites have a certified energy management
system. The results of the Carbon Disclosure Project likewise
indicate that we are on the right path. In 2015, we achieved
98 out of 100 points in the Climate Disclosure Scoring, which
assesses the level of reporting details as well as transparency,
and were thus clearly in the upper range of all participating
companies in the Germany, Austria and Switzerland category.
In the Climate Performance Scoring, we ranked in performance
band C, putting us above average. The Carbon Disclosure
Project, an independent non-profit organization, assessed the
emissions reduction progress and climate impact mitigation
reporting of companies.
-
Combined Management Report 69
Corporate Responsibility Fundamental Information about the Group
We are the undisputed market and technology leader in liquid
crystals (LC), which are primarily used in televisions and
mobile communication applications. We are also one of the
leading suppliers of decorative and functional effect pigments.
Our high-tech materials and solutions are used by customers
in the consumer electronics, lighting, coatings, printing techno-
logy, plastics applications, and cosmetics industries.
•
Performance Materials
We received a Stevie Award for our AFS® Lab Water systems at
the 2015 American Business Awards ceremony in San Francisco,
California in September. The new Large AFS-E system was
a finalist in the "Best Product Health & Pharmaceuticals"
category. Today's diagnostic labs need multiple compact water
systems to feed a single analyzer or a few smaller ones. Our
AFS-E systems meet this need.
• Invest in new and disruptive technologies for the long term
• Partner with our customers and
• Drive dialogues on unmet needs in the scientific community
and solve the relevant problems
Portfolio expansion
We made important product launches to expand our portfolio
across all segments in 2015. In Biomonitoring, we made three
additions to our MAS-100® product family of air samplers,
expanding our Biomonitoring portfolio to food and beverage
customers. The family of products, developed for use in isola-
tors, allows sampling at critical control points. The compact
and easy-to-handle design makes these products well-suited
for use in controlled environments.
In RNA detection, we introduced a number of important new
products. For example, our Magna ChIRP™ RNA Interactome
Kits allow researchers to more easily identify, recover and
analyze regions of chromatin. The kits provide reliable detec-
tion and discovery of RNA-associated genomic DNA sequences,
RNA sequences and proteins.
In Process Solutions, we expanded our Provantage® Bio-
development Services to include a Clone Generation Service.
With this addition, we provide a full range of services to optimize
yield, productivity, consistency and efficiency of clinical-trial
drug products. Our services help accelerate time-to-clinic by
delivering high-quality, high-expressing cell lines. Our flexible
production platform offers a choice of cell lines and the fully
documented clones meet traceability requirements for clinical
production, IND submission and commercial manufacturing.
With the launch of our new Mobius® 2000 liter single-use
bioreactor, we influence key standards such as microbiological
film selection and single-use technologies, in both upstream
and downstream production and we can provide a scalable
solution to customers looking to perform single-use in upstream
processing. This new bioreactor enables us to help customers
in the biosimilars market implement manufacturing strategies
in a short time frame to increase speed to market.
New and disruptive technologies
Our innovation efforts also focus on new technologies that
have long-term impact. We received a United States patent for
developing a selective membrane layering method that signifi-
cantly improves the consistency of virus filtration performance.
The method is used to manufacture our Viresolve® Pro device,
a virus filtration technology that offers highly productive
parvovirus clearance for monoclonal antibodies and therapeutic
proteins. As a result of selective layering, the ViresolveⓇ Pro
device provides an industry-leading performance consistency
superior to other virus filtration devices on the market.
To solidify our leadership in tangential flow filtration (TFF),
we introduced single-pass TFF with Pellicon® cassettes, an
enhanced application of our existing technology that allows
concentration of process streams without the recirculation
required in traditional TFF. This alternative application elimi-
nates typical process constraints caused by higher volumes or
concentration factors, resulting in increased capacity. It also
enables continuous processing by coupling the TFF step in line
with other process steps.
To further accelerate growth in cell analysis, we introduced
the new Cellvento TM CHO platform of cell culture media and
companion feed formulations for batch, fed-batch and perfusion
applications. The chemically defined, non-animal-origin media
deliver superior cell growth and productivity for various CHO
cell types used in biopharmaceutical development and manu-
facturing. The range of products gives customers the flexibility
to choose the most suitable product to achieve the best possible
performance results for their specific cell line.
We also introduced a new technology that compacts dry
powder cell culture media into granules and therefore improves
solubility, facilitating the handling of cell culture media used in
biopharmaceutical production. The compacted media are more
convenient to use, allowing biopharmaceutical manufacturers
to further optimize their upstream processes.
Research and Development Fundamental Information about the Group
Combined Management Report 77
Partnerships
In February, we entered into a partnership agreement to
provide upstream process development services for Precision
Biologics, Inc., a Texas-based clinical-stage biotechnology
company, to advance a preclinical monoclonal antibody. The
antibody, NEO-201, binds to a tumor-specific antigen found in
several forms of cancer, offering therapeutic potential across
multiple cancer types, including colorectal, lung, ovarian and
pancreatic - an especially deadly cancer with limited treat-
ment options.
In May, we entered into an agreement with Singulex, Inc.,
a developer and leading provider of Single Molecule Counting
technology for clinical diagnostics and scientific discovery,
to manage its life science research business. We now have
exclusive rights to further develop and commercialize the
technology for research applications worldwide.
Driving scientific dialogues
In the field of filtration, we established a new Scientific Advisory
Board, which held its inaugural meeting in 2015. The goal is to
solve the most challenging problems in filtration in collabora-
tion with our customers by bringing together application and
technology experts. Board members include some of the
most knowledgeable external filtration experts and renowned
scientists as well as colleagues of our Life Science business. As
a leader in filtration, we are committed to continuously explor-
ing new and disruptive innovations in the field. The Advisory
Board is focused on identifying and addressing the most critical
unmet needs in the area of filtration.
In the third quarter, the scientific journal "Methods of
Molecular Biology" published two chapters on the use of our
Immobilon PVDF (polyvinylidene fluoride) membranes for
protein analysis, authored by our experts. We were featured
due to our significant presence in and contribution to Western
Blotting, which is the most commonly used analytical tech-
nique in cell and molecular biology.
We also published an original white paper recognizing
the emerging biotech community's impact on the future of
healthcare. This paper followed the Emerging Biotech Summit
held in June in Philadelphia, Pennsylvania, hosted by Merck's
Life Science and ealthcare business sectors and attended by
40 biotech leaders from across the United States. There we
established an open dialogue within the biotech community
and gained insight from executives on the topics of advancing
products faster through clinical development and bringing
lifesaving drugs to market.
We received several major industry awards for our product
innovations in 2015:
-
"R&D Magazine" presented us with two R&D 100 Awards
in November. These awards are viewed as the "Oscars of
Innovation" and recognize technologies in a wide variety of
industries, including telecommunications, high-energy physics,
software, manufacturing, and biotechnology. We won in the
"Process/Prototyping" category for our AFSⓇ water systems
and in the "Analytical/Test" category for our Simplicon™ RNA
Reprogramming Technology. This technology makes it possible
to generate virus-free, human-induced stem cells safely and
efficiently using a single transfection step, giving researchers
an effective reprogramming method when studying diseases.
Avelumab (anti-PD-L1 mAb)
Solid tumors
Phase III
Immuno-Oncology
At the 2015 American Society of Clinical Oncology (ASCO)
Annual Meeting, multiple presentations were made on the
preliminary safety and efficacy of avelumab (formerly known
as MSB0010718C), an investigational fully human anti-PD-L1
IgG1 monoclonal antibody that potentially uses the body's
own immune system to fight cancer. It included an oral presen-
tation on ovarian cancer and posters on gastric cancer, non-
small cell lung cancer (NSCLC) and several other studies in
a range of patient populations. The NSCLC data were from the
international open-label Phase I trial with multiple ascending
doses that is investigating the safety, tolerability, pharmacoki-
netics, as well as biological and clinical activity in patients with
metastatic or locally advanced solid tumors. In this analysis,
the safety and clinical activity in 184 patients with stage
IIIb/IV NSCLC who had progressed after receiving at least
one platinum-containing doublet were assessed. Objective
response was observed in 25 (13.6%) patients, including one
complete response and 24 partial responses; 19 responses
were ongoing at the time of the analysis, including in two
patients who continued to respond off-treatment.
An oral presentation at ASCO 2015 showed data from
the Phase I study for a cohort of patients with recurrent or
refractory ovarian cancer, unselected for PD-L1 expression,
with a median of four prior lines of treatment not including
adjuvant treatment. Of the 75 enrolled patients, eight showed
a partial response and 33 patients had stable disease, trans-
lating into a disease control rate (DCR) of 54.7%. The objec-
72 Combined Management Report Fundamental Information about the Group Research and Development
tive response rate was 10.7%. Further patients with ovarian
cancer have been enrolled in the ongoing Phase Ib study and
Phase III studies in platinum-resistant or platinum-refractory
and platinum-sensitive ovarian cancer are planned.
Clinical data of avelumab from a Phase I study in Japanese
patients with advanced gastric cancer were also presented
at ASCO. Of the 20 patients treated who had received multiple
prior therapies, partial responses were observed in three
patients. Enrollment of patients into the Japanese study has
continued and further studies in patients with advanced gastric
cancer are planned. Six abstracts were presented at the annual
European Cancer Congress (ECC) held in Vienna in September.
New data were presented in urothelial (e.g. bladder), meso-
thelial (e.g. pleura) and gastric/gastroesophageal cancers.
Additional NSCLC and ovarian cancer data from Phase Ib trials
were also presented.
Avelumab is currently being evaluated in a Phase II study
in metastatic Merkel cell carcinoma (MCC) known as JAVELIN
Merkel 200. MCC is a rare and aggressive form of skin cancer
for which there is currently no specific therapy approved. The
Phase II study is assessing the safety and efficacy of avelumab
in patients with metastatic MCC who have progressed after at
least one prior chemotherapy regimen. The primary endpoint
is objective response rate, and secondary endpoints include
duration of response, progression-free survival, overall survival
and safety. A total of 88 patients were enrolled in this study by
the third quarter of 2015 at sites across Asia-Pacific, Australia,
Europe and North America. It is the largest clinical trial ever
performed in this patient population. In the United States, the
FDA granted avelumab Orphan Drug Designation in MCC in
September, followed by Fast Track Designation and Break-
through Therapy Designation in the fourth quarter of 2015. In
December, the European Commission also granted avelumab
Orphan Drug Status in metastatic MCC in the European Union
following a positive opinion from the European Medicines
Agency (EMA)'s Committee for Orphan Medicinal Products.
Merck and Pfizer initiated two international Phase III
studies of avelumab in the treatment of NSCLC. The first
study, JAVELIN Lung 200, was initiated in April, and aims to
enroll approximately 650 patients. It will evaluate avelumab
in patients whose disease has progressed after receiving
a platinum-containing doublet chemotherapy compared with
docetaxel. The primary endpoint of this study is overall sur-
vival (OS) in patients with programmed death-ligand 1 posi-
tive (PD-L1+) NSCLC. The second study, JAVELIN Lung 100, is
designed to assess the safety and efficacy of avelumab, com-
pared with platinum-based doublet chemotherapy in patients
with late-stage NSCLC who have not previously received any
treatment for their systemic lung cancer. This Phase III study
is an open-label, multicenter, randomized clinical trial, in
which patients with recurrent or stage IV PD-L1+ NSCLC will
receive either avelumab or the investigator's choice of first-
line platinum-based chemotherapy, depending on the patient's
histology (either squamous or non-squamous). The study
expects to enroll approximately 420 patients at more than 240
sites around the world. The primary endpoint of the study is
progression-free survival in patients with PD-L1+ tumors.
Secondary endpoints include progression-free survival in
patients with strongly PD-L1 positive (PD-L1++) tumors,
overall survival, objective response rate, quality of life, tolera-
bility and safety in patients treated with avelumab versus
investigator-choice chemotherapy.
In December, Merck and Pfizer announced the initiation
of four additional Phase III studies investigating avelumab in
further indications. JAVELIN Gastric 100 is designed to evalu-
ate superiority of avelumab as a maintenance treatment for
advanced or metastatic gastric/gastro-esophageal junction
cancers versus continuation of first-line platinum-based chemo-
therapy. This randomized, open-label study aims to enroll
around 650 patients at more than 220 sites across the globe.
The study JAVELIN Gastric 300 will evaluate avelumab as
a third-line treatment in advanced or metastatic gastric/gastro-
esophageal junction cancers, in approximately 330 patients at
about 170 sites worldwide. JAVELIN Ovarian 200 will investigate
avelumab as a treatment for platinum-resistant/refractory
ovarian cancer. Study investigators intend to enroll approxi-
mately 550 patients across more than 190 sites. In addition,
avelumab will be evaluated as a maintenance treatment, in
the first-line setting, for patients with urothelial cancer in the
JAVELIN Bladder 100 trial. This study is expected to enroll
around 670 patients across more than 200 sites in 38 countries.
The primary endpoint for all these studies is overall survival.
We started a Phase I trial with a novel investigational agent
known as M7824. This is an open-label, multiple-ascending
dose study, aiming to enroll 106 patients. This potential first-
in-class bifunctional immunotherapy is designed to simulta-
neously block two immuno-inhibitory pathways that are
commonly used by cancer cells to evade the immune system,
thereby potentially controlling tumor growth by restoring and
enhancing anti-tumor immune responses.
Biopharma provides annual grants for outstanding extra-
mural research in certain fields in oncology. This year's Grants
for Oncology Innovation were awarded to three groups (two
from Spain and one from Italy) at a ceremony coinciding with
the 2015 European Cancer Congress (ECC) in Vienna, Austria.
To enhance our R&D technology portfolio in immuno-
oncology we entered into an exclusive strategic collaboration
and license agreement with Intrexon Corporation to develop
and commercialize Chimeric Antigen Receptor T-cell (CAR-T)
cancer therapies. CAR-T cells are genetically engineered T-cells
with synthetic receptors that recognize a specific antigen
expressed on tumor cells. When CAR-T cells bind to a target,
an immunological attack against the cancer cells is triggered.
Fundamental Information about the Group
Combined Management Report 73
Avelumab (anti-PD-L1 mAb)
Neurology/Immunology
In the field of multiple sclerosis we announced in September
that we intend to submit data on our investigational treatment,
cladribine tablets, for the treatment of relapsing-remitting
multiple sclerosis (RRMS) to the European Medicines Agency
(EMA). The decision follows our evaluation of new data and
additional analyses which allow a better characterization of the
compound's benefit-risk profile. Submission plans for other
parts of the world are also being developed. We had wound
down our clinical development program for cladribine tablets
in 2011 after some regulatory authorities expressed concerns
over the insufficient characterization of the drug's benefit-risk
profile. Nevertheless, several large clinical trials were allowed
to continue and additional safety information was also collected
in a long-term registry.
At the European Committee for Treatment and Research in
Multiple Sclerosis (ECTRIMS) meeting held in Barcelona in
early October, eight abstracts were presented on Rebif®, our
high-dose, high-frequency interferon beta-1a for relapsing
forms of multiple sclerosis (MS). Data presented included
post-hoc assessments of controlled studies in relapsing MS
of predictive scores for disease activity and disability pro-
gression, as well as a cost-effectiveness analysis of RebifⓇ vs.
Avonex® (interferon beta-1a) based on the "no evidence of
disease activity" (NEDA) measure. These new data should
help healthcare professionals and patients to make informed
treatment decisions and to better understand the impact of
RebifⓇ in patients with relapsing forms of MS.
The annual Grants for Multiple Sclerosis Innovation (GMSI)
are awarded by Biopharma for outstanding extramural research
projects in certain fields of MS from all over the world. In 2015
the awards were made on the occasion of the 31st congress of
the European Committee for Treatment and Research in Multiple
Sclerosis (ECTRIMS) to four research groups from Finland,
Italy, the Netherlands, and the United Kingdom.
In 2015, the "Journal of Neurology, Neurosurgery and Psychi-
atry" (JNNP) published 15-year follow-up data for Rebif® from
the PRISMS (Prevention of Relapses and Disability by Inter-
feron beta-1a Subcutaneously in Multiple Sclerosis) trial. The
published data analyzed the relationship, over a 15-year period,
between cumulative exposure to RebifⓇ treatment and other
possible prognostic factors with long-term clinical outcomes in
relapsing-remitting multiple sclerosis. In these post hoc
exploratory analyses, higher-dose exposure to IFN B-1a and
longer time on treatment were associated with better long-
term outcomes over many years in patients with RRMS.
Patient enrollment was completed for the Phase IIa study
of M2736 (also known as ATX-MS-1467), an investigational
immune-tolerizing agent. This is an open-label, one-arm, proof-
of-principle trial to evaluate the safety of M2736 and its effect
on immune tolerance in subjects with relapsing multiple sclerosis
which involves frequent neuroimaging using magnetic reso-
nance imaging. The outcome of the study is expected in 2016.
In the field of immunology, our soluble fusion protein
atacicept met an important milestone in fully completing patient
enrollment into the ADDRESS II study, a Phase IIb clinical trial
in patients with systemic lupus erythematosus (SLE). The target
of 279 SLE patients was met ahead of schedule, and key
results from the study are expected in 2016. Clinical Phase I
testing of our BTK inhibitor (M2951) in patients with SLE
began in the fourth quarter of 2015.
Fertility
Research and Development
Early in 2015 and following a review of all the data from our
clinical studies, we decided to discontinue the development
program for abituzumab (formerly known as DI17E6) in the
area of oncology. A Phase Ib trial in solid tumors, in collaboration
with Sanofi U.S., investigating pimasertib in combination with
Sanofi U.S.'s hDM2 antagonist (SAR 405838) was concluded
and the development will not be further pursued. Furthermore,
after reviewing the competitive environment, we decided to
return our rights outside China to the PARP inhibitor BeiGene-290
to BeiGene.
builds on the framework that the two companies have developed
during a two-year partnership in cancer metabolism, which
began in 2013. Under the terms of the new agreement, Merck
will have an exclusive license to the joint intellectual property
and Selvita will receive milestone payments and royalties upon
successful development and commercialization of products by
Merck.
In November, Merck announced that it had entered into
a three-year collaboration to validate new therapeutic concepts
in the field of oncology with Selvita, headquartered in Krakow,
Poland. The aim of the collaboration is to deliver potential first-
in-class small molecules as lead candidate drugs for multiple
oncology indications. This collaboration will steer a joint port-
folio of discovery projects in a risk/reward sharing model and
Our subsidiaries are engaged in a wide variety of local
projects. We have defined overarching criteria for selecting
projects, and the decisions concerning specific local projects
are made by our subsidiaries. In 2015, we spent a total of
around € 100 million on community engagement activities.
70 Combined Management Report Fundamental Information about the Group
Research and Development
Research and Development
We discover and develop new products and solutions
worldwide to improve the quality of life for patients and
to meet customer needs. We consistently aim to further
optimize the relevance and efficiency of our research
and development activities, whether in-house or through
external collaborations.
Around 5,000 employees work for Merck researching innova-
tions to serve long-term health and technology trends in both
established and growth markets.
We spent around € 1.7 billion on research and development
in 2015. Here we focus on both in-house research and external
collaborations, which enable us to increase the productivity of
our research while simultaneously reducing financial outlay.
The organizational set-up of our research and development
activities reflects the structure of Merck with three business
sectors.
Healthcare
Biopharma
The R&D organization of our Biopharma business advanced
several key programs in 2015, both in the early and late stages
of development - many of which are molecules discovered at
Merck. With a clear focus on oncology, immuno-oncology and
immunology, there is significant potential in the near term to
benefit patients and the business.
Under the direction of Luciano Rossetti, MD, Head of Global
R&D, several new senior leaders joined the organization,
including Alise Reicin, MD, Senior Vice President, Head of
Global Clinical Development, and Laszlo Radvanyi, MD, Head
of the Translational Innovation Platform Immuno-Oncology.
In addition, Joern-Peter Halle, PhD was appointed Head of
External Innovation for Biopharma R&D.
In September, our Biopharma business announced the
expansion of its R&D facility in Darmstadt, Germany. We are
investing € 65 million in a new laboratory building that will
span more than 16,000 square meters and accommodate
approximately 200 current employees whose focus will be on
accelerating innovation in R&D. The new building will unite
different functions within R&D Discovery Technologies, includ-
ing Molecular Pharmacology, Medicinal Chemistry, Computa-
tional Chemistry, Molecular Interactions and Biophysics,
Protein Engineering and Antibody Technologies, and Protein
and Cell Sciences. The research building, when completed in
autumn 2017, will be located within the new "Pharma Square"
at our global headquarters in Darmstadt. We are thus uniting
a significant part of our R&D activities in a single area, creating
ideal conditions for the advancement of our biopharmaceutical
pipeline.
Oncology
Regarding Erbitux®, in April 2015 the safety division of the
Japanese Ministry of Health, Labour and Welfare issued an
official notification to update the product information of
Erbitux® for use in unresectable, advanced or recurrent
colorectal cancer (CRC) patients with wildtype RAS tumors, in
line with the current approval status in Europe.
At the European Society for Medical Oncology (ESMO)
World GI (Gastrointestinal) Congress in Barcelona, Spain in
July, results were presented from the Phase II CAPRI-GOIM
trial. This was an independent study performed by an academic
group which enrolled 340 KRAS exon 2 wild-type mCRC patients.
Patients received first-line treatment of FOLFIRI plus ErbituxⓇ
and responders were then randomized to receive second-line
treatment of FOLFOX plus ErbituxⓇ or FOLFOX alone. A quad-
ruple wild-type population from this study (no mutation in
KRAS, NRAS, BRAF or PIK3CA; assessed by next-generation
sequencing) showed significantly prolonged progression-free
survival, improved overall survival, and response rates with
second-line ErbituxⓇ/FOLFOX after first-line Erbitux®/FOLFIRI.
This suggests that continuing anti-EGFR treatment while
switching the chemotherapy backbone in second line is feasible
following progression, although confirmatory data from other
studies will be needed.
Evofosfamide is an investigational hypoxia-activated
prodrug thought to be activated under severe tumor hypoxic
conditions, a feature of many cancers, which was investigated
in Phase III trials in two indications (soft tissue sarcoma
and pancreatic cancer). In May, we announced that the U.S.
Food and Drug Administration (FDA) had granted Fast Track
Research and Development
Fundamental Information about the Group Combined Management Report 71
designation for the development of evofosfamide for the
treatment of previously untreated patients with metastatic or
locally advanced unresectable pancreatic cancer. In December
2015 the outcome of both indications being investigated in
Phase III was assessed. Unfortunately studies in neither indi-
cation achieved their primary endpoints. The decision was
subsequently made to discontinue the development program
for evofosfamide and we returned the rights to the program to
Threshold Inc.
Tepotinib, an investigational small molecule inhibitor of the
c-Met receptor tyrosine kinase, progressed into two Phase II
parts of the ongoing Phase I/II trial. In early 2015, it was
moved to the Phase II part of an ongoing Phase I/II trial in
Asian patients with Met-positive (Met+) EGFR mutant non-
small cell lung cancer (NSCLC). The study plans to randomize
approximately 136 patients with Met+ tumors who have failed
first-line gefitinib, to tepotinib 500 mg/d plus gefitinib or tepo-
tinib plus cisplatin/pemetrexed. The primary endpoint is pro-
gression-free survival (PFS). In the second quarter tepotinib
was moved to the Phase II part of an ongoing open-label
Phase I/II trial in Asian patients to evaluate its efficacy, safety,
and pharmacokinetics as first-line treatment versus sorafenib
in subjects with treatment-naive advanced hepatocellular carci-
noma. The study plans to randomize approximately 140 patients
with Met+ tumors to tepotinib 500 mg per day or sorafenib
400 mg twice a day. The primary endpoint is time to progression.
In the field of oncology diagnostics, we signed an agree-
ment with Illumina, Inc. in March 2015. We are working with
Illumina to develop sequencing-based assays that detect and
simultaneously measure multiple genetic variants in a single
tumor sample in clinical trial settings. This will enable us to
perform genome studies at a pace unheard of a few years ago,
and could lead to the development of several diagnostics, thus
strengthening our position as a global leader in precision medi-
cine in oncology. In addition, Merck and its partner Sysmex
Inostics GmbH announced that the first liquid biopsy RAS bio-
marker testing center opened in the Vall d'Hebron Institute of
Oncology in Spain. The liquid biopsy method, also known as
blood-based biomarker testing, is a simplified and rapid
approach for determining the RAS (KRAS and NRAS) mutation
status of tumors, as it requires a single blood draw, rather
than a tissue biopsy or surgical procedure. The liquid biopsy
RAS biomarker test is expected to receive its European
Conformity approval (CE mark) in the coming months.
Ovidrel® (recombinant-hCG), used to trigger follicle maturation
and ovulation, was assessed in a Phase III trial in ovulation
induction (OI) in Japan to bridge to the existing ovulation
induction and advanced reproductive treatment (ART) data from
global pivotal trials. We are currently preparing a regulatory
submission in Japan based on the positive outcome of this trial.
Biopharma announced its support of the Grant for Fertility
Innovation (GFI) fund with grants totaling up to € 1.2 million
for the years 2015/2016. The announcement was made during
the 31st annual meeting of the European Society of Human
Reproductive and Embryology (ESHRE) which took place in
Lisbon, Portugal. Launched in 2009, the GFI is dedicated to
transforming innovative translational fertility research projects
into concrete health solutions to improve the outcomes of
assisted reproductive technologies (ART). In the last six years,
approximately 750 applications to GFI were received from
over 50 countries around the world.
Utilizing Intrexon's cell engineering techniques and RheoSwitch®
platform, the collaboration aims to develop leading-edge
products that empower the immune system to overcome the
current challenges of CAR-T therapy. The collaboration will
thus focus on developing a next-generation CAR-T platform to
generate drug candidates.
Research and Development
Non-small cell lung cancer
Hepatocellular cancer
Solid tumors
Solid tumors
Solid tumors
Solid tumors
Non-small cell lung cancer, 1st line
Status
Registration¹
Phase II
Phase II
74 Combined Management Report Fundamental Information about the Group
Phase I
Avelumab (anti-PD-L1 mAb)
Phase I
Phase I
Phase III
Avelumab (anti-PD-L1 mAb)
Non-small cell lung cancer, 2nd line
Phase III
Avelumab (anti-PD-L1 mAb)
Gastric/gastro-esophageal junction cancer, 1st line
Phase III
Avelumab (anti-PD-L1 mAb)
Gastric/gastro-esophageal junction cancer, 3rd line
Phase I
Immuno-Oncology
Phase II
Tepotinib (c-Met kinase inhibitor)
Endocrinology
BeiGene-283 (BRAF inhibitor)
M2698 (p70S6K and Akt inhibitor)
M3814 (DNA-PK inhibitor)
The annual Grant for Growth Innovation (GGI) is awarded
by Biopharma for outstanding extramural research projects in
the field of growth disorders. In 2015 the GGI was awarded to
two research groups from the United Kingdom and the United
States at a ceremony which coincided with the 54th European
Society for Paediatric Endocrinology (ESPE) conference in
Barcelona, Spain.
General Medicine
We announced on November 3, 2015, that the United Kingdom
regulatory authority had approved an updated labeling for
Glucophage® XR (extended release metformin) for the treat-
ment of patients with type 2 diabetes. The label change removes
from the list of contraindications moderate renal impairment
stage 3a in the absence of other conditions that may increase
the risk of lactic acidosis and chronic heart failure. This means
that in patients with stable chronic heart failure GlucophageⓇ
XR may now also be used with a regular monitoring of cardiac
and renal function. Earlier in the year, the French regulatory
authority had already approved an update of the labeling for
GlucophageⓇ IR (immediate release metformin), removing the
same contraindications. The label changes apply to all countries
in the European Union. The decisions were based on analyses
of Merck's extensive efficacy and safety data collected over
many years as well as new clinical studies available for
GlucophageⓇ.
Recently we received approval of metformin for the treat-
ment of prediabetes in Hungary. This approval follows that
in a number of other countries including Mexico, Poland, the
Philippines, and Turkey where Glucophage® can already be
prescribed for patients with prediabetes.
Neglected diseases
Merck promotes a Group-wide Access to Health initiative to
address key unmet medical needs of neglected tropical dis-
eases especially in children from developing countries. This
includes an R&D platform with a focus on tropical and priority
communicable diseases. In this connection, we obtained the
rights to the investigational antimalarial compound known as
DDD107498, from Medicines for Malaria Venture (MMV). The
objective of the future clinical program is to demonstrate
whether this investigational compound exerts activity on a num-
ber of malaria parasite life-cycle stages, and remains active
in the body long enough to offer potential as a single-dose
treatment against the most severe strains of malaria.
BIOPHARMA PIPELINE
as of December 31, 2015
In July 2015, the European Commission (EC) authorized an
update to the European marketing authorization for KuvanⓇ
(sapropterin dihydrochloride), to allow its use in children with
phenylketonuria (PKU) below four years of age who have been
shown to be responsive to such treatment. This EC decision
was based on a review of data from a Phase IIIb clinical study
known as SPARK. On October 1, we announced that we had
reached an agreement with BioMarin Pharmaceutical Inc.,
San Rafael, California, USA, to return the rights to Kuvan to
allow us to focus on core areas within our Healthcare business
sector. We also agreed to return our option to develop and
commercialize Peg-Pal, an investigational drug that is also
designed for the treatment of PKU.
Fundamental Information about the Group
Research and Development
Tepotinib (c-Met kinase inhibitor)
Tepotinib (c-Met kinase inhibitor)
Relapsing-remitting multiple sclerosis
Relapsing-remitting multiple sclerosis
Indication
Cladribine tablets (lymphocyte-targeting agent)
M2736 (immune-tolerizing agent)
Oncology
Compound
Therapeutic area
Combined Management Report 75
Neurodegenerative diseases
Middle East and Africa (MEA)
47.2
•
Europe
19.7
North America
Sigma-Aldrich became part of Merck on November 18, 2015.
As we are currently in the integration process, the remaining
text in this section refers exclusively to Merck, without Sigma-
Aldrich. The Sigma-Aldrich figures that are already available
can be found in the table at the end of this section.
As part of our Group strategy we place particular emphasis on
talent development, performance management and compen-
sation. In addition, we want to foster employee diversity in
order to be optimally prepared for future global challenges.
In order to support the Group strategy by providing suitable
programs and initiatives, we have defined three focus areas:
•
Enabling business growth and transformation
Innovation is shaping our future
Innovation plays a particularly important role at Merck. In
order to further enhance the preconditions for innovation, in
2015 we opened the modular Innovation Center in Darmstadt.
This gives employees the possibility to focus on their ideas and
work on projects in an environment that stimulates creativity.
After all, innovation calls for innovative employees and scope
for creativity. The Innovator Academy, which offers our employ-
ees various training courses, for instance on design thinking,
creativity techniques and the business model canvass, is an
important element of the Innovation Center. Internal project
teams, start-ups and the Merck Accelerator program as well as
further interested colleagues from various areas throughout
Merck make extensive use of this offer.
Building and fostering the corporate culture
The developments and the objectives achieved in these areas
are presented in the following.
Enabling business growth and
transformation
In a continuously changing world, qualified employees capable
of innovative thinking are of tremendous importance to the
success of any company. Therefore, the aim of our human
resources strategy is to develop employees of all age groups
and to prepare them for new challenges.
88 Combined Management Report Report on Economic Position Review of Forecast against Actual Business Developments
REVIEW OF FORECAST AGAINST ACTUAL
BUSINESS DEVELOPMENTS
In the Annual Report for 2014, we gave forecasts of the key
financial performance indicators for the Merck Group and our
business sectors for 2015. At the time of the forecast, the
acquisition of Sigma-Aldrich was still pending due to outstand-
ing antitrust clearances. We therefore provided a separate
forecast in the event of the successful acquisition of Sigma-
Aldrich, in which we expected the first-time consolidation of
Sigma-Aldrich in mid-2015. The following report reviews the
forecast against the actual business developments, including
the first-time consolidation of Sigma-Aldrich on November 18,
2015.
Net sales
"Start in die Ausbildung", a German program to prepare young
people for an apprenticeship, was continued with 20 interns,
the same number as in 2014. The program is for young people
between the ages of 16 and 25 who have completed secondary
school without having successfully found an apprenticeship for
at least one year after completing school. We promote the
professional expertise of our apprentices through numerous
regional and global project activities. These include supporting
a center for homeless children in Kenya. We were recognized
for this and other activities to promote the social skills of
apprentices. At the 2015 Hermann Schmidt Award ceremony,
Merck received a special prize for innovative vocational training
from the German Federal Institute for Vocational Training.
1.9
Enhancing leadership, talent and performance management
Asia-Pacific (APAC)
Our global advanced training program ensures that all of our
employees and executives around the world develop the skills
that they and we need to implement our company strategy
and to remain successful in the future. For instance, we offer
them a range of globally aligned classroom training courses on
17 selected subjects. In 2015, more than 4,000 employees
participated in these programs. Moreover, we make various
e-learning and language courses as well as book summaries
and development tools available to our employees. In addition,
local, business, and function-related offers exist to ensure the
continuous further development of our employees. Our Team
Performance workshop supports the participants in improving
their effectiveness and cooperation.
Latin America
For the Life Science business sector, we forecast a moderate
organic increase in sales in the Annual Report for 2014. Posting
strong organic sales growth of 6.5% in 2015, the Life Science
business sector exceeded this forecast. Process Solutions
made a significant contribution to this development with
organic sales growth of 11.6%. In addition, the Life Science
business sector saw a portfolio effect of 10.2% due to the
acquisition of Sigma-Aldrich.
For the Performance Materials business sector, we pre-
dicted slight organic sales growth, supplemented by a strong
portfolio effect. At 0.6%, the actual organic growth was only
slightly below this forecast. Special mention should be made
of the dynamic development of the OLED materials business,
as well as the energy-saving UB-FFS technology from the Display
Materials business unit. However, the mature LC technology
TN-TFT suffered from an accelerated decline in volumes. The
portfolio effect of the revenues from acquired businesses was
10.4%.
EBITDA pre exceptionals
In 2015, excluding the acquisition of Sigma-Aldrich, EBITDA
pre exceptionals of the Merck Group saw a solid increase over
the previous year, thus exceeding the forecast we gave in the
Annual Report for 2014. In addition, apart from operating per-
formance, positive foreign exchange effects of the U.S. dollar
and major Asian currencies contributed to this development.
Including Sigma-Aldrich, we generated a strong EBITDA pre
exceptionals increase of 7.1% to € 3,630 million for the Merck
Group in 2015.
The semiconductor industry is the most important sales
market for the business with integrated circuit materials
(IC Materials). The long-term growth of the semiconductor
industry has a cyclical demand pattern. According to Gartner,
a market research institute specializing in the technology and
electronics markets, in 2015 the industry's sales were at the
previous year's level as a result of declining demand in the PC
business. In 2014, dynamic growth of 8% was recorded.
Our Healthcare business sector generated slight organic
sales growth of 1.6% in 2015, thus slightly exceeding the
guidance provided in the Annual Report for 2014. In addition
to the performance of Rebif® in North America, which exceeded
our expectations, this was due to the organic increase in sales
of our products to treat diabetes (Glucophage®), cardiovascu-
lar diseases (ConcorⓇ), infertility (Gonal-f®), and thyroid dis-
orders (EuthyroxⓇ), as well as NeurobionⓇ, a brand marketed
by the Consumer Health business.
Research and Development
Fundamental Information about the Group Combined Management Report 79
Advanced Technologies
An outstanding example of our activities in the Advanced
Technologies business unit are OLEDs, which are used in new
lighting techniques and display technologies. OLEDs provide
brilliant colors and sharp images from any viewing angle; they
have a long lifespan and are highly energy-efficient. In addi-
tion, OLEDS enable round or flexible displays, making them
perfect for use in the latest technical applications. One such
example is the smart watch, a wristwatch that provides Internet
access along with additional computer functionality.
22.4
The name of our product line for these types of applica-
tions is livilux®. We have developed a strong portfolio of world-
wide patents, based on more than ten years of experience.
Development partnerships with customers are a way of testing
new technologies and making them market-ready. For instance,
together with printer manufacturer Seiko Epson, we have
established a technology that can be used to print OLED dis-
plays. While we contributed our expertise in OLED material
With the acquisition of Qlight Nanotech, we want to further
expand our leading position and deepen our expertise in the
research and development of display materials. Operating as
a research hub in Jerusalem, Qlight develops materials and
applications based on semiconducting nanocrystals. It has
a leading technology team with significant experience and
innovations in nanoscience and nanotechnology used in light-
ing applications and for displays and screens, among other
things.
80 Combined Management Report Fundamental Information about the Group
People at Merck
People at Merck
Our employees are crucial to our success. Therefore, it is
particularly important to recruit the right talent with the right
capabilities at the right time to Merck, as well as to develop
and retain them.
Overview of our headcount figures
As of December 31, 2015, we had 49,613 employees world-
wide (2014: 39,639). The increase in the headcount is due
primarily to the integration of Sigma-Aldrich. In 2015, we were
represented by a total of 211 legal entities with employees in
66 countries.
BREAKDOWN OF EMPLOYEES
by region (Merck incl. Sigma-Aldrich)
in %
8.8
and ink development to the collaboration, Seiko Epson pro-
vided its know-how in print heads featuring Micro Piezo inkjet
technology as well as process expertise. The jointly developed
technology offers the advantage of lower costs and higher
material efficiency. In contrast to evaporated OLED displays,
the materials are applied at room temperature under normal
pressure in the case of printed OLED displays. In addition, this
technique only deposits material in the areas where diodes are
actually located, thereby helping to conserve resources.
The markets for automotive coatings and cosmetics are
crucial to Merck's Pigments business. As reported by the
German Automobile Industry Association (VDA), global auto-
mobile sales increased by 4% in 2014. The growth drivers
were China (+13%), the United States (+6%) and western
Europe (+5%), whereas automotive sales volumes declined
in Latin America and eastern Europe. Owing to the weakening
of economic activity in China, global growth of the automo-
tive industry is expected to come in slightly weaker in 2015.
According to Euromonitor International, global consumption
of materials used to produce cosmetics grew by 2%, with Asia
reporting the highest growth rate of 5%.
We predicted slight organic sales growth for the Merck Group
in 2015, supplemented by a slight portfolio effect and a mod-
erately positive exchange rate effect. All business sectors
contributed significantly to the moderate 2.6% organic increase
in the net sales of the Merck Group, thus exceeding the fore-
cast. In addition, despite the delay in the acquisition of Sigma-
Aldrich owing to antitrust reviews, we recorded a solid port-
folio effect of 4.3%, in part due to the good performance of
AZ Electronic Materials, a company we acquired in 2014. The
strengthening of the U.S. dollar and major Asian currencies
against the euro in 2015 contributed significantly to the strong
positive currency effect of 6.2% on net sales.
Performance Materials
(FTES - full-time equivalents)
by region Latin America
3,877.6
4,024.2
320.0
4,344.2
Middle East
and Africa (MEA)
637.9
724.0
216.6
North America
5,076.3
5,156.5
4,615.9
22,785.7
2,426.5
20,359.2
19,946.2
725
217
North America
5,092
5,172
global, total
39,012.4
940.6
9,772.4
40,094.3
942
9,794
48,911.1
Number of employees
Asia-Pacific (APAC)
Europe
9,474.4
9,830.4
1,237.8
11,068.2
4,622
8,816.8
Number of countries in which the company has employees
66
66
41.3%
41.3%
42.6%
41.6%
Percentage of women in the workforce
in Germany
37.5%
global, total
37.6%
38.2%
Percentage of women in management positions global, total
(Global Grade 14+)
Percentage of managers in the workforce
(Global Grade 14+)
Percentage of employees working part-time
Percentage of employees aged 0-29 years
Percentage of employees aged 30-49 years
Percentage of employees aged 50+ years
Average length of service in years
26.3%
26.8%
49.0%
639
75.9%
93.1%
34
66
Number of legal entities with employees
146
146
65
211
People at Merck Fundamental Information about the Group Combined Management Report 81
Number of employee nationalities
122
122
_ 1
_ 1
Number of employees working outside Germany
71.8%
72.2%
global, total
in Germany
and Africa (MEA)
4,352
Competitiveness through diversity
To us, diversity means much more than having a certain gender
ratio. Therefore, as part of our strategy, we focus on topics
such as internationality and demography. Diversity is not only
important to us on a managerial level, but also throughout the
entire workforce. Together with a culture of inclusion, diversity
promotes innovation and improves team performance. One
of the strategic goals is to recognize the strengths of such
a diverse workforce and to appreciate individual differences. It
is important to us to create an integrative work environment
in which all employees have the possibility to realize their full
potential. With respect to three of our six company values,
namely respect, transparency and integrity, multifaceted ideas
are furthered and perspectives strengthened in order to drive
innovation and to add more value. By signing the Equal Oppor-
tunity Charter of the German Mining, Chemical and Energy
Industrial Union (IG BCE) in 2015, we underscored our com-
mitment to fairness and tolerance in the workplace.
In addition to the Chief Diversity Officer, who is responsible
for strategically managing diversity within the company, Merck
also established the Diversity Council in 2013. Its aim is to build
further buy-in for diversity and inclusion within the company.
The council consists of high-ranking managers from all parts
of the company. In 2015, the Diversity Council worked to
introduce our Diversity Framework, which bundles the diversity
and inclusion strategies. It focuses on the following four topics:
recruiting the right people to work for Merck, developing and
retaining them, promoting efficient collaboration, driving inno-
vations and improvements, and serving customers with diverse
needs. In addition, we support specific employee networks in
order to foster exchange among like-minded individuals.
People at Merck Fundamental Information about the Group Combined Management Report 83
In September 2015, we celebrated Global Diversity Days with
a campaign entitled "It starts with YOU - Diversity & Inclusion
at Merck". The objective of this year's initiative was to heighten
awareness of diversity and inclusion among our workforce
through global events. Globally, employees on five continents
took part in one of 27 events.
Our goal is to anchor knowledge about our growth markets
within the company. People from a total of 122 different nations
work for Merck. Only 26% of our employees are German citizens,
and 72.2% work outside Germany.
Women currently make up 41.3% of the workforce. Since
the ratio of women to men varies widely across the different
regions, businesses and functions, we have set ourselves the
goal of increasing the percentage of female employees wher-
Iever they are underrepresented. Here we take into account
the situation that is typical for the industry as well as regional
differences.
In Germany as well as several other EU countries, Japan
and the United States, we are preparing ourselves for demo-
graphic change. Since the average age of our employees in
these countries is slightly more than 40, the need for urgent
action does not yet exist; however, we assume that this figure
will continue to rise in the coming years. While increasing
automation and digitalization will certainly help to lower the
burden, we are already using various programs to meet the
demographic challenges in Germany. For instance, in 2015 we
not only developed new shift models, but also successfully
introduced preventive health measures for shift workers.
Moreover, we are systematically analyzing positions at the
Darmstadt site in terms of demographic suitability, and deriv-
ing measures from this analysis. The participation in a research
project in 2015 focusing on "mindfulness" was a further step
to sensitize the workforce to the limits of their own physical
and mental resources.
Diversity enriches our management team
We are convinced that balanced diversity among management
enhances career advancement opportunities for talented
employees while also helping to provide a broad experience
base within the company. In addition, it allows for differentiated
decision-making, thereby making a significant contribution to
the success of the company.
As a global company, we consider it highly important to
have an international management team. Currently, 61% of
our managers - meaning positions rated Global Grade 14 and
above in our Global Grading System - have a nationality other
than German. Altogether, 64 different nationalities are repre-
sented in such positions.
The percentage of management positions held by women
(Global Grade 14 and up) is currently 26.8% Group-wide.
Certain Group functions such as IT have a lower percentage of
women in management positions. However, the figures are
steadily increasing across Merck as a whole. We have achieved
our strategic goal of raising the percentage of management
positions held by women from 25% to 30% and intend to
further increase this percentage by the end of 2016. The
report on stipulations to promote the proportion of women in
management positions at Merck KGaA pursuant to section 76
(4) and section 111 (5) of the German Stock Corporation Act
can be found in the Corporate Governance section of this
report.
Safety in day-to-day work
As a responsible employer, it is especially important to us to do
everything in our power to prevent workplace-related illnesses
and accidents. We apply the lost time injury rate (LTIR) as an
indicator to determine the success of measures aimed at acci-
dent prevention as well as occupational health and safety. This
key performance indicator describes the number of workplace
accidents resulting in lost time of more than one day per one
million working hours. In 2010, we had set ourselves the goal
of reducing the lost time injury rate to 2.5 by 2015. Our future
target is even more ambitious. By 2020, we intend to sustain-
ably lower the LTIR to 1.5. The aim is to permanently stabilize
or outperform this challenging figure, which we achieved for
the first time in 2015.
An open corporate culture and a diverse workforce contribute
substantially to our business success. Therefore, promoting
diversity and inclusion as well as making employees more will-
ing to embrace cultural change are special areas of emphasis
of our human resources work.
Build and foster the corporate culture
years ago we implemented global and IT-based processes and
programs that help us to implement our philosophy of trans-
parent, consistent and competitive compensation sustainably.
Moreover, it is our objective to offer compensation that is both
performance- and position-based in both internal and external
comparisons. As a family-owned company, total compensation
offered by Merck focuses not only on monetary salary compo-
nents but also includes attractive non-monetary fringe benefits.
Since 2015, it has been possible for individual performance to
have a stronger impact on the variable bonus. In this way we
create greater incentives for employees to achieve top perfor-
mance, while at the same time allowing them to participate to
a greater extent in the success of the company.
Competitive and appropriate total compensation is a core
element of our attractiveness as an employer as well as moti-
vating and retaining our employees. For this reason, several
We also offer our top talent and senior executives a range
of advanced training programs. One of the aims of the seven-
month International Management Program is to promote
global thinking among young talent and to strengthen their
leadership competencies. Additionally, in cooperation with top
international universities, the Merck University has been offer-
ing a multi-regional, modular one-year program since 1999.
To date, 345 members of top management have taken part in
this program. Furthermore, Merck cooperates globally with
universities in order to support employees who wish to study
for an Executive MBA, for instance. In 2015, we launched the
Growth Markets Management program in India and Latin
America for local executives. This program, which encom-
passes business and company-specific topics, is also offered in
China and Turkey. The programs had participants from a variety
of countries and regions such as Africa, the Middle East,
Japan, and Russia. Globally, a total of 98 managers took part
in these programs in 2015. Moreover, in 2015 the Managerial
Foundation Program was conducted in 15 countries with 507
participants and the Advanced Management Program was
attended by 110 participants in four countries.
Through our investments in leadership quality, talent develop-
ment and advanced training, we strengthened the loyalty of
employees in countries with relatively high turnover rates such
as China and India.
Enhancing leadership, talent and
performance management
Furthering the performance culture at Merck is another focal
point of our human resources work. In this context, differenti-
ated compensation and advanced training opportunities are
important incentives. In order to establish this type of culture,
we consider it particularly important for managers to set an
example through their attitude and behavior. Selecting and
positioning the right employees, both internally and externally,
are crucial here.
Enhancing and developing a common understanding of
leadership
Our managers are expected to drive our innovative business
model. They achieve this by recognizing and making use of the
opportunities offered by the diverse cultures and experiences of
employees. At the same time, executives are to set an exam-
ple, for instance by living the company values and nurturing
a feedback culture. As part of an evaluation of our leadership
and business model, not only were roles adapted, but leader-
ship was also singled out as a central topic. Therefore, in Octo-
ber 2015, a new strategic competency model was introduced
to further develop and support our business strategy and thus
the related leadership culture. The strategic competencies
according to which managers and employees are to behave are
purposeful, future-oriented, innovative, results-driven, collab-
orative, and empowering. We will use the new model to build
and expand these central competencies in line with our future
strategic direction.
Promoting talent within the company, attracting talent
from outside
The continuous rate of improvement in recent years can
be particularly attributed to the BeSafe! program, which was
launched in 2010. This is a global initiative with harmonized
standards as well as local modules to meet the specific require-
ments at individual sites. This program focuses on engaging
managers in the safety culture and making safety an intrinsic
value, thus empowering our employees to take responsibility
for their own safety. In 2015, we continued to sensitize our
employees to workplace hazards through numerous activities
and awareness campaigns.
Within the framework of the "Fit for 2018" program, we
launched the capability initiative "ONE Talent Development,
Rewards and Performance Management" as part of our Group
strategy. The aim is to attract highly qualified graduates from
around the world to Merck and to retain them.
People at Merck
We consider it important to identify employee potential early on
and foster it on an individual basis. We want to offer our
employees interesting career opportunities, continuous personal
and professional development as well as prospects within the
company. We are therefore continuously working to strengthen
the performance and development culture within the com-
pany. Our processes are intended to support this and to ensure
that internal positions are filled in an even more efficient
manner. In order to achieve this, talent and performance man-
agement processes are globally aligned for all employees in
accordance with the same principle and are part of a shared
IT system. We systematically combine talent recognition with
performance management. Regular, individualized performance
evaluations make it easier to identify employees with high
potential and to develop them accordingly. Clear objectives,
differentiated and open feedback and individual development
plans are important prerequisites for personal development,
as well as for the success of the company.
In 2015, we further expanded our workforce pool to inter-
nally fill management positions when they become vacant. The
vast majority of management position vacancies were also
filled by internal candidates in 2015. In addition, we recruited
external executives in order to add new perspectives to our
long-standing in-house expertise.
Merck is using the motto "Make great things happen" to
position itself in the global job market, which conveys to
potential applicants a sense of what makes Merck unique: an
inspiring, motivating work environment in which innovations
thrive; an environment in which everyone has the opportunity
to apply their ideas and engagement to benefit customers and
the company, while at the same time developing themselves
as employees. Further increasing Merck's attractiveness as an
employer was an important reason for the repositioning of the
corporate brand in 2015. In late 2015, we started an analysis
of the impact of the new corporate brand on employer brand-
ing. It is essential to harmonize employer branding and mes-
sages with the new brand in order to position Merck as an
attractive and authentic employer.
In recruitment, we focus our efforts on successfully attract-
ing talent while paying attention to costs. For this, a globally
uniform and binding process was introduced. This starts with
a search in the internal talent pool and an internal job posting
before external channels such as job portals and recruitment
agencies are utilized. On the one hand, the process offers
employees better development opportunities, and on the other
hand it minimizes the costs incurred during external recruitment.
In order to support executives in making hiring decisions
and to establish uniform quality standards, we offer interview
training courses for employees with personnel responsibility.
In the courses, the participants learn proper interview behav-
iors, professional question techniques and how to incorporate
diversity aspects into the hiring decision.
Making performance worthwhile
82 Combined Management Report Fundamental Information about the Group
Since 2010, Merck has been presenting the Safety Excel-
lence Award annually in order to underscore the importance
of safety. It is granted to all production sites with no workplace
accidents on record for the year. In 2015, 41 out of 61 produc-
tion sites were recognized.
Despite our efforts to prevent accidents, there were two
workplace accidents resulting in fatalities in 2015. In the
United States, an employee died in a car accident. In Germany,
an employee was killed in an accident with a fork lift.
Reconciling the demands of a career and family
We want to help our employees achieve a good balance between
their professional and personal objectives. This maintains and
strengthens their motivation and performance potential, ena-
bling them to better schedule their lives to suit their own needs.
8,895
49,613
Asia-Pacific (APAC)
Europe
9,488
9,839
1,257
11,096
40,718
20,537
2,479
23,429
Number of employees
by region Latin America
3,883
4,032
320
20,950
Middle East
(Dec. 31, 2015)
(Dec. 31, 2014)
39,639
We offer our employees in Germany and the United States
various flexible working models. The mywork@Merck working
model initially implemented in 2013 at the Darmstadt, Gerns-
heim and Grafing sites in Germany for all exempt employees
aims to strengthen a culture of performance and trust within
the company. Employees can choose their working hours and
work location freely. Since October 2014, non-exempt employ-
ees at these sites whose positions are suitable for this working
model have also been able to make use of it. In addition,
mywork@Merck was also introduced for Merck Accounting
Solutions & Services Europe GmbH, Merck Export GmbH,
Merck Schuchardt OHG, and Merck Selbstmedikation GmbH.
At the end of 2015, a total of 4,122 employees made use of
mywork@Merck. Globally, 5.1% of our employees worked part-
time in 2015. 10.9% of our part-time employees are men.
84 Combined Management Report Fundamental Information about the Group
People at Merck
In addition, we offer our employees throughout Germany
targeted and independent information, advice and assistance
with regard to finding childcare and nursing care, as well as
home and garden services. At various sites, employees benefit
from childcare options that we subsidize. A daycare center
with capacity for 150 children between the ages of one and
twelve has been operating at the Darmstadt site for 48 years.
Since 2013, the daycare center has had expanded, year-round
opening hours from 6:30 a.m. to 7 p.m., needs-oriented day-
care hour options of 25, 35, or 50 hours per week, as well as an
adjacent new building, which is used exclusively as a nursery
for up to 30 children ranging in age from one to three years.
A good staff ratio, which offers parents and children reliability
with respect to the number of hours of care, is particularly
important to us. While their children adjust to the new envi-
ronment, our employees can make use of additional offices for
parents at the daycare center premises.
Dedicated employees contribute to success
A dedicated workforce is crucial in order to succeed as a global
company. Honest and balanced feedback from our employees
is thus important to us since it reveals, among other things,
the factors that influence engagement and what the organiza-
tion's strengths and weaknesses are.
In 2014 and 2015, around 20,000 of our employees from all
business sectors and Group functions took part in the McKinsey
Organizational Health Index (OHI) survey. Using nine health
dimensions, the OHI shows in a holistic and business-oriented
manner how efficient an organization is. In comparison with
the more than 1,000 companies that conducted the survey,
our OHI score for motivation is in the second quartile.
(Dec. 31, 2015) (Dec. 31, 2015)
Although opportunities for improvement were identified,
the overall results show that in comparison, our score is
above-average. The consolidated OHI results were presented
to our Executive Board in 2015. Work on central topics derived
from the survey has already begun. The topics identified in the
survey are being monitored and further pursued within the
scope of employee surveys.
OVERVIEW OF EMPLOYEE FIGURES
People at Merck Fundamental Information about the Group Combined Management Report 85
Merck
Merck excl.
Sigma-Aldrich
Sigma-Aldrich
Merck incl.
Sigma-Aldrich
global, total
Additionally, Merck received an important distinction in
2015 for the innovation programs Innospire and the Innovation
Cup. These were awarded the Innovation Prize of German
Industry, the world's oldest innovation award, in the innova-
tive personnel concepts category. Innospire fosters innovative
employee ideas for new businesses; the Innovation Cup is
aimed at top students from around the world. A further inno-
vation program entitled Outcubation was realized in Heidelberg
to promote young talent and was published in Nature Biotech-
nology, a renowned journal.
With its Liquid Crystals business, Merck is the leading pro-
ducer of liquid crystal mixtures for the display industry. Based
on data collected by market researchers at DisplaySearch, in
recent years the display industry has achieved growth rates in
display surface areas averaging 10%. This dynamic growth
was driven by higher sales volumes and increasing average
display sizes. Owing to weak demand for televisions, 2015
saw waning growth dynamics. The display industry remains a
growth sector in which the leading display technology is based
on liquid crystals. OLED technology, for which Merck also ranks
among the leading material suppliers, is gaining importance in
the high-quality display sector.
26.1%
global, total
3.0%
4.0%
4.9%
-5.8%
- 1.7%
1.0%
-7.0%
9.0%
2.0%
19.0%
2.8%
8.0%
8.9%
2014
2015¹
Development in
Development in
Semiconductor industry sales
Materials for production of cosmetics
Global automobile sales volumes
Growth of LC display surface area
Performance Materials
8.7%
Share of biopharmaceuticals in the global pharmaceutical market
24.0%
27.3%
The demand for Process Solutions products depends
heavily on the volume of biological product sales as well as the
research & development activities of biopharmaceutical com-
panies. Global biopharmaceuticals are approaching US$ 200 bil-
lion in sales and are expected to double by 2020. According to
EvaluatePharma, there are more than 7,500 active biologics
projects in the pipeline, 25% of which are monoclonal anti-
bodies. Biosimilars are a small, but fast-growing part of the
pharmaceutical market. In 2015, IMS expects spending on bio-
similars to reach US$ 2 billion annually, or approximately 1%
of total global spending on biologics.
performance and prospects of research tools markets. In com-
parison with 2014, the European market grew by 1.9% (2014:
1.6%), especially as a result of positive market developments
from the EU Research and Innovation program Horizon 2020.
Growth of the U.S. market improved to 3.2% (2014: +3.0%)
thanks to the robust performance of the biotech industry.
Emerging economies delivered higher growth; however, a
slowdown in China was visible.
For the global laboratory product market relevant to Bio-
science and Lab Solutions, the market research firm Frost &
Sullivan calculated growth of 3.0% for 2015 (2014: 2.8%).
Growth was primarily driven by biopharmaceutical industry
customers, specifically emerging biotech start-ups. The stabi-
lization of U.S. academic funding also helped to improve the
Our Life Science business sector is a leading supplier of prod-
ucts and services for general laboratory applications, as well
as researching, developing and producing drug therapies of
biological and chemical origin.
Life Science
In a market study, the company Nicholas Hall quantified
growth of the global over-the-counter pharmaceutical market
at 4.9% in 2015 (2014: 4.0%). The market growth drivers
were India at 8.9% (2014: 9.0%) as well as Latin America at
7.0% (2014: 8.2%). The Japanese and western European
markets showed the weakest growth dynamics of 0.2% and
3.3%, respectively.
According to EvaluatePharma, among our therapeutic areas
of focus, particularly the markets for multiple sclerosis thera-
pies and type 2 diabetes treatments showed the highest
growth, increasing by 8.0% (2014: 19.0%) and 2.0% (2014:
9.0%), respectively. Moreover, it should be emphasized that
the market for infertility treatments recorded a sales decline
of -7.0% (2014: 1.0%). Despite this difficult environment,
the Biopharma business generated an organic sales increase
of around 3.7% with Gonal-f®, a hormone used in the treat-
ment of infertility. In 2015, the market for oncology drugs to
treat colorectal cancer declined by a further 1.7% in compari-
son with the previous year (2014: -5.8%).
Not only the growth of the pharmaceutical sector as a
whole, but also in particular the development of the biophar-
maceutical market are relevant for our business. According
to EvaluatePharma, the share of sales accounted for by bio-
pharmaceuticals as a proportion of the overall pharmaceutical
market has steadily increased since 2006, amounting to 24.0%
in 2015. In absolute terms, global biopharmaceutical sales
amounted to around US$ 183 billion in 2015. For the coming
years, EvaluatePharma continues to expect increasing sales
of biopharmaceuticals. It is also likely that the trend towards
biopharmaceuticals making up an ever greater share of the
overall pharmaceutical market will continue.
The IMS Health Global Market Prognosis 2015-2019, a study
published by IMS Health, expects an 8.9% increase in sales
for the global pharmaceutical market in 2015 (2014: 8.7%).
This sales increase is primarily attributable to Latin America
and the United States. The U.S. pharmaceutical market saw
growth of 11.4% (2014: 12.6%) and in Latin America, growth
was as high as 15.8% (2014: 11.6%). At 7.0%, growth of the
Chinese market was weaker compared with the previous year
(2014: 11.2%). However, at 5.8%, European market growth
continued (2014: 4.1%).
Healthcare
23.0%
Combined Management Report 87
Macroeconomic and Sector-Specific Environment
Owing to the development of the €/US$ exchange rate in 2014-2015, market growth in U.S. dollars is weaker than when viewed in terms of euros.
1 Predicted development. Final development data for 2015 were not available for all industries when this report was prepared.
2 Growth figures are based on market data stated in U.S. dollars. Market data from EvaluatePharma on the growth of indications are based on published company reports and are
subject to exchange rate fluctuations.
8.0%
level
sales at the
previous year's
1.8%
4.0%
slightly weaker
growth
2.0%
13.8%
Report on Economic Position
Market for laboratory products
declining
growth
dynamics
Market for OTC pharmaceuticals
64.2%
global, total
15.2%
19.3%
14.4%
14.9%
global, total
11.3%
15.2%
10.5%
64.3%
of which men
2.6%
5.1%
5.2%
5.5%
5.9%
number of nationalities
67
64
Life Science
global, total
4.7%
54.7%
10.9%
global, total
Market for infertility treatment²
62.6%
Market for the treatment of colorectal cancer²
Market for type 2 diabetes therapies²
Market for multiple sclerosis therapies²
Global pharmaceutical market
Healthcare
According to the latest information, in 2015 the GDP of the
United States, the world's largest economy, grew by 2.5%
(2014: 2.4%), which was 0.6 percentage points short of the
2014 forecast. Growth in the United States slowed down in
2015 due to a decline in investment spending by the oil indus-
try and a harsh winter. For the eurozone, the IMF noted a
1.5% increase in GDP in 2015 (2014: 0.9%). In Asia (exclud-
ing Japan), GDP grew in 2015 by 6.6% (2014: 6.8%). India
(7.3%) and China (6.9%) made noteworthy contributions to
this development. Japan, South Korea and Taiwan remained
behind the previous year's growth expectations. However,
with GDP growth of 0.6%, Japan returned to positive territory
(2014: 0.0%). By contrast, economic activity slightly weak-
ened in South Korea, with GDP growth of 2.7% (2014: 3.3%)
and in Taiwan, with growth of 2.2% (2014: 3.8%).
According to the most recent report by the International
Monetary Fund (IMF), the recovery in industrialized countries
continued in 2015, whereas economic activity in emerging
economies and developing countries weakened for the fifth
year in a row. The IMF reported that global gross domestic
product (GDP) rose by 3.1% in 2015, representing a decrease
of 0.3 percentage points compared with 2014. While indus-
The development of our net sales in 2015 was influenced by
general global trends and by the growing importance of the
Asia-Pacific region (APAC). In 2015, the APAC region accounted
for approximately 56% of the organic growth in Group sales.
All business sectors made positive contributions to the overall
organic sales growth of the APAC region. In 2015, Healthcare
and Performance Materials generated the APAC region's larg-
est share of sales in absolute terms. At 10.4%, the highest
organic sales growth in the region was achieved by Healthcare.
Life Science and Performance Materials followed far behind,
with organic growth rates of 5.5% and 0.8%, respectively.
Macroeconomic and Sector-Specific Environment
trialized countries generated an increase of 1.9%, at 4.0%
emerging economies again made the largest contribution to
global growth.
86 Combined Management Report Report on Economic Position Macroeconomic and Sector-Specific Environment
20.9%
REPORT ON ECONOMIC POSITION
26.0%
22.2%
global, total
21.3%
10.1
10.0
1 No data available owing to the Sigma-Aldrich integration process, which is currently underway.
Long-term success through employee development
The basic and advanced training of our employees remains
a special area of focus. In 2015, we maintained a consistently
high vocational training rate in Darmstadt, Merck's largest
site. More than 500 young people were enrolled in vocational
training programs here in a total of 23 different occupations
in 2015. Upon the successful completion of their training, we
offer unlimited employment contracts to all apprentices work-
ing in occupations for which we have sustainable demand. On
average, the post-apprenticeship hiring rate - taking voluntary
terminations into account - was more than 90% over the past
five years. We also continue to offer vocational training to
a large number of young people at other sites.
SIMON CLARK
is a Brazilian parasitologist who
shares his passion for biology with
numerous followers on YouTube.
SAMUEL CUNHA
"To stay passionate, we
always have to think
Find the answer on page 10.
Does Merck drive fresh ideas?
"Things only improve if
there are people who
have crazy ideas and try
out something new."
at the University of Exeter. His
YouTube videos also mainly address
topics in physics.
is a PhD student in climate physics
THOUGHTS ON THE FUTURE
Six young researchers
350
Chairman of the Executive Board and CEO of Merck
STEFAN OSCHMANN
2018
"[He shall run the pharmacy] ensuring
that it is properly stocked with good,
freshly prepared medicinal products at
all times so as to cure ailments and
prevent ill health."
Excerpt from the "Pharmacy Privilege" issued by the ruling court to the company founder
FRIEDRICH JACOB MERCK:
1668
2017
Annual Report
Merck
of the future, of the poten-
tial result of our work."
"Scientific curiosity has
been a major driver of our
success for 350 years. It
has enabled us to pioneer
new technologies. And now
we are helping to shape
the digital revolution."
What does Merck think of this principle?
SIMONE STREY
EVA AMSEN
What does the future that we're helping to shape
look like? Our magazine delivers the answers
and celebrates the innovative strength that we have
been demonstrating for 350 years.
THE NEXT 350 YEARS
IMAGINE
ALWAYS CURIOUS
Find the answer on page 15.
Does Merck act responsibly?
"Handling our natural
resources responsibly is
becoming increasingly
important."
control in agriculture easier. The young company is working
with the Merck Innovation Center in Darmstadt.
is a graduate geographer and CEO of Peat, a start-up that is
developing software solutions to make sustainable pest
Find the answer on page 12.
Does Jakob's motto also apply at Merck?
"Only if we know why we
are doing something,
can we master the great
challenges of our time."
Berlin-based start-up specialized in developing
solutions for scientific mind mapping.
Find the answer on page 11.
is co-founder and CEO of NeuroNation, a
Find the answer on page 14.
Does Merck promote creativity?
clear solution."
hand, as not all
problems have a
"Research and
creativity should
go hand in
is a biologist, a PhD student at Oxford and a popular YouTube blogger.
INÉS DAWSON
Find the answer on page 13.
Does Merck practice interdisciplinary exchange?
but also with people
from totally different
fields - for example,
with artists."
is important to
exchange ideas
not only with
their colleagues,
"For scientists it
is a biochemist, writer and science
communicator based in London.
JAKOB FUTORJANSKI
CP
0
In September, we entered into a collaboration with Phosplatin
Therapeutics to evaluate avelumab in combination with PT-112, a
novel small molecule inducer of apoptosis with evidence of down-
stream immunogenic cell death (ICD) properties, currently in Phase I
development in solid tumors and hematological malignancies.
We procure many raw materials, packaging materials, technical
products, components, and services worldwide. Our overarching goal
is to protect the stability of these supply chains and always provide
our customers with the best products and services, while offering
them optimal quality and service. Our supplier management focuses
on compliance with fundamental environmental and social standards,
in addition to high quality, delivery reliability and competitive prices.
They are primarily derived from the core labor standards of the ILO
(International Labour Organisation), from the UN Global Compact,
and from the Code of Conduct of the BME (German Federal Associ-
ation for Materials Management, Purchasing and Logistics). Our
Group Procurement Policy and Responsible Sourcing Principles define
our procurement practices.
Due to the growing significance of emerging markets as sourcing
markets for Merck, we have reinforced our efforts to ensure adher-
ence to our supply chain standards. At the end of 2014, we joined
the Together for Sustainability (TFS) chemical industry initiative.
Since then, we have been utilizing the supplier assessment and audit
results shared among all member companies, who in turn abide by
all restrictions stipulated within competition law. Through TfS, we so
far have access to assessments for more than 730 of our most impor-
tant suppliers. We initiated assessments of 463 of them in 2017.
Responsibility for our employees
Employees are crucial to the success of a company. They therefore
play a central role in our business endeavors. In accordance with the
Merck values, we live a culture of mutual esteem and respect. We
seek to further our entrepreneurial success by recruiting, developing
and motivating the most suitable employees, which is why we focus
our employee strategy on employee development, compensation,
and performance management. We furthermore strive to foster
diversity among our employees (more information can be found
under "People at Merck").
Responsibility for the environment
In the manufacture of our products, we seek to impact the environ-
ment as little as possible. This especially includes efficiently conserv-
ing resources such as energy, water and raw materials while also
continuously reducing our emissions and waste.
Environmental management system
In our Corporate Environment, Health and Safety Policy, which is
applicable Group-wide, we have defined our principles and strategies
for environment, health and safety. It is an integral component of
our EHS management system, which is certified annually by external
auditors in accordance with the international standard OHSAS 18001.
At all our sites, local EHS managers oversee operational environ-
mental protection measures. These employees continually receive
training and obtain additional qualifications. Since our businesses
are constantly changing, our environmental management system is
subject to internal and external audits on a regular basis to ensure
that the ISO 14001 requirements are still being met. In 2017, we
obtained an ISO 14001 group certificate for the ninth consecutive
year. This certificate covers 83 sites around the world. Additionally,
our environmental management system was successfully adapted to
the new ISO standard 14001:2015. Our spending on environmental
protection, health and safety efforts totaled € 200 million in 2017,
which also includes investments made during the year.
Focus areas: Energy efficiency,
greenhouse gas emissions, water, waste and recycling
Climate impact and resource scarcity are key challenges facing
society in the 21st century. As a responsible company, it is especially
important for us to do our part. We have therefore set ourselves the
goal of reducing total direct and indirect greenhouse gas emissions
by 20% by 2020 (2006 baseline), irrespective of production growth.
In 2017, the CDP (formerly the Carbon Disclosure Project) gave our
efforts to conserve water a "B" rating (2016: A-). The CDP assesses
companies in terms of their performance and transparency in climate
impact and water management.
To achieve our climate impact mitigation goals, we have launched
the EDISON program that consolidates all our climate impact mitigation
and energy efficiency activities. Through the more than 300 EDISON
projects initiated since 2012, we aim to annually save around
98 metric kilotons of CO2 in the medium term. Overall, thanks to the
EDISON projects we have saved approximately 75,000 megawatt
hours of energy since 2012.
At the same time, we are pushing forward with the changeover
to regenerative power generation. In 2017, we installed solar power
panels at the Jigani and Peenya sites of our Life Science business
sector in Bangalore, India. These generate a total of 1,265,000 kilo-
watt hours of power per year. Since each of the installations covers
approximately 30% of the sites' power requirements, we will lower
our annual emissions by around 1,200 metric tons. We also installed
a solar voltaic system in Burlington, Massachusetts (USA). With an
output of 182 kilowatts, this is to generate 218,000 kilowatt hours of
power annually, thus reducing our emissions by around 60 metric tons.
Combined Management Report
Fundamental Information about the Group
_ Corporate Responsibility
Supplier management
81
Fundamental Information about the Group Corporate Responsibility
80
The Deutsche Philharmonie Merck is our musical ambassador. We
consider classical music to be the universal language that brings
people together; as such, it is an important part of our culture. The
concerts of this professional ensemble represent an integral part of
the cultural life in the vicinity of our Group headquarters in Darmstadt
and remain highly popular, with around 21,000 people attending
them in 2017. In addition, the orchestra again toured internationally.
Concerts took place in Austria, the Czech Republic and Morocco in
2017. One particular aim is to make classical music more accessible
to young people, for instance through special partnerships for children
and adolescents as well as cooperation programs with schools, such
as the orchestra workshop.
Promoting literature
Like music, literature is an important mediator between cultures.
That is why we support five literary prizes around the world, some
of which every two years: the Johann Heinrich Merck Award for
Literary Critique and Essay in Germany, the Premio Letterario Merck
in Italy, the Merck-Kakehashi Literature Award in Japan, the Merck-
Tagore Award in India, and the Merck Translation Award in Russia.
The awards primarily recognize those authors who build bridges
between cultures, as well as between literature and science.
The Johann Heinrich Merck Award for Literary Critique and Essay,
which we have been presenting since 1964 and is worth € 20,000,
went to Jens Bisky, a culture editor at the Süddeutsche Zeitung. With
the Premio Letterario Merck, we recognize authors in Italy who build
bridges between literature and science with their works. The 2017
prize, worth € 10,000, was awarded to U.S. writer Sam Kean for his
work "The Violinist's Thumb". The jury decided on an honorable men-
tion for Italian mathematician, author and professor Paolo Zellini.
Responsibility for our products
The safety of our products is at the core of our corporate respon-
sibility. When used properly, they must pose no risk to customers,
patients, consumers, or the environment. Our goal is to ensure a
positive benefit/risk profile for our products, which is why we regu-
larly examine safety across their entire life cycle and continuously
take steps to minimize risks. We provide patients, consumers and
customers with extensive informational material so that they can use
our products in a safe, responsible and proper manner.
In our pharmaceutical marketing activities, the focus is always on
the health and well-being of patients because we want them to receive
effective and high-quality treatment. All guidelines pertaining to mar-
keting and advertising are part of our Group-wide compliance pro-
gram, which is complemented by our internal guidelines and various
voluntary commitments that, in many cases, exceed the applicable
statutory regulations.
Safety of our chemical products
Numerous regulations are in place to ensure that chemicals pose no
risk to humans or the environment. Compliance with these regulatory
requirements is an important part of our work. Through a Group-wide
policy, we have established global processes for defining, directing and
implementing product safety, as well as the corresponding manage-
ment structures. We incorporate all relevant national and interna-
tional chemical regulations into our policies and guidelines and
adhere to them. This includes the EU chemicals regulation REACH
(Registration, Evaluation, Authorisation and Restriction of Chemicals)
and CLP (Classification, Labelling and Packaging of Substances and
Mixtures, EU GHS). Furthermore, we are committed to transparency.
For instance, in line with the Global Product Strategy, an international
initiative of the chemical industry, we provide our customers with
product safety summaries for hazardous materials.
For the final REACH registration phase, we are also working to
register all the relevant chemical substances within the stipulated
period. We successfully completed the two registration phases in
2010 and in 2013. The next step, or phase III, requires us to eval-
uate and register by June 2018 all substances annually produced or
imported in quantities ranging from one to 100 metric tons. This
process also includes substances added to our portfolio from the
Sigma-Aldrich acquisition and is on schedule.
Safety of our Healthcare products
Patient and consumer safety has top priority in everything we do.
During the entire life cycle of our medicines and consumer health
products, we provide patients, consumers and physicians with up-to-
date risk-benefit evaluations. To this end, company experts process
safety-relevant information from various sources such as clinical
trials, adverse reaction reports and scientific literature. Ultimate
responsibility for the safety of our biopharmaceuticals is borne by
our Global Chief Medical Officer, with support from the Medical Safety
and Ethics Board. Our Global Drug Safety unit continuously monitors
and evaluates the safety and risk-benefit ratio of our medicines
worldwide (pharmacovigilance). For our Consumer Health products,
this function is performed by the Global Product Safety unit. Overall
responsibility for the safety of our over-the-counter products is borne
by the Chief Medical Officer for the Consumer Health business, sup-
ported by the Safety & Labelling Committee.
For products in our Allergopharma business, we have also devel-
oped comprehensive clinical efficacy and safety profiles that we con-
tinuously update. For the safety of patients, we have established a
global pharmacovigilance system that we are always working to
enhance.
Quality of our products
Our goal is to provide customers and patients with high-quality brand-
name products. Through our quality vision - "Quality is embedded in
everything we do!" - we remind our employees of their responsibility -
across all business sectors, all Group functions and all levels of the
company.
Combined Management Report
The Deutsche Philharmonie Merck
ENERGY CONSUMPTION1
2014
120
111
37
34
Biomass and self-generated renewable energy
27
135
141
96
Indirect energy consumption
808
808
796
884
Electricity
Liquid fossil fuels²
in gigawatt hours
1,256
1,206
2015
2016
2017
Total energy consumption
2,162
2,260
2,241
2,270
Direct energy consumption
1,354
1,452
1,445
1,386
Natural gas
1,207
1,267
79
Fundamental Information about the Group _ Corporate Responsibility
Combined Management Report
Customers
sector
Competitors
Scientists
Communities
76
Combined Management Report
Fundamental Information about the Group Corporate Responsibility
To us, corporate responsibility means taking action and listening. The
dialogue with our various stakeholder groups is therefore highly
important to us. These stakeholders include employees, business
associates, the Merck family, investors, regulatory agencies, and
associations. We also engage in this continuous exchange to create
transparency and clearly demonstrate how we live the Merck values.
Thanks to good performance with respect to responsible and
sustainable entrepreneurial conduct, we were again included in the
FTSE4Good index in 2017. To be included in this leading international
sustainability index, a company must demonstrate socially conscien-
tious, ecological and ethical conduct. In 2017, we also maintained
our good standing in other major sustainability indices. For instance,
we are included in the STOXX Global ESG Leaders index, as well as
the Euronext Vigeo Eurozone 120 index and the Ethibel Sustainability
Index (ESI) Excellence Europe. In 2017, EcoVadis, an independent
rating agency, granted us gold status for our sustainability perfor-
mance. EcoVadis assesses suppliers from 120 countries across the
four categories of Environment, Labor Practices, Fair Business Prac-
tices, and Sustainable Procurement.
We are developing a new anti-malarial compound that has the strong
potential to not only treat, but also prevent malaria reinfection.
Through a strategic collaboration with the University of Cape Town
in South Africa and the Medicines for Malaria Venture, we are seeking
to identify new compounds that are already efficacious in the liver
stage and those that can provide long-lasting efficacy to improve
post-treatment protection. We are currently developing a kit for malaria
diagnosis based on our MuseⓇ cell analyzer. This kit will accurately
detect and type the malaria pathogen and identify the stage of infection.
In 2017, we achieved promising results in preclinical trials.
Our product IR3535® is used in insect repellents to help protect
against infections transmitted by mosquito and tick bites. Products
containing this active ingredient stand out due to their particularly
good tolerability in young children and pregnant women. They protect
against Zika, Chikungunya and Dengue fever. Work is underway on
a formulation to fight malaria. In several countries, products formu-
lated with IR3535Ⓡ were recently approved for head lice prophylaxis
in school children.
Strategic sphere of activity: Health
Ensuring access to health for underserved populations and commu-
nities in low- and middle-income countries is one of our strategic
priorities. Through our A2H approach, which spans all our businesses,
we aim to help improve sustainable access to high-quality health
solutions. Since we realize that access is a complex and multifaceted
challenge with no one-size-fits-all solution, our programs and initi-
atives are tailored to global, regional and local needs. We consider
partnerships, collaboration and dialogue to be key instruments in
delivering sustainable results, focusing on four areas known as the
"4As": Availability, Affordability, Awareness, and Accessibility. In the
Access to Medicine Index, which is published every two years, Merck
ranked fourth in 2016, moving up two places.
Availability
Healthcare
Availability entails the research, development and refinement of health
solutions that address unmet needs and are tailored to local environ-
ments.
NGOs
Management
and labor repre-
sentatives
Combined Management Report
At the 53rd ASCO Annual Meeting (June 2-6 in Chicago), we
shared results from our increasingly broad oncology portfolio, from
immuno-oncology to DNA damage response (DDR) approaches, in a
wide range of hard-to-treat cancers. Over 40 abstracts showcased
the impact of our commitment to shaping cancer care today and
tomorrow, including data for avelumab, Erbitux® (cetuximab), and
pipeline updates on the anti-PD-L1/TGF-ẞ trap M7824, the DNA-PK
inhibitor M3814, the BTK inhibitor M7583, and tepotinib, an investi-
gational small-molecule inhibitor of the c-Met receptor tyrosine
kinase.
75
Health: In low- to middle-income countries, many people lack access
to high-quality health solutions. We are applying our expertise here
and joining forces with strong partners to develop solutions for
patients locally. Our fight against the worm disease schistosomiasis
in Africa is a good example.
Environment: We are constantly working to improve the sustain-
ability footprint of our products and are furthermore helping our
customers achieve their own sustainability goals. The development
of new display technologies both with liquid crystals and organic
light-emitting diodes (OLEDs) are an example. They lower the power
consumption of televisions, smartphones, and tablet PCs.
Education and culture: Research and development throughout the
world thus benefit from curiosity, creativity, and enthusiasm. Cultural
offerings inspire people and expand their horizons. Cultural inspi-
ration also opens people up to new ideas. It favorably influences
society's acceptance of science, technological progress and innova-
tions. That is why we promote global educational offers and cultural
initiatives.
Our commitment to corporate responsibility is aligned with the UN
Sustainable Development Goals and we are attempting to contribute
to this ambitious agenda by 2030. Furthermore, we support relevant
responsible governance initiatives. We are a member of the United
Nations Global Compact and are committed to complying with the
compact's principles regarding human rights, labor standards, envi-
ronmental protection, and anti-corruption. Moreover, we also live our
corporate responsibility through our commitment to follow the guide-
lines of the Responsible Care Global Charter, an initiative of the
International Council of Chemical Associations (ICCA). Responsible
Care aims to drive continuous improvement and achieve excellence
in environmental, health, safety, and security performance in the
chemical industry. Furthermore, we are also a member of the Chemie³
initiative in Germany, a collaboration between the German Chemical
Industry Association (VCI), the German Employers' Federation of the
Chemical Industry (BAVC), and the German Mining, Chemical and
Energy Industrial Union (IG BCE). As part of this globally unique
alliance, the partners want to make sustainability a core part of the
chemical industry's guiding principles and to jointly drive the sector's
position within the German economy as a key contributor to sustain-
able development.
Share-
holders
The Merck
family
Government
agencies
Employees
Neighbors
Patients
Suppliers
Merck
Associations
and politicians
With our newly formed Merck Global Health Institute, we seek to
improve healthcare in developing countries. Our focus is on schistoso-
miasis, malaria, bacterial infections, and antimicrobial resistance. The
Institute's initiatives and programs particularly address key unmet
medical needs of women and children. Our objective is not only to
develop medicines, but also to improve diagnosis, disease control, and
reduce disease transmission, as well as strengthen local health systems.
The portfolio also covers the development of a new pediatric formulation
of praziquantel to treat the worm disease schistosomiasis in children
under the age of six through a public-private partnership. In addition,
we are conducting research into innovative schistosomiasis diagnostics
in partnership with key international stakeholders to identify vulnerable
populations. And we are looking for new schistosomiasis biomarkers
as well as new anti-schistosomiasis compounds.
Affordability
We seek to address affordability challenges through our efforts to
provide assistance to those people who are unable to pay for the
health solutions they need. To tackle these challenges, we have taken
a pro-access approach through our intellectual property initiatives
and are engaging in equitable pricing strategies. We provide trans-
parent information about our patents and patent applications in pub-
licly available databases. To strengthen our commitment to the London
Declaration to fight neglected tropical diseases, in 2017 we joined
the DNDI NTD Drug Discovery Booster consortium and opened our
compound library. The objective is to find potential cures for leish-
maniasis and Chagas disease. Moreover, we are one of more than
100 members of WIPO Re: Search, an open innovation platform spon-
sored by the World Intellectual Property Organization (WIPO).
Through intellectual property and knowledge sharing, platform part-
ners seek to accelerate early discovery for infectious diseases.
To utilize our market and technological leadership in liquid crystals
beyond applications in energy-saving displays, we opened a new pro-
duction facility for liquid crystal window modules in Veldhoven in the
Netherlands. According to initial measurement results, our smart win-
dows can cut energy use in climate-controlled buildings by up to 40%
and replace conventional sun shading solutions. In this way, we help
builders to save resources and costs. The principle behind this is as
follows: These windows can be manually or automatically controlled
to darken and provide sun protection and to do so in a variety of
colors. This technology is made possible thanks to the special prop-
erties of our liquid crystals. In combination with customized dyes, the
liquid crystals control the amount of incident light by either absorbing
and blocking electromagnetic waves (dark state) or allowing them to
pass through (transparent state). In contrast to competing technolo-
gies, our long-lasting licrivision TM materials switch within seconds and
are highly color-neutral. Architects and builders can customize the
desired color to suit the setting. For the semiconductor industry, we
have developed a series of environmentally sustainable specialty
chemicals and materials - including PFOS-free antireflective and
photoresists. In the cosmetics industry, we are addressing the contin-
uing trend for ingredients that meet stringent sustainability criteria.
Our portfolio of fillers dispenses entirely with microplastic particles
criticized for polluting waters and marine life enrichment. We are also
committed to continuously increasing the energy efficiency of our
production processes. Many of our cosmetic raw materials are reg-
istered and approved in accordance with the COSMOS standard.
COSMOS is an international association that developed and manages
the COSMOS standard AISBL, an international standard for organic
and natural cosmetics.
78
Combined Management Report
Fundamental Information about the Group Corporate Responsibility
Life Science: Reducing environmental impacts
in various product life cycle stages
We want to lower the environmental and health impact of our products.
This applies to the entire life cycle - from production and use through
to the disposal of our products. With our Design for Sustainability
(DFS) program implemented in 2014, we have developed a compre-
hensive approach for more sustainable life science products. It keeps
sustainability criteria in the foreground during product development
or re-engineering and documents them in a scorecard. Since the
acquisition of Sigma-Aldrich, we have expanded the DFS program so
that it is now an umbrella concept that encompasses all our portfolio
offerings. The objective is to lower environmental impacts of devices
and instruments, also during use by customers. Beginning with the
concept stage, product teams identify potential environmental impacts
and opportunities to make improvements. In 2017, we achieved
improvements in 35% of our new Life Science product developments.
One of our notable product releases in 2017 was the new Milli-Q® IQ
7000 Ultrapure Lab Water System, which uses mercury-free UV oxi-
dation lamps.
In addition, our researchers are developing innovative solutions
in line with the "12 Principles of Green Chemistry" developed by
chemists Paul T. Anastas and John C. Warner. The objective is to
permit research that is as environmentally compatible as possible,
and to minimize adverse effects on human health. With DOZNⓇ, we
have developed a web-based quantitative Green Chemistry analysis
tool. We are working to make the DOZNⓇ tool available for our cus-
tomers so that they will also be able to measure their environmental
footprint impact for life science research.
We are expanding our portfolio to include greener alternatives,
such as the new solvent, Cyrene TM. This product was named the
"Bio-based Chemical Innovation of 2017" - an accolade that can be
attributed to proving that safer, greener alternatives can also offer
superior performance. CyreneTM is derived from waste cellulose and
is employed as an alternative to solvents that are widely used but
are under increasing regulatory restriction due to their associated
toxicity. We not only think about the current life of our products but
also look ahead to end-of-life considerations and potential future
product lives as well. The application of single-use products - many
of which pose a challenge to recycle in the current infrastructure - is
growing as life science markets are expanding and adopting new
technologies. We have therefore developed innovative recycling pro-
grams which have led to the recycling of more than 1,300 tons of
our customers' products from 2015 to 2017.
Strategic sphere of activity:
Education and culture
Cultural promotion is a core element of our commitment to society,
building on our centuries-old tradition of supporting art and culture.
We thus further characteristics that are essential to our business
activities as a high-tech company: creativity, a passion for discovery,
curiosity, as well as the courage to transcend boundaries.
Boosting scientific education
We view education as a key component of culture - and vice versa.
Education can help us understand culture. But culture can also build
a bridge to education; it can stimulate curiosity and creativity. We
therefore support educational projects at many of our sites and grant
scholarships, for instance, or help define the curricula of selected
classes in schools. We want to spark an interest in science, particu-
larly among young people. This is why we have been supporting the
"Jugend forscht" (Young Researchers) competition for more than
30 years. Since 1996, we have been organizing the state-level com-
petition for the German Federal State of Hesse and have also hosted
the nationals twice.
Through our Junior Labs, we want young people to enjoy con-
ducting experiments. These learnings labs at the Technical University
of Darmstadt combine classroom instruction with trending topics and
modern research methods. In 2017, around 2,500 school students
used the chemistry laboratory with an extended program and around
1,000 school students experimented in the biology laboratory.
In 2017, we launched our first continuing education program for
teachers outside Germany by conducting a project in India. Indian
teachers were trained in organic electronics, with a special focus on
energy-saving, sustainable technologies. As part of SPARK, our
global volunteer program, employees from our Life Science business
sector share their skills and experience with students and support
our local communities. The program is intended to spark curiosity in
science and inspire them to consider a STEM-related career. In 2017,
more than 2,500 employees invested more than 13,700 hours in the
SPARK program. As part of SPARK, in 2017 we sent a Curiosity Cube™
on a journey through the United States. This is a freight container that
transforms into a mobile laboratory and is equipped with state-of-the-
art technology. In 2017, the Cube traveled more than 29,000 km
across the United States and made stops in over 85 schools and city
centers. More than 38,000 students have visited the Cube. Each of
the nearly 23,000 experiments conducted were supervised by one
of our employees.
-
In 2017, our Performance Materials developed the new liquid crystal
technology SA-VA (Self-Aligned Vertical Alignment) to market read-
iness. We have been developing the materials and process in the
scope of close technical partnerships with our customers. SA-VA is
an eco-friendly and resource-conserving technology that requires
less energy and creates less waste products than conventional tech-
nologies during display manufacture. SA-VA also provides a more
efficient display manufacturing process and could allow improved
design features for display manufacturers. SA-VA can be used in all
types of display applications, above all in large-size TVs.
Performance Materials: Increasing the sustainability of
manufacturing processes and final products
Through our products, we are helping overcome global challenges
such as climate impact and resource scarcity. In doing so, we are
also helping our customers to reduce the negative impacts of their
own activities and to achieve their own sustainability goals.
Apart from the collaboration already underway with the Univer-
sity of Buea in Cameroon, in 2017 we started cooperating under the
auspices of this program with the University of California in San
Diego. The focus is on potential treatments for leishmaniasis, Chagas
disease, and African trypanosomiasis (sleeping sickness).
Furthermore, we continue to work with the World Health Organi-
zation (WHO) to combat the worm disease schistosomiasis in Africa.
Through the Merck Praziquantel Donation program, we are donating
Cesol® 600 tablets containing the active ingredient praziquantel to
WHO. Since the start of this program, around 150 million patients
primarily school-aged children - have been treated. In total, we have
donated nearly 700 million praziquantel tablets to WHO since 2007.
As a founding member of the Global Schistosomiasis Alliance, we are
helping to eliminate schistosomiasis worldwide.
-
Through our Merck Global Health Institute, we are also an active
member of the Pediatric Praziquantel Consortium, a partnership we
initiated. Within this consortium, we are working hand in hand with
partners on developing a pediatric formulation of praziquantel to also
treat children under six with this medicine.
Combined Management Report
Fundamental Information about the Group _ Corporate Responsibility
77
711
Awareness
Through our Su-Swastha project we are working with various
non-governmental organizations and the Indian Health and Family
Ministry to improve healthcare in rural India. Among other things,
we provide inexpensive medicines while also educating the local
population and health professionals on everyday health issues and
their treatment. In 2017, more than 11,000 people were reached in
482 community meetings.
The Global Pharma Health Fund (GPHF), a non-profit organization
funded by Merck, works to combat counterfeit medicines in developing
and emerging countries. To date, the GPHF has supplied 836 Minilabs
at cost to detect counterfeit medicines to around 100 countries;
41 Minilabs were provided in 2017 alone. According to a report pub-
lished by WHO at the end of 2017, the Minilab made it possible to
identify more than 1,000 counterfeit medicines out of 20,000 tested
medicines.
Accessibility
We promote initiatives to strengthen supply chains and to develop
localized health solutions in order to deliver and reach out efficiently
at the point of care. We are a founding member of the Accessibility
Platform, an informal, private-sector initiative that is working on a
comprehensive approach to meeting supply chain and distribution
challenges in developing countries. The platform promotes information
exchanges between the various stakeholders and creates joint options
for action.
Together with two other Accessibility Platform members Roche
and Novartis, in 2017 we co-hosted a panel session at the World
Health Summit. Attendees included the Ghanaian Ministry of Health,
the World Health Organization, and the Global Fund to Fight AIDS,
Tuberculosis and Malaria. We support training and knowledge sharing
with our manufacturing partners in Africa, Asia and Latin America
with the aim of strengthening local manufacturing quality standards.
In India, we are cooperating with the non-profit organization
known as Narmada Samagra. Our River Ambulance transports health
workers and provides healthcare solutions to local populations living
in the remote region along the Narmada River. In 2017, we funded
the maintenance of the boat donated in the previous year. Addition-
ally, in the northeastern Indian state of Jharkhand, we are funding
a health center that gives the region's approximately 20,000 inhab-
itants access to medical personnel. In 2017, the Merck Global Health
Institute sponsored a new gynecology ward in the district hospital of
Akonolinga in the African country Cameroon.
Strategic sphere of activity:
Environment
We help to raise awareness by empowering health professionals,
communities and patients with the appropriate tools, knowledge
and skills to make informed decisions with respect to prevention,
diagnostics, treatment, and care. We regularly conduct campaigns
to increase awareness of certain diseases globally. Here we are focus-
ing on diseases that we have extensive expertise in, for instance
cancer, thyroid disorders, diabetes and multiple sclerosis. In 2017,
we established the Merck Foundation, a charitable organization that
combines some of our activities in underserved regions of the world.
Through our Access Dialogues series, we are promoting discourse
on access-to-health challenges with numerous public and private
stakeholders. In 2017, the topics of focus were intellectual property
and supply chain challenges in developing countries.
712
Fundamental Information about the Group _ Corporate Responsibility
740
726
711
731
379
390
393
387
374
414
341
333
324
357
6
11
731
54
793
2016
0
¹In line with the Greenhouse Gas Protocol, for all previous years (up to the 2006 baseline) the energy consumption has been calculated based on the current corporate structure of the reporting
year and retroactively adjusted for acquisitions or divestments of (parts of) companies, or for changes in emission factors (portfolio-adjusted).
2Light and heavy fuel oil, liquefied petroleum gas (LPG), diesel and gasoline.
82
Combined Management Report
Fundamental Information about the Group Corporate Responsibility
TOTAL GREENHOUSE GAS EMISSIONS (SCOPE 1 AND 2 OF THE GHG PROTOCOL) 1
in metric kilotons
Total CO₂eq³ emissions
thereof
direct CO₂eq emissions
Indirect CO2eq emissions
Biogenic CO2 emissions
2006²
2014
2015
2017
56
38
1 In line with the Greenhouse Gas Protocol, for all previous years (up to the 2006 baseline) the greenhouse gas emissions have been calculated based on the current corporate structure of
the reporting year and retroactively adjusted for acquisitions (e.g. Sigma-Aldrich in 2015) or divestments of (parts of) companies, or for changes in emission factors (portfolio-adjusted).
2 Baseline for our emission targets is 2006.
The FDA in 2015 granted avelumab Orphan Drug Designation for
MCC, as well as Fast Track and Breakthrough Therapy Designations
for the treatment of patients with metastatic MCC whose disease has
progressed after at least one previous chemotherapy regimen.
Breakthrough Therapy Designation is intended to expedite the devel-
opment and review of treatments for serious or life-threatening
disease where preliminary clinical evidence indicates that the drug
may demonstrate substantial improvement over existing therapies
for one or more endpoints.
This FDA approval was based on data from JAVELIN Merkel 200,
an international, multicenter, single-arm, open-label, Phase II study
with two parts. The first, part A, included 88 patients with metastatic
MCC whose disease had progressed after at least one chemotherapy
treatment. The objective response rate was 33%, with 11% of patients
experiencing a complete response and 22% of patients experiencing
a partial response. At the time of analysis, tumor responses were
durable, with 93% of responses lasting at least six months (n=25)
and 71% of responses lasting at least 12 months (n=13). Duration
of response ranged from 2.8 to more than 24.9 months.
The second, part B, at the time of the data cut-off included
39 patients with histologically confirmed metastatic MCC who were
treatment-naïve to systemic therapy in the metastatic setting. The
objective response rate was 62%, with 14% of patients experiencing
a complete response and 48% of patients experiencing a partial
response. 67% of patients experienced a progression-free survival
rate of three months.
The next regulatory milestone followed in May, when the FDA
granted BavencioⓇ accelerated approval for the treatment of patients
with locally advanced or metastatic urothelial carcinoma (UC) who
have disease progression during or following platinum-containing
chemotherapy, or who have disease progression within 12 months
of neoadjuvant or adjuvant treatment with platinum-containing
chemotherapy. This indication was also approved under the Acceler-
ated Approval Program based on tumor response and duration of
response, and continued approval for this indication may be contin-
gent upon verification and description of clinical benefit in confirma-
tory trials.
84
Combined Management Report
Fundamental Information about the Group _ Research and Development
Advanced urothelial carcinoma is an aggressive disease with a high
rate of recurrence. Bladder cancer accounts for approximately 90%
of urothelial carcinomas and is the sixth most common cancer in the
United States. Despite advances in the treatment of locally advanced
or metastatic disease, the prognosis for patients remains poor, with
the five-year survival rate at approximately 5%, meaning more treat-
ment options are urgently needed.
The efficacy and safety of BavencioⓇ in urothelial carcinoma were
demonstrated in the corresponding cohorts of the JAVELIN Solid
Tumor trial, a Phase I, open-label, single-arm, multicenter study of
BavencioⓇ in the treatment of various solid tumors. These urothelial
carcinoma cohorts (n=242) enrolled patients with locally advanced
or metastatic urothelial carcinoma with disease progression on or
after platinum-containing chemotherapy, or who had disease pro-
gression within 12 months of treatment with a platinum-containing
neoadjuvant or adjuvant chemotherapy regimen. Patients with six
months or more of follow-up experienced an overall response rate
of 16.1%. Duration of response was not precisely estimable, with a
range of response from 1.4 to 17.4 months.
In September, we gained three further regulatory approvals for
BavencioⓇ. The first was from the regulatory authority in Switzerland
(Swissmedic) for the treatment of patients with metastatic MCC
whose disease has progressed after at least one chemotherapy treat-
ment. In mid-September, the European Commission granted approval
for BavencioⓇ as a monotherapy for the treatment of adult patients
with metastatic MCC, making it the first and only approved treatment
for metastatic MCC in the 28 member states of the European Union
as well as Liechtenstein, Iceland and Norway. A few days later, the
Japanese Ministry of Health, Labour and Welfare (MHLW) granted
the first Asian approval for BavencioⓇ, making it the first-ever treat-
ment indicated for curatively unresectable MCC and the first anti-
PD-L1 to become available in Japan. Regulatory approval for the
treatment of metastatic MCC followed in December in Canada and
in January 2018 in Australia as well as in Israel. In addition, BavencioⓇ
was approved in Israel at the end of January to treat patients with
urothelial carcinoma.
Through our strategic alliance with Pfizer, we continue to explore
the therapeutic potential of avelumab. Our clinical development
program known as JAVELIN involves more than 30 clinical programs,
including various Phase III trials and over 7,000 patients being
evaluated across more than 15 different tumor types. In addition to
MCC and UC, these cancers include breast, gastric/gastro-esophageal
junction, head and neck, Hodgkin's lymphoma, melanoma, mesothe-
lioma, non-small cell lung, ovarian, and renal cell carcinoma (RCC).
On December 21, the FDA granted Breakthrough Therapy Desig-
nation for avelumab in combination with INLYTA® (axitinib) for
treatment-naïve patients with advanced RCC.
In addition to the host of abstracts presented at key congresses in
2017 including the 2017 American Society of Clinical Oncology
(ASCO) Annual Meeting and the 2017 European Society for Medical
Oncology (ESMO) Congress - we provided an update on our Phase III
JAVELIN Gastric 300 study in November. The study is the first global
trial of a checkpoint inhibitor versus an active chemotherapy com-
parator rather than placebo in patients with pre-treated advanced
gastric cancer. The trial did not meet its pre-specified primary end-
point of superior overall survival. The data are being further examined
in an effort to better understand the results and we will present them
at a medical congress in 2018. We remain committed to our ongoing
gastric clinical development program with avelumab.
As part of our commitment to developing new treatment options
for patients with hard-to-treat cancers who would otherwise have
a low chance of survival and to exploring all potential options, we
entered into several strategic collaborations in 2017. The first of
these was in March, when our collaboration with EpiThany to evaluate
avelumab in combination with EP-101 STEMVAC, an investigational
multi-antigen, polyepitope cancer vaccine, in a Phase II trial in women
with breast cancer was announced. The second was announced in
May, with Swiss/German biotech company VAXIMM AG to evaluate
avelumab in combination with VAXIMM's VXM01. VXM01 is an inves-
tigational oral T-cell immunotherapy designed to activate T-cells to
attack the tumor vasculature, and, in several tumor types, attack
cancer cells directly. Under the terms of the agreement, VAXIMM
will be responsible for conducting two open-label Phase I/II trials -
one in glioblastoma and one in metastatic colorectal cancer (CRC).
In June, we announced a collaboration with eFFECTOR Therapeu-
tics to evaluate a novel immuno-oncology combination in microsat-
ellite stable colorectal cancer. Together we plan to initiate a Phase II,
open-label, randomized, non-comparative study to evaluate the
safety, tolerability and efficacy of avelumab in combination with
eFFECTOR's investigational small molecule MNK1/2 inhibitor, eFT508,
in microsatellite stable relapsed or refractory CRC patients.
701
In 2017, we achieved a number of significant milestones with
avelumab, an anti-PD-L1 antibody that we are co-developing and
co-commercializing with Pfizer. The first regulatory milestone took
place in March, when the U.S. Food and Drug Administration (FDA)
granted accelerated approval for avelumab under the brand name
BavencioⓇ for the treatment of adults and pediatric patients 12 years
and older with metastatic Merkel cell carcinoma (MCC), based on
tumor response and duration of response. Continued approval for
this indication may be contingent on verification and description of
clinical benefit in confirmatory trials. Metastatic MCC is a rare and
aggressive skin cancer that previously had no approved treatment
options, making this the first indication for Bavencio® and the first
FDA-approved treatment and immunotherapy for metastatic MCC.
Since fewer than half of patients with metastatic MCC survive more
than one year and less than 20% survive beyond five years,
BavencioⓇ offers patients a much-needed treatment option that could
make a meaningful difference in the treatment of this.
Oncology and Immuno-Oncology
BIOPHARMA
Healthcare
3 eq = equivalent.
Energy management plays a key role in our efforts for energy effi-
ciency and climate impact mitigation. Our production sites in Darmstadt
and Gernsheim account for around 28% of our global energy con-
sumption. Both these facilities have fulfilled the international energy
management standard ISO 50001 since 2012. Currently, 12 of our
production sites have a certified energy management system. We
intend to maintain our climate targets in the future. In 2017, the
Executive Board confirmed the greenhouse gas reduction target and
the required measures to achieve it, for instance through projects
to raise energy efficiency levels and to reduce process-related green-
house gas emissions.
In addition to energy, we also focused on the topic of water in
2017. Since 2016, we have been pursuing the goal of implementing
a sustainable water management system at sites with high consump-
tion levels by 2020. At sites with relevant water use located in areas
of high water stress, we are aiming to cut our water consumption by
10% by 2020 (2014 baseline). At the end of 2017, we had lowered
our water consumption at the relevant sites by around 9% in com-
parison with 2014. In 2017, the CDP gave our efforts to conserve
water a "B", two scores better than in the previous year.
Natural resources are becoming scarcer. We therefore want to
use raw materials as efficiently as possible and to limit the loss of
raw materials. Consequently, we intend to minimize the environmen-
tal impacts of our waste as far as possible. In 2016, we developed
the Merck Waste Score, which allows us to compare the amount of
waste our sites are producing and monitor the development of the
amount of waste we produce. In 2017, the Executive Board resolved
for the first time to reduce the environmental impact of our waste
by 5% by 2025 (2016 baseline). For this purpose, we are analyzing
the improvement potential of production processes and disposal
routes employed by our sites. In principle, all sites are to contribute
to the waste reduction efforts.
Responsibility for society
We see ourselves as part of society - both at our individual sites and
worldwide. Taking responsibility towards society is an integral part
of our entrepreneurial approach. We believe that we can make an
important contribution to the community through our knowledge,
our skills and our products.
0
Our social responsibility activities are primarily focused on those
areas in which we have problem-solving expertise stemming from
our core businesses. We are thus engaged in health and environ-
mental projects and furthermore support education, especially in the
natural sciences. We provide disaster relief in emergency situations,
particularly in those regions in which we operate.
Combined Management Report
Fundamental Information about the Group _ Research and Development
83
Research and Development
We conduct research and development (R&D) worldwide in order to
develop new products and services designed to improve the quality
of life of patients and to satisfy the needs of our customers. Further
optimizing the relevance and efficiency of our research and develop-
ment activities - either on our own or in cooperation with third par-
ties is one of our top priorities.
Approximately 6,800 employees work for Merck researching innova-
tions to serve long-term health and technology trends in both estab-
lished and growth markets.
Merck spent around € 2.1 billion on research and development
in 2017. In our research and development activities, we focus on
both in-house research and external collaborations which enable us
to increase the productivity of our research while simultaneously
reducing financial outlay. The organizational set-up of our research
and development activities reflects the structure of Merck with three
business sectors.
Our subsidiaries are engaged in a wide variety of local projects.
We have defined a general set of criteria for selecting projects, and
the decisions concerning specific projects are made by our subsidi-
aries. In 2017, we spent a total of € 34 million on community engage-
ment activities.
0
Direct energy consumption
1.1
0
in terajoules
Total energy consumption
2014
2015
2016
2017
7,783
8,137
8,068
8,172
4,874
5,228
5,202
4,990
0
Natural gas
0
0.5
Steam, heat, cold
Steam, heat, cold
97
96
95
144
Total energy sold
Electricity
Steam, heat, cold
0.6
0.5
0.5
0.3
0.6
0.5
0.3
4,345
0
4,561
2,524
2,664
Steam, heat, cold
349
346
342
518
2,563
Total energy sold
1.8
1.8
1.1
Electricity
2.2
4,342
1.8
2.2
2,560
1.8
3,182
Liquid fossil fuels²
432
400
133
Electricity
Biomass and self-generated renewable energy
97
122
508
346
Indirect energy consumption
2,909
2,909
2,866
4,522
486
• Meet customer needs
• Partner with the global scientific community
• Invest in new and disruptive technologies for the long term
•
In 2017, we continued to focus on delivering the promise of
accelerating access to health for people everywhere. We launched
15,000 products, including nearly 9,000 chemicals, while aiming to:
Improve and expand our portfolio
Across our three Life Science business units of Research Solutions,
Process Solutions and Applied Solutions, our R&D teams are dedi-
cated to finding innovative solutions to our customers' toughest chal-
lenges. In the Life Science business sector, we invest significantly in
R&D, with more than 1,500 employees working in various R&D func-
tions around the world.
Combined Management Report
Allergopharma, our allergy business, is one of the leading manufac-
turers of diagnostics and prescription drugs for allergen immuno-
therapy. With its own research department and in cooperation with
research institutes and other partners, Allergopharma is developing
a better understanding of the immunological mechanism that under-
lies the development of allergies and is working on the next gener-
ation of drugs for allergen immunotherapy.
Allergopharma
Our Consumer Health business develops and sells over-the-counter
medicines and food supplements as well as several prescription med-
icines in Europe, in particular in France, Germany and the United
Kingdom, and in growth markets in Latin America, the Middle East,
Africa, and Southeast Asia. The focus of our research and develop-
ment activities is on the continuous improvement of existing formu-
lations as well as on the development of new products and line
extensions. For example, in 2016/2017 we successfully launched the
all-new brand Vivera® across several Latin American markets, con-
taining one of the most researched and most effective probiotics in
the world for the treatment of gastro-intestinal upset. We are fol-
lowing a consumer-centric innovation approach based on intensive
market research across all our key markets. Since 2014, we have
been establishing cooperation agreements with independent third-
party research facilities to leverage their specific capabilities and
expertise for the development of new products that meet the specific
needs of consumers.
Consumer Health
89
Fundamental Information about the Group _ Research and Development
Improve and expand our portfolio
Life Science
We launched innovations across all segments of our portfolio through-
out 2017. In Research Solutions, we introduced a next-generation
high-sensitivity protein detection platform, SMCXPRO™ technology,
which allows scientists to detect and quantify low-abundance bio-
markers that traditional methods cannot measure.
Combined Management Report
In Process Solutions, we launched CAN MultiFlow TM screening
services to more accurately predict genotoxic and mode-of-action
properties of substances, ingredients and drug compounds. We
were the first company to provide this service in the United States.
Assessing toxicity is one of the most important steps in the devel-
opment of chemicals, ingredients and drugs for use in pharmaceu-
ticals, agriculture or consumer goods.
Transforming growth factor ẞ
In October, our Carlsbad, California-based manufacturing facility for
the production of BioRelianceⓇ viral and gene therapy products com-
pleted both a U.S. Food and Drug Administration pre-license inspec-
tion and a European Medicines Agency marketing authorization appli-
cation inspection. As a leading contract manufacturing organization
for the production of next-generation gene therapies, the achieve-
ment underscores our commitment to bring our customers closer to
commercialization of novel therapies. In December, we signed a
commercial supply agreement to manufacture viral vectors for blue-
bird bio for use in potentially transformative gene therapies.
Beyond basic gene-editing research, Merck supports development
of gene- and cell-based therapeutics and manufacturing viral vectors.
We recognize the potential benefits of conducting properly
defined research with genome editing because of the breakthrough
therapeutic potential. Therefore, we support research with genome
editing under careful consideration of ethical and legal standards.
The Group has established the Merck Bioethics Advisory Panel to
provide guidance for research in which its businesses are involved,
including research on or using genome editing.
In addition, the Canadian Patent Office issued a "Notice of Allow-
ance" for the patent application covering CRISPR technology used in
a genomic-integration method for eukaryotic cells. And, in December,
we were granted a patent for CRISPR technology by the Singapore
Intellectual Property Office. Patents have also been filed for the inser-
tion CRISPR method in the United States, Brazil, China, India, Israel,
Japan, and South Korea.
We further strengthened our patent portfolio in August, when the
European Patent Office (EPO) issued a "Notice of Intention to Grant"
for a patent application covering our CRISPR technology used in a
genomic-integration method for eukaryotic cells. The patent provides
protection for our CRISPR technology, which gives scientists the
ability to advance treatment options for the toughest medical chal-
lenges we face today.
The Australian Patent Office granted Merck patent rights relating
to the use of CRISPR in a genomic-integration method for eukaryotic
cells. With this CRISPR genomic-integration technology, scientists
can replace a disease-associated mutation with a beneficial or func-
tional sequence, a method important for creation of disease models
and gene therapy. Additionally, scientists can use the method to
insert transgenes that label endogenous proteins for visual tracking
within cells.
In 2017, we developed an alternative CRISPR genome-editing
tool that makes CRISPR more efficient, flexible and specific, giving
researchers more experimental options and faster results, which can
accelerate drug development and access to new therapies. Our
research on proxy-CRISPR, "Targeted Activation of Diverse CRISPR-
Cas Systems for Mammalian Genome Editing via Proximal CRISPR
Targeting," was published in the April 7, 2017, edition of Nature
Communications.
Invest in new and disruptive technologies for the long term
CRISPR genome-editing technology is advancing treatment options
for some of the toughest medical challenges faced today, including
chronic illnesses and cancers for which there are limited or no treat-
ment options. Merck has a 12-year history in the genome-editing
field and was the first company to globally offer custom biomolecules
for genome editing (TargeTron TM biomolecules and zinc finger nucle-
ases), driving adoption of these techniques within the worldwide
research community.
Fundamental Information about the Group _ Research and Development
90
We also launched MC-Media Pads for convenient food and bev-
erage testing. The product offers streamlined, convenient indicator
organism testing for robust quality control of food and beverages,
helping customers improve their sample-testing workflows by
increasing efficiency without compromising quality.
In Applied Solutions, we introduced a new testosterone calibrator
kit for in vitro diagnostic use. The certified kit allows users to calibrate
assays and verify calibrations and is the first of its kind to receive
CE mark approval - indicating compliance with the European Union's
Medical Device Directive.
We also introduced Millistak+®HC Pro, the first portfolio of high-
capacity, fully synthetic depth filters for non-treated Chinese Hamster
Ovary harvest clarification and downstream filtration applications.
The product provides a cleaner and more consistent depth filtration
process than traditional diatomaceous earth (DE) and cellulose-based
filtration processes.
We took a significant step towards increasing manufacturing flex-
ibility and enabling higher productivity with the launch of the Ex-Cell®
Advanced ™ HD Perfusion Medium. This first off-the-shelf, high-den-
sity cell culture medium supports perfusion processes and facilitates
high productivity at low perfusion rates, increasing production yield
and speed to clinic.
In addition, we introduced the Stericup® Quick Release 500mL
vacuum filtration system, a filter bottle system ideally suited for
sterile filtration of cell culture media, buffers and reagents. Even
routine processes like microfiltration must be reliable and consistent
because quality and reproducibility are critical to the cell culture
process. The improved liquid sterile filtration system offers ergo-
nomic design updates that optimize user control and streamline the
filtration process, while safeguarding results with the proven perfor-
mance of Millipore® membranes.
Protein kinase
Osteoarthritis
Programmed cell death ligand 1
Bruton's tyrosine kinase
B-lymphocyte stimulator
Ataxia Telangiectasia and Rad3-related kinase
Ataxia Telangiectasia Mutated kinase
A proliferation-inducing ligand
A disintegrin and metalloproteinase with thrombospondin motifs
Protein kinase B
ADAMTS-5
There is no guarantee any product will be approved in the sought-after indication.
3 As announced on March 30, 2017, in an agreement with Avillion, anti-IL-17 A/F nanobody will be developed by Avillion for plaque psoriasis and commercialized by Merck.
More information on the ongoing clinical trials can be found at www.clinicaltrials.gov.
2 Sponsored by the National Cancer Institute (USA).
¹As announced on August 25, 2017, the European Commission has granted marketing authorization for cladribine tablets for the treatment of highly active relapsing multiple sclerosis in the
28 countries of the European Union in addition to Norway, Liechtenstein and Iceland.
Phase I
Malaria
Phase I
Pipeline products are under clinical investigation and have not been proven to be safe and effective.
Akt
APRIL
ATM
Monoclonal antibody
Interleukin
Immunoglobulin A
TGFB
PK
PeEF2
PD-L1
Methionine aminopeptidase 2
MetAP2
mAb
IL
IgA
BTK
BLYS
ATR
Plasmodium eukaryotic elongation factor 2
Partner with the global scientific community
In 2017, a number of lighthouse projects demonstrated the diver-
sity of use of printable organic solar cells (OPV). For example, OPV
In collaboration with Stelis Biopharma, we opened a new joint process
scale-up lab in Bengaluru, India, to provide end-to-end solutions
from process development to scale-up manufacturing - for pre-clinical,
clinical and commercial supply. Both companies bring technological
expertise and an extensive bioprocess development and manufac-
turing portfolio that will help customers accelerate development of
biopharmaceuticals for clinical trials and manufacturing with greater
reliability and cost effectiveness.
OVERVIEW OF OUR HEADCOUNT FIGURES
• Advance technologies for life
• Fulfill your personal ambitions
• Foster fruitful partnerships
Experience the joy of curiosity
.
Our promise as an employer is thus "Bring Your Curiosity To Life."
We have formulated four core messages that characterize our
employer brand and are applicable to Merck as a whole. They deter-
mine how we collaborate, how we advance our business, how our
employees can develop within the company and who we are:
In line with the new development of our corporate brand in 2015,
we also adapted our employer brand and launched it globally in May
2017. At the core, it is based on the passion, creativity and curiosity
of our employees, through whom Merck has become a global science
and technology company. We are convinced that curiosity leads to
positive outcomes.
A career with Merck is enriching - both from a professional and
a personal perspective. It is important to us to create an inclusive
work environment in which all employees have the possibility to
maximize their potential. To support our company's growth and inno-
vation course, the focus of our human resources work is on further-
ing engaged people, capable talents and empowered leaders.
The success of our company depends crucially on the dedication of
our employees. We want to offer them framework conditions that
meet their individual needs. This encompasses an exciting range of
tasks and advanced training possibilities, furthering flexible forms
of cooperation and a culture of mutual esteem and respect. Our
objective is to create a working environment in which curiosity can
best unfold.
People at Merck
People at Merck
Fundamental Information about the Group
Combined Management Report
94
As of December 31, 2017, we had 52,941 employees worldwide
(2016: 50,414). In 2017, we were represented by a total of 217 legal
entities with employees in 66 countries.¹
In 2018, we want to focus even more strongly on the needs of our
customers and markets. Therefore, in December 2017, we announced
that we will combine our expertise in three newly created business
units aligned with our target markets: Display Solutions, Semicon-
ductor Solutions, and Surface Solutions. In the future, all activities
pertaining to research, business development and external partner-
ships will be united in a central research and innovation unit.
DISTRIBUTION OF EMPLOYEES
19%
1 Merck also has employees at sites which are not fully consolidated subsidiaries. These figures refer to all people directly employed by Merck and therefore may deviate from figures in the financial
section of this report.
To strengthen employee retention and generate impetus for the
future of our company, we pay special attention to honest and con-
tinuous feedback. Having used various methods to obtain feedback
for many years, in 2016 we reintroduced our global employee survey.
Based on the results, strategic focal topics were identified and cor-
responding initiatives derived. In October 2017, another employee
survey was conducted in 22 languages and the status of implemen-
tation reviewed. Around 42,100 employees (84%) took part. Our
Group-wide score, which shows how attached our employees feel to
the company, was 59%. We are thus on a par with other pharma-
ceutical and chemical companies. As of 2018, these results will be
incorporated across the Group.
REGULAR GLOBAL EMPLOYEE SURVEYS
Our human resources work is founded on a company culture that
values and motivates people and promotes the right framework con-
ditions for innovation and engagement.
Driving innovation through
engaged people
1,097
Middle East and Africa (MEA)
2%
Asia-Pacific (APAC)
11,294
23%
Latin America
4,050
9%
25,980
47%
Europe
North America
10,520
by region
-
Strategic realignment
modules integrated into a glass façade in São Paulo, Brazil, provide
shade, innovative design and energy efficiency. We presented a novel
façade concept combining OLED and OPV module design with func-
tionality at the Biennale of Architecture and Urbanism in Seoul,
Korea. The growing interest of architects in this innovative construc-
tion material was reflected in the Innovation Award for Architecture
and Construction, which went to OPV at BAU 2017, the world's lead-
ing exhibition for architecture, materials and systems. The upcoming
technology trend in the LED lighting market - human centric lighting
(HCL) places the focus of light planning on people's health and
well-being. This trend is impressively confirmed by the 2017 Nobel
Prize in Physiology or Medicine, which was awarded for discoveries
of molecular mechanisms controlling the circadian rhythm, which is
significantly affected by light. Our product developments specifically
address this up-and-coming market for HCL LED lighting. Micro-LED
displays are also currently attracting great attention. From our broad
portfolio for the LED industry, we have already supplied our custom-
ers with first materials for this new application.
Our new liquid crystal technology SA-VA (self-aligned vertical
alignment) is eco-friendly and resource-conserving; it requires less
energy and creates fewer waste products than conventional modes
during display manufacture. We have been developing the materials
and process within the scope of close technical partnerships. The
technology also provides a more efficient display manufacturing pro-
cess and could offer improved design features for display manufac-
turers. SA-VA has the potential to be used in all types of display
applications, including mobile IT applications, but most importantly
large-screen TVs. We expect the first products in mid-sized applica-
tions, but extending quickly to large-screen and high-end TV appli-
cations. We also made further progress with the development of new
liquid crystal technologies to enable free-form LC displays. Here we
aimed to enable the use of low-cost plastic substrates rather than
the thin glass commonly used in LC displays to date. We are working
closely with display makers in Asia to optimize the materials and
process for our innovative polymer wall LC technology. This could
provide robust and bendable plastic displays without the defect
patterns that typically occur when an LC display is pressed or bent.
device display sector. UB-FFS is highly attractive for mobile applica-
tions. It provides the highest light efficiency as pixel sizes become
increasingly smaller due to the demand for higher-resolution smart-
phones and tablets. We also further developed this energy-saving
technology for larger display applications, including TVs and public
information displays, where high light efficiency is particularly val-
uable in the highest-resolution displays, for example 8K.
In 2017, we continued to work with our customers, the display
manufacturers, to further develop high-performance liquid crystal
technologies. The systematic introduction of new liquid crystal mate-
rials and the development of higher-performance liquid crystal mix-
tures led to numerous newly qualified and commercialized products
in all applications, including large-screen TVs, public information
displays, as well as mobile devices and automotive applications. We
developed and commercialized a number of new photoresist formu-
lations for producing the thin-film transistor backplanes that are
used for both LC and OLED display manufacture. Our high-resolution
photoresist technology is especially important for the more complex
and demanding electronic patterning required in increasingly high-
resolution displays. Our innovative liquid crystal technology UB-FFS
(ultra-brightness fringe-field switching) also saw growth in the mobile
Display Materials
We are the undisputed market and technology leader in liquid crystals
(LCs) and photoresist materials, which are primarily used in televi-
sions and mobile communication applications. We are also one of
the leading suppliers of OLED materials as well as decorative and
functional effect pigments. Materials for integrated circuits round off
the portfolio.
Performance Materials
Angiex Inc., Cambridge, Massachusetts, will be the first project
undertaken by the new U.S. BioReliance® End-to-End Biodevelop-
ment Center. We formed a collaboration with Angiex Inc. to help
accelerate clinical readiness of a new cancer therapy. Our goal is to
support the biotechnology start-up's ability to speed its lead oncology
antibody drug candidate to clinical use by providing access to end-to-
end process development tools, education programs and training.
We expanded our BioReliance® End-to-End Biodevelopment Centers
in North America, China and Europe to meet increasing customer
demand for their turnkey portfolio of bioprocessing products, man-
ufacturing capabilities and industry-leading technological expertise.
The expansion includes the opening of two new process development
centers, located in the United States and China, following the com-
mercial success of our biodevelopment center in Martillac, France.
The two new facilities provide a full range of process development
capabilities and services, including cell line development services
and both upstream and downstream process development, as well
as non-GMP clinical production. The United States facility will be open
to customers in 2018.
Meet customer needs
91
Fundamental Information about the Group _ Research and Development
Combined Management Report
In addition, we extended our strategic alliance with Samsung
BioLogics after a memorandum of understanding (MoU) was signed
in November. The alliance aims to accelerate process development
and clinical material production at small biotech start-ups focusing
on novel drug development for which Samsung BioLogics acts as a
contract manufacturer. The new MoU is an extension of an MoU
signed in 2014 that encompasses a long-term supply agreement
under which we provide raw materials for biopharmaceutical manu-
facturing.
Progress continued within the scope of our participation in
Horizon 2020, the EU Framework Program for Research and Innova-
tion, to improve biopharmaceutical downstream processing. The
nextBioPharmDSP, a consortium of seven organizations, is devel-
oping a more efficient, cost-effective and environmentally friendly
downstream process to manufacture monoclonal antibodies and bio-
similars. The biopharmaceutical industry faces pressures to reduce
manufacturing costs and deliver greater efficiencies while being
environmentally responsible. Through the Horizon 2020 program,
consortium members are already delivering important advances for
downstream processing.
In 2017, we also formed a strategic alliance with Baylor College
of Medicine, Houston, Texas, and its vaccine product development
partnership, Texas Children's Hospital Center for Vaccine Development,
to advance vaccine research and development for neglected and
emerging infections. The collaboration focuses on bringing vaccines
through development to efficiently deliver them to societies in need.
Together, we are working to optimize the vaccine manufacturing
process to increase vaccine stability and yield.
Beyond classic displays, we have more strongly positioned liquid
crystals under the licrivisionTM brand as an innovative material for
windows in architectural and automotive applications. We are cur-
rently focusing on three variants: sun protection, glare protection,
and privacy control where the windows switch to opaque. At the end
of November, we opened our first production facility for switchable
liquid crystal window modules in Veldhoven, the Netherlands. In
addition, we presented our liquid crystal window technology for auto-
motive sunroofs at the International Motor Show (IAA) in Frankfurt,
Germany. We continued to advance the development of smart anten-
nas, which can also be used in the automotive industry. Thanks to
a thin functional layer of liquid crystals, the antenna can be elec-
tronically pointed to a satellite without the need to move the device
mechanically. Together with Hella, a light and electronics expert, and
other partners, we have developed a smart automotive headlight
system based on an LC display. With a total of 30,000 pixels, the
smart adaptive lighting can be set in a continuously variable manner
and in real time to various driving situations. Hella is to bring the
developed technology to series production.
-
92
Fundamental Information about the Group _ Research and Development
Phase I³
In electronic packaging, we strengthened our research activities
by participating in a consortium led by the Fraunhofer Institute for
Reliability and Microintegration in Berlin. We are further advancing
material and technology development in hybrid electronics. At the
LOPEC 2017 exhibition in Munich in March, we presented the proto-
type of a flexible display consisting of a backplane with organic thin-
film transistors as well as liquid crystals from Merck. We will continue
to focus strongly on the development of these technologies.
In 2017, we made significant progress with our material and tech-
nology developments for flexible displays. At major exhibitions, for
example, together with strategic partners we presented prototypes
demonstrating the market readiness of our materials and the related
technologies. During SID Display Week in May, we additionally
reported on the development of printing inks. In 2017, our printed
red, green and blue layers demonstrated first-ever efficiency values
comparable to those of vacuum evaporation technology. This will
allow flexible or rollable screens to be manufactured in the future,
such as for automotive applications or large-area displays. Printed
displays achieve greater brightness and better energy efficiency. In
reflective displays, our partner Clearink Displays won the prestigious
Best in Show Award at SID 2017. To respond to the growing demand
from the industry for our innovative material solutions, we started
investing in our R&D site in Chilworth, United Kingdom, to increase
our lab capacity.
Advanced Technologies
93
Fundamental Information about the Group _ Research and Development
Combined Management Report
We further developed our range of fluorosurfactants, which
strongly differentiates itself from competing products owing to its
favorable ecotoxicological profile. In early 2017, TividaⓇ FL 3000
was added to our portfolio of nonionic surfactants. Even in very low
concentrations, it significantly improves the flow and wetting behav-
ior of coating systems.
In technical applications, we intensified our activities in additives
for 3D laser direct structuring with a focus on 3D printing of plastics.
Together with our partners, we also developed laboratory prototypes
which we presented at the LASER World of Photonics 2017 in Munich,
Germany and the International Motor Show (IAA) 2017 in Frankfurt,
Germany. Laser additives enable computer-controlled fabrication of
three-dimensional components with integrated electronic parts and
laser-assisted circuit board bonding. We made good progress in
high-voltage technology. Within the scope of the iShield research
project, which is funded by the German Federal Ministry of Education
and Research (BMBF), we are collaborating with academic and indus-
trial partners to develop and qualify a novel material to shield gen-
erators and engines.
The exceptional color saturation and brilliance of MeoxalⓇ effect
pigments based on aluminum flakes is finding increasing use in auto-
motive and plastic coatings. In addition, Xirallic® NXT Cougar Red,
a pure, bluish red pigment with an extraordinary sparkle, was intro-
duced for automotive coatings as the latest addition to the XirallicⓇ
NXT series. Further pigment developments support the market trend
towards achromatic coatings. In the plastics field, the extremely
pure, silver-white IriodinⓇ 6163 WAY was added to the WAY series
of weather-proof pigments for outdoor applications. For the cosmet-
ics sector, both new sparkle effects and matte effect pigments were
successfully launched as part of the Smart Effects initiative. In the
fillers area, new formulations, such as an alcohol-free variant of the
anti-aging active ingredient RonaCare® CP5, were added to the port-
folio. Based on two-dimensional and three-dimensional skin models,
we developed a technology to more efficiently assess new cosmetic
actives. Particularly in efficacy testing of natural substances, we
expect to already have marketable products in 2018.
Pigments & Functional Materials
In order to better support our customers in Asia, in 2017 we
opened a new research center in Taiwan, where we are conducting
research in atomic layer deposition and gas phase deposition for
front-end applications, as well as very thermally conductive, eco-
nomically sustainable, high-performance sinter pastes for chip pack-
aging applications. At our sites in Shizuoka, Japan, and Darmstadt,
Germany, we are developing innovative dielectrics that can be used
at lower application temperatures and are thus suitable for novel
chip types. Our thick-film photoresist technology found new applica-
tions for the production of 3D NAND storage chips that enable higher
storage capacity than conventional planar technology with the same
surface area. Besides other applications, these new-generation stor-
age chips are increasingly being used in solid-state drives (SSDs),
successors of classic hard drives.
Gas-phase deposition materials are a growth area within our semi-
conductor chemicals business. To meet the constantly growing chal-
lenges in chip production, increasingly more chemical elements are
being used in advanced semiconductor fabrication processes; this is
often enabled by atomic layer deposition technology. For the depo-
sition of layers that often are only a few atoms thick, novel materials
such as precursor chemicals are required, which can be applied at
lower temperatures and/or selectively to only certain parts of a wafer.
Such surface-selective processes automatically carry the target
materials to the right position. This provides advantages for our
customers as they can eliminate costly photolithography steps and
at the same time automatically avoid overlay registration errors.
Integrated Circuit Materials
To accelerate the development of free-form displays, Merck is coop-
erating with FlexEnable of the United Kingdom. This company is
working in the field of conformable, large area, full color and video
rate organic liquid crystal displays (LCDs) on polymer substrates.
With a bend radius that can go below 30 millimeters, organic LCDs
can meet new market requirements, for example in automotive appli-
cations, where thin, conformable and shapeable displays are needed.
It will soon be possible to curve organic LCDs around complex sur-
faces and shapes when our innovative polymer wall LC technology
is used. In order to develop new digital optical applications with
liquid crystals, in May we entered into a five-year collaboration with
the University of Leeds. This is one of the United Kingdom's most
renowned research institutions for liquid crystal applications and has
recently built a reputation in particular for non-display applications
such as switchable contact lenses.
Combined Management Report
Psoriasis
Merkel cell cancer, 1st line
Systemic lupus erythematosus
Registration¹
Phase II
Status
Relapsing multiple sclerosis
Multiple sclerosis
Indication
Oncology
Cladribine tablets (lymphocyte-targeting agent)
Evobrutinib (BTK inhibitor)
Tepotinib (c-Met kinase inhibitor)
Neurology
Therapeutic area
as of December 31, 2017
BIOPHARMA PIPELINE
On September 18, we announced the recipients of the Grant for
Growth Innovation (GGI) for 2017 during the 10th International
Meeting of Pediatric Endocrinology in Washington, D.C. Sixty-five
applications were received from 28 countries and reviewed by an
independent scientific steering committee consisting of six interna-
tionally renowned endocrinologists and researchers. Research groups
based in France and Denmark were each awarded a grant for inno-
vation projects in the field of growth and growth disorders.
In May, the Medicines and Healthcare Products Regulatory Agency
(MHRA) in the United Kingdom authorized Glucophage® SR (sustained
release formulation; metformin), for the reduction in the risk or delay
of the onset of type 2 diabetes in adult, overweight patients with
impaired glucose tolerance (IGT) and/or impaired fasting glucose
(IFG), and/or increased glycated hemoglobin (HbA1c), when inten-
sive lifestyle changes for 3 to 6 months have failed.
General Medicine & Endocrinology
Compound
Non-small cell lung cancer
Phase II
Tepotinib (c-Met kinase inhibitor)
M4344 (VX-803, ATR inhibitor)
Phase I
Solid tumors
M6620 (VX-970, ATR inhibitor)
Phase I
Solid tumors
M9831 (VX-984, DNA-PK inhibitor)
Phase I
Solid tumors
M3814 (DNA-PK inhibitor)
Phase I
Solid tumors
M2698 (p70S6K and Akt inhibitor)
Phase II
Hepatocellular cancer
Redi-ject™ pre-filled pen in the United States and originally approved
by the FDA in 2013, the new version of the pen, based on input from
people who use the pen, is easy both to learn and to use. Gonal-fⓇ
is the only gonadotropin that comes in a pre-filled, ready-to-use pen
in the United States. The new Gonal-f® pen, like its predecessor,
enables a fine-tuning of treatment allowing for minimum increments
of 12.5 IU to titrate a wide range of doses and precisely target the
dosing to patient needs. In addition, its new design features include
an amendment to the dose display window for enhanced readability.
In November, the FDA approved a new version of Gonal-f®
(follitropin alfa injection) pre-filled pen. Known as Gonal-f® RFF
We further underscored our commitment to innovation in fertility
in July, when we awarded € 1.25 million to external research pro-
jects, supporting the advancement of medical science through the
Grant for Fertility Innovation (GFI). Launched as the first of the Merck
Grants for Innovation in 2009, it is dedicated to transforming inno-
vative translational fertility research projects into actual solutions
aimed at improving fertility treatment outcomes. In 2017, the GFI
Award Ceremony included the announcement of the Merck Lifetime
Achievement Award in Fertility Innovation, granted to Professor
Bruno Lunenfeld for his revolutionary work within the fertility field
since 1954.
In early 2017, the CHMP granted a positive opinion for the new
PergoverisⓇ Pen, followed by a European Commission approval in
May. The pen addresses an unmet medical need by providing a con-
venient and ready-to-use fertility combination treatment option for
women with severe follicle stimulating hormone (FSH) and luteiniz-
ing hormone (LH) deficiency. The liquid version of PergoverisⓇ was
created by evolving the original freeze-dried powder and solvent
combination - which required patients to mix the product vials them-
selves before daily injection - towards a ready-to-use pre-filled Pen
solution. The new PergoverisⓇ Pen is the only premixed combination
of human FSH and human LH on the European market available in
a pre-filled injection device for self-administration.
Combined Management Report
86
In September, we announced the recipients of the fourth annual
Grant for Oncology Innovation (GOI) awards. The three winners of
this program shared prize money totaling € 1 million to progress
their research. A scientific steering committee of internationally
renowned oncology experts selected the winning proposals from
around 100 applicants worldwide based on relevance to patient care,
innovative approach, scientific impact, feasibility and relevance for
the personalization of treatment.
On July 6, we introduced the winners of our seventh Biopharma
Innovation Cup. The winning team received € 20,000 for its innova-
tive idea around the role of natural killer cells in cancer immunology.
The Biopharma Innovation Cup is designed to support the profes-
sional development of post-graduate students and to foster innova-
tion from a promising new generation of academic talent. It show-
cases our strong commitment to leveraging innovation, curiosity and
collaboration. With more than 1,400 applications from 60 countries,
the Biopharma Innovation Cup in 2017 achieved a new level of pop-
ularity.
In June, we announced our entry into a new strategic collaboration
with the biopharmaceutical company F-star of Cambridge, United
Kingdom, for the development and commercialization of five bispecific
immuno-oncology antibodies. Beyond these, we will have further
rights to replace, as well as to add to these antibodies using F-star's
bispecific antibody platform. This collaboration will further strengthen
our immuno-oncology pipeline and underscores our commitment to
discovering and developing breakthrough cancer therapies that make
a meaningful difference to patients' lives.
Also in January, we announced a three-year strategic collaboration
with The University of Texas MD Anderson Cancer Center, the aim of
which is to accelerate the development of investigational cancer
therapies in four cancers - breast, colorectal, glioblastoma and
leukemia. The collaboration will enhance the value of our future
oncology/immuno-oncology pipeline, with a goal of starting multiple
registration phase studies in novel indications in the next two to three
years.
In January, we kicked off a collaboration and licensing agreement
with Domain Therapeutics of Strasbourg, France, to explore the
potential of adenosine inhibition in the development of novel immuno-
oncology agents. Domain Therapeutics is a company focused on the
discovery and development of first-in-class compounds against
transmembrane targets, and in particular against G protein-coupled
receptors (GPCRs). This collaboration strengthens our combination
strategy in immuno-oncology and underscores our science-driven
approach to discovering and developing novel compounds through
both internal capabilities and external collaborations.
At the ESMO congress (September 8-12 in Madrid), we presented
a total of 23 abstracts representing five therapeutic agents, which
highlighted our company's expanding scientific expertise. Data were
presented on the role of established medicine Erbitux® (cetuximab),
with quality of life (QoL) data in colorectal cancer and real-world data
in both CRC and squamous cell carcinoma of the head and neck. With
respect to avelumab, we presented updated efficacy and safety data
in metastatic MCC and UC (12-month follow-up data in pre-treated
patients with locally advanced or metastatic disease). We also pre-
sented new data and updates from our rapidly evolving pipeline,
including first stand-alone data in metastatic triple negative breast
cancer from potential first-in-class ATR inhibitor M6620. M6620 is
currently being investigated in several ongoing Phase I trials across
a variety of tumor types. Other pipeline updates included data on
the potential first-in-class dual p70S6K/Atk inhibitor M2698 and
tepotinib in patients with advanced hepatocellular carcinoma (HCC).
We are investing significant resources in the promising area of
DDR. In January, we signed a licensing agreement with Boston-based
Vertex Pharmaceuticals that covers the worldwide development and
commercialization of four research and development programs that
investigate novel approaches to the treatment of cancer. The addition
of the DDR portfolio in-licensed from Vertex to our own in-house DDR
platform has positioned us as one of the key players in the DDR field.
Our broad DDR portfolio includes inhibitors for enzymes of major
DDR pathways, such as Ataxia Telangiectasia and Rad3-related
kinase (ATR), DNA-PK and Ataxia Telangiectasia Mutated kinase
(ATM).
Pipeline updates at ASCO also included early clinical results for
tepotinib, M7583, an oral, highly selective, covalent inhibitor of
Bruton's tyrosine kinase (BTK), and the first clinical data for M3814,
an investigational DNA-dependent protein kinase (DNA-PK) inhibitor.
We also featured new research at ASCO on our investigational
bifunctional immunotherapy anti-PD-L1/TGF-ẞ trap (M7824), which
is thought to have the potential to simultaneously block both PD-L1
and TGF-B. An oral presentation showcased dose escalation Phase I
clinical data exploring the potential of M7824 in advanced solid
tumors.
Multiple presentations on avelumab at ASCO included data in first-
line metastatic Merkel cell carcinoma and previously treated meta-
static urothelial carcinoma, as well as results from the Phase Ib trial
of avelumab in combination with axitinib in RCC. Beyond metastatic
MCC, locally advanced or metastatic UC and RCC, we also presented
further avelumab abstracts in non-small cell lung cancer and meta-
static castrate-resistant prostate cancer, locally advanced squamous
cell carcinoma of the head and neck, and relapsed or refractory
diffuse large B-cell lymphoma.
85
Fundamental Information about the Group _ Research and Development
Combined Management Report
Fundamental Information about the Group _ Research and Development
Solid tumors
Neurology & Immunology
Following a positive opinion from the Committee for Medicinal
Products for Human Use (CHMP) of the European Medicines Agency
(EMA) in June, the European Commission (EC) granted marketing
authorization in August for Mavenclad® 10 mg (cladribine tablets)
for the treatment of highly active relapsing multiple sclerosis in the
28 countries of the European Union (EU) as well as in Norway,
Liechtenstein and Iceland. MavencladⓇ is the first oral short-course
treatment to have shown efficacy across key measures of disease
activity in patients with highly active RMS, including disability pro-
gression, annualized relapse rate and magnetic resonance imaging
(MRI) activity.
Fertility
87
Fundamental Information about the Group _ Research and Development
Combined Management Report
On June 26, at the European Association of Neurology meeting
held in Amsterdam, analyses of data from three clinical studies
(CLARITY, CLARITY Extension and ORACLE-MS) were announced
which suggest that MavencladⓇ selectively and discontinuously
reduces both B and T lymphocytes in patients with early and relaps-
ing forms of MS. An early reduction of peripheral blood B cells was
seen, with cell numbers reaching a nadir at 13 weeks after treatment,
followed by a rapid reconstitution toward baseline. A moderate
reduction in T cell counts was also shown, although to a lesser degree
than B cells; this reduction was more pronounced in CD4+ than in
CD8+ lymphocytes.
We presented data at the American Academy of Neurology (AAN)
69th Annual Meeting (April 22 - 28 in Boston). A total of 15 abstracts
on MS, including studies evaluating Rebif® (interferon beta-1a) and
MavencladⓇ, were presented.
On September 12, we announced that a Phase IIb study of evo-
brutinib, a Bruton's tyrosine kinase inhibitor (BTKI) discovered by
Merck, had been initiated in rheumatoid arthritis (RA) following a
Phase IIa study which met the pre-defined criteria for progressing
to a dose-finding study in this disease. Evobrutinib is now in Phase IIb
studies in three immunological indications: RA, MS, and SLE. Evo-
brutinib was discovered in our own laboratories and is an example
of the innovation of our R&D activities within Healthcare.
We presented 11 abstracts in oral and poster sessions for clinical
programs in systemic lupus erythematosus (SLE), osteoarthritis
(OA), rheumatoid arthritis (RA) and fibrotic diseases, including one
late-breaker, at the 2017 American College of Rheumatology/Asso-
ciation of Rheumatology Health Professionals (ACR/ARHP) Annual
Meeting held from November 3-8, 2017 in San Diego. Noteworthy
data included a late-breaking abstract on FORWARD, a five-year
Phase II study of sprifermin in OA of the knee, providing insights into
its potential disease-modifying properties. The study of 549 patients
met its primary endpoint, demonstrating statistically significant,
dose-dependent increases in MRI total femorotibial joint cartilage
thickness from baseline in the two sprifermin groups receiving the
highest doses as compared with the placebo group after the two-year
treatment period. Demonstration of an increase in cartilage thickness
as opposed to a delay in decreasing cartilage thickness has not been
previously reported.
Additionally, the recipients of the fifth annual Grant for Multiple
Sclerosis Innovation (GMSI) were announced during the 7th Joint
ECTRIMS-ACTRIMS Meeting. In 2017, 77 proposals from 25 countries
were submitted. Three research teams from Canada, Portugal and
the United States were selected to share the € 1 million grant.
ORACLE-MS trials highlighted that MavencladⓇ delivers and sustains
four years of disease control with a maximum of 20 days of oral
treatment in the first two years. An additional safety analysis assess-
ing malignancy and infection risk was presented along with data for
MavencladⓇ, which further detailed how the treatment is thought to
selectively target the adaptive immune system.
Data for approved multiple sclerosis treatments MavencladⓇ and
Rebif® (interferon beta-1a) and investigational product evobrutinib
were presented at the MSParis 2017, 7th Joint ECTRIMS-ACTRIMS
Meeting (October 25-28 in Paris). A post hoc analysis in high disease
activity sub-groups from the two-year CLARITY study confirmed that
MavencladⓇ significantly increased the proportion of patients with no
evidence of disease activity (NEDA) compared with placebo (43.7%
vs 9.0%). Efficacy data from the CLARITY, CLARITY Extension and
Several MavencladⓇ submissions are currently under review and
we plan to conduct additional filings for regulatory approval in other
countries, including the United States.
The Mavenclad® marketing authorizations in Europe, Canada,
Australia, and Israel are based on more than 10,000 patient-years
of data with over 2,700 patients included in the clinical trial program,
and up to ten years of observation in some patients. MavencladⓇ is
the first treatment in relapsing multiple sclerosis (RMS) to show
sustained clinical efficacy for up to four years with a maximum of
20 days of oral treatment over two years. The efficacy and safety
results of these studies allowed for a detailed characterization of its
benefit-to-risk profile. Mavenclad® is a selective immune reconsti-
tution therapy that simplifies treatment administration by giving
patients two short annual courses of tablets in four years without
the need for frequent monitoring. The most clinically relevant adverse
reactions were lymphopenia and herpes zoster.
On December 7, Merck received approval (Updated Registration)
for MavencladⓇ in Australia. The Therapeutic Goods Administration
(TGA) updated the registration including the indication, dosing and
safety information of MavencladⓇ for the treatment of RRMS in
Australia. In January, the Israeli Ministry of Health approved MavencladⓇ
for the treatment of adult patients with highly active RMS as defined
by clinical or imaging features.
On November 30, Health Canada approved MavencladⓇ as mono-
therapy for the treatment of adult patients with relapsing-remitting
multiple sclerosis (RRMS) to reduce the frequency of clinical exacer-
bations and delay the progression of disability.
Multiple sclerosis (MS) is one of the world's most common neurolo-
gical disorders and there are still significant unmet needs for MS
patients, particularly those with highly active relapsing MS (RMS).
Phase I
M3541 (ATM inhibitor)
Solid tumors
Phase I
Solid tumors
M4112 (cancer immunotherapy)
Phase I
Solid tumors
M7824 (anti-PD-L1/TGFẞ trap)
Phase I²
Solid tumors
M9241 (NHS-IL12, cancer immunotherapy)
Phase I
Hematological malignancies
Avelumab (anti-PD-L1 mAb)
Phase I
Solid tumors
Avelumab (anti-PD-L1 mAb)
Immunology
Phase II
Sprifermin (fibroblast growth factor 18)
Atacicept (anti-BLYS/anti-APRIL fusion protein)
Abituzumab (anti-CD51 mAb)
Phase II
Phase II
Systemic sclerosis with interstitial lung disease
Rheumatoid arthritis
Phase II
IgA nephropathy
Phase II
Systemic lupus erythematosus
Phase II
Osteoarthritis
M5717 (PeEF2 inhibitor)
General Medicine
M6495 (anti-ADAMTS-5 nanobody)
M1095 (ALX-0761, anti-IL-17A/F nanobody)
Evobrutinib (BTK inhibitor)
Evobrutinib (BTK inhibitor)
Atacicept (anti-BLYS/anti-APRIL fusion protein)
Phase II
Avelumab (anti-PD-L1 mAb)
Locally advanced head and neck cancer
Avelumab (anti-PD-L1 mAb)
Avelumab (anti-PD-L1 mAb)
Avelumab (anti-PD-L1 mAb)
Avelumab (anti-PD-L1 mAb)
Immuno-Oncology
Therapeutic area
Compound
as of December 31, 2017
BIOPHARMA PIPELINE
Fundamental Information about the Group _ Research and Development
Combined Management Report
88
Phase I
Hematological malignancies
M7583 (BTK inhibitor)
Phase I
Solid tumors
M8891 (MetAP2 inhibitor)
Indication
Phase III
Status
Phase III
Avelumab (anti-PD-L1 mAb)
Phase III
Renal cell cancer, 1st line
Avelumab (anti-PD-L1 mAb)
Phase III
Phase III
Phase III
Urothelial cancer, 1st line maintenance
Ovarian cancer platinum-resistant/-refractory
Ovarian cancer, 1st line
Avelumab (anti-PD-L1 mAb)
Avelumab (anti-PD-L1 mAb)
Phase III
Gastric cancer, 1st line maintenance
Phase III
Non-small cell lung cancer, 2nd line
Non-small cell lung cancer, 1st line
Phase I
Global pharmaceutical market
One of the major duties of our leaders is to motivate and encourage
employees to show their innovative strength. A dialogue in a spirit
of partnership, the development of strategic competencies and the
continuous further development of our leaders help to build trust and
to strengthen our company's success over the long term.
in Germany
global, total
66
66
66
global, total
211
215
global, total
217
1222
129
131
772
91
97
26.1%²
global, total
Percentage of women in leadership positions (= role 4 or higher)5
Percentage of women in the workforce
Number of nationalities working in Germany
Percentage of employees with German citizenship
Percentage of employees working outside Germany
Percentage of employees with global managers
Latin America
4,344.2
4,136.5
4,046.2
region
Middle East
and Africa (MEA)
940.6
1,041.8
1,096.1
North America
9,772.4
10,022.0
10,506.7
Number of countries
Number of legal entities
Number of nationalities
23.1%
23.2%
75.9%
75.3%
Percentage of executives (= role 4 or higher)5
Percentage of executives who
are not German citizens
61.0%²
64.7%
64.4%
Number of nationalities
642
70
65
Number of apprentices in Germany
5063
5764
5884
Vocational training rate
5.3%
5.1%
7.9%
by
5.7%
global, total
74.9%
8.1%
9.7%
10.2%
41.6%
42.8%
43.1%
38.2%
38.6%
39.1%
26.8%²
28.8%
30.3%
in Germany
27.3%²
28.7%
29.7%
5.9%²
Number of employees (FTE - full-time equivalents)
25,302.5
23,727.1
As a responsible employer, the physical and mental well-being of our
employees is extremely important to us. To enable employees to plan
their lives independently and to boost their long-term satisfaction,
providing a flexible and health-oriented working environment is a
special focus of our human resources work.
A healthy work-life balance is a crucial precondition for the per-
formance ability and motivation of our people. That is why we offer
our employees at many sites around the world flexible and innovative
working models. The "mywork@merck" working model allows
employees at the German sites in Darmstadt and Gernsheim to freely
choose their working hours and location in agreement with their teams
and supervisors. In addition, we also introduced "mywork@merck"
for Merck Accounting Solutions & Services Europe GmbH, Merck
Export GmbH, Merck Schuchardt OHG, Merck Selbstmedikation
GmbH, Merck Versicherungsvermittlung GmbH and Merck Chemicals
GmbH. Employees no longer record their time electronically and must
only document their hours if they exceed their standard working
hours within the agreed working time framework. At the end of
December 2017, a total of 5,267 employees made use of this model.
In 2017, 4.6% of our employees worldwide worked part-time, 10.7%
of whom are men.
By offering information, advice and assistance in finding childcare,
nursing care, as well as home and garden services, we help employees
to reconcile the demands of their professional and personal lives. At
various sites, employees benefit from childcare options that we sub-
sidize. A daycare center has been operating at the Darmstadt site,
looking after children between the ages of one and twelve for the
past 50 years. The adjacent new building houses a nursery for up
to 60 children between the ages of one and three years. During the
orientation phase, our employees can make use of additional offices
for parents at the daycare center premises. In addition, a good
ratio of staff to children is important to us to reliably supervise the
children.
A TRANSPARENT AND FLEXIBLE
EMPLOYEE REWARD SYSTEM
At Merck, we reward the performance of every individual through
appropriate and competitive total compensation. For years, we have
been achieving this through global processes and programs that are
supported by digital platforms. We also offer our managers flexible,
market- and needs-oriented compensation tools. These support well-
informed decisions and thus provide comprehensible, performance-
and position-based compensation. Apart from monetary compensa-
tion components, we also offer our employees attractive fringe and
social benefits. Our "benefits4me" offer comprises three pillars:
Company benefits including a company pension
•
• Health and well-being
Service offers
Worldwide, we offer various benefit packages to meet the different
needs of our employees using well-established programs. Focusing
more closely on individualized fringe and social benefits in the future
will continue to enable our employees to individually choose those
benefits that best meet their personal situation and stage of life.
A CONSTANT FOCUS ON HEALTH AND SAFETY
Workplace safety and health protection are a very high priority at
Merck. It is especially important to us to do everything in our power
to prevent workplace-related illnesses and accidents. We apply the lost
time injury rate (LTIR) as an indicator to determine the success of
measures aimed at accident prevention as well as occupational health
and safety. This key performance indicator describes the number of
workplace accidents resulting in lost time of one day or more per
one million working hours. After having reached the goal of 2.5 that
we had set in 2010, in 2015 we set ourselves a new, ambitious goal:
By 2020 we intend to sustainably lower the LTIR to 1.5. With an LTIR
of 1.5 in 2017, we attained this goal.
Since 2010, we have been using the "BeSafe!" program to further
expand our occupational safety activities. Uniform standards as well
as local modules to meet specific safety requirements at individual
sites can help to improve conditions. The program focuses on engag-
ing managers in the safety culture and building their buy-in; it aims
to make safety an intrinsic value and empower our employees to take
responsibility for their own safety. In 2017, we continued to sensitize
our employees to workplace hazards through numerous awareness
campaigns.
Since 2010, Merck has been presenting the Safety Excellence
Award annually in order to underscore the importance of safety. It
is granted to all production sites with no workplace accidents on
record for the year; in 2017, it was awarded to 59 out of 97 sites.
Combined Management Report.
Fundamental Information about the Group
People at Merck
99
FOSTERING WORK-LIFE BALANCE
OVERVIEW OF EMPLOYEE FIGURES1
As an employer, we take on responsibility for the well-being of our
people and offer a wide range of opportunities to optimize work-life
balance and to protect their health and safety.
People at Merck
Fundamental Information about the Group
People at Merck
97
STRATEGIC COMPETENCY DEVELOPMENT
A transparent competency model is a further pillar of our personnel
development efforts. Managers and employees should show strategic
competence by being purposeful, future-oriented, innovative, results-
driven, collaborative, and empowering. By demonstrating these qual-
ities, our leaders can build a strong culture of collaboration based on
curiosity, creativity and trust. In addition, our leaders are expected
to set an example, for instance by living the Merck values and taking
responsibility for their own decisions. To assess the performance and
potential of every individual and to establish an effective leadership
culture, regular and differentiated feedback is of utmost importance.
This way, employees and supervisors can develop a shared vision,
execute the business strategy and further develop a unifying culture.
PERSONNEL DECISIONS BASED ON DATA AND FACTS
Digitalization and data-based decisions are also taking hold in Human
Resources management at Merck, particularly with respect to the
development and use of personnel management tools. With People
Analytics, Human Resources has developed a modern, data-supported
approach that features greater transparency and deeper insights into
relevant personnel information from the businesses and Group func-
tions. It is based on globally integrated data management and state-
of-the-art analytics. People Analytics supports our managers with data
and facts that can serve as the basis for major personnel decisions.
This makes it possible to advise the company management more
precisely and purposefully in its decision-making. People Analytics
helps Human Resources to build strategic advisory capacities.
Additionally, we introduced predictive analytics based on the data
now available, which enables us, for example, to identify factors that
have a substantial impact on employee turnover.
DIVERSITY AND MANAGEMENT
In order to manage our global and diverse organization, we need
leaders who can build international teams and promote international
cooperation so as to contribute to a productive and flexible working
atmosphere. We seek managers whose inclusive leadership style also
reflects different employee and customer traits. This opens up career
opportunities for talented employees from all areas of our company
and ensures a broad experience base as well as differentiated
decision-making.
At Merck, many teams work across sites and internationally. The
diversity of competencies and experiences among the team members
offers tremendous potential that our leaders can make use of. Inter-
nationality and a global mindset characterize our company culture
and are therefore mirrored by our international management team.
In 2017, 64.4% of our executives were not German citizens. Alto-
gether, 65 different nationalities are represented in such positions.
Our goal for the period until 2021 is to maintain the proportion of
female leaders at a stable level of 30%, and we are working to fur-
ther increase the representation of women in leadership positions
and business units where they are still underrepresented. To achieve
this objective, in 2017 we formed special teams that are responsible
for developing goals and measures at departmental level to help us
move female candidates into positions in different areas and hierar-
chies. At the end of 2017, women occupied 30.3% of leadership roles
Group-wide. These figures are steadily increasing across the com-
pany as a whole, but not consistently across business units, Group
functions and hierarchical levels. The report on stipulations to pro-
mote the proportion of women in leadership positions at Merck KGaA
pursuant to section 76 (4) and section 111 (5) of the German Stock
Corporation Act can be found in the Corporate Governance section
of this report.
MANAGEMENT PROGRAM FOR EXECUTIVES
We use targeted advanced training to further the professional career
paths of our top talent and senior executives. One of the aims of the
nine-month International Management Program is to promote global
thinking among aspiring executives and to strengthen their leader-
ship competencies. In cooperation with top international universities,
the Merck University has been offering a multi-regional, modular
program since 1999. To date, 373 members of top management have
taken part. Furthermore, Merck cooperates globally with universities
in order to support employees who wish to study for an MBA. In
2015, we launched the Growth Markets Management program for
local people managers in India and Latin America, which focuses on
business management and Merck-specific topics. This program is
also offered in China as well as in Europe for the Middle East and
Africa region, with participants from a variety of countries and
regions such as Africa, the Middle East, Japan, and Russia. Moreover,
in 2017 we ran the Managerial Foundation Program for new people
managers in 21 countries with 917 participants, and the Advanced
Management Program, which was attended by 179 experienced people
managers in four countries.
In 2017, we once again expanded our workforce pool to internally
fill management positions when they become vacant. The vast
majority of management position vacancies were filled by internal
candidates again in 2017. In addition, we recruited highly qualified
external executives in order to add new perspectives to our long-
standing in-house expertise.
98
Combined Management Report
Fundamental Information about the Group
Differentiated solutions to support
employee well-being
4.4%
global, total
Europe
942
1,045
1,097
North America
9,794
10,037
10,520
global, total
48,911.1
49,652.7
52,223.5
Asia-Pacific (APAC)
11,068.2
10,725.3
11,272.1
Europe
22,785.7
and Africa (MEA)
Asia-Pacific (APAC)
Middle East
4,050
Number of employees
by
Latin America
Merck (overall)
Dec. 31, 2015
Merck (overall)
Dec. 31, 2016
Merck (overall)
Dec. 31, 2017
49,613
50,414
52,941
11,096
10,754
11,294
23,429
24,438
25,980
4,352
4,140
region
Combined Management Report.
Number of employees in the "mywork@merck" model (Germany)
4,507
0.3%
-6.7%
4.6%
4.2%
2.8%
2.4%
25.6%
12.5%
23.8%
5.2%
2.0%
5.3%
1.8%
1.8%
19.7%
2.6%
3.8%
7.2%
11.3%
9.6%
Market for OTC pharmaceuticals
Life Science
Market for laboratory products
Share of biopharmaceuticals in the global pharmaceutical market²
Performance Materials
Growth of LC display surface area
Global automobile sales volumes
Materials for production of cosmetics
Semiconductor industry sales
Development
Development
2017¹
2016
3.0%
4.7%
7.4%
8.4%
1 Predicted development. Final development rates for 2017 were not available for all industries when this report was prepared.
2 Growth rates based on market data in local currency, translated at a constant euro exchange rate. The IQVIA market data on the growth of indications are based on current figures,
including the third quarter of 2017. Annual growth based on the values for the past 12 months. The type 2 diabetes market excludes the United States since this market is insignificant to Merck.
3 Growth rates based on market data stated in U.S. dollars. Market data from Evaluate Pharma on the growth of indications are based on published company reports and are subject
to exchange rate fluctuations.
HEALTHCARE
In the latest study published in September 2017 by the pharmaceutical
market research firm IQVIA entitled "Market Prognosis 2017-2021",
the growth of the global pharmaceutical market for 2017 is quantified
at 3.0%. By comparison, in 2016, sales growth was still 4.7%. As was
already the case in 2016, the EMEA region was a main contributor to
growth in 2017. Latin America (excluding Venezuela) also fueled
growth. Whereas growth in the United States fell significantly to 1.7%,
(2016: 5.2%), at 6.2% the Latin American market (excluding
Venezuela) continued to see strong growth (2016: 7.6%). The EMEA
region was also robust with growth of 4.0% (2016: 4.7%). At 3.2%,
the Asia-Pacific region recorded a decline in growth (2016: 6.2%).
Not only the growth of the pharmaceutical sector as a whole, but
also in particular the development of the biopharmaceutical market
is relevant for our business. According to IQVIA, the market volume
of biological pharmaceuticals was approximately € 222 billion in
103
Review of Forecast against Actual Business Developments
NET SALES
For 2017, we had forecast slight to moderate organic net sales
growth for the Merck Group. The positive organic development of net
sales in the Healthcare and Life Science business sectors more than
offset the declining business development in Performance Materials.
Overall, we thus generated a moderate organic net sales increase of
3.8%. Furthermore, we expected a neutral exchange rate effect on
our net sales. Here we assumed that the positive euro/US$ develop-
ment would roughly compensate for negative exchange rate develop-
ments in various growth markets, yet we expected high volatility of
exchange rates owing to political and macroeconomic developments.
This assessment was confirmed because as of mid-2017, and in
contrast to the previous trend, the euro started to significantly appre-
ciate in value against the U.S. dollar and various emerging market
currencies. As a result, for the full year 2017 we saw a slightly negative
exchange rate effect of -1.5% on our net sales, contrary to our original
forecast.
In 2017, our Healthcare business sector generated solid organic sales
growth of 4.7%, thus exceeding our forecast for slight organic growth.
Sales growth in 2017 was again driven by the continued good dynamics
in our growth markets, which exceeded our expectations, as well as
positive effects from the full takeover of the commercialization of the
antidiabetic agent GlucophageⓇ in China from BMS. Our other franchises
developed as expected. As forecast, a low negative portfolio effect
of -1.0% stemmed from the divestment of the business in Pakistan.
For our Life Science business sector, at the beginning of the year we
had forecast solid organic growth of net sales; slightly above expected
market growth of around 4% per year. In fiscal 2017, the business
sector achieved organic growth of 5.3%, in line with our forecast. As
expected, Process Solutions was the most dynamic business unit,
delivering the largest contribution to organic sales growth within Life
Science. As expected, Research Solutions and Applied Solutions also
contributed positively to organic sales performance, albeit to a lesser
extent than Process Solutions. The low positive portfolio effect of
+0.4% met the forecast we gave at the beginning of the year and
was mainly due to the acquisition of BioControl Systems.
Contrary to our original expectations of slight organic sales growth,
the Performance Materials business sector recorded a slight organic
sales decline of -1.7% in 2017. In the first quarter, signs of a nor-
malization of our market shares in the Liquid Crystals business,
particularly in China - which had been unusually high in recent years -
intensified. This development became increasingly visible in the
following quarters, and the price pressure typical in this industry
could no longer be offset by corresponding volume growth. The good
organic development in the Integrated Circuit Materials and Pigments &
Functional Materials business units could not fully offset the decline
in the Display Materials business unit.
EBITDA PRE
For the Merck Group, we had forecast an approximately stable EBITDA
pre¹ in 2017 with either a slightly positive or negative fluctuation from
the year-earlier figure. Due to the difficult foreign exchange environ-
ment in the second half of the year and because of the adjustment
processes in our Liquid Crystals business, in our report on the second
quarter we assumed that our EBITDA pre would be at the lower end
of this implied range of € 4.4 billion to € 4.6 billion. For 2017 as a
whole, EBITDA pre amounted to € 4,414 million, which was -1.7%
below the year-earlier level.
For our Healthcare business sector, we expected a high single-digit
percentage decrease in EBITDA pre owing to the continued rise in
research and development costs resulting from the ongoing develop-
ment of our pipeline, particularly in immuno-oncology, a negative
product mix due to the continued decline in sales of RebifⓇ, as well
as the absence of one-time income from the previous year. In 2017,
Healthcare generated EBITDA pre of € 1,949 million, which corre-
sponded to a decline of -8.4% and was thus in line with our forecast.
For Life Science, we had expected an increase in EBITDA pre in the
high-single digit to low teens range due to the expected organic sales
growth and the realization of synergies from the acquisition of
Sigma-Aldrich as planned. With EBITDA pre of € 1,786 million, the
business sector delivered growth of 8.1%, which was within the
forecast range we had given at the beginning of the year.
¹ Not defined by International Financial Reporting Standards (IFRS).
104
Combined Management Report
Report on Economic Position
Review of Forecast against Actual Business Developments
For our Performance Materials business sector, at the beginning of
the year we still had assumed a slight increase in EBITDA pre compared
with the year-earlier level of € 1,106 million. However, the correction
in our Liquid Crystals business that materialized in the course of the
year as well as the increasingly difficult foreign exchange environment
that particularly affects our Performance Materials business sector,
required a reassessment of this original assumption. Stringent cost
discipline and the good performance in our other business units could
only partly offset the decline in the highly profitable Liquid Crystals
business. In our report on the second quarter, we assumed that
EBITDA pre of Performance Materials would decline in the mid single-
digit to mid teens range to between € 950 million and € 1,050 million.
For 2017 as a whole, Performance Materials achieved EBITDA pre of
€ 980 million. This corresponded to a decline of -11.4% compared
with the previous year and was thus within the adjusted range we
had predicted.
Review of Forecast against Actual Business Developments
Market for the treatment of colorectal cancer³
Report on Economic Position
1 Evaluate Pharma.
2017. In recent years, the share of the global pharmaceutical market
accounted for by these products has grown continuously and already
amounted to 25.6% in 2017 (2016: 23.8%). Globally, the largest
share, or 34.7%, was attributable to the U.S. market.
A look at the therapeutic areas of relevance to Merck shows the
following developments, which reflect robust growth, albeit with a
weakening trend. The markets for the therapeutic areas multiple
sclerosis grew by 7.4% (2016: 8.4%), type 2 diabetes¹ by 9.6%
(2016: 11.3%) and fertility by 7.2% (2016: 12.5%). The market for
oncology drugs for the treatment of colorectal cancer showed a positive
trend and grew by 0.6% (2016: -6.7%).
According to the market research firm Nicholas Hall, the growth
of the global over-the-counter pharmaceutical market was 4.6% in
2017, which represents an increase of 0.4 percentage points in com-
parison with 2016. At 8.6%, India again fueled growth in 2017 (2016:
8.2%). In Japan, growth was again weak at 0.6% (2016: 0.9%).
1 Excluding the United States.
102
Combined Management Report
Report on Economic Position
Macroeconomic and sector-specific environment
LIFE SCIENCE
Our Life Science business sector is a leading supplier of products and
services for both research and applied laboratory applications, as well
as for formulating, purifying, manufacturing, and quality-assuring
drug therapies of biological and chemical origin.
According to the market research firm Frost & Sullivan, the labo-
ratory product market relevant to Research Solutions and Applied
Solutions achieved growth of 2.8% in 2017 (2016: 2.4%). Following
a slow start to 2017, growth picked up. Growth was primarily driven
by biopharmaceutical industry customers, specifically emerging biotech
start-ups. In comparison with 2016, European market growth increased
to 1.9% (2016: 1.5%), driven by stronger GDP forecasts and easing
of the uncertainty over Brexit. The U.S. market grew by 3.2% (2016:
2.5%), with increased National Institutes of Health (NIH) funding
and the expected tax reform spurring investment in 2017 and possibly
also in 2018. Emerging countries recorded higher growth rates, with
growth being mainly driven by China and India. Although the GDP
growth of China slowed down, investments in research and develop-
ment grew as one of the key priorities of the 13th five-year plan. India
generated high single-digit growth with laboratory products and is
focusing more strongly on supporting academic and government
research.
The demand for Process Solutions products depends heavily on the
sales of biopharmaceutical companies as well as the productivity of
their research & development activities.
According to IQVIA, the market volume of biotechnological phar-
maceuticals grew in 2017 to US$ 222 billion (equivalent to 25.6% of
the global pharmaceutical market). More than 8,000¹ biotechnological
drug candidates were in preclinical and clinical development. In
2016, monoclonal antibodies accounted for 26%¹ of these drug can-
didates (2015: 25%¹). Biosimilars are a small, but fast-growing part
of the pharmaceutical market. For 2016, annual sales of biosimilars
were estimated at US$ 1.8 billion¹; this figure is expected to increase
to US$ 10.8 billion¹ by 2022.
PERFORMANCE MATERIALS
With its Liquid Crystals business, Merck is the leading producer of
liquid crystal mixtures for the display industry. The dynamic growth
rates of display surfaces have declined to an average of 4% in recent
years according to surveys by the market researchers at IHS Display-
Search. This growth was mainly attributable to increasing average
display size amid slightly declining sales volumes. The display industry
remains a growth sector in which the leading display technology is
based on liquid crystals. OLED technology, for which Merck also ranks
among the leading material suppliers, is gaining importance in the
high-quality display sector.
The markets for automotive coatings and cosmetics are crucial to
Merck's Pigments business. As reported by IHS, global automobile
sales volumes rose by approximately 2% in 2017. The growth drivers
were China and Europe whereas the U.S. market declined slightly for
the first time after a long period of growth. According to Euromonitor
International, global consumption of materials used to produce cos-
metics grew by around 2%.
The semiconductor industry is the most important sales market
for the business with integrated circuit materials (IC Materials). The
long-term growth of the semiconductor industry has a cyclical
demand pattern. According to Gartner, a market research institute
specializing in the technology and electronics markets, in 2017 the
industry's sales grew by around 20%, above all owing to strong
demand for the storage technologies DRAM and NAND.
Combined Management Report
Market for fertility treatment²
Market for type 2 diabetes therapies²
Market for multiple sclerosis therapies²
global, total
22.2%
22.8%
23.4%
41.1
41.3
41.4
Asia-Pacific (APAC)
36.7
36.7
36.9
Europe
42.4
42.4
42.5
Latin America
39.5
62.1%
39.9
62.5%
global, total
5,267
global, total
4.7%
4.7%
4.6%
Percentage of employees working part-time
Men
11.3%
10.6%
10.7%
Percentage of employees aged 17-29 years
global, total
15.2%
14.7%
14.5%
Percentage of employees aged 30-49 years
Percentage of employees aged 50+
Average age globally
62.6%
4,122
40.3
Middle East and Africa (MEA)
3 Relates only to Merck KGaA (around 19% of the workforce of the entire Group in 2015).
4 All Merck sites in Germany (around 25% of the workforce of the entire Group in 2016 and 2017).
5 Not including Sigma-Aldrich legal entities in Germany or Allergopharma.
100
Combined Management Report
Report on Economic Position
Macroeconomic and sector-specific environment
Report on Economic Position
Macroeconomic and sector-specific environment
According to the most recently available figures from the International
Monetary Fund (IMF), industrial countries faced heightening growth
expectations in 2017. In this context, the recovery of the global
economy strengthened. In around 120 economies that account for
three-quarters of global GDP, growth increased in 2017 compared with
the previous year. This has been the most extensive synchronized
global growth since 2010.
According to the latest IMF forecasts, global gross domestic product
(GDP) rose by 3.7% in 2017, equivalent to an increase of 0.5 percent-
age points in comparison with 2016. As in the previous year, strong
regional differences could be seen. Industrial nations registered an
increase in growth to 2.3% (2016: 1.7%). At 4.7% (2016: 4.4%),
emerging economies and developing countries again achieved an
increase in growth rates. The GDP of the United States, the world's
largest economy, grew by 2.3% (2016: 1.5%). The eurozone also
registered an increase in GDP growth to 2.4% (2016: 1.8%). The
emerging economies of Asia registered an increase in growth to 6.5%
(2016: 6.4%). As in 2016, India (6.7%) and China (6.8%) were the
strongest growth drivers. In the industrialized countries of Asia, the
GDP of Japan grew by 1.8% (2016: 0.9%) and that of Taiwan by
2.0% (2016: 1.5%). Korea registered growth of 3.0% (2016: 2.8%).
In 2017, organic sales growth at Merck was largely attributable to
the Asia-Pacific and Latin America regions. While Asia-Pacific accounted
for approximately 60% of Group-wide growth, Latin America accounted
for 18%. In the aforementioned regions, the Healthcare and Life
Science business sectors contributed positively to organic sales
growth. By contrast, however, sales of the Performance Materials
business sector decreased organically in both regions. While North
America still generated around 36% of organic growth in 2016, it
accounted for roughly 3.5% in 2017. This was due to declining business
in the Healthcare business sector. Healthcare sales in North America
decreased organically by -4.5%.
Combined Management Report
Report on Economic Position
Macroeconomic and sector-specific environment
101
Healthcare
2 Excluding Sigma-Aldrich.
Average age by region
1 Merck also has employees at sites which are not fully consolidated subsidiaries. These figures refer to all people directly employed by Merck and therefore may deviate from figures in the financial
section of this report.
14.2
39.5
39.3
39.4
North America
44.2
44.3
44.1
Average length of service
Average length of service in Germany
Germany
global, total
43
42.9
43
10.0
9.9
9.8
14.4
14
EBITDA pre of Corporate and Other, which had reached a level of
€ 301 million in 2017, was 24% below the year-earlier level of
€ -396 million. Our expectation at the beginning of the year of a
slight improvement over the previous year was thus exceeded. This
development was mainly due to currency hedging losses, which were
not as high as we had expected at the beginning of the year owing
to the more difficult foreign exchange environment as of the second
half of the year. Consequently, in the course of the year we had
specified our forecast for EBITDA pre of Corporate and Other at
€-300 million to € - 350 million, and reached the lower end of this
range.
Building empowered leaders
People at Merck
Combined Management Report.
Fundamental Information about the Group
95
FOSTERING INNOVATIVE POTENTIAL
Innovation is absolutely essential to the success of a science and
technology company. Curiosity and a focus on new ideas provide a
fruitful basis for innovation and have a positive impact on company
performance. The modular Innovation Center in Darmstadt, which
opened in 2015, offers our employees the opportunity to embrace
new ideas and work on select projects in an inspiring environment.
Sufficient scope and adequate support, also in the form of a suitable
working environment, actively promote the innovative strength of
our employees. Apart from initiatives to generate ideas and advance
projects, the Innovation Center offers our employees various training
courses on topics such as innovative methods, creative techniques
and developing business models. Internal project teams, start-ups
from our Accelerator program as well as many interested colleagues
from various areas throughout Merck benefit from this offer. Recently,
the training courses offered by the Innovation Center were digital-
ized, making them available to all employees worldwide.
VALUING CULTURAL DIVERSITY
Our success is based on courage, achievement, responsibility,
respect, integrity and transparency. These values determine how we
perform our work daily, the way in which we approach challenges,
as well as our dealings with customers, business associates and
colleagues. Openness and respect characterize our company culture.
The objective is to create a culture of mutual respect and esteem in
which the strengths of a diverse workforce and individual differences
are appreciated.
The Chief Diversity Officer and a council of high-ranking execu-
tives from all business sectors and select Group functions play a key
role in strategically defining and managing our diversity and inclusion
policies. Their work focuses on operationalizing the resolutions we
passed in 2015 on the topics of diversity and inclusion. Key elements
of this are recruiting people representing a breadth of qualifications,
skills and experiences, developing and retaining them. In addition,
we support specific employee networks in order to foster exchange
among like-minded individuals. Apart from our women's networks in
various countries, we also support networks that promote the inter-
ests of the LGBTIQ community as well as Afro-American and foreign
employees.
In September 2017, the Group-wide Diversity Days were held for
the sixth time with a campaign entitled "Different Perspectives".
Various events and activities took place to heighten awareness of
diversity and inclusion among our workforce. Globally, employees in
32 countries across six continents took part in numerous events and
shared their experiences on the intranet and in social networks.
Women currently make up 43.1% of the workforce. However, the
ratio of women to men varies widely across the different regions,
businesses and functions. We are therefore working to raise the
proportion of women wherever they are underrepresented, taking
into account the situation typical for the industry as well as regional
differences.
Demographic change is posing challenges in Germany as well as
several other EU countries, the United States, and Japan. The aver-
age age of our employees is slightly more than 41. We assume that
this figure will continue to rise in the coming years and are preparing
for this situation. As part of our range of "Health and Well-being"
offers, we specifically promote employee physical and psychological
well-being. These offers vary from country to country and are
adapted to local circumstances. In addition, we offer multifaceted
continuing education throughout the entire professional careers of
our employees.
In Germany, our company signed the Diversity Charter in 2013,
the Equal Opportunity Charter in 2015 and the Inclusion Action Plan
of the German Mining, Chemical and Energy Industrial Union (IG BCE)
in 2017. By joining these initiatives, we underscore our commitment
to fairness and tolerance at the workplace.
Furthering and asking more of talent
We endeavor to identify and develop the abilities of our employees
early on. Our objective is to extensively further current and future
employees and offer them interesting advanced training opportuni-
ties in order to prepare them for future and more challenging tasks.
As a global employer with intercultural expertise, people from a total
of 131 nations work for Merck; 23.2% of our employees are German
citizens and 74.9% work outside Germany. At our headquarters in
Darmstadt, 11% of our staff comes from 89 different countries.
96
Our focus on systematic personnel development allows us to sus-
tainably strengthen the performance potential within our company
and to increase the motivation of our people. Only by expanding
the abilities of each individual can we count on innovative and curious
employees and managers in the future and flexibly respond to different
requirements.
TARGETED ADVANCED TRAINING AND
MAXIMIZING PERFORMANCE CAPABILITY
A HOLISTIC RECRUITMENT APPROACH
When filling job vacancies, we pursue a holistic recruitment approach
coupled with globally uniform and binding procedures. This starts
with an internal job posting before external channels such as job
portals and recruitment agencies are used. On the one hand, this
process enables us to offer employees better development oppor-
tunities, and on the other hand it minimizes the costs of external
recruitment. For employees with leadership responsibility, we offer
targeted interview coaching to support them in selecting candidates
and to establish uniform quality standards.
Individual development opportunities are also supported by a
new job architecture, which was introduced in 2017. It applies glob-
ally and enables us to harmonize all positions and to simplify their
classification. This job architecture defines three fundamental and
equivalent career paths: managers, experts and project managers.
Employees who wish to advance in their careers and aim for a top
position within the company can also do so via the expert and project
manager career paths.
Global classroom training courses and workshops developed
specifically for teams help our employees develop and build individ-
ual abilities in line with new requirements and perspectives. In 2017,
more than 5,700 employees participated in global classroom training
courses to prepare themselves for new opportunities and challenges.
Digital solutions in the form of more than 4,000 e-learning and
languages courses are available to our employees. To enable our
employees to realize their full potential, we also provide local busi-
ness- and function-related offers. All measures are documented in
a development plan introduced globally.
Employee development at Merck is founded on regular exchanges
and a culture in which employees aspire to high levels of performance
and engagement. As the basis for internal strategic talent manage-
ment, the performance and potential management process is globally
aligned for all employees in accordance with the same principles and
is part of a shared IT system. We systematically combine talent
recognition with performance assessments based on employee target
agreements, as we are convinced that regular feedback helps all
employees to grow in terms of their performance and potential.
Regular individual assessments permit us to more readily identify
high-potential employees and to further them accordingly. Clear
objectives, differentiated and open feedback and individual develop-
ment plans are thus important prerequisites for both the personal
development of every individual and the success of the company.
Through software-supported intensive analysis of our personnel data,
we can identify the potential of talented employees early on, which
helps to optimize our succession planning efforts and find even better
matches for internal positions.
We promote the professional expertise of our apprentices through
numerous regional and global project activities. In 2017, these
included supporting a center for homeless children in South Africa.
Furthermore, through our "Start in die Ausbildung" program, we help
prepare young people who have not been able to find an apprentice-
ship. With a total of 20 young people between the ages of 16 and 25
in 2017, the number of participants was slightly lower than in the
previous year. Although they have a school leaving qualification, they
had been searching for an apprenticeship for at least one year with-
out success.
Since 2016, we have also been working on a specially developed
program to help refugees enter the job market. As part of the "Inte-
grating refugees through training" program, a further group of 12 young
people who were forced to flee their home countries started linguistic,
technical, cultural, and job-specific training to prepare them for voca-
tional training and thus for the labor market.
VOCATIONAL TRAINING TO RECRUIT YOUNG PEOPLE
A globally accessible welcome portal is available to new employees
in order to help them prepare for their new job at Merck and to
support their onboarding phase. To further improve the onboarding
process, various initiatives were started in 2017. For instance, super-
visors, Human Resources and new employees can already exchange
information and documents before the employee's first day of work.
In addition, all new employees are assigned an experienced colleague
who can help them to familiarize themselves with the daily working
routine. Our managers are also given detailed information such as
onboarding plans and process descriptions to support them with this
task.
People at Merck
Fundamental Information about the Group
Combined Management Report
In 2017, we again maintained a constant, high vocational training rate
in Darmstadt, our largest site. A total of 535 young people were
enrolled in apprenticeships in 23 different occupations at our head-
quarters in 2017. We give unlimited employment contracts to all
apprentices working in occupations for which we have sustainable
demand. On average, the post-apprenticeship hiring rate - taking
voluntary terminations into account - was more than 90% over the
past five years. We also offer vocational training at other sites in
Germany, in which a total of 53 apprentices participated in 2017.
0.4%
-1.3%
3.9%
0.1%
0.5%
Total change
17117
9.1%
1,232
608
15,327
7.3%
-2.3%
4,921
-0.8%
in %
3,810
Acquisitions/
divestments
Exchange rate
effects
Organic growth¹
1.1%
Net sales
4,756
1 Not defined by International Financial Reporting Standards (IFRS).
Merck Group
Middle East and Africa (MEA)
Latin America
Asia-Pacific (APAC)
North America
9.7%
0.5%
3.8%
Consolidated Income Statement
-1.5%
in %
€ million
in %
100.0%
15,024
2016
in %
100.0%
15,327
Net sales
2017
€ million
Change
Europe
MERCK GROUP
The consolidated income statement of the Merck Group is as follows:
113
Merck Group
Report on Economic Position
Combined Management Report
-1.0%
2.0%
-0.3%
-1.5%
8.4%
8.8%
0.1%
0.2%
-1.8%
-0.9%
€ million/change in %
Latin America
MERCK GROUP
Merck Group
-1.7%
2,446
Performance Materials
Acquisitions/
divestments
-1.0%
0.4%
Exchange rate
-1.7%
5.3%
5,882
Life Science
-1.6%
effects
Organic growth¹
4.7%
6,999
Healthcare
Net sales
€ million/change in %
Healthcare
6,999
46%
Net sales components by business sector - 2017
MERCK GROUP
O
38%
Life Science
5,882
2,446
Performance Materials
15,327
Net sales components by region - 2017
3.8%
Total change
2.1%
4.0%
-2.6%
In the Middle East and Africa region, the 8.8% increase in sales
to € 608 million (2016: € 559 million) was mainly due to organic
growth in Healthcare, which is the most important business sector
for the region. The share of Group sales attributable to the region
remained unchanged at 4%.
The very positive development of net sales in Latin America resulted
in sales growth of 8.4% to € 1,232 million (2016: € 1,136 million). This
was mainly attributable to the good operating business of Healthcare,
which generated double-digit organic growth rates in the region. In
2017,
the share of Group sales attributable to Latin America remained
unchanged at 8%.
The decrease in net sales in North America by -1.3% to € 3,810 mil-
lion (2016: € 3,858 million) was mainly due to the exchange rate
development of the U.S. dollar. The organic sales growth of Life Science
(4.5%) and the decline in sales of Healthcare largely offset each other.
Consequently, the share of Group sales attributable to North America
declined to 25% (2016: 26%).
In 2017, sales in Europe amounted to € 4,756 million (2016:
€ 4,735 million), thus remaining at the year-earlier level. The organic
growth driven by Life Science and Performance Materials was almost
completely offset by negative foreign exchange effects, which were
primarily due to the British pound. As a result, Europe's share of
Group sales remained unchanged at 31%.
In Asia-Pacific, the Group's largest region in terms of sales, Merck
generated net sales of € 4,921 million in 2017 (2016: € 4,736 million),
which represents an increase of € 185 million or 3.9%. The very
strong organic growth of 7.3%, which was due to the business per-
formance of the Healthcare and Life Science business sectors, was
partly canceled out by negative foreign exchange effects (-1.8%)
and divestment effects (-1.5%). The contribution to Group sales by
the Asia-Pacific region rose by one percentage point to 32% (2016:
31%).
25%
North America
3,810
31%
Europe
4,756
608
Middle East and Africa (MEA)
4%
Asia-Pacific (APAC)
4,921
32%
1,232
303
8%
€ million/% of net sales
Net sales by region - 2017
MERCK GROUP
Merck Group
Report on Economic Position
Combined Management Report
112
1 Not defined by International Financial Reporting Standards (IFRS).
2.0%
-0.3%
-0.9%
-1.5%
2.0%
65.4%
-5,320
-10
59.9%
977
10.9%
1,633
17.0%
> 100.0%
907
-3.5%
-521
2.5%
386
2,610
-8.0%
3.2%
70
14.3%
2,154
14.5%
2,224
26
-2.2%
-326
-2.0%
- 300
¹ Excluding amortization of internally generated or separately acquired software.
2 Not defined by International Financial Reporting Standards (IFRS).
Net income
2,600
Non-controlling interests
-0.1%
17.0%
-0.0%
10.8%
EBITDA pre, the key financial indicator used to steer operating
business, declined slightly by € - 76 million or -1.7% to € 4,414 million
(2016: € 4,490 million). The resulting EBITDA pre margin thus
decreased by around one percentage point to 28.8% (2016: 29.9%).
The reconciliation of the operating result (EBIT) to EBITDA pre is
presented in the chapter entitled "Internal Management System".
Thanks to the successful operating business and especially owing
to the exceptional tax income in connection with the tax reform in the
United States, the excellent level of net income rose by € 972 million
or 59.7% to a record level of € 2,600 million (2016: € 1,629 million).
Earnings per share increased accordingly to € 5.98 (2016: € 3.75).
The income balance of € 386 million (2016: expense balance of
€ -521 million) under income taxes was due to one-time effects in
connection with tax reform in the United States. The new U.S. tax
regulations led in particular to a reduction in the deferred tax
liabilities of the Merck Group and thus to corresponding deferred tax
income. Further information about income taxes in general and U.S.
tax reform in particular can be found in Note (14) "Income taxes" in
the Notes to the Consolidated Financial Statements.
impact on earnings, which was allocable to the Life Science business
sector, was reported under other operating expenses and eliminated
during the calculation of EBITDA pre. Detailed information about the
development and composition of other operating expenses and income
can be found in Note (11) "Other operating income" and Note (12)
"Other operating expenses" of the Consolidated Financial Statements.
Overall, the development of income and expenses in the Group
income statement led to a 1.8% increase in the operating result
(EBIT), which amounted to € 2,525 million (2016: € 2,481 million).
The improvement in the negative financial result by € 26 million
to € -300 million (2016: € -326 million) resulted mainly from
exchange rate gains in connection with the financing activities of the
Group. At € - 271 million, the interest result contained in the financial
result was on a par with the previous year (2016: € -270 million)
(see Note (13) "Financial result" in the Notes to the Consolidated
Financial Statements).
Other operating expenses and income (net) showed an income
balance of € 290 million in 2017 (2016: € 14 million). The strong
increase resulted primarily from transactions in the Healthcare
business sector. In particular, the gain on the divestment of the
Biosimilars business amounting to € 319 million had an impact. This
gain was eliminated in the calculation of EBITDA pre. Reversals of
impairment losses, the receipt of compensation for future license
payments and the receipt of milestone payments also contributed to
this (see explanations in the section entitled "Healthcare"). Further-
more, this item also includes expenses in connection with the company's
350th anniversary in 2018. On the occasion of this anniversary, a
promise of a one-time payment as well as a gift in the form of Merck
shares was made to employees. These expenses were also eliminated
during the calculation of EBITDA pre. In 2017, a provision in a mid
double-digit million amount was set up for an ongoing European
Commission antitrust review proceeding relating to the acquisition
of Sigma-Aldrich (see Note (27) "Other provisions" in the Notes to
the Consolidated Financial Statements). The corresponding negative
1 Not presented: Research and development costs of € 42 million allocated to Corporate and Other.
78%
Healthcare
1,632
225
Performance Materials
11%
241
Life Science
11%
Research and development costs by business sector¹ - 2017
€ million/in %
MERCK GROUP
Merck Group
Report on Economic Position
Combined Management Report
114
The increase in Group research and development costs by 8.3% to
€ 2,140 million, which was primarily attributable to the Healthcare
business sector, led to a research spending ratio (research and devel-
opment costs as a percentage of net sales) of 14.0% (2016: 13.2%).
Accounting for 78% of Group R&D spending (2016: 76%), Healthcare
was the most research-intensive business sector of the Merck Group.
The development of marketing and selling expenses was mainly
influenced by the Healthcare business sector, which reported higher
marketing and selling expenses particularly owing to imminent market
launches and higher license expenses.
In 2017, gross profit of the Merck Group increased by € 184 million or
1.9% to € 10,007 million (2016: € 9,823 million). This increase was
due to the Life Science business sector, where gross profit rose by
€ 315 million, whereas the other two business sectors did not meet
the year-earlier level. The gross margin of the Group, i.e. gross profit
as a percentage of net sales, amounted to 65.3% (2016: 65.4%).
59.7%
> 100.0%
-6
972
-4
1,629
Profit after tax
Income tax
Profit before income tax
Research and development costs
-6.1%
-930
Administration expenses
(-1,017)
(of which: amortization of intangible assets)¹
-30.7%
-4,702
Marketing and selling expenses
1.9%
184
16%
9,823
65.3%
10,007
Gross profit
2.3%
(-1.0%)
(2)
(-181)
(-179)
(of which: amortization of intangible assets)¹
-119
-34.6%
-5,201
-34.7%
-2,140
-14.0%
(of which: amortization of intangible assets)¹
(-5)
Financial result
1.8%
44
16.5%
> 100.0%
275
0.1%
14
2,481
1.9%
16.5%
2,525
Operating result (EBIT)²
290
Cost of sales
Other operating expenses and income
(−1)
8.3%
-165
-13.2%
(-1.5%)
8.8%
-76
-5.7%
(15)
3.9%
-175
- 30.1%
-4,526
(-1,032)
-854
-1,976
(-4)
(10.6%)
15,327
Net sales by business sector - 2017
€ million/% of net sales
With organic sales growth of 4.7%, the Healthcare business sector
achieved an increase in sales of € 144 million to € 6,999 million
(2016: € 6,855 million). Consequently, Healthcare remained the
strongest business sector in terms of sales with a one percentage
point higher share of 46% (2016: 45%) of Group sales. In 2017, Life
Science achieved organic sales growth of 5.3%. Including negative
foreign exchange effects (-1.7%) and acquisition-related sales
increases (+0.4%), sales of this business sector rose by € 224 million
to € 5,882 million (2016: € 5,658 million). In 2017, Life Science
accounted for an unchanged 38% share of Group sales. Owing to slight
organic sales declines (-1.7%) as well as slight negative exchange
rate effects (-0.9%), the net sales of Performance Materials amounted
to € 2,446 million (2016: € 2,511 million). Consequently, this business
sector accounted for 16% (2016: 17%) of Group net sales.
Improved inventory management
2,510.7
Slight organic growth
EBITDA pre¹
1,106.4
Slight increase
Business free cash flow¹
1,010.7
Low double-digit percentage decline
Corporate and Other
EBITDA pre¹
-396.2
Business free cash flow¹
-484.7
1 Not defined by International Financial Reporting Standards (IFRS).
EBITDA pre of Corporate and Other
should improve slightly in 2017 in
comparison with the previous year.
Volume increases in all businesses driven,
among other things, by a recovery in the
display market visible since the end of 2016
Continued price decline typical
for the Liquid Crystals business
Continued initial signs of a normalization
of our high market shares in the Liquid
Crystals business cannot be ruled out
Recovery in the display market, broader earnings
base and active cost management can more than
offset the continued price decline in liquid crystals
Higher investments in property, plant and equipment,
as well as digitalization initiatives
Combined Management Report
Report on Economic Position
Review of Forecast against Actual Business Developments
109
Q1/2017 Interim Report
Forecast for 2017 in:
Results 2017
Q2/2017 Interim Report
Q3/2017 Interim Report
in € million
Solid organic sales growth
Low portfolio effect due to the
acquisition of BioControl Systems
Solid organic sales growth,
slightly above expected market
growth of around 4% per year
15,024
Solid organic sales growth,
slightly above expected market
growth of around 4% per year
Low positive portfolio effect due to the acquisition
of BioControl Systems, which generated sales of
US$ 34 million in 2015
Positive development resulting
from expected sales growth
Percentage growth compared with
the previous year in the high single-
digit to low teens range
Increase in the
twenties percentage range
Slight organic growth
Low portfolio effect due
to the divestment of our
business in Pakistan
€ ~1,900 million to € 2,000 million € 1,900 million to € 2,000 million € 1,900 million to € 2,000 million
4,414.5
(-1.7%)
3,318
(0.0%)
6.16
6,999.0
(+2.1%:
+4.7% Organic,
-1.0% Portfolio,
-1.6% Currency)
1,949.3
(-8.4%)
€ ~1,340 million to € 1,430 million € ~1,340 million to € 1,430 million € ~1,320 million to € 1,410 million
1,447.9
(-12.1%)
108
Combined Management Report
Report on Economic Position
Review of Forecast against Actual Business Developments
Life Science
Actual results
2016 in € million
Forecast for 2017 in the
Annual Report for 2016
Net sales
5,657.9
EBITDA pre¹
1,652.3
Business free cash flow¹
1,144.0
Performance Materials
Net sales
Main comments
Solid organic growth, and thus slightly
above the expected market growth of
approximately 4% per year
Process Solutions likely to remain
the strongest driver of growth
Research Solutions and Applied Solutions
also contribute positively to organic sales
development to a smaller extent
Slight organic growth
5,881.5
(+4.0%:
€ ~1,780 million to € 1,850 million € ~1,780 million to € 1,850 million
•
Group net sales increase slightly by 2.0% to € 15.3 billion
• Healthcare and Life Science deliver organic sales growth
• EBITDA pre of € 4.4 billion nearly meets high year-earlier level
• At 28.8%, Group profitability (EBITDA pre margin) remains at a
high level (2016: 29.9%).
• U.S. tax reform leads to significant deferred tax income and a corre-
sponding increase in profit after tax as well as earnings per share
• Stable earnings per share pre of € 6.16 (2016: € 6.21).
.
Business free cash flow of € 3.3 billion on a par with year-earlier
figure
• Net financial liabilities decline by -11.9% to € 10.1 billion (Decem-
ber 31, 2016: € 11.5 billion)
MERCK GROUP
Key figures
€ million
Net sales
Operating result (EBIT)¹
Margin (% of net sales) 1
EBITDA¹
Margin (% of net sales)¹
EBITDA pre¹
Margin (% of net sales)¹
Profit after tax
Earnings per share (€)
Earnings per share pre (€)1
Business free cash flow¹
¹ Not defined by International Financial Reporting Standards (IFRS).
Change
2017
2016
€ million
Overview of 2017
+5.3% Organic,
+0.4% Portfolio,
-1.7% Currency)
Merck Group
Merck Group
€ ~1,780 million to € 1,850 million
€ ~1,310 million to € 1,380 million € ~1,350 million to € 1,440 million
€ ~1,400 million to € 1,490 million
1,785.8
(+8.1%)
1,401.7
(+22.5%)
Slight organic sales decline
Slight to moderate
organic decline in sales
Slight to moderate
organic decline in sales
€ ~1,050 million to € 1,130 million
€950 million to € 1,050 million
€ 950 million to € 1,050 million
€ ~820 million to € 890 million
€ ~ 820 million to € 890 million
€ ~ 820 million to € 890 million
2,446.0
(-2.6%:
-1.7% Organic,
0.0% Portfolio,
-0.9% Currency)
979.8
(-11.4%)
905.8
(-10.4%)
€~-350 million to € -400 million
€ ~-350 million to € -400 million
€ ~-540 million to € - 590 million
€ ~ 500 million to € -550 million
€ ~-300 million to € - 350 million
€ ~-450 million to € -500 million
-300.5
(-24.2%)
-437.4
(-9.8%)
110
Combined Management Report
Report on Economic Position
Course of Business and
Economic Position
MERCK GROUP
Slight organic growth
Low portfolio effect due
to the divestment of our
business in Pakistan
€ ~3,040 million to € 3,340 million
3,318
3,318
-0.8%
-0.05
6.21
6.16
59.5%
2.23
3.75
5.98
59.9%
977
1,633
2,610
29.9%
28.8%
-1.7%
-76
4,490
4,414
29.4%
27.9%
-3.0%
-133
4,415
4,282
16.5%
16.5%
1.8%
DEVELOPMENT OF NET SALES
44
AND RESULTS OF OPERATIONS
rate development of the U.S. dollar, as well as Asia-Pacific as a result
of negative exchange rate effects from the Chinese renminbi and the
Japanese yen. Acquisitions and divestments caused Group net sales
to decline by -0.3%. The divestment of the subsidiaries in Pakistan in
December 2016 had a negative impact on net sales of the Healthcare
business sector, whereas the first-time consolidation of BioControl
Systems, Inc., (USA), led to higher sales in Life Science.
2 Quarterly breakdown unaudited.
1 Not defined by International Financial Reporting Standards (IFRS).
5.9%
4.2%
2.3%
3.1%
%
3,830
3,724
3,805
3,665
2016
3,848
3,727
3,891
3,861
2017
Q4
Q3
Q2
Q1
€ million/organic growth in %
Net sales and organic growth¹ by quarter²
MERCK GROUP
The development of net sales in the individual quarters as well as
the respective organic growth rates in 2017 are presented in the
following overview:
111
Merck Group
Report on Economic Position
Combined Management Report
In 2017, net sales of the Merck Group increased by € 303 million or
2.0% to € 15,327 million (2016: € 15,024 million). This increase was
mainly attributable to organic sales growth of € 578 million or 3.8%,
driven by the Healthcare and Life Science business sectors. In 2017,
the stronger euro resulted in negative foreign exchange effects of
-1.5%. In particular, this affected North America due to the exchange
6.15 to 6.50
2,481
2.0%
EBITDA pre¹
2,127.9
High single-digit percentage decrease
in EBITDA pre compared with 2016
Business free cash flow¹
1,648.1
Low double-digit percentage decline
Organic sales growth in growth markets offsets
the ongoing decline in Rebif® sales
Continued price pressure in Europe,
Asia-Pacific as well as Middle East and Africa
Full takeover of the commercialization of
the antidiabetic agent GlucophageⓇ in China
from BMS contributes slightly to sales growth
Slightly negative portfolio effect due to the divestment
of the business in Pakistan, which had generated sales
in the mid double-digit million range in 2016
Continued rise in research and development
spending due to further pipeline development,
particularly in immuno-oncology
Negative product mix effect due
to the decline in RebifⓇ sales
Absence of exceptional income recorded
in 2016, such as the release of provisions for
research projects discontinued in prior years
and the divestment of a minority interest
Royalty income for Avonex® due to a
patent granted in the United States in 2016
Agreement on a one-time payment
for future license payments
Decline in EBITDA pre
Continued investments in property, plant
and equipment as well as digitalization
within the scope of strategic initiatives
1 Not defined by International Financial Reporting Standards (IFRS).
Combined Management Report
Report on Economic Position
Review of Forecast against Actual Business Developments
107
Q1/2017 Interim Report
Forecast for 2017 in:
Results 2017
Q2/2017 Interim Report
Q3/2017 Interim Report
in € million
15,326.6
(+2.0%:
+3.8% Organic,
-0.3% Portfolio,
€ 15,500 million to € 16,600 million € ~15,300 million to € 15,700 million € ~15,300 million to € 15,700 million
-1.5% Currency)
€ 4,400 million to € 4,600 million
€ ~4,400 million to € 4,600 million
€ 4,400 million to € 4,600 million
€ ~2,930 million to € 3,150 million
6.15 to 6.50
€ ~2,960 million to € 3,260 million
6.15 to 6.50
Slight organic growth
2,525
6,855.0
Continued realization of synergies from
the integration of Sigma-Aldrich in Life Science
Slight sales recovery and active cost
management in Performance Materials
Increasing investments in property, plant and
equipment, as well as digitalization initiatives
Combined Management Report
Report on Economic Position
Review of Forecast against Actual Business Developments
105
BUSINESS FREE CASH FLOW
For 2017, we expected business free cash flow of the Merck Group to
see a single-digit percentage decline. We exceeded this forecast with
stable business free cash flow. This was mainly driven by higher
EBITDA pre of Corporate and Other as well as the positive develop-
ment of inventories and receivables.
106
303
Report on Economic Position
Review of Forecast against Actual Business Developments
Merck Group
Actual results
2016 in € million
Forecast for 2017 in the
Annual Report for 2016
Net sales
15,023.5
EBITDA pre¹
4,490.4
Business free cash flow¹
3,318.2
EPS pre¹
6.21
Healthcare
Main comments
Slight to moderate organic growth
Neutral exchange rate effect
Approximately stable compared
with the previous year;
this comprises a slightly positive
or negative percentage fluctuation
from the year-earlier figure
Single-digit percentage decline
Slight organic sales growth in Healthcare
Solid organic growth slightly
above market growth in Life Science
Slight organic growth in Performance Materials
Neutral exchange rate effect due to positive
€/US$ development and negative foreign exchange
developments in various growth markets
Increasing research and development
spending in Healthcare
Net sales
Realization of additional synergies as planned
from the Sigma-Aldrich acquisition amounting to
€ 80 million compared with the previous year
Higher EBITDA pre
Combined Management Report
-7
1.2%
28
2,632
38
-9
2,609
23
0.9%
-2,195
-2,048
-147
7.2%
3,387
3,488
-100
-2.9%
34
in %
€ million
Dec. 31, 2016
2,889
The slight reduction in working capital to € 3,387 million (2016:
€ 3,488 million) was due mainly to the increase in trade accounts
payable.
MERCK GROUP
Working capital¹
Combined Management Report
Report on Economic Position
Merck Group
117
2 Previous year's figures have been adjusted, see Note (4) "Acquisitions and divestments" in the Notes to the Consolidated Financial Statements.
€ million
Receivables from royalties and licenses
Inventories²
Trade accounts payable
Working capital¹,2
1 Not defined by International Financial Reporting Standards (IFRS).
Change
Dec. 31, 2017
2,923
Trade accounts receivable
legislation, deferred taxes were remeasured using modified tax rates.
The resulting decrease in deferred tax liabilities led to corresponding
tax income and consequently to an improvement in net income (see
Note (14) "Income taxes” in the Notes to the Consolidated Financial
Statements).
The composition and the development of net financial debt were as
follows:
Net financial debt¹
8,213
9,650
1,653
1,978
-1,437
-325
-14.9%
-16.4%
767
758
10
1.3%
73
80
-8.6%
113
in %
€ million
Dec. 31, 2016
Dec. 31, 2017
€ million
Bonds and commercial paper
Bank loans
Liabilities to related parties
Loans from third parties and other financial liabilities
Liabilities from derivatives (financial transactions)
Finance lease liabilities
MERCK GROUP
Financial liabilities
Cash and cash equivalents
Current financial assets
Net financial debt¹
1 Not defined by International Financial Reporting Standards (IFRS).
MERCK GROUP
Reconciliation of net financial debt¹
Change
less
The total assets of the Merck Group declined in comparison with
December 31, 2016 by € 2,637 million to € 35,621 million (Decem-
ber 31, 2016: € 38,258 million). A significant reason for this was the
development of the euro-U.S. dollar exchange rate. In particular,
intangible assets, which for the most part are carried in U.S. dollars,
declined sharply owing to the weaker U.S. dollar. The development of
other non-current liabilities was mainly due to the decline in deferred
tax liabilities included in this item. Owing to new U.S. tax reform
1 Previous year's figures have been adjusted, see Note (4) "Acquisitions and divestments" in the Notes to the Consolidated Financial Statements.
-6.9%
0.1%
Non-current liabilities¹
of which:
Provisions for pensions and other post-employment benefits
2,257
Other non-current provisions
788
Non-current financial liabilities
8,033
Other non-current liabilities¹
1,842
Current liabilities¹
of which:
Current provisions
Current financial liabilities
16
36.7%
14,050
39.5%
2,923
Current financial assets
90
Other current assets¹
Cash and cash equivalents
1,221
589
Trade accounts payable
Total assets¹
35,621
100.0%
38,258
100.0%
-2,637
-6.9%
14,066
Equity
Other current liabilities¹
Total liabilities and equity¹
12,919
2,790
2,195
3,234
35,621
100.0%
412
3,788
414
2,048
2
-997
147
393
38,258
100.0%
-2,637
2,841
128
-5.0%
23.8%
36.3%
15,119
39.5%
-2,200
-14.5%
2,313
834
-454
8,809
-56
-46
-776
-1,321
8,635
24.2%
9,089
3,163
Trade accounts receivable
-16
4
Healthcare
123
In Latin America, where organic sales growth amounted to 11.1%,
net sales of € 922 million significantly exceeded the year-earlier level
(2016: € 839 million). Organic sales growth in all businesses and
therapeutic areas, especially for Erbitux®, Euthyrox® and with core
strategic brands in the Consumer Health business, led to this devel-
opment. Including negative exchange rate effects of -1.0%, the
region's share of Healthcare sales increased to 13% (2016: 12%).
The Middle East and Africa region generated net sales of € 500 mil-
lion (2016: € 461 million). Organic sales growth of 10.4% resulted
mainly from the development of fertility medicines, EuthyroxⓇ and
ConcorⓇ, as well as double-digit organic sales growth of the Consumer
Health business.
HEALTHCARE
Net sales components by region - 2017
€ million/change in %
Europe
North America
Asia-Pacific (APAC)
Latin America
Middle East and Africa (MEA)
Healthcare
1 Not defined by International Financial Reporting Standards (IFRS)
Net sales
Report on Economic Position
Combined Management Report
In North America, net sales amounted to € 1,494 million (2016:
€ 1,601 million). The organic decline of -4.5% was mainly driven by
the development of Gonal-f®, which had benefited from a favorable
competitive situation in the previous year. Moreover, the difficult
competitive situation for Rebif® and the organic sales decline of
SaizenⓇ contributed to this development. Besides double-digit
organic growth of other fertility medicines, initial sales of BavencioⓇ
also had a positive effect. This immuno-oncology medicine was
approved in the United States for the treatment of metastatic Merkel
cell carcinoma in March 2017 and advanced bladder cancer in May
2017. Including negative exchange rate effects of -2.2%, the region's
share of Healthcare sales was 21% (2016: 23%).
Asia-Pacific, the second-largest region in terms of sales, generated
organic growth of 20.5%, contributing 23% to the business sector's
net sales (2016: 21%). This was mainly due to the changed business
model for GlucophageⓇ marketing in China as of January 1, 2017.
The business with fertility medicines, including Gonal-f®, as well as the
Consumer Health business generated double-digit organic growth in
some cases. A portfolio effect of -4.7% resulted from the divestment
of our business activities in Pakistan. Including currency headwinds of
-2.8%, net sales in the region amounted to € 1,581 million (2016:
€ 1,399 million).
€ million/% of net sales of the business sector
13%
Latin America
922
23%
Asia-Pacific (APAC)
1,581
0
2,502
7%
500
36%
Europe
2,502
21%
North America
1,494
Europe, which accounts for 36% of Healthcare sales (2016: 37%)
and is the business sector's largest region in terms of sales, saw an
organic sales decline of -1.4% and generated net sales of € 2,502 mil-
lion (2016: € 2,555 million). This was particularly due to the difficult
competitive situation and further price reductions for Rebif®. Sales
of ErbituxⓇ and Gonal-fⓇ also declined organically, the latter being due
to the unusually strong growth in 2016. The organic sales growth of
the Consumer Health business as well as initial sales of MavencladⓇ,
which was approved in 2017, could only partly compensate for this
development. Overall, net sales decreased by -2.1%.
Middle East and Africa (MEA)
Net sales by region - 2017
1,494
Exchange rate
effects
2.1%
124
Combined Management Report
Report on Economic Position
Healthcare
Net sales and organic growth rates of the key products developed in
2017 as follows:
HEALTHCARE
Product sales and organic growth¹
€ million/Organic growth in %
1,611
Rebif®
1,741
853
Erbitux®
-1.0%
-1.6%
4.7%
6,999
-4.5%
-0.7%
-2.2%
Acquisitions/
divestments
-0.1%
Total change
-2.1%
-6.7%
17111
Organic growth¹
-1.4%
20.5%
11.1%
922
- 2.8%
-1.0%
-4.7%
-0.1%
500
10.4%
-1.9%
13.0%
10.0%
8.5%
1,581
HEALTHCARE
2 Quarterly breakdown unaudited.
¹ Not defined by International Financial Reporting Standards (IFRS).
Currency translation difference
Dividend payments to shareholders and to E. Merck²
Acquisitions²
Payments from the disposal of assets held for sale and from other divestments²
Free cash flow¹
Other
December 31
¹ Not defined by International Financial Reporting Standards (IFRS).
2 According to the consolidated cash flow statement.
2017
11,513
-429
624
2016
12,654
118
600
11
January 1
€ million
-11.9 %
-37.8 %
4
-0
-1.3%
10,823
12,597
-1,774
-14.1%
-167
589
-350
-37.3 %
90
145
10,144
11,513
-55
-1,369
939
-2.1%
11.9%
12.4%
2016
2017
388
GlucophageⓇ
662
753
Gonal-fⓇ
%
704
1,689
1,766
%
4.4%
2.6%
5.8%
5.9%
880
-12.2%
-5.5%
-4.6%
2 Including Neurobion®, Dolo-Neurobion®, Dexabion® and GavindoⓇ.
¹ Not defined by International Financial Reporting Standards (IFRS).
270
SaizenⓇ
259
286
Neurobion® 2
-1.3%
309
Euthyrox®
370
431
5.6%
ConcorⓇ
444
74.7%
332
2,632
-25.0%
of which:
45.4%
33.8%
36.7%
39.5%
Dec. 31, 2013
Dec. 31, 2014
Dec. 31, 2016¹
Dec. 31, 2017
Current liabilities
Liabilities (total)
Finance structure²
Non-current assets
Total assets
Equity
Non-current assets
Total assets
Asset coverage²
53.2%
79.1%
80.0%
80.7%
Combined Management Report
120
1 Previous year's figures have been adjusted, see Note (4) "Acquisitions and divestments" in the Notes to the Consolidated Financial Statements.
2 Not defined by International Financial Reporting Standards (IFRS).
40.0%
46.5%
37.2%
Inventories¹
Asset ratio²
37.5%
82.4%
76.0%
41.8%
45.9%
49.9%
64.5%
59.7%
40.1%
Equity
Equity ratio²
in %
119
Merck Group
Report on Economic Position
Combined Management Report
2 Quarterly breakdown unaudited.
¹ Not defined by International Financial Reporting Standards (IFRS).
-8.9%
MERCK GROUP
-16.1%
-0.4%
%
672
1,085
799
763
2016
29.7%
Report on Economic Position
Business free cash flow¹ by business sector² - 2017
€ million/in %
Performance Materials
Key balance sheet figures
MERCK GROUP
The development of key balance sheet figures is as follows:
Our credit ratings from the independent rating agencies did not change
in 2017. Merck is currently rated by Standard & Poor's, Moody's and
Scope. Standard & Poor's has issued a long-term credit rating of A
with a stable outlook, Moody's a rating of Baa1 with a stable outlook,
and Scope a rating of A-, likewise with a stable outlook. An overview
of the development of our rating in recent years is presented in the
Report on Risks and Opportunities.
Outside Germany, high levels of strategic investment were also
made. Particularly in China, both the Healthcare and Life Science
business sectors invested € 25 million and € 26 million, respectively,
in new production facilities. Furthermore, the Performance Materials
business sector invested € 12 million in the Netherlands to construct a
production facility for the manufacture of liquid crystal window modules.
In 2017, strategic investments of € 212 million were made to
expand the Darmstadt site. Of this amount, € 76 million was used
to upgrade global headquarters; the projects include an Innovation
Center and an employee cafeteria, among other things. In addition,
a new sampling center for regulated products was constructed for
€ 10 million. In the Healthcare business sector, investments included
€ 33 million in a new laboratory building for pharmaceutical research
and € 28 million in a new packaging center.
The investments in property, plant, equipment and software as well
as advance payments for intangible assets included in the calculation
of business free cash flow increased in 2017 by 21.9% to a total of
€ 1,047 million (2016: € 859 million). The investments in property,
plant and equipment included therein amounted to € 936 million in
2017 (2016: € 753 million), of which € 438 million (2016: € 332 million)
was attributable to strategic investment projects each with a project
volume of more than € 2 million; the remainder was attributable to
smaller investment projects.
24%
The contributions of the operating business sectors to business free
cash flow of the Group developed in 2017 as follows: Healthcare
generated business free cash flow amounting to € 1,448 million (2016:
€ 1,648 million). Consequently, with a 39% share (2016: 43%) of
Group business free cash flow (excluding the decline of € -437 million
due to Corporate and Other) Healthcare was once again the business
sector with the highest cash flows as per the definition of this key
performance indicator. In 2017, the Life Science business sector
achieved a further increase in the previous year's strong level by
22.5% to € 1,402 million (2016: € 1,144 million), thus increasing its
share of Group business free cash flow to 37% (2016: 30%). Perfor-
mance Materials contributed € 906 million (2016: € 1,011 million) to
this Group financial indicator, equivalent to 24% (2016: 27%).
Healthcare
1,448
39%
1 Not defined by International Financial Reporting Standards (IFRS).
1,402
Life Science
37%
906
² Not presented: Decline in Group business free cash flow by € -437 million due to Corporate
and Other.
612
Merck Group
AND ECONOMIC SITUATION
122
of the U.S. dollar, the Chinese renminbi and the British pound. The
divestment of the business in Pakistan at the end of 2016, which
primarily affected sales in the General Medicine franchise (including
CardioMetabolic Care), led to a portfolio effect of -1.0%. Commission
income, which is also included in net sales, dropped by -53.4% to
€ 83 million (2016: € 178 million). This was especially attributable
to the takeover of the GlucophageⓇ commercialization rights in China
from Bristol-Myers Squibb at the beginning of 2017. In the past,
Healthcare recorded exclusively commission income for GlucophageⓇ
sales in China. Since the beginning of 2017, the business sector no
longer reports commission income for this product, but rather the
corresponding sales for GlucophageⓇ in China. In return, license pay-
ments are made to Bristol-Myers Squibb.
In 2017, the Healthcare business sector generated organic sales
growth of 4.7%. Negative foreign exchange effects of -1.6% and a
negative portfolio effect of -1.0% resulted in overall sales growth of
2.1%. Consequently, net sales amounted to € 6,999 million (2016:
€ 6,855 million). In the Biopharma business, organic sales growth
was especially attributable to medicines from the General Medicine
franchise (including CardioMetabolic Care), first and foremost
Glucophage®, Euthyrox® and ConcorⓇ. The Consumer Health business
also delivered very strong organic growth. By contrast, sales of the
two top-selling products, the multiple sclerosis medicine Rebif® and
the oncology drug ErbituxⓇ, declined organically. The negative
exchange rate effects resulted mainly from the decline in the value
AND RESULTS OF OPERATIONS
DEVELOPMENT OF NET SALES
-12.1%
-200
1,648
1,448
31.0%
27.9%
-8.4%
-179
2,128
1,949
Combined Management Report
Report on Economic Position
Healthcare
The development of net sales in the individual quarters as well as
1,754
1,646
2016
1,773
1,708
1,783
1,735
35.4%
2017
Q3
Q2
Q1
€ million/organic growth in %
Net sales and organic growth¹ by quarter²
HEALTHCARE
the respective organic growth rates in 2017 are presented in the
following overview:
Q4
30.8%
-11.1%
-269
Margin (% of net sales) 1
EBITDA pre¹
Margin (% of net sales)¹
EBITDA¹
Operating result (EBIT)¹
Net sales
€ million
121
Healthcare
Margin (% of net sales)¹
Report on Economic Position
Key figures
HEALTHCARE
Healthcare
The good key balance sheet figures, which improved further in
2017, illustrate the solid finance policy being pursued by the Merck
Group. For instance, the equity ratio rose to 39.5% (2016: 36.7%)
and has thus reached a very good level. We will continue to assign
high priority to the rapid reduction of our financial liabilities. In 2017,
there were no changes to our credit ratings by the independent
rating agencies Standard & Poor's (A with a stable outlook), Moody's
(Baa1 with a stable outlook) and Scope (A- with a stable outlook).
Based on our solid net assets and financial position as well as
successful business performance, the economic position of the Merck
Group can be assessed positively overall. It represents a good foun-
dation for the promising further development of our businesses.
The business performance of Life Science was very successful and
we are excellently positioned for the future. Performance Materials
was adversely affected by the market development in the Liquid
Crystals business. The business sector is intensively working to con-
solidate our position at a continued high level.
With the approvals of BavencioⓇ and MavencladⓇ, our Healthcare
business sector achieved major milestones. The steady further devel-
opment of the promising pipeline remains a high priority. This was
reflected by an above-average increase in research and development
costs. In 2017, the divestment of the Biosimilars business closed and
the company announced it is reviewing strategic options for the
Consumer Health business.
Fiscal 2017 was a year of challenges and one that opened up numerous
new opportunities for the future with the approvals of BavencioⓇ and
MavencladⓇ. Key strategic intentions were implemented or introduced.
The financial targets that we had set ourselves for 2017 were
achieved. Moderate organic growth enabled Group net sales to
increase to € 15,327 million (2016: € 15,024 million). In 2017,
EBITDA pre amounted to € 4,415 million (2016: € 4,490 million),
which meant we almost reached the very good year-earlier figure.
With an EBITDA pre margin of 28.8% (2016: 29.9%), our profitability
remains at a notable level even though the Healthcare and Performance
Materials business sectors contended with challenges. We also made
progress with the reduction of net financial debt: Despite our high
capital spending, we lowered our debt by € -1,369 million. Conse-
quently, net financial debt amounted to € 10,144 million on Decem-
ber 31, 2017 (December 31, 2016: € 11,513 million).
Combined Management Report
OVERALL ASSESSMENT OF BUSINESS PERFORMANCE
Business free cash flow¹
Change
2,425
2,155
23.2%
20.7%
-9.2%
-146
1,593
1 Not defined by International Financial Reporting Standards (IFRS).
1,447
144
6,855
6,999
in %
€ million
2016
2017
2.1%
910
Dec. 31, 2015
Q4
Performance Materials
980
38%
Life Science
1,786
41%
Healthcare
1,949
1 Not defined by International Financial Reporting Standards (IFRS).
2 Not presented: Decline in Group EBITDA pre by € - 301 million due to Corporate and Other.
21%
116
Report on Economic Position
Merck Group
MERCK GROUP
Balance sheet structure
Non-current assets¹
of which:
Goodwill¹
Dec. 31, 2017
Combined Management Report
Dec. 31, 2016
€ million/in %
MERCK GROUP
2017
1,240
1,093
1,076
1,005
2016
1,084
1,158
EBITDA pre¹ by business sector² - 2017
1,174
%
14.5%
1,036
-8.3%
-6.5%
1 Not defined by International Financial Reporting Standards (IFRS).
2 Quarterly breakdown unaudited.
The slight decrease in Group EBITDA pre was attributable to the
Healthcare and Performance Materials business sectors. By contrast,
the good business performance of Life Science had a positive effect
on this earnings indicator. Healthcare, which again was the business
sector with the highest EBITDA pre, generated € 1,949 million in 2017
(2016: € 2,128 million), thus contributing 41% (2016: 43%) of Group
EBITDA pre (excluding the € - 301 million decline due to Corporate
and Other). EBITDA pre of the Life Science business sector improved
by 8.1% to € 1,786 million (2016: € 1,652 million). Consequently,
the business sector's share of Group EBITDA pre rose by 4 percentage
points to 38% (2016: 34%). With an EBITDA pre of € 980 million
(2016: € 1,106 million), the share of this Group key performance
indicator attributable to Performance Materials decreased to 21%
(2016: 23%).
1,075
Q4
Change
28,166
281
392
7,455
20.9%
7,670
20.0%
-215
-2.8%
-1,663
2,609
2,889
34
145
-55
1,087
134
939
-350
23
€ million
-1,433
4,231
in %
79.1%
€ million
30,589
in %
80.0%
€ million
in %
-2,423
-7.9%
1,363
13,582
8,317
Property, plant and equipment¹
4,512
Other non-current assets
1,755
Current assets¹
15,015
9,980
Other intangible assets¹
Q3
-5.6%
-392
178
2,518
2,696
€ million
2016
2017
Change
1 Not defined by International Financial Reporting Standards (IFRS).
Payments from the disposal of property, plant and equipment
Free cash flow¹
Payments for investments in property, plant and equipment
Payments from the disposal of intangible assets
in %
7.1%
Cash flow from operating activities according to the cash flow statement
Payments for investments in intangible assets
Free cash flow¹
MERCK GROUP
The increase in cash inflows from operating activities served among
other things to finance the strong investing activity of the Group.
Consequently, free cash flow decreased to € 1,433 million (2016:
€ 1,693 million). The composition as well as the development of the
relevant items are presented in the following table:
The equity of the Merck Group rose slightly in 2017 to € 14,066 million
(December 31, 2016: € 14,050 million). The very strong level of profit
after tax amounting to € 2,610 million (2016: € 1,633 million) was
offset by currency translation differences from the translation of
assets held in foreign currencies into euro, dividend payments, and
the profit transfer to E. Merck KG (see "Consolidated Statement of
Comprehensive Income" and "Consolidated Statement of Changes
in Net Equity" in the Consolidated Financial Statements). The lower
level of total assets and the slight increase in equity led to an
improvement in the equity ratio by nearly 3 percentage points to
39.5% (December 31, 2016: 36.7%).
Merck Group
Report on Economic Position
Combined Management Report
118
11,513
44
156
€ million
10,144
-132
> 100.0%
Q3
Q2
Q1
760
2017
€ million/change in %
Business free cash flow¹ and change by quarter²
MERCK GROUP
The distribution of business free cash flow across the individual
quarters and the percentage changes in comparison with 2016 were
as follows:
Business free cash flow of the Merck Group was € 3,318 million in
2017, which met the previous year's figure. The slight decline in
EBITDA pre as well as higher capital spending were primarily offset
by the development of receivables. The composition of this financial
indicator is presented in the combined management report under
"Internal Management System".
-15.4%
-260
-260
> 100.0%
21
1,693
1,433
44
28.4%
-203
-716
-919
> 100.0%
2
2
4
23
19
-366
-1,693
Combined Management Report
Q2
Q1
EBITDA pre¹ and change by quarter²
MERCK GROUP
-1,433
€ million/change in %
The development of EBITDA pre in the individual quarters in com-
parison with 2016 as well as the respective growth rates are pre-
sented in the following overview:
115
Merck Group
Report on Economic Position
47.0%
-9.2%
12.1%
10.1%
708
EBITDA²
(of which: adjustments)
reversals of impairment losses
Depreciation/amortization/impairment losses/
831
-146
Operating result (EBIT)²
1,593
20.7%
1,447
-123
220
6.8%
468
9.8%
42
3
39
23.2%
-14.8%
35.4%
2,155
> 100.0%
54.3%
13
10
> 100.0%
28
- 330
-316
18
28
12
40
Other adjustments
Acquisition-related adjustments
Gains (-)/losses (+) on the divestment of businesses
Integration costs/IT costs
Restructuring costs
-11.1%
-269
-4.1%
(-122) (>100.0%)
(71)
2,425
30.8%
(-51)
27.9%
557
31.0%
Report on Economic Position
Healthcare
127
Research and development costs amounted to € 1,632 million (2016:
€ 1.496 million); the resulting research spending ratio increased to
23.3% (2016: 21.8%). This development was mainly due to higher
investments in the Biopharma pipeline. Furthermore, 2016 was posi-
tively impacted by the release of provisions amounting to € 57 million.
These were originally set up in connection with the termination of
clinical development projects in previous years.
The development of other operating expenses and income was
due to multiple effects in both 2017 and 2016. For instance, license
income, which is reported under other operating income, included
the milestone payments for the approval of BavencioⓇ. In 2017, the
medicine was approved in the indication Merkel cell carcinoma in the
United States, the European Union, Switzerland, Iceland, Liechten-
stein, Norway, Japan, and Canada, as well as for the treatment of
urothelial carcinoma in the United States. This item also still included
higher royalty income from Avonex® and PlegridyⓇ (both Biogen Inc.)
due to the additional patent granted in the United States in June 2016
as well as income from an agreement on a one-time payment for
future license payments at the beginning of 2017. The gain on the
divestment of the Biosimilars business in August 2017 amounting to
€ 319 million also had a significant effect on other operating expenses
and income. The previous year was also positively influenced by the
gain on returning the rights to KuvanⓇ to BioMarin Pharmaceutical Inc.,
USA (€ 330 million). Both effects were eliminated in the calculation of
EBITDA pre. The following impairment loss reversals and impairment
losses were also included in other operating expenses and income:
The reversal of the impairment loss on the intangible asset for cladri-
bine tablets in 2017 owing to the regulatory approval of MavencladⓇ
amounted to € 17 million. In addition, an impairment loss recorded
in 2011 on the biopharmaceutical production facility in Corsier-sur-
Vevey, Switzerland, was reversed in the amount of € 69 million. More-
over, 2017 included an impairment loss of € 33 million on the co-
commercialization right for XalkoriⓇ. In 2016, this co-commercialization
right was already impaired by € 71 million.
After eliminating depreciation, amortization, impairments and
reversals of impairment losses as well as adjustments, EBITDA pre
decreased to € 1,949 million (2016: € 2,128 million). This led to a
margin relative to sales of 27.9% (2016: 31.0%).
%
The development of EBITDA pre in the individual quarters in
comparison with 2016 is presented in the following overview:
HEALTHCARE
EBITDA pre¹ and change by quarter²
€ million/change in %
Q1
Q2
Q3
Q4
2017
633
480
453
384
2016
508
Combined Management Report
2,128
The increase in marketing and selling expenses related mainly to the
market launches of MavencladⓇ and BavencioⓇ. This item again
included license expenses payable to Bristol-Myers Squibb as of the
beginning of 2017 owing to the takeover of the commercialization
rights to GlucophageⓇ in China.
1,949
-179
-8.4%
EBITDA pre²
1 Excluding amortization of internally generated or separately acquired software.
2 Not defined by International Financial Reporting Standards (IFRS).
565
688
EBITDA pre¹
€ million
Business free cash flow¹
HEALTHCARE
In 2017, business free cash flow amounted to € 1,448 (2016:
€ 1,648 million). The lower level in comparison with the previous
year was mainly due to the decline in EBITDA pre. In addition, higher
capital spending contributed to the decline in this key figure, whereas
the development of receivables had a positive impact.
DEVELOPMENT OF BUSINESS FREE CASH FLOW
Healthcare
Report on Economic Position
Combined Management Report
128
2 Quarterly breakdown unaudited.
¹ Not defined by International Financial Reporting Standards (IFRS).
-22.9%
-19.9%
-13.8%
497
24.5%
Gross profit of the Healthcare business sector decreased slightly in
2017 and amounted to € 5,412 million (2016: € 5,478 million). At
77.3%, the resulting gross margin was below the previous year's
figure (2016: 79.9%).
Other operating expenses and income
-7.6%
4%
(-)
67
61
12.6%
447
1%
263
-4.2%
52%
-3.3%
31%
4%
87
23.6%
10%
56
0.6%
7%
¹ Not defined by International Financial Reporting Standards (IFRS).
With Gonal-fⓇ, the leading recombinant hormone used in the treat-
ment of infertility, the Healthcare business sector generated sales of
€ 704 million and was thus significantly below the year-earlier level
(2016: € 753 million). The organic sales decline of -4.6% resulted
primarily from performance in North America and Europe. The strong
year-earlier sales in North America were due to a favorable competitive
situation. Positive, and in some cases double-digit, organic growth
in the regions Asia-Pacific as well as Middle East and Africa offset this
development. By contrast, exchange rates had a negative impact of
-1.8%.
In the Endocrinology franchise, net sales of € 383 million were
below the year-earlier level (2016: € 404 million) due to a slight
organic sales decline of -2.3% and a negative exchange rate effect of
-2.1%. Sales of the growth hormone Saizen®, the top-selling product
in the franchise, amounted to € 259 million (2016: € 270 million).
This was attributable to both an organic sales decline of -2.1% and
a negative exchange rate effect of -2.0%.
The General Medicine franchise (including CardioMetabolic Care),
which commercializes products to treat cardiovascular diseases, thyroid
disorders and diabetes, among other things, generated organic growth
of 16.4%. Including currency headwinds of -1.3% and a negative
portfolio effect of -3.2%, net sales amounted to € 1,925 million (2016:
€ 1,720 million). Double-digit organic growth was due in particular to
the performance of GlucophageⓇ, which is used in the treatment of
diabetes. Sales of GlucophageⓇ grew organically by 74.7% and
included the effect of the takeover of the GlucophageⓇ marketing rights
in China from Bristol-Myers Squibb. Including an exchange rate impact
of -2.0% and a portfolio effect of -1.8%, net sales of this diabetes
treatment increased to € 662 million (2016: € 388 million). Euthyrox®,
a medicine to treat thyroid disorders, delivered double-digit organic
growth of 12.4% in 2017 and generated sales of € 370 million (2016:
€ 332 million). Organic growth in all regions, above all the markets in
Asia-Pacific and Latin America, contributed to this development.
Concor®, a beta-blocker, grew organically by 5.6%. Including currency
headwinds (-0.9%) and a portfolio effect (-1.5%), sales amounted to
€ 444 million (2016: € 431 million). The portfolio effect in General
Medicine (including CardioMetabolic Care) resulted mainly from the
divestment of our business in Pakistan at the end of 2016.
126
Combined Management Report
Report on Economic Position
Healthcare
In 2017, the Consumer Health business, which markets over-the-
counter pharmaceuticals, generated organic growth in all main sales
regions totaling 7.6%. Including currency headwinds of -0.5% and
a portfolio effect of -1.0%, net sales of the business amounted to
€ 911 million (2016: € 860 million). The global core strategic brands
contributed significantly to this development, particularly NeurobionⓇ
and NasivinⓇ, as well as the regional brand VigantolⓇ, which is primarily
marketed in Europe.
The results of operations developed as follows:
HEALTHCARE
Middle East and
Africa (MEA)
Results of operations
Latin America
1,012
-3.2%
63%
Investments in property, plant and equipment,
Combined Management Report
Report on Economic Position
Healthcare
125
Sales of the drug RebifⓇ, which is used to treat relapsing forms of
multiple sclerosis, saw an organic sales decline of -5.5% in 2017.
Including negative exchange rate effects of -2.0%, sales of
€ 1,611 million were recorded (2016: € 1,741 million). The organic
decline was primarily attributable to performance in the main sales
markets, namely North America and Europe. Generating 63% of
sales (2016: 61%), North America remained the most important
sales market for Rebif® despite an organic decline in sales of -3.2%.
Price increases in the United States at the beginning of 2017 and in
August could not offset declining sales volumes. Including negative
foreign exchange effects of -2.3%, sales in the region amounted to
€ 1,012 million (2016: € 1,071 million). In Europe, both price reduc-
tions and continued competitive pressure led to an organic sales
decline of -12.1%. This resulted in sales of € 456 million (2016:
€ 524 million), reflecting a decline in the region's contribution to total
RebifⓇ sales to 28% (2016: 30%). The other regions, namely Latin
America, Middle East and Africa, and Asia-Pacific, generated sales of
€ 142 million (2016: € 145 million). They once again generated a 9%
share of Rebif® sales (2016: 9%).
Including a slight organic sales decline of -1.3% and negative exchange
rate effects of -1.7%, sales of the oncology medicine ErbituxⓇ
amounted to € 853 million (2016: € 880 million). In Europe, the
top-selling region for ErbituxⓇ, sales decreased organically by -4.2%.
This development was mainly due to compulsory price reductions in
several countries as well as to the difficult competitive situation.
Sales in Europe amounted to € 447 million (2016: € 470 million).
Consequently, the region's share of total ErbituxⓇ sales declined to
52% (2016: 54%). The Asia-Pacific region saw an organic sales
decline of -3.3% and contributed 31% to sales (2016: 32%).
Together with negative exchange rate effects of -2.5%, sales
amounted to € 263 million (2016: € 280 million). Double-digit
organic growth of 23.6% in Latin America led to sales of € 87 million
(2016: € 73 million), lessening the impact of the sales decline in the
other regions despite negative foreign exchange effects of -5.1%.
At € 56 million, sales in the Middle East and Africa region were at
the previous year's level (2016: € 56 million). Organic growth of
0.6% was canceled out by exchange rate effects of -1.1%.
HEALTHCARE
Sales and organic growth¹ of RebifⓇ and ErbituxⓇ by region - 2017
€ million
Total
1,611
Rebif®
Organic growth¹ in %
-5.5%
Europe
456
-12.1%
North America
% of sales
€ million
Erbitux®
Organic growth¹ in %
% of sales
100%
853
-1.3%
100%
28%
Asia-Pacific
(APAC)
14
-1.9%
(-)
Change
2017
(-558)
-2,587
(-565)
-37.7%
-135
5.2%
(7)
(-1.3%)
Administration expenses
-299
-4.3%
-270
Research and development costs
-1,632
-23.3%
-1,496
- 3.9%
-21.8%
-29
10.7%
-136
9.1%
(of which: amortization of intangible assets)¹
(-1)
(-1)
(of which: amortization of intangible assets)¹
€ million
-38.9%
Marketing and selling expenses
Net sales
6,999
in %
100.0%
2016
Cost of sales
-1,587
-22.7%
6,855
-1,377
in %
100.0%
-20.1%
€ million
144
-211
in %
2.1%
15.3%
(of which: amortization of intangible assets)¹
(-2)
Gross profit
5,412
77.3%
(-1)
5,478
(-1) (>100.0%)
79.9%
-67
-1.2%
-2,722
Change
342
2016
822
14.5%
-75
(of which: adjustments)
EBITDA²
(3)
12.7%
(27)
-9.2%
(-87.4%)
1,580
26.9%
1,378
24.4%
202
(-24)
746
reversals of impairment losses
Depreciation/amortization/impairment losses/
(-)
Other operating expenses and income
-224
-3.8%
-209
-3.7%
-15
7.3%
Operating result (EBIT)²
834
14.2%
556
9.8%
277
49.8%
14.6%
(-1)
Restructuring costs
Gains (-)/losses (+) on the divestment of businesses
1,652
29.2%
22
134
8.1%
1 Excluding amortization of internally generated or separately acquired software.
132
30.4%
Combined Management Report
Life Science
In 2017, gross profit increased by 10.6% to € 3,294 million (2016:
€ 2,978 million). In 2016, cost of sales contained higher expenses from
the step-up of inventories as a result of the first-time consolidation of
Sigma-Aldrich. In addition, the strong increase in gross profit was
attributable to organic sales growth as well as the positive effect
from the acquisition of BioControl Systems, which more than offset
considerable negative foreign exchange effects. Marketing and selling
expenses increased by 1.6% to € 1,734 million (2016: € 1,706 million)
while R&D expenses decreased by -7.0% to € 241 million (2016:
€ 260 million). Other operating expenses and income (net) increased
by 7.3% to € - 224 million (2016: € -209 million), among other things
owing to a provision set up for litigation risks in connection with the
antitrust review proceedings for the acquisition of Sigma-Aldrich (see
Note (27) "Other provisions" in the Notes to the Consolidated Financial
Statements). Within the scope of the calculation of EBITDA pre, these
expenses were eliminated accordingly. In comparison with 2016,
the operating result (EBIT) of Life Science rose by € 277 million to
€ 834 million (2016: € 556 million). After depreciation and amortization
and adjustments, EBITDA pre rose by 8.1% to € 1,786 million (2016:
€ 1,652 million). This reflects the strong organic sales performance
of the combined Life Science business, which continues to focus on
actively managing costs and realizing the planned synergies from
the acquisition of Sigma-Aldrich.
The development of EBITDA pre in the individual quarters in
comparison with 2016 is presented in the following overview:
LIFE SCIENCE
EBITDA pre¹ and change by quarter²
Report on Economic Position
1,786
22
-58.3%
Acquisition-related adjustments
Other adjustments
EBITDA pre²
2 Not defined by International Financial Reporting Standards (IFRS).
5
114
1
122
4
> 100.0%
-8
-6.6%
1
63
150
-88
Integration costs/IT costs
€ million/change in %
(-1)
-7.0%
2017
5,882
in %
100.0%
Cost of sales
-2,588
-44.0%
Net sales
2016
5,658
-2,679
€ million
in %
224
4.0%
-47.4%
92
in %
100.0%
€ million
Change
5.1%
effects
Acquisitions/
divestments
Total change
-2.0%
-0.1%
6.0%
2,066
3.0%
-1.6%
-0.3%
1.0%
1,575
4.7%
-1.6%
1.9%
-3.4%
(of which: amortization of intangible assets)¹
(of which: amortization of intangible assets)¹
(-63)
(-1.9%)
Administration expenses
-261
-4.4%
-248
-4.4%
(8)
-13
Research and development costs
-241
-4.1%
-260
-4.6%
18
5.4%
1.6%
-28
- 30.1%
(3)
(-4.4%)
Gross profit
3,294
56.0%
2,978
52.6%
315
10.6%
Marketing and selling expenses
-1,734
2017
(of which: amortization of intangible assets)¹
(-445)
-1,706
(-453)
(-60)
Organic growth¹
8.0%
2017
Q2
Combined Management Report
Report on Economic Position
Performance Materials
Performance Materials
PERFORMANCE MATERIALS
Key figures
134
€ million
Operating result (EBIT)¹
Margin (% of net sales)¹
EBITDA¹
Margin (% of net sales)¹
EBITDA pre¹
Margin (% of net sales)¹
Business free cash flow¹
Net sales
282
Q4
34.7%
281
423
2016
269
277
390
%
4.6%
52.8%
1 Not defined by International Financial Reporting Standards (IFRS).
2 Quarterly breakdown unaudited.
Q3
416
209
6.8%
1 Not defined by International Financial Reporting Standards (IFRS).
2017
Change
2016
1,106
-127
-11.4%
40.1%
906
44.1%
1,011
980
-105
DEVELOPMENT OF NET SALES AND
RESULTS OF OPERATIONS
In 2017, net sales of the Performance Materials business sector
decreased by -2.6% to € 2,446 million (2016: € 2,511 million). This
was mainly due to organic declines in sales (-1.7%) as the Display
Materials business did not reach the previous year's level. The
stronger euro compared with 2016 also impacted the development
of net sales (-0.9%).
The Display Materials business unit, consisting of the Liquid Crystals
business and complementary materials, represented more than 50%
of the net sales of Performance Materials. This business unit saw an
organic decrease in sales, but continued to defend its market leadership
position. The decline in sales stemmed from the performance of estab-
lished liquid crystal technologies, caused by a normalization of the
unusually high market shares as well as the price declines customary
in this industry. An exception here was the energy-saving UB-FFS
technology, which achieved high double-digit growth.
The Integrated Circuit Materials (IC-Materials) business unit recorded
very strong organic sales growth, to which all major businesses
contributed. Particularly high growth rates were achieved in the busi-
nesses with dielectric materials and deposition materials for chip
production.
The Pigments & Functional Materials business unit generated a
moderate increase in sales. The main driver was demand for materials
for decorative applications, such as XirallicⓇ pigments, which are used
particularly in automotive coatings.
In the Advanced Technologies business unit, higher demand for
OLED materials led to significant sales growth.
-10.4%
42.9%
38.7%
-12.1%
€ million
in %
2,446
2,511
-65
-2.6%
689
823
-134
-16.3%
28.2%
32.8%
947
1,077
-130
2017
Q1
445
Q2
€ million/change in %
LIFE SCIENCE
Business free cash flow¹
€ million
EBITDA pre¹
Combined Management Report
Report on Economic Position
9.9%
Life Science
Change
2017
2016
€ million
in %
1,786
133
419
461
Q4
454
2016
393
417
%
13.3%
9.0%
1 Not defined by International Financial Reporting Standards (IFRS).
2 Quarterly breakdown unaudited.
DEVELOPMENT OF BUSINESS FREE CASH FLOW
In 2017, the business free cash flow of the Life Science business
sector rose by 22.5% or € 258 million to € 1,402 million (2016:
€ 1,144 million). The increase was primarily driven by the positive
development of EBITDA pre, inventories, and receivables. This was
partly offset by higher capital spending.
Q3
426
424
0.5%
1,652
Q1
134
Investments in property, plant and equipment, software as well as
Elimination first-time consolidation of BioControl Systems²
12
-12
-100.0%
Business free cash flow¹
1,402
-100.0%
1,144
22.5%
¹ Not defined by International Financial Reporting Standards (IFRS).
2 Previous year's figures have been adjusted, see Note (4) "Acquisitions and divestments" in the Notes to the Consolidated Financial Statements.
The development of business free cash flow items in the individual
quarters in comparison with 2016 is presented in the following
overview:
LIFE SCIENCE
Business free cash flow¹ and change by quarter²
258
146
-146
Elimination first-time consolidation of Sigma-Aldrich
advance payments for intangible assets
-371
-313
-59
18.7%
Changes in inventories²
28
3
25
> 100.0%
Changes in trade accounts receivable as well as receivables from royalties and licenses
-41
-64
23
-36.4%
8.1%
2,241
-29.5%
1,144
LIFE SCIENCE
Net sales and organic growth¹ by quarter²
€ million/organic growth in %
Q1
Q2
Q3
2017
The development of sales in the individual quarters in comparison
with 2016 as well as the respective organic growth rates are presented
in the following graph:
1,481
1,408
Q4
1,496
2016
1,397
1,430
1,391
1,441
1,495
%
growth of 8.0% attributable to high demand across the portfolio and
was thus again the main driver of growth in Life Science in 2017.
Applied Solutions continued to perform well, posting organic growth
of 4.7%. The Research Solutions business unit reported an organic
sales increase of 3.0%.
AND RESULTS OF OPERATIONS
1,580
1,378
202
14.6%
26.9%
24.4%
1,786
In 2017, Life Science posted organic sales growth of 5.3%, partially
offset by negative foreign exchange effects of -1.7%. The acquisition
of BioControl Systems in December 2016 contributed 0.4% to net
sales. Including these effects, net sales rose overall by 4.0% to
€ 5,882 million (2016: € 5,658 million). All three business units
contributed favorably to the organic sales growth of the Life Science
business sector in 2017. Process Solutions generated organic sales
1,652
8.1%
30.4%
29.2%
1,402
258
22.5%
DEVELOPMENT OF NET SALES
134
3.3%
4.2%
4.8%
From a geographic perspective, all regions contributed positively to
the organic sales growth of Life Science.
North America remained the largest region for the Life Science
business sector, accounting for 35% (2016: 36%) of net sales. It
posted organic sales growth of 4.5%, driven by a 6.7% increase in
Process Solutions. Research Solutions and Applied Solutions also
demonstrated positive growth dynamics with 2.7% and 3.4% growth,
respectively. In 2017, Research Solutions benefited from improved
customer demand and initial sales synergies from the Sigma-Aldrich
acquisition as well as from a weak comparative basis in 2016. Applied
Solutions continued its positive development, particularly owing to
good demand in Analytics and Biomonitoring. Overall, net sales in
North America rose to € 2,093 million (2016: € 2,031 million).
Europe, Life Science's second largest geographic market, generated
organic net sales growth of 3.9% in 2017 with positive performance
across most of the portfolio. Having already generated strong growth
in 2016, Process Solutions and Research Solutions continued to perform
well in 2017, generating good organic growth rates of 4.3% and
3.8%, respectively. Overall, sales increased to € 2,022 million (2016:
€ 1,960 million) equating to a contribution of 34% (2016: 35%) of
the business sector's net sales in 2017.
Within Asia-Pacific, sales grew organically by 8.2% with all busi-
nesses contributing favorably. The largest contributor was Process
Solutions with 17.6% organic sales growth driven by Upstream &
Systems as well as Filtration & Chromatography. Net sales in Asia-
Pacific rose to € 1,395 million (2016: € 1,324 million) representing
an overall contribution of 24% (2016: 23%) to the business sector.
In Latin America, Life Science reported organic growth of 6.3%,
primarily driven by the double-digit growth in Applied Solutions,
especially Lab Water and Biomonitoring. Net sales in the region
increased to € 273 million (2016: € 256 million) accounting for 5%
of the business sector's net sales (2016: 4%), a slight increase over
2016.
The Middle East and Africa region posted strong organic sales
growth of 8.7%. Net sales in the region grew to € 98 million (2016:
€ 87 million) representing 2% (2016: 2%) of Life Science net sales
in 2017.
LIFE SCIENCE
Net sales components by region - 2017
North America
2,093
€ million/change in %
North America
Asia-Pacific (APAC)
Latin America
Middle East and Africa (MEA)
1 Not defined by International Financial Reporting Standards (IFRS).
Exchange rate
Net sales
Europe
35%
34%
Europe
2,022
98
1 Not defined by International Financial Reporting Standards (IFRS).
2 Quarterly breakdown unaudited.
8.9%
130
Combined Management Report
Report on Economic Position
Life Science
LIFE SCIENCE
Net sales by region - 2017
€ million/% of net sales of the business sector
5%
Latin America
273
24%
Asia-Pacific (APAC)
1,395
2%
Middle East and Africa (MEA)
9.8%
2,022
14.2%
277
-45.6%
1,448
1,648
-200
-12.1%
1 Not defined by International Financial Reporting Standards (IFRS).
The development of business free cash flow in the individual quarters
43
in comparison with 2016 is presented in the following overview:
Business free cash flow¹ and change by quarter²
€ million/change in %
Q1
Q2
Q3
2017
356
HEALTHCARE
467
-94
Changes in trade accounts receivable as well as receivables from royalties and licenses
Business free cash flow¹
€ million
in %
1,949
2,128
-179
-8.4%
software as well as advance payments for intangible assets
-51
-411
-63
18.0%
Changes in inventories
-39
-38
-2
5.0%
-348
366
Q4
259
2016
EBITDA¹
Margin (% of net sales) 1
EBITDA pre¹
Margin (% of net sales)¹
Business free cash flow¹
1 Not defined by International Financial Reporting Standards (IFRS).
Change
Margin (% of net sales)¹
2017
5,882
€ million
in %
5,658
224
4.0%
834
556
2016
Operating result (EBIT)¹
Net sales
€ million
423
543
341
%
4.4%
10.3%
¹ Not defined by International Financial Reporting Standards (IFRS).
2 Quarterly breakdown unaudited.
-32.6%
-24.0%
Life Science
LIFE SCIENCE
Key figures
Combined Management Report
Report on Economic Position
Life Science
129
49.8%
Organic growth¹
3.9%
Life Science
Acquisitions/
divestments
Net sales for this business unit increased by a total of 6.0% to
€ 2,241 million (2016¹: € 2,115 million). The share of sales generated
by Process Solutions represented 38% (2016: 37%) of Life Science
net sales. All Process Solutions businesses contributed to this strong
performance.
The Process Solutions business unit, which markets products and
services for the entire pharmaceutical production value chain, gener-
ated organic sales growth of 8.0% in 2017. Following restrained
organic sales growth in the first half of the year, demand from several
major accounts increased slightly towards year-end. By contrast,
demand from regional accounts developed very well throughout 2017.
4.0%
0.4%
0.4%
3.2%
-1.7%
5.3%
1 Previous year's figures have been adjusted due to an internal realignment.
5,882
98
6.8%
1.2%
-0.7%
6.3%
273
5.4%
8.7%
Combined Management Report
Report on Economic Position
Life Science
effects
Net sales
Exchange rate
Results of operations
LIFE SCIENCE
The results of operations developed as follows:
1 Not defined by International Financial Reporting Standards (IFRS).
Applied Solutions
Research Solutions
Process Solutions
€ million/change in %
Net sales components by business unit - 2017
LIFE SCIENCE
The Applied Solutions business unit generated organic sales growth
of 4.7% with its broad range of products for researchers as well as
scientific and industrial laboratories. Including exchange rate and
portfolio effects, net sales rose to € 1,575 million (2016¹: € 1,498 mil-
lion) representing 27% (2016: 27%) of the business sector's net
sales. The sales performance of Applied Solutions was driven by all
business fields except Biosystems & Regulated Materials.
1 Previous year's figures have been adjusted due to an internal realignment.
The Research Solutions business unit, which provides products and
services to support life science research for pharmaceutical, biotech-
nology and academic research laboratories, posted organic sales
growth of 3.0% in 2017. In addition to initial sales synergies from
the acquisition of Sigma-Aldrich, Lab & Specialty Chemicals was the
key driver of net sales growth for Research Solutions, which increased
to € 2,066 million (2016¹: € 2,045 million), representing 35% (2016:
36%) of the business sector's net sales.
131
-0.5%
-2.3%
12.3%
1,395
3.0%
1.0%
-2.5%
4.5%
2,093
3.2%
0.3%
-1.0%
Total change
8.2%
40.1%
1,106
44.1%
-127
-11.4%
Performance Materials
-242
Report on Economic Position
980
137
Combined Management Report
7
1
-100.0%
-3
3
In 2017, gross profit was € 65 million below the previous year's level,
resulting in a gross margin of 53.2% (2016: 54.4%). The operating
result (EBIT) decreased by € 134 million to € 689 million in 2017
(2016: € 823 million). Apart from the sales-related decline in gross
profit, the main reasons were higher marketing and selling expenses
as well as additional research costs in order to press ahead further
in growth markets, for example the development of liquid crystal
window modules and OLED materials.
(-13)
-21.2%
-5
> 100.0%
5
26
1
1
20
7
EBITDA pre amounted to € 980 million, which was € 127 million lower
than in the previous year (2016: € 1,106 million). The EBITDA pre
margin declined to 40.1% (2016: 44.1%).
(of which: amortization of intangible assets)¹
-233
PERFORMANCE MATERIALS
EBITDA pre¹ and change by quarter²
€ million/change in %
Q1
2017
5
263
2016
273
% -
-3.7%
Q2
Q3
239
249
273
282
The development of EBITDA pre in the individual quarters in
comparison with 2016 is presented in the following overview:
-12.5%
-11.7%
1 Not defined by International Financial Reporting Standards (IFRS).
2 Quarterly breakdown unaudited.
DEVELOPMENT OF BUSINESS FREE CASH FLOW
At € 906 million, the business free cash flow of the Performance
Materials business sector fell short of the high year-earlier figure
(2016: € 1,011 million). This resulted from the lower EBITDA pre,
which could not be offset by the release of capital from the decrease
in receivables.
(-14)
4.1%
-9
-9.3%
-9.9%
2 Not defined by International Financial Reporting Standards (IFRS).
Depreciation/amortization/impairment losses/
EBITDA pre²
-36
-1.5%
-37
-3.0%
-73
Other operating expenses and income
(19.9%)
(-1)
(-2)
(-3)
(of which: amortization of intangible assets)¹
5.7%
-12
-8.5%
-213
-9.2%
-225
Research and development costs
19.0%
-12
-2.4%
-61
Marketing and selling expenses
-2.9%
-72
Administration expenses
(5.8%)
Operating result (EBIT)²
1 Excluding amortization of internally generated or separately acquired software.
689
28.2%
Other adjustments
Acquisition-related adjustments
Gains (-)/losses (+) on the divestment of businesses
Integration costs/IT costs
Restructuring costs
-12.1%
-130
42.9%
1,077
38.7%
947
1.5%
(56.8%)
(9)
(16)
(26)
EBITDA²
(of which: adjustments)
4
10.1%
254
10.5%
258
reversals of impairment losses
97.5%
-16.3%
-134
32.8%
823
(-1)
-4.7%
-0.9%
54.4%
-1.5%
0.4%
223
5.3%
-0.2%
Total change
Acquisitions/
divestments
effects
Organic growth¹
5.6%
Net sales
231
Exchange rate
Results of operations
PERFORMANCE MATERIALS
The results of operations developed as follows:
1 Not defined by International Financial Reporting Standards (IFRS).
Performance Materials
Middle East and Africa (MEA)
Latin America
Asia-Pacific (APAC)
North America
Europe
€ million/change in %
Net sales components by region - 2017
PERFORMANCE MATERIALS
Performance Materials
Report on Economic Position
Combined Management Report
-1.1%
136
1,945
-1,145
-3.4%
37
-12.1%
-1.0%
-13.0%
10
-8.5%
0.6%
-7.9%
2,446
-1.7%
-0.9%
-2.6%
Change
€ million
2017
in %
Net sales
2,446
100.0%
2016
2,511
in %
100.0%
€ million
in %
-65
-2.6%
Cost of sales
-46.8%
-65
Since they account for a low proportion of sales, the two regions
Latin America and Middle East and Africa played a subordinate role.
They recorded an organic decline in sales since the high level of sales
generated with insect repellents in 2016 normalized.
In Europe, Performance Materials generated sales of € 231 million
(2016: € 220 million). The Pigments & Functional Materials business
unit was the main driver of the organic sales increase of 5.6%.
2017
645
612
611
579
2016
622
621
645
623
%
-0.9%
-3.2%
-1.5%
-1.2%
1 Not defined by International Financial Reporting Standards (IFRS).
-2.4%
PERFORMANCE MATERIALS
-1,145
-45.6%
(of which: amortization of intangible assets)¹
(-118)
(-118)
Gross profit
1,301
53.2%
1,366
Q4
In North America, net sales declined slightly to € 223 million
(2016: € 226 million) owing to foreign exchange effects. Organically,
sales reached the previous year's level.
Q3
Q1
Accounting for 80% (2016: 80%), the Asia-Pacific region again gen-
erated the vast majority of the business sector's net sales. This is
due to the concentration of customers for display and integrated
circuit materials in Asia-Pacific. In this region, sales declined to
€ 1,945 million (2016: € 2,013 million). Organically, sales decreased
by -2.4% owing to the performance of the Display Materials business
unit. The good development of the IC Materials and Pigments busi-
nesses could not offset this.
223
North America
9%
231
9%
Europe
10
Middle East and Africa (MEA)
0%
The development of business free cash flow in the individual quarters
Asia-Pacific (APAC)
1,945
80%
37
Latin America
2%
€ million/% of net sales of the business sector
Net sales by region - 2017
PERFORMANCE MATERIALS
2 Quarterly breakdown unaudited.
Combined Management Report
Report on Economic Position
Performance Materials
135
The development of net sales in the individual quarters as well as
the respective organic growth rates in 2017 are presented in the
following overview:
PERFORMANCE MATERIALS
Net sales and organic growth¹ by quarter²
€ million/organic growth in %
Q2
Business free cash flow¹
in comparison with 2016 is presented in the following overview:
228
Report on Risks and Opportunities
Combined Management Report
140
The development of business free cash flow was positively
impacted by the improvement in EBITDA pre. However, higher capital
spending led to cash outflows, which negatively affected this key
performance indicator. Overall, negative business free cash flow
improved to € -437 million (2016: € -485 million).
currency losses. The operating result (EBIT) attributable to Corporate
and Other amounted to € -445 million (2016: € -492 million) and
EBITDA totaled € -400 million (2016: € -465 million). After elimi-
nating adjustments, EBITDA pre amounted to € - 301 million (2016:
€ 396 million).
In 2017, administration expenses reported under Corporate and
Other increased to € 298 million (2016: € 276 million). Research and
development costs allocated to Corporate and Other amounted to
€ 42 million (2016: € 7 million) and included expenses for the Inno-
vation Center (management of ideation), costs of the New Business
Builder unit (entering innovation fields and conducting innovation
projects), as well as costs of the Global Health Institute, which is
responsible for developing health solutions in developing countries.
These projects are initiatives with benefits for Merck as a whole.
Other operating expenses (net) improved to € -101 million (2016:
€ -207 million). Among other things, this was attributable to lower
-9.8%
47
-485
-437
-24.2%
96
-396
- 301
-14.0%
65
-465
-400
-9.5%
Report on Risks and Opportunities
Risks and opportunities are inherent to entrepreneurial activity. We
have put systems and processes in place to identify risks at an early
stage and to counteract them by taking appropriate action. Within
the company, opportunity management is an integral component of
internal decision-making processes such as short- and medium-term
planning and intra-year business plans.
Risk and opportunity management
Merck is part of a complex, global business world and is therefore
exposed to a multitude of external and internal influences. Every
business decision is therefore based on the associated risks and
opportunities.
For us, innovation is a major element of the Group strategy. Research
and development projects can experience delays, expected budgets
can be exceeded, or targets can remain unmet. Research and develop-
ment activities are of special importance to the Healthcare business
sector. In the course of portfolio management, we regularly evaluate
and, if necessary, refocus research areas and all R&D pipeline projects.
PROBABILITY OF OCCURRENCE
The underlying scales for measuring these factors are shown below:
The significance of risks is calculated on the basis of their potential
negative impact on the forecast financial targets in conjunction with
the probability of occurrence of the respective risk. In line with these
two factors, risks are classified as "high", "medium" or "low".
RISKS
Risk and opportunity assessment
141
Report on Risks and Opportunities
Combined Management Report
47
If the occurrence of the identified opportunities is rated as likely,
they are incorporated into the business plans and the short-term
forecasts. Trends going beyond this or events that could lead to a
positive development in the net assets, financial position and results
of operations are presented in the following report as opportunities.
These could have a positive effect on our medium-term prospects.
OPPORTUNITY MANAGEMENT PROCESS
The residual risk after the implementation of these measures is
presented in the internal risk report as net risk.
Likewise, risk-mitigating measures are reported and assessed. The
effectiveness of these measures and the planned implementation
time frame are monitored by Group Risk Management.
The objective of our risk management activities is to recognize, assess
and manage risks early on and to implement appropriate measures
to minimize them. The responsibilities, objectives and processes of
risk management are described in our internal risk management
guidelines. The business heads, managing directors of Merck subsidi-
aries, and the heads of Group functions are specified as employees
with responsibility for risks. The group of consolidated companies for
risk reporting purposes is the same as the group of consolidated
companies for the consolidated financial statements. Every six months,
the risk owners assess their risk status and report their risk portfolio
to Risk Management. We use special risk management software in the
context of these activities.
RISK MANAGEMENT PROCESS
Within the scope of audits, Group Internal Auditing regularly
reviews the performance of risk management processes within the
units and, at the same time, the communication of relevant risks from
the operating businesses to Group Risk Management.
For reporting risks with a potential negative impact on our EBIT,
a threshold is set at a value of € 5 million in the standard process
and at a value of € 25 million in the ad hoc process. Risks below these
thresholds are steered independently within the business sectors.
The relevant timeframe for internal risk reporting is five years. The
effects of risks described in this report on risks and opportunities are
presented as annual values. The assessment of the risks presented
relates to December 31, 2017. There were no relevant changes after
the balance sheet date that would have necessitated an amended
presentation of the risk situation of the Group.
Group Controlling & Risk Management forms the organizational frame-
work for risk management and reports directly to the Group Chief
Financial Officer. Group Risk Management uses the information
reported to determine the current risk portfolio for the Merck Group,
presenting this in a report to the Executive Board, the Supervisory
Board and the Finance Committee with detailed explanations twice
per year. This also encompasses a probability-weighted aggregation
of risks at Group level using a Monte Carlo simulation. Furthermore,
significant changes in the assessment of the risks already known and
new significant risks can be reported at any time and are communicated
to the corporate bodies on an ad hoc basis.
In our internal risk reporting, risks are defined as potential future
events or developments that could lead to a negative deviation from
our (financial) targets. In parallel, opportunities are defined as potential
events or developments that imply a positive deviation from our
planned (financial) targets. Identified future events and expected
developments are taken into account in internal planning provided
that it can be assumed that their occurrence is likely in the planning
period. The risks and opportunities presented in the following risk
and opportunities report are those potential future events that could
respectively lead to a negative or positive deviation from the topics
covered by planning.
The risk management system described concentrates on business risks,
and not on opportunities at the same time. The opportunity manage-
ment process is integrated into our internal controlling processes and
carried out in the operating units on the basis of the Group strategy.
The businesses analyze and assess potential market opportunities
as part of strategy and planning processes. In this context, investment
opportunities are examined and prioritized primarily in terms of their
potential value proposition in order to ensure an effective allocation
of resources. We selectively invest in growth markets to leverage the
opportunities of dynamic development and customer proximity at a
local level.
RISKS AND OPPORTUNITIES OF
RESEARCH AND DEVELOPMENT
-492
in %
19.4%
282
271
201
212
222
239
Q4
Q3
Q2
-9.3%
%
257
2016
233
2017
Q1
€ million/change in %
Business free cash flow¹ change by quarter²
¹ Not defined by International Financial Reporting Standards (IFRS).
2 Quarterly breakdown unaudited.
-18.3%
-24.8%
€ million
2016
2017
Change
1 Not defined by International Financial Reporting Standards (IFRS).
Business free cash flow¹
EBITDA pre¹
EBITDA¹
Operating result (EBIT)¹
-445
€ million
CORPORATE AND OTHER
for central, non-allocated IT functions, including expenses related to
the expansion and harmonization of IT systems within the Merck
Group, as well as research and development costs not allocable to a
single business sector.
Corporate and Other comprises Group administration expenses for
Group functions that cannot be directly allocated to the business
sectors, such as Finance, Procurement, Legal, Communications, and
Human Resources. Corporate costs additionally encompass expenses
Corporate and Other
Q4
139
Corporate and Other
Report on Economic Position
Combined Management Report
Key figures
PERFORMANCE MATERIALS
Furthermore, we are expanding our expertise through a PMatX
incubator for next-generation electronics in Israel. With a focus on
start-up companies for state-of-the-art electronics, the topics being
addressed are closely related to Performance Materials.
Opportunities offered by digitalization
and activities to boost innovative strength
net assets, financial position and results of operations
Immaterial negative impact on the
net assets, financial position and results of operations
Critical negative impact on the
net assets, financial position and results of operations
Medium
Medium
Low
Medium
Medium
Medium
Low
Low
High
Medium
Medium
Low
High
High
Medium
Low
Probability of occurrence < 20%
20-50%
51-80%
> 80%
142
Combined Management Report
net assets, financial position and results of operations
Moderate negative impact on the
Substantial negative impact on the
Explanation
Very likely
20-50%
51-80%
> 80%
DEGREE OF IMPACT
Degree of impact
> € 50 million
€ 20-50 million
€ 5-20 million
<€ 5 million
Report on Risks and Opportunities
The combination of the two factors results in the risk matrix below,
which shows the individual risks and their significance to the Group.
> € 50 million
€ 20-50 million
€ 5-20 million
< € 5 million
Impact
Explanation
Unlikely
Possible
Likely
RISK MATRIX
Digital technologies are becoming increasingly important for our
markets and our world of work. Therefore, in 2015, we launched
strategic digital initiatives geared to improving the efficiency of our
internal processes and to evaluating the opportunities of digitalization
with regard to our products and customers. In addition to collabo-
rations with external partners to expand e-health solutions for
patients, e.g. our MSdialog platform, the Accelerator program, which
is being driven by our Innovation Center, is one component of our
innovation strategy. We achieved a record number of applicants, with
the number of applications increasing by 82% over the previous
round. The program comprises support for and access to start-up
companies that offer innovative digital solutions in the fields of
healthcare, life science and performance materials. With the Merck
Venture Investment Fund, we are also strengthening our collaboration
with and access to highly innovative start-ups. The expansion of
these activities could lead to new market opportunities for us. In the
medium term, these could have a positive impact on the development
of our sales.
OPPORTUNITIES
Internal control system for
the Group accounting process
in the manufacturing of displays
We see opportunities in the medium-to long-term possibilities of
significant market growth of OLED applications in high-quality display
applications. We are building on more than ten years of experience
in manufacturing organic light-emitting diode (OLED) materials as
well as a strong portfolio of worldwide patents in order to develop
ultrapure and extremely stable materials that are precisely tailored
to customer requirements. The development in the OLED market is
being driven by the diversification of applications for OLED displays.
OLED technology is an established alternative to LCDs in small-area
displays, for instance smartphones. However, owing to technological
advances, OLED technology is being used in more and more large-
area displays, such as televisions. High-quality lighting applications,
for example for automobiles, offer further growth potential for
OLEDs. In order to make the mass production of large-area OLED
displays more efficient, we have been cooperating since the end of
2012 with Seiko Epson Corporation to enable printing processes for
OLED displays. At the beginning of the second quarter of 2017, the
HyperOLED project started within the scope of the Horizon 2020
initiative, an EU-based program. As part of this project, together with
four other partners, we will be developing high-performance, hyper-
fluorescence OLEDs for display and lighting applications over the next
three years.
To expand our expertise in the field of high-quality display appli-
cations, we entered into a development agreement with CLEARink
Displays. Together, we plan to launch an innovative, patented and
reflecting display technology for mobile devices. Our objective is to
commercialize the first video-enabled reflecting color displays in 2018.
Opportunities due to new
application possibilities for liquid crystals
We are pursuing a strategy of leveraging our expertise as the global
market leader in liquid crystals in order to develop new fields of
application for innovative liquid crystal technologies. For instance,
we are pressing ahead to capture the future markets for liquid crystal
windows (LCWs) and mobile antennas. Thanks to licrivision™ tech-
nology, LCWs create new architectural possibilities.
144
Combined Management Report
Report on Risks and Opportunities
Through continuously variable brightness control, they can for example
increase a building's energy efficiency. To drive forward the market
penetration of liquid crystal windows, we are investing around
€ 19 million in the construction of a production facility for window
modules. Initial sales, albeit at a low level, are expected in 2018 with
greater medium-term potential. Antennas that can receive signals
transmitted in the high frequency range can also be realized with the
aid of corresponding liquid crystal mixtures. As a result, mobile data
exchange could improve significantly in a wide variety of fields of
application. Since novel liquid crystal materials for antennas are
currently being developed, the market launch of liquid crystal antennas
could still take a few years. New application opportunities for liquid
crystals could have medium- to long-term positive effects on the
financial indicators of the Performance Materials business sector.
Opportunities offered by the increased
importance of the automotive platform
In the future, topics such as data transmission, individual design,
smart lighting and autonomous driving will play an important role in
the automotive industry, thus expanding our opportunities in smart
technologies.
In 2017, we presented our automotive innovations at our own
exhibition stand at the International Motor Show (IAA) in Frankfurt am
Main, Germany, for the first time. With our products and displays in the
New Mobility World, we offered visitors the opportunity to familiarize
themselves with the broad range of future applications and with Merck.
Opportunities from leveraging
the e-commerce and distribution platform
With the acquisition of Sigma-Aldrich in 2015 we have gained access
to the leading life science e-commerce platform. Our customers are
already benefiting from an offering of more than 300,000 products
including highly respected brands distributed via this e-commerce plat-
form. We are further expanding this platform in order to continuously
increase the number of products available on it. Making ordering
processes faster and more convenient for our customers and offering
support through individualized product recommendations could lead
to higher sales volumes and enable us to win new customers. Con-
sequently, this distribution channel could lead to an above-average
development of sales in the medium term.
This is being expanded through the collaboration with Elsevier.
Our products are now listed in Reaxys, a chemicals database. Users
can now conveniently find and purchase the products we develop
and supply.
The acquisition of Grzybowski Scientific Inventions complements
our e-commerce platform. The retro-synthesis software from this
acquisition offers the possibility to identify and select synthesis
methods.
Risk due to increased competition
and customer technology changes
In the Healthcare business sector, both our biopharmaceutical products
and classic pharmaceutical business are exposed to increased com-
petition from rival products (in the form of biosimilars and generics).
In the Life Science and Performance Materials business sectors, risks
are posed by not only cyclical business fluctuations but also changes
in the technologies used or customer sourcing strategies, particularly
with respect to liquid crystals. We use close customer relationships
and in-house further developments as well as market proximity,
including precise market analyses as mitigating measures. Overall,
owing to its possible occurrence with a critical negative impact, the
market risk is classified as a medium risk.
Opportunities due to new technologies
We compete with numerous companies in the pharmaceutical, chemical
and life science sectors. Rising competitive pressure can have a
significant impact on the quantities sold and prices attainable for our
products.
MARKET RISKS AND OPPORTUNITIES
The net risk of negative political and macroeconomic develop-
ments is seen as possible and has critical negative effects on the net
assets, financial position and results of operations. We thus rate this
as a medium risk.
The objective of the internal control system for the accounting process
is to implement controls that provide assurance that the financial
statements are prepared in compliance with the relevant accounting
laws and standards. This system covers measures designed to ensure
the complete, correct and timely conveyance and presentation of
information that is relevant for the preparation of the consolidated
financial statements and the combined management report.
Group Accounting provides support to the local contacts and ensures
a consistently high quality of reporting throughout the entire reporting
process.
For Group financial reporting purposes, most of our subsidiaries
use standard SAP software. Consolidation software from SAP is also
used for the elimination of intragroup transactions. A detailed autho-
rization concept ensures the separation of duties with respect to both
single-entity reporting and the consolidated financial statements. In
principle, the accounting process is designed to ensure that all units
involved adhere to the principle of dual control.
The effectiveness of Merck's internal control system with regard to
accounting and the compliance of financial reporting by the individual
companies is confirmed by both the local managing director and the
local chief financial officer when they sign the single-entity reporting.
For the accounting treatment of balance sheet items, Group Accounting
closely cooperates with Group Risk Management in order to correctly
present potential balance sheet risks. All the structures and processes
described are subject to regular review by Group Internal Auditing
based on an annual audit plan set out by the Executive Board. The
results of these audits are dealt with by the Executive Board, the
Supervisory Board and the Finance Committee. The internal control
system at Merck makes it possible to lower the risk of material mis-
statements in accounting to a minimum. However, no internal control
system - regardless of its design - can entirely rule out a residual risk.
KEY TOOLS
The internal control system aims to ensure the accuracy of the con-
solidated accounting process through functioning internal controls
with reasonable assurance. The Group Accounting function centrally
steers the preparation of the consolidated financial statements of
Merck KGaA as the parent company of the Merck Group. This Group
function defines the reporting requirements that all Merck subsidiaries
must meet. At the same time, this function steers and monitors the
scheduling and process-related requirements of the consolidated
financial statements. Group Accounting centrally manages all
changes to the equity holding structure and correspondingly adapts
the Group's scope of consolidation. The proper elimination of intragroup
transactions within the scope of the consolidation process is ensured.
Group-wide accounting guidelines form the basis for the preparation
of the statutory financial statements of the parent company and of
the subsidiaries, which are reported to Group Accounting; the guidelines
are adapted in a timely manner to reflect changes in the financial
regulatory environment and are updated in accordance with internal
reporting requirements. For special issues, such as the accounting
treatment of intangible assets within the scope of company acquisitions
or pension obligations, external experts are additionally involved where
necessary.
The individual companies have a local internal control system.
Where financial processes are handled by a Shared Service Center,
the internal control system of the Shared Service Center is additionally
applied. Both ensure that accounting complies with IFRS (International
Financial Reporting Standards) and with the Group accounting guide-
lines.
Business-related risks
and opportunities
Opportunities are assessed in their respective specific business envi-
ronment. General measures of the business functions are quantified
during operational planning in relation to sales, EBITDA pre and
business free cash flow. Net present value, internal rate of return,
the return on capital employed (ROCE), and the amortization period
of the investment are primarily used to assess and prioritize investment
opportunities. Similarly, scenarios are frequently set up to simulate
the influence of possible fluctuations and changes in the respective
factors on results. There is no overarching, systematic classification
of the probability of occurrence and impact of opportunities.
POLITICAL AND REGULATORY RISKS AND OPPORTUNITIES
As a global company, we face political and regulatory changes in a
large number of countries and markets.
In the Healthcare business sector, the known trend towards increasingly
restrictive requirements in terms of drug pricing, reimbursement and
approval is continuing. These requirements can negatively influence
the profitability of our products, also through market referencing
between countries, and jeopardize the success of market launches
and new approvals. Foreseeable effects are taken into account as far
as possible in the business sector's plans. Close communication with
health and regulatory authorities serves as a preventive measure to
avert risks. Remaining risks beyond the current plans resulting from
restrictive regulatory requirements are classified as a medium risk
owing to the possible critical negative impact.
Combined Management Report
Report on Risks and Opportunities
143
Risk of stricter regulations for the
manufacturing, testing and marketing of products
Likewise, in our Life Science and Performance Materials business
sectors, we must adhere to a multitude of regulatory specifications
regarding the manufacturing, testing and marketing of many of our
products. Specifically in the European Union, we are subject to the
European chemicals regulation REACH. It demands comprehensive
tests for chemical products. Moreover, the use of chemicals in
production could be restricted, which would make it impossible to
continue manufacturing certain products. We are constantly pursuing
research and development in substance characterization and the
possible substitution of critical substances so as to reduce the occur-
rence of this risk, and therefore view it as unlikely. Nevertheless, it
is classified as a medium risk given its critical negative impact on
the net assets, financial position and results of operations.
Risk of negative political and macroeconomic developments
The destabilization of political systems (as for example in Turkey or
the Middle East), the possible establishment of trade barriers as well
as foreign exchange policy changes can lead to declines in sales in
certain countries and regions. These risks are taken into account as
far as possible in the business plans of the affected countries and
regions and mitigated through product, industry and regional diver-
sification.
Potential negative macroeconomic developments, for example in
Argentina and Brazil, can also impact our business. To minimize these
impacts, corresponding measures pertaining to the sales strategy
have been initiated in these countries.
The United Kingdom's imminent exit from the European Union
("Brexit") gives rise to risks for our existing business in that country
(2017: sales of € 429 million, 1,514 employees and five production
sites) such as the decline in the value of the British pound, a weak-
ening of economic activity in the United Kingdom, regulatory changes,
and the creation of trade barriers such as import duties, which could
have an impact on our profitability. To analyze these risks and to
counteract them in a timely and targeted manner, internal working
groups have been set up.
Risk of more restrictive regulatory requirements
regarding drug pricing, reimbursement and approval
< 20%
Probability of occurrence
906
> 100.0%
Changes in trade accounts receivable and receivables from royalties and licenses
Elimination first-time consolidation of Sigma-Aldrich
65
84
> 100.0%
-3
3
-100.0%
Business free cash flow¹
1,011
-105
-10.4%
1 Not defined by International Financial Reporting Standards (IFRS).
138
Combined Management Report
Report on Economic Position
Performance Materials
-49
35
-19
Changes in inventories
278
-17.8%
Change
€ million
-14
2017
2016
980
1,106
EBITDA pre¹
in %
-11.4%
Investments in property, plant and equipment, software as well as
advance payments from intangible assets
-125
-109
-16
14.5%
€ million
-127
EBITDA pre
Report on Expected Developments
The following report provides a forecast for fiscal 2018 of the devel-
opment of the Merck Group and its three business sectors: Healthcare,
Life Science and Performance Materials. The forecast again covers
our key performance indicators as in the previous year, namely net
sales, EBITDA pre and business free cash flow. On September 5, 2017,
Merck announced that strategic options for the Consumer Health
business are being examined. This analysis of strategic options had
not yet been completed when this report was prepared, and on
December 31, 2017 the Executive Board came to the conclusion that
a divestment of the Consumer Health business within 12 months is
not to be considered as very likely. Therefore, our forecast is based
on an unchanged portfolio compared with fiscal 2017.
FORECAST FOR THE MERCK GROUP
15,326.6
Actual results
2017
Forecast for 2018
Net sales
Report on Expected Developments
€ million
Combined Management Report
In the area of financial risks and opportunities, we use an active
management strategy to reduce the effects of fluctuations in
exchange and interest rates. The management of financial risks and
opportunities by using derivatives in particular is regulated by extensive
guidelines. Speculation is prohibited. Derivative transactions are
subject to constant risk controls. A strict separation of functions
between trading, settlement and control functions is ensured.
LIQUIDITY RISKS
RISK AND OPPORTUNITY MANAGEMENT IN RELATION
TO THE USE OF FINANCIAL INSTRUMENTS
As a corporate group that operates internationally and due to our
presence in the capital market, we are exposed to various financial
risks and opportunities. Above all, these are liquidity and counterparty
risks, financial market risks and opportunities, risks of fluctuations
in the market values of operational tangible and intangible assets,
as well as risks and opportunities from pension obligations.
Financial risks and opportunities
Nevertheless, reputational risks could result, for instance through
public dialogues in social media. Overall, we rate this as a low risk.
RISKS AND OPPORTUNITIES
FROM THE USE OF SOCIAL MEDIA
The company Merck and its employees are active on numerous social
media channels. The consistent and legally compliant use of the
channels and their content is important in terms of increasing aware-
ness of our brand, among other things. Merck takes precautions and
implements processes to ensure awareness of the proper handling
of social media, controlling publication and actively managing
communication.
For numerous markets in Asia, the Middle East, Latin America and
Africa, we expect that in the coming years all business sectors will
continue to make above-average contributions to growth. In order
to further expand this potential for our businesses, we have moved
forward with several investment projects in recent years. For
instance, in 2017 we invested around € 25 million in China to further
expand the capacity of a pharmaceutical manufacturing facility as
well as a further € 26 million in a manufacturing plant for our Life
Science business sector. Moreover, we are continuing our engagement
in Africa. The greater local presence and customer proximity could
give us a key competitive edge and, in the medium to long term,
offers the opportunity for significant growth in sales and EBITDA pre.
Opportunities due to an expanding
local presence in high-growth markets
To combat product-related crime, an internal coordination network
covering all functions and businesses ("Merck Anti-Counterfeiting-
Operational Network") was set up several years ago. In addition,
security measures are in use to protect products against counterfeiting.
Innovative technical security solutions and defined preventive
approaches are used to ward off dangers relating to cybercrime and
espionage. Measures to prevent risks and to prosecute identified
offenses are conducted in all the relevant crime areas in close and
trustworthy cooperation with the responsible authorities. The impact
of these risks on business operations depends on the respective
individual case, product-specific factors, the value chain, as well as
on regional aspects in particular. Our Corporate Security department
is responsible for the overall coordination of all measures in this area.
Overall, the threat resulting from crime in general is seen as being
possible and is classified as a medium risk.
Owing to our portfolio, we are exposed to a number of sector-specific
crime risks. This relates primarily to products, including among other
things, counterfeiting, illegal channeling, misuse as well as all types
of property crime, including attempts at these crimes. Crime
phenomena such as cybercrime and espionage could equally affect
our innovations or innovation abilities as such.
4,414.5
152
- Moderate organic growth
- Moderately negative
foreign exchange effect
Negative foreign exchange effect, particularly owing to the development
Negative foreign exchange
For the Healthcare business sector, we forecast a moderate organic
increase in net sales in 2018. Again in 2018, this is expected to be
driven mainly by strong dynamics in our growth markets, which
should offset the still challenging market environment for RebifⓇ and
continued price pressure in numerous markets. Furthermore, we
expect sales of MavencladⓇ in the high double-digit million range and
of BavencioⓇ in the mid double-digit million range.
For the Merck Group, in 2018 we expect moderate organic sales
growth in comparison with the previous year. With regard to foreign
exchange rates, we continue to expect a volatile environment due
to political and macroeconomic developments. For the full year, we
forecast a moderately negative exchange rate effect on our net sales
compared with the previous year, with a greater impact in the first
half than in the second half of the year. The estimation for 2018 is
based on a €/US$ exchange rate in the range of 1.18-1.22 and further
declines in the value of the currencies of various growth markets.
NET SALES
- Lower EBITDA pre and investments in property, plant and equipment as well as
digitalization initiatives, higher inventory levels due to a changed product mix
and volume increases
of the U.S. dollar and currencies of various growth markets
Risks due to product-related crime and espionage
Ongoing adjustment processes in the Liquid Crystals business that will not be
offset despite the enhanced diversification of Performance Materials and active
cost management
the integration of Sigma-Aldrich in the Life Science business sector
-
- Organic sales growth and continued realization of planned synergies from
in marketing and sales; absence of positive one-time effects from the previous year
- Slight organic decline
- In Healthcare continued high investments in research and development as well as
- Slight to moderate organic decrease in Performance Materials owing to the ongoing
adjustment processes in the Liquid Crystals business
· Solid organic growth in Life Science, slightly above expected market growth
-
-
- Moderate organic growth in Healthcare due to strong dynamics in growth
markets as well as increasing sales of MavencladⓇ and BavencioⓇ
Key assumptions
- Low double-digit
percentage decline
3,318.0
Business free
cash flow
-
effect of 4% to -6%
- Negative foreign exchange effect, driven primarily by the exchange rate
of the U.S. dollar and currencies of various growth markets
Companies in the chemical and pharmaceutical industries are
exposed to product liability risks in particular. Product liability risks
can lead to considerable claims for damages, loss of reputation and
costs to avert damages. We have taken out the liability insurance
that is standard in the industry for such risks. However, it could be
that the insurance coverage available is insufficient for individual
cases. Although the occurrence of product liability claims in excess
of the existing insurance coverage is considered unlikely, individual
cases could still have a critical negative effect on the net assets,
financial position and results of operations. We therefore rate a
potential product liability risk as a medium risk.
Special mention should be made of the strategic alliance formed in 2014
between our company and Pfizer Inc. as a research and development
opportunity in the Healthcare business sector. In 2017, the European
Commission approved BavencioⓇ, an anti-PD-L1 antibody we are
co-developing with Pfizer, in 28 countries of the European Union,
Iceland, Liechtenstein and Norway as well as in Canada and Japan. This
builds on the previous approvals in the United States and Switzerland.
BavencioⓇ is thus the first immunotherapy for patients with metastatic
Merkel cell carcinoma.
Report on Risks and Opportunities
- Moderately negative
foreign exchange effect
Single-digit
percentage decline
Key assumptions
-
Organic sales growth in growth markets will compensate for the organic decline in
RebifⓇ sales, which is expected to be in the high single-digit percentage range
- Continued price pressure in Europe and also in the Asia-Pacific as well as Middle
East and Africa regions
- BavencioⓇ and MavencladⓇ will contribute visibly to sales growth
- Solid organic growth of our Consumer Health business
- Negative foreign exchange effect, driven primarily by the exchange rate
of the U.S. dollar and currencies of various growth markets
- Continued rise in research and development spending due to expected
further pipeline development, particularly in immuno-oncology
- Increasing marketing and selling expenses
Slight organic decline
Negative product mix effect due to a decline in sales of RebifⓇ
€ 200 million (milestone payments for BavencioⓇ; one-time payment received
for future license payments)
- Cost savings owing to the divestment of our Biosimilars business
- Increasing earnings contributions from BavencioⓇ and MavencladⓇ
Negative foreign exchange effect, driven primarily by the exchange rate
of the U.S. dollar and currencies of various growth markets
- Decline in EBITDA pre
- Increase in working capital due to product mix effects
NET SALES
For the Healthcare business sector, we expect moderate organic sales
growth in 2018. The development of our growth markets in the Latin
America, Middle East and Africa, as well as Asia-Pacific regions is
expected to contribute to this growth to a large extent. We also
assume that the products newly approved in 2017, namely BavencioⓇ
and MavencladⓇ, will contribute significantly to growth with sales in
the mid double-digit million range and high double-digit million
range, respectively. These positive effects should be able to more
than offset the expected decline in sales of Rebif® as well as continued
price pressure in key markets in Europe, Asia-Pacific, as well as
Middle East and Africa. Furthermore, we assume that our Consumer
Health business will also contribute to the positive organic sales
development. In particular, the U.S. dollar exchange rate and foreign
exchange developments in various growth markets should lead to a
moderately negative exchange rate effect.
EBITDA PRE
For 2018, we forecast currency-adjusted EBITDA pre of the Healthcare
business sector to see a slight percentage decline compared with the
previous year. However, the expected negative foreign exchange
environment will additionally adversely affect EBITDA pre. Positive
one-time effects amounting to approximately € 200 million, which we
realized in 2017, will not be incurred in 2018. This includes BavencioⓇ
milestone payments from Pfizer and a one-time payment for future
license payments. Continuously rising research and development
costs for further pipeline development, particularly in immuno-
oncology, will be an additional key driver of the forecast organic
development of EBITDA pre. However, this budgeted cost increase
will be further updated in the course of the year depending on clinical
data and prioritization decisions. We also expect our marketing and
selling costs to increase further. In addition, we assume that our
product mix will develop unfavorably owing to the expected decline in
sales of Rebif®. The divestment of our Biosimilars business in 2017 and
the resulting absence of research and development costs as well as
increasing contributions from our newly approved products BavencioⓇ
and Mavenclad® will partly offset the expected decline in organic
EBITDA pre.
- Absence of positive one-time effects from 2017 amounting to approximately
Product liability risks
- Moderately negative
foreign exchange effect
1,447.9
Combined Management Report
146
Quality controls along the entire value chain reduce the risks related
to product quality and availability. This starts with the qualification
of our suppliers. Quality controls also include comprehensive quality
requirements for raw materials, purchased semi-finished products
and plants. We are dependent on individual suppliers for a number
of precursor products, packaging materials and finished goods. In the
event that one of these suppliers curtails or discontinues production,
or supply is disrupted, this could potentially have a critical impact
on the business concerned. With long-term strategic alliances for
precursor products critical to supply and price as well as alternative
sourcing strategies, we reduce the probability of occurrence of these
risks and rate them as unlikely. Overall, these are classified as
medium risks.
Risks of dependency on suppliers
Although the occurrence of these risks is considered unlikely, an
individual event could have a critical negative effect on the net
assets, financial position and results of operations and are therefore
classified as a medium risk.
Further risks include operational failures due to fire or force majeure,
for example natural disasters such as floods or earthquakes, which
could lead to a substantial interruption or restriction of business
activities. Insofar as it is possible and economically viable, the Group
limits its damage risks with insurance coverage, the nature and
extent of which is constantly adapted to current requirements. Like-
wise, we are exposed to risks of production outages and the related
supply bottlenecks that can be triggered by technical problems in
production facilities with very high capacity utilization. We are working
to continuously mitigate the risks by making regular investments,
setting up alternative sourcing options and maintaining inventory
levels.
Operational failure risks
We are required to comply with the highest standards of quality in
the manufacturing of pharmaceutical products (Good Manufacturing
Practice). In this regard we are subject to the supervision of the
regulatory authorities. Conditions imposed by national regulatory
authorities could result in a temporary ban on products/production
facilities, and possibly affect new registrations with the respective
authority. We take the utmost effort to ensure compliance with regu-
lations, regularly perform our own internal inspections and also carry
out external audits. Thanks to these quality assurance processes,
the occurrence of a risk is unlikely, however cannot be entirely ruled
out. Depending on the product concerned and the severity of the
objection, such a risk can have a critical negative impact on the net
assets, financial position and results of operations. Therefore, we
rate this as a medium risk.
Risk of a temporary ban on products/production facilities or
of non-registration of products due to non-compliance with
quality standards
PRODUCT-RELATED RISKS AND OPPORTUNITIES
Risks of discontinuing development projects
and regulatory approval of developed medicines
Sometimes development projects are discontinued after high levels
of investment at a late phase of clinical development. Decisions
such as those relating to the transition to the next clinical phase - are
taken with a view to minimizing risk. Furthermore, there is the risk
that regulatory authorities either do not grant or delay approval,
which can have an impact on earnings, for example by lower sales
or missed milestone payments from collaboration agreements. Addi-
tionally, there is the danger that undesirable side effects of a pharma-
ceutical product could remain undetected until after approval or regis-
tration, which could result in a restriction of approval or withdrawal
from the market. We are currently not aware of any risks beyond
general development risks that could significantly affect the net
assets, financial position and results of operations.
- Moderate organic growth
-
The expenses currently being incurred, especially in our Healthcare
research and development, are already reflected in the current plans.
The same applies to net sales generated by the products BavencioⓇ
and Mavenclad®. If approved in further countries, the estimated sales
potential could increase.
Apart from these regulatory submissions, we are pushing ahead
with research projects in further important indications and are
actively pursuing new opportunities through in- and outlicensing.
We plan to submit Mavenclad® for regulatory review in the United
States and both drugs in Asia.
In addition, MavencladⓇ was approved in 2017 in the European
Union by the European Commission. Approvals were also granted in
Canada and Australia. It is the first short-course oral treatment
approved in Europe for the treatment of relapsing multiple sclerosis
in patients with high disease activity. The first market launch will
take place in Germany, followed by the United Kingdom and the
remaining EU member states.
Additionally, BavencioⓇ was approved by the FDA for the treatment
of patients with locally advanced or metastatic urothelial cancer.
Combined Management Report
145
Report on Risks and Opportunities
Combined Management Report
EBITDA pre
Business free
cash flow
1,949.3
Moreover, we in-licensed four oncology research and development
programs from Vertex. With this strategic portfolio acquisition, we are
strengthening our oncology pipeline in two attractive areas where we
already possess substantial expertise: DNA damage response as well
as immuno-oncology. These areas offer highly promising therapeutic
synergies.
Report on Expected Developments
We pursue the opportunities that arise and specify their expected
effects in the forecast development of our key performance indicators -
net sales, EBITDA pre and business free cash flow. Furthermore, we
will actively seek new opportunities, examine their implementation
and drive them forward where appropriate. If opportunities arise in
addition to the forecast developments, or these occur more quickly
than anticipated, this could have correspondingly positive effects on
our net assets, financial position and results of operations.
In the Life Science business sector, for 2018 we again predict solid
organic growth of net sales, which should be slightly above expected
market growth. We see medium-term growth at around 4% per year.
We assume that Process Solutions will be the largest growth driver.
The expected topline synergies from the Sigma-Aldrich acquisition
will contribute to sales growth as planned.
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
⚫ Scope
2015
2017
Legal risks
Generally, we strive to minimize and control our legal risks. To this
end, we have taken the necessary precautions to identify threats and
defend our rights where necessary.
Nevertheless, we are still exposed to litigation risks or legal pro-
ceedings. In particular, these include risks in the areas of product
liability, competition and antitrust law, pharmaceutical law, patent
law, trademark law, tax law, and environmental protection. As a
research-based company, we have a valuable portfolio of industrial
property rights, patents and brands that could become the target of
attacks and infringements. The outcome of future proceedings or
those currently pending is difficult to foresee.
For instance, we are currently involved in litigation with Merck & Co.
Inc. (outside the United States and Canada: Merck Sharp & Dohme
Corp. (MSD)), against whom we have filed lawsuits in various countries.
This company has also sued us in the United States for trademark
infringement, among other things.
Due to long statutes of limitations or in some cases the absence
thereof, it is not possible to rule out that we will face third-party
claims arising from the same issue despite the conclusion of legal
proceedings. Court or official rulings or settlements can lead to
expenses with a significant impact on our business and earnings.
Despite extensive precautionary measures, non-compliance with
laws and regulations leading to related consequences can never be
completely excluded.
Tax risks are reviewed regularly and systematically by Group Tax.
Corresponding standards and guidelines are used in order to identify
tax risks at an early stage as well as to review, evaluate and corre-
spondingly minimize them. Risk reduction measures are coordinated
by Group Tax together with the subsidiaries abroad.
In our opinion, the lawsuits described below constitute the most
significant legal risks. This should not be seen as an exhaustive list
of all legal disputes currently ongoing.
Combined Management Report
Report on Risks and Opportunities
2016
149
• Moody's
BBB/Baa2
COUNTERPARTY RISKS
Counterparty risks arise from the potential default by a partner in con-
nection with financial investments, loans and financing commitments
on the one hand and receivables in operating business on the other.
Combined Management Report
Report on Risks and Opportunities
147
As for counterparty risks from financial transactions, we review all
positions relating to trading partners and their credit ratings on a
daily basis. We manage financial risks of default by diversifying our
financial positions and through the related active management of
our trading partners. Significant financial transactions involving
credit risk are entered into with banks and industrial companies that
have a good credit rating. Moreover, our large banking syndicate - the
multi-currency revolving credit facility of € 2 billion was syndicated by
19 banks - reduces possible losses in the event of default.
The solvency and operational development of trading partners is
regularly reviewed as part of the management of operational counter-
party risks. Sovereign risks are also analyzed. The volume of receiv-
ables of each customer is capped in line with their credit ratings.
Risk-mitigating measures, such as credit insurance, are utilized as
appropriate. Nevertheless, defaults by isolated trading partners,
even those with outstanding credit ratings, cannot be entirely ruled
out, although rated as unlikely (further information can be found in
"Credit risks" in Note (38) "Management of financial risks" in the
Consolidated Financial Statements).
Counterparty risk is classified as a medium risk overall owing to
the unlikely probability of occurrence with a potential critical negative
effect.
FINANCIAL MARKET OPPORTUNITIES AND RISKS
As a result of our international business activities and global corporate
structure, we are exposed to risks and opportunities from fluctuations
in exchange rates. These result from financial transactions, operating
receivables and liabilities, as well as forecast future cash flows from
sales and costs in foreign currency. We use derivatives to manage
and reduce the aforementioned risks and opportunities (further infor-
mation can be found in “Derivative financial instruments" in the Notes
to the Consolidated Financial Statements). Due to their possible
occurrence with a potentially critical negative effect on the net
assets, financial position and results of operations, foreign exchange
rate risks are rated as medium risk.
Variable interest and current financial liabilities are exposed to
the risks and opportunities of interest rate fluctuations. These are
also managed and reduced using derivatives. Interest rate risks have
a potentially moderate negative impact, are considered unlikely and
pose low risks overall.
• S&P
RISKS OF IMPAIRMENT OF BALANCE SHEET ITEMS
The carrying amounts of individual balance sheet items are subject
to the risk of changing market and business conditions and thus to
changes in fair values as well. Necessary impairments could have a
significant negative non-cash impact on earnings and affect the
accounting ratios.
RISKS AND OPPORTUNITIES FROM PENSION OBLIGATIONS
We have commitments in connection with pension obligations. The
present value of defined benefit obligations can be significantly
increased or reduced by changes in the relevant valuation parameters,
for example the interest rate or future salary increases. Pension
obligations are regularly assessed as part of annual actuarial reports.
The obligations are covered by the pension provisions reported in
the balance sheet based on the assumptions as of the balance sheet
date. Some of these obligations are funded by plan assets (further
information can be found under "Provisions for pensions and other
post-employment benefits" in the Notes to the Consolidated Financial
Statements). To the extent that pension obligations are covered by
plan assets consisting of interest-bearing securities, shares, real
estate, and other financial assets, decreasing or negative returns on
these assets can adversely affect the fair value of plan assets and
thus result in further additions to pension provisions. By contrast,
rising returns increase the value of plan assets, thereby resulting in
excess cover of plan liabilities. We increase the opportunities of fluc-
tuations in the market value of plan assets on the one hand and reduce
the risks on the other by using a diversified investment strategy. The
unlikely risk due to pension obligations could have moderate negative
effects on the net assets, financial position and results of operations,
and is to be classified as low.
ASSESSMENTS BY INDEPENDENT RATING AGENCIES
The capital market uses the assessments published by rating agencies
to help lenders assess the risks of a financial instrument used by
Merck. We are currently rated by Standard & Poor's, Moody's and
Scope. Standard & Poor's has issued a long-term credit rating of A
with a stable outlook, Moody's a rating of Baal with a stable outlook,
and Scope a rating of A-, likewise with a stable outlook. In line with
market procedures, our financing conditions are closely tied to our
rating. The better a rating, the more favorably we can generally raise
funds on the capital market or from banks.
148
Combined Management Report
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REPORT ON RISKS AND OPPORTUNITIES
Overview of rating development
S&P/Moody's
A/A2
A-/A3
BBB+/Baa1
This applies in particular to the high level of intangible assets including
goodwill, which mainly derive from the purchase price allocations
made in connection with past acquisitions (further information can
be found under "Goodwill" and "Other intangible assets" in the Notes
to the Consolidated Financial Statements). All relevant risks were
assessed during the preparation of the consolidated financial state-
ments and taken into account accordingly. We rate risks beyond this
as unlikely with a critical negative impact. Therefore, this is seen as a
medium risk.
153
RISKS FROM PRODUCT-RELATED
AND PATENT LAW DISPUTES
Nevertheless, potentially critical negative impacts of the litigation
on the financial position cannot be ruled out.
Although the number of risks reported is higher than the specific
opportunities identified, we consider the distribution of risks and
opportunities to be balanced. A balanced overall view is also supported
by the fact that net sales and business success are built on a diverse
range of pharmaceutical and chemical products for a variety of indus-
tries. As the markets differ in their structure and economic cycles,
this diversification helps to lower risk.
The most significant individual risks in the businesses have been
named in the report above, with business-related risks being the
most significant alongside legal risks.
With respect to high and medium risks, certain changes have
resulted as the assessment of the individual risks has of course
altered over the fiscal year due to changing external and internal
conditions, while the overall risk profile remained stable. Thanks to
the risk reduction measures taken - such as the consistent implemen-
tation of management action (organizational responsibility and process
improvements), existing insurance coverage and accounting precau-
tions - we take counteraction, in particular against significant risks.
The overall risk of the Group, which is derived from the probability-
weighted aggregation of the identified risks, leads to the assessment
that we are not exposed to risk scenarios of a nature to threaten the
existence of the Group as a going concern or for which coverage and
financing of the losses is questionable. We are confident that we will
continue to successfully master the challenges arising from the above
risks in the future as well.
In our view, business-related opportunities offer the greatest
potential. An important element here is the continuous expansion of
our businesses in Asia, Latin America, Africa, and the Middle East.
With the successful focusing and continued intensification of our
research and development activities, we want to be able to continue
to offer our customers innovative products and help shape markets.
Moreover, we also consolidate our expertise in numerous alliances with
industrial partners as well as various universities and international
organizations. We are making targeted investments in future-oriented
companies and start-ups via our Merck Ventures Investment Fund
and our Accelerator programs. The topic of innovation is at the forefront
of all our activities. Externally, this is becoming particularly apparent
through our new Innovation Center at Group headquarters in
Darmstadt, which is to develop into a nucleus of creativity at Merck.
The activities listed hold significant opportunities for us in the medium
to long term, beyond the underlying forecast period.
BUSINESS FREE CASH FLOW
6,999.0
Net sales
Forecast for 2018
Actual results
2017
€ million
Overall view of the risk and
opportunity situation and
management assessment
FORECAST FOR THE HEALTHCARE BUSINESS SECTOR
Combined Management Report
154
For the business free cash flow of the Merck Group in 2018, we
forecast a decline in the low double-digit percentage range, driven
by lower EBITDA pre, continued high investments in property, plant
and equipment, and higher inventories owing to a changed product
mix and higher volumes.
BUSINESS FREE CASH FLOW
In our estimation, negative EBITDA pre of Corporate and Other
will increase in the low double-digit percentage range in 2018. This
development relates to investments in innovation and digitalization
initiatives. Previously, these costs were incurred in the business sectors
and are now recorded centrally under Corporate and Other. By contrast,
expected currency hedging gains should have a compensating effect
in 2018.
We assume that in our Performance Materials business sector,
the expected good development of the other business units as well
as disciplined cost management will once again in 2018 not be able to
offset the expected sales and earnings decline in the highly profitable
Liquid Crystals business. Consequently, we expect that organic
EBITDA pre will decline in the mid-teens percentage range in com-
parison with 2017. The difficult foreign exchange environment, which
hits the Performance Materials business especially hard due to its
regional positioning, will have an additional negative impact on the
earnings situation.
For the Life Science business sector, in fiscal 2018 we expect a similar
dynamic for currency-adjusted growth of EBITDA pre as in the previous
year (2017: +8%). Both the expected sales development and the
further planned realization of synergies from the Sigma-Aldrich
acquisition will contribute to this. However, organic EBITDA pre
growth of the Life Science business sector is likely to be lowered by
a moderately negative foreign exchange effect.
For the Healthcare business sector, we forecast a slight percentage
decline in organic EBITDA pre; the foreign exchange environment is
expected to have a moderately negative impact on EBITDA pre.
Owing to the continuous further development of our research pipeline,
we are budgeting higher research and development costs compared
with 2017. However, this is subject to the development of clinical
data and prioritization decisions. Furthermore, the absence of positive
one-time effects from the previous year amounting to approximately
€ 200 million (milestone payments for BavencioⓇ; one-time payment
for future license payments) will have a negative impact.
EBITDA pre is our key financial indicator to steer operating business.
On a currency-adjusted basis, we forecast a slight percentage decline
in EBITDA pre for the Merck Group in 2018 compared with 2017. In
addition, based on the above-described currency scenario, however,
foreign exchange rates are expected to impact our EBITDA pre by
approximately -4% to -6% compared with 2017, which will affect
all three business sectors.
EBITDA PRE
We forecast a slight to moderate organic decline in net sales for
the Performance Materials business sector in 2018 compared with
2017. The adjustment processes in our Liquid Crystals business will,
as expected, also continue in 2018, leading to significant sales
declines. We assume that the expected good sales growth of the other
business units will not be able to compensate for this development.
Report on Expected Developments
We are involved in a patent dispute in the United States with Biogen
Inc. (Massachusetts, USA) ("Biogen"). Biogen claims that the sale
of RebifⓇ in the United States infringes on a Biogen patent. The
disputed patent was granted to Biogen in 2009 in the United States.
Subsequently, Biogen sued Merck and other pharmaceutical companies
for infringement of this patent. Merck defended itself against all
allegations and brought a countersuit claiming that the patent is
invalid and not infringed on by our actions. A Markman hearing took
place in January 2012, leading to a decision in the first quarter of 2016.
A first-instance ruling is now expected for 2018. A courtordered
mediation proceeding did not lead to an agreement between the
parties. We have taken appropriate accounting measures.
Irrespective of the fact that acquisitions made in the past have been
successfully completed, the risk of conducting the acquisition and
integration exists for future transactions. This includes, among other
things, the inability to meet sales volume targets and higher integration
costs than expected, as well as the failure to meet synergy goals.
The divestment of companies and businesses can lead to liability vis-
à-vis the buyer, for instance through indemnity clauses and guarantee
commitments. Through strong due diligence processes and closely
managed integration processes, we seek to reduce the probability of
occurrence of this risk. Therefore, we classify this as a low risk with
an unlikely probability of occurrence and potentially moderate negative
effects on the net assets, financial position and results of operations.
Risks of the divestment, acquisition
and integration of companies and
In the Performance Materials business sector, Merck is involved in a
legal dispute with JNC Corporation, Japan, (JNC). JNC claims that by
manufacturing and marketing certain liquid crystals mixtures, Merck
has infringed JNC patents. Merck maintains that JNC's patent
infringement assertion is invalid owing to relevant prior art and has
filed the corresponding nullity actions, which in three cases were
already successful in first-instance proceedings. JNC has filed com-
plaints in each case. In a correction trial, a decision in favor of JNC
was issued in the second instance. Both Merck and the Korean Patent
Office have filed complaints with the Korean Supreme Court. In par-
allel, JNC filed two patent infringement suits. In 2017, a first-instance
decision was issued in favor of Merck, which JNC then appealed.
Merck has taken appropriate accounting measures. Nevertheless, a
potentially critical negative impact of the litigation on the financial
position cannot be ruled out.
In July, Bristol-Myers Squibb Co., USA, E.R. Squibb & Sons L.L.C.,
USA, Ono Pharmaceutical Co., Ltd., Japan, and a private individual
filed suit in the United States District Court of Delaware against Merck
and Pfizer Inc., USA, (Pfizer) based on the allegation that BavencioⓇ
infringes a U.S. patent. The plaintiffs accuse multiple companies of
infringing a U.S. patent relating to methods of treating tumors with
anti-PD-L1 antibodies. Both Merck and Pfizer have initiated legal
steps to defend themselves. A potentially critical negative impact of
the litigation on the financial position cannot be ruled out.
RISKS DUE TO ANTITRUST AND
OTHER GOVERNMENT PROCEEDINGS
RaptivaⓇ: In December 2011, the federal state of São Paulo, Brazil,
sued us for damages because of alleged collusion between various
pharmaceutical companies and an association of patients suffering
from psoriasis and vitiligo. This collusion is alleged to have been
intended to increase sales of the medicines from the companies
involved to the detriment of patients and state coffers. Moreover,
patients are also suing for damages in connection with the product
RaptivaⓇ.
We have taken appropriate accounting measures for these issues.
Risks in excess of this with a substantial negative effect on the net
assets, financial position and results of operations cannot be ruled
out, but are considered unlikely. This is rated as a medium risk.
On July 6, 2017, Merck received notice from the European Commission
(EU Commission), in which the EU Commission informed Merck of its
preliminary conclusion that Merck and Sigma-Aldrich allegedly trans-
mitted incorrect and/or misleading information within the scope of
the acquisition of Sigma-Aldrich. The EU Commission received regis-
tration of the merger on April 21, 2015 and granted clearance on
June 15, 2015 subject to the condition that Merck and Sigma-Aldrich
divest parts of the European solvents and inorganic chemicals busi-
nesses of Sigma-Aldrich in order to resolve antitrust concerns.
According to the preliminary viewpoint of the EU Commission com-
municated in the letter dated July 6, 2017, Merck and Sigma-Aldrich
withheld in this connection important information about an innovation
project allegedly relevant for certain laboratory chemicals of signifi-
cance to the analysis by the EU Commission. According to the EU
Commission, the innovation project should have been included in the
remedies package. A meeting of the cooperation procedure between
the EU Commission and Merck took place on February 5, 2018. The
ongoing investigations are limited to the examination of violations
of EU merger control procedures and do not affect the validity of the
EU Commission's decision to approve the merger. The risk is considered
likely with a critical negative impact on the net assets, financial
position and results of operations and is thus classified as high.
Appropriate accounting measures have been taken.
150
Combined Management Report
Report on Risks and Opportunities
RISKS OWING TO A SETTLEMENT AGREEMENT
OF THE DIVESTED GENERICS GROUP
Paroxetine: In connection with the divested generics business, we
are subject to antitrust investigations by the British Competition and
Market Authority (CMA) in the United Kingdom. In March 2013, the
authorities informed us of the assumption that a settlement agree-
ment entered into in 2002 between Generics (UK) Ltd. and several
subsidiaries of GlaxoSmithKline plc, (UK) in connection with the anti-
depressant drug paroxetine violates British and European competi-
tion law. Merck, the then owner of Generics (UK) Ltd., was allegedly
involved in the negotiations for the settlement agreement and is
therefore liable. The investigations into Generics (UK) Ltd. started
in 2011, without this being known to us. On February 11, 2016, the
CMA imposed a fine in this matter. We have taken legal action against
this fine. Appropriate accounting measures have been taken. This is
currently classified as a medium risk with a moderate negative impact
on the financial position.
Human resources risks
businesses
Our future growth is highly dependent on our innovative strength.
Therefore, the expertise and engagement of employees in all sectors
in which we operate are crucial to the success of the company. The
markets relevant to the company are characterized by intensive
competition for qualified specialists and by the challenge of being
perceived by the public as an attractive employer. Fluctuation risks
specific to countries and industries have to be identified ahead of
time and specifically addressed in order to keep the skills and expertise
critical to success and business within the company.
Information technology risks
We use a variety of IT systems and processes in order to optimally
support our globalization. Trends in information technology offer
various opportunities but also harbor risks.
Risks due to cybercrime and the failure
of business-critical IT applications
Increasing international networking and the related possibility of IT
system abuse are resulting in cybercrime risks for Merck, such as
the failure of central IT systems, the disclosure or loss of the data
integrity of confidential data from research and business activities,
the manipulation of IT systems in chemical process control, or an
increased burden or adverse impact on IT systems as a result of virus
attacks.
The Merck Group operates an information protection management
system based on ISO 27001 comprising security guidelines as well
as organizational and technical measures to prevent and address IT
security incidents. Globally used IT applications form the basis for
the contractual delivery of products and solutions. The failure of
business-critical IT applications could therefore have a direct influence
on our ability to deliver and the quality of our products. This also
applies to the failure of a data center. To achieve the required service
quality, we use a quality management system certified to ISO 9001
that also applies to the provision of IT.
In addition, to reduce the risk of failure, we operate several
redundantly designed data centers. Likewise, complications with the
changeover of IT systems could negatively impact the earnings situa-
tion. Close monitoring of critical IT projects serves to mitigate this risk.
Despite the mitigating measures taken and functional continuity
plans, the effects of cybercrime or the failure of business-critical IT
applications and their influence on the net assets, financial position
and results of operations are considered high risks owing to likely
and potentially critical negative impacts.
Environmental and safety risks
As a company with global production operations, we are exposed to
risks of possible damage to people, goods and our reputation. Audits,
consulting and training on environmental protection and occupational
health and safety minimize these risks to people and the environment.
In order to ensure the continuity of plant and equipment, we monitor
these risks both at our own sites as well as at suppliers and contract
manufacturers. By adhering to high technical standards, our rules of
conduct and all legal requirements in environmental protection and
occupational health and safety, we ensure the preservation of goods
and assets. We have taken sufficient appropriate accounting measures
for the environmental risks known to us. Nevertheless, we classify
these as a high risk since a critical negative impact on the financial
position cannot be ruled out.
Combined Management Report
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151
Recruiting and retaining specialists and talent is therefore one
of the key priorities for the company and is managed through the
targeted use of, for instance, employer branding initiatives, global
talent and succession management processes as well as competitive
compensation packages. Nevertheless, employee-related risks that
affect business activities are possible, even though their impact is
difficult to assess. We rate this as a medium risk.
In 2018, we expect business free cash flow of the Healthcare business
sector to show a single-digit percentage decline. This will be primarily
driven by the expected decline in EBITDA pre and the increase in
working capital due to product mix effects.
In order to ensure its continued existence, a company must be able
to fulfill its commitments from operating and financial activities at all
times. To reduce potential liquidity risks, we have a central Group-wide
liquidity management system in place and a balanced maturity profile.
The maturities of our financial liabilities are aligned with our planned
free cash flow. Furthermore, we have a multicurrency revolving credit
facility of € 2 billion with a term until 2020, which ensures continuing
solvency if I any liquidity bottlenecks occur. As our loan agreements
do not contain any financial covenants, these agreed lines of credit
can be accessed even if Merck's credit rating should deteriorate.
Additionally, we have a commercial paper program with a maximum
volume of € 2 billion.
Overall, the liquidity risk is unlikely and rated as low.
in %
The Executive Board is authorized to increase the company's share
capital with the approval of the Supervisory Board and of E. Merck
once or repeatedly up to and including April 27, 2022 by up to a total
of € 56,521,124.19 by issuing new no-par value bearer shares
against cash and/or non-cash contributions ("Authorized Capital 2017").
Limited liability shareholders shall be generally granted the statutory
right to subscribe to the new shares.
The Articles of Association can be amended by a resolution by the
Annual Meeting that requires the approval of the general partners.
The resolutions of the General Meeting are, notwithstanding any
statutory provisions to the contrary, adopted by a simple majority of
the votes cast. Where the law requires a capital majority in addition
to the voting majority, resolutions are adopted by a simple majority
of the share capital represented in the vote. The Articles of Association
of the company encompass authorized and contingent capital.
According to the Articles of Association of Merck, the general partners
not holding an equity interest who form the Executive Board are
admitted by E. Merck KG with the consent of a simple majority of
the other general partners. A person may only be a general partner
not holding an equity interest if he or she is also a general partner
of E. Merck KG. In addition, at the proposal of E. Merck KG and with
the approval of all general partners not holding an equity interest,
further persons who are not general partners not holding an equity
interest may be appointed to the Executive Board.
Pursuant to the information on voting rights submitted to us in accor-
dance with the German Securities Trading Act (WPHG), on Decem-
ber 31, 2017 no shareholders owned direct or indirect investments
exceeding more than 10% of the voting rights.
As of the balance sheet date, the company's subscribed capital is
divided into 129,242,251 no-par value bearer shares plus one regis-
tered share. Each share therefore corresponds to € 1.30 of the share
capital. The holder of the registered share is E. Merck Beteiligungen KG.
It is entitled and obliged to appoint one-third of the members of the
Supervisory Board representing the limited liability shareholders. If
the holder of the registered share is a general partner, he or she has
no such right of appointment. The transfer of the registered share
requires the company's approval. The approval is granted at the sole
discretion of the personally liable general partner with an equity
interest, namely E. Merck KG.
The following information is provided in accordance with section
315 (4) of the German Commercial Code and the explanatory report
pursuant to section 176 (1) sentence 1 of the German Stock Corpo-
ration Act (AktG).
Report in accordance with
section 315 (4) of the German
Commercial Code (HGB)
Report in accordance with section 315 (4) of the German Commercial Code (HGB)
Combined Management Report
158
Business free cash flow of the Merck Group is expected to decline
in the low double-digit percentage range, above all due to lower
EBITDA pre, continuing investments in property, plant and equip-
ment and in digitalization initiatives, as well as higher inventories.
business sector, on a currency-adjusted basis we expect similar
growth dynamics of EBITDA pre as in the previous year. For the
Performance Materials business sector, we forecast EBITDA pre to
decline in the mid-teens percentage range on a currency-adjusted
basis. We assume that the currently difficult foreign exchange environ-
ment in all three business sectors will lead to a decline in EBITDA
pre of between -4% and -6%.
For 2018, we expect moderate organic growth of net sales for the
Merck Group, which is likely to be driven by the Healthcare and Life
Science business sectors. In addition, we assume a moderately negative
foreign exchange effect due to the current weakness of the U.S.
dollar as well as the development forecast for various currencies in
our growth markets. EBITDA pre of the Merck Group is expected to
decrease slightly on a currency-adjusted basis in comparison with
the previous year. In the Healthcare business sector, we expect a
slight organic percentage decline in EBITDA pre. For the Life Science
Summary
Report on Expected Developments
Combined Management Report
For the Performance Materials business sector, we forecast a decline
in business free cash flow in the mid double-digit percentage range.
Besides the negative development of EBITDA pre, we expect higher
investments in property, plant and equipment as well as high inventory
levels due to volume increases.
BUSINESS FREE CASH FLOW
In 2018, our Performance Materials business sector will probably
again be unable to compensate for the expected sales decline in the
highly profitable Liquid Crystals business despite the expected good
performance of the other business fields as well as high cost discipline.
Consequently, we expect that organic EBITDA pre will decline in the
mid-teens percentage range in comparison with 2017. The difficult
foreign exchange environment, which hits the Performance Materials
business especially hard due to its regional positioning, will additionally
have a moderately negative impact on the earnings situation.
EBITDA PRE
We forecast a slight to moderate organic sales decline in the Perfor-
mance Materials business sector in 2018 compared with 2017. In our
estimation, the adjustment processes in our Liquid Crystals business
will continue unabated in 2018. This is attributable to the normalization
of our market shares, especially in China, which had been unusually
high in recent years. This has been recognizable since 2017. Therefore,
it is to be expected that the pricing pressure customary in this industry
will once again not be offset by the corresponding volume growth
in 2018. Despite the meanwhile high degree of diversification of our
Performance Materials business sector, in our estimation this develop-
ment will not be offset by good organic growth in our other business
fields. OLED technology (Advanced Technologies) and the semiconduc-
tor materials business are expected to show a dynamic development.
Due to unfavorable foreign exchange developments, in Performance
Materials in 2018 we expect to see a moderately negative foreign
exchange effect stemming mainly from the U.S. dollar exchange rate,
as well as declines in the value of key Asian currencies.
NET SALES
Decline in EBITDA pre, sustained high investments in property, plant and
equipment and higher inventory levels due to volume increases
- Negative foreign exchange effect, particularly owing to the development of
the U.S. dollar and currencies in key Asian markets
- The decline in market shares and prices in the Liquid Crystals business cannot
be offset by growth of the other businesses and active cost management
- Market share adjustment and price decline in the Liquid Crystals business
Negative exchange rate effect, especially due to the forecast development of
the U.S. dollar and currencies in key Asian markets
157
However, the Executive Board is authorized, with the approval of
the Supervisory Board, to exclude the limited liability shareholders'
subscription right in full or in part in case of a capital increase against
cash contributions pursuant to or by analogous application of section
186 (3) sentence 4 AktG, if the issue price of the new shares is not
substantially lower than the stock exchange price of the company's
shares already listed and if the new shares which are issued under
exclusion of the subscription right do not exceed a proportional amount
of 10% of the share capital either at the time of the Authorized Capital
2017 taking effect or at the time of the Authorized Capital 2017 being
utilized. This restriction to 10% of the share capital shall include the
proportional amount of the share capital that is attributable to shares
which are issued under exclusion of the subscription right or sold
during the term of the Authorized Capital 2017 based on an authori-
zation to issue new shares or sell own shares by direct or analogous
application of section 186 (3) sentence 4 AktG. Further, this restriction
shall also include the proportional amount of the share capital that
is attributable to shares which may or must be issued in order to
service bonds carrying a conversion or option right or a conversion
or option obligation, if the bonds are issued during the term of the
Authorized Capital 2017 under exclusion of the limited liability share-
holders' subscription right by analogous application of section 186 (3)
sentence 4 AktG.
It is likewise possible to exclude the subscription right of the limited
liability shareholders with the approval of the Supervisory Board in
the case of capital increases through non-cash contributions, particularly
for the purpose of acquiring enterprises, parts of enterprises or interests
in enterprises.
In addition, with the approval of the Supervisory Board, the limited
liability shareholders' subscription rights can be excluded in order to
enable E. Merck KG to exercise its right pursuant to Article 32 (3) of the
Articles of Association of the company to participate in a capital increase
by issuing shares or freely transferable share subscription rights.
BUSINESS SPLIT AND TRANSFER TO
MERCK REAL ESTATE GMBH, DARMSTADT
Since the technical system requirements to report the business sectors
spun off as regards the OpCos are not yet in place, the business
sectors spun off are to be temporarily leased back to Merck until the
ERP systems of the respective OpCos are introduced. For this purpose,
Merck KGaA is entering into a business leasing contract with the
respective OpCo with retrospective effect from January 1, 2018. Until
the technical system requirements have been implemented, owing
to the business lease Merck KGaA will record business transactions
in its own name and on its own behalf. Once the ERP systems have
been introduced for each OpCo, the business lease will be terminated
and the business will be taken over in full.
Combined control and profit and loss transfer agreements already
exist between the respective OpCos. Going forward, these agree-
ments are to remain in effect. Consequently, in the future there will
still be one company for corporation tax, trade tax and turnover tax
purposes. In the future, each OpCo will be owned by a business-
sector-relevant intermediate holding company, each of which is a
wholly owned subsidiary of Merck KGaA.
OPERATING ACTIVITIES OF THE BUSINESS SECTORS
As part of the strategic further development of Merck KGaA, it is
planned to spin off the existing operating activities of the Healthcare,
Performance Materials and Life Science business sectors into three
separate companies with the legal form of a GmbH or German limited
liability corporation (hereinafter: "OpCo" or plural "OpCos"). The spin-
off of the business sectors to these OpCo target companies domiciled
in Darmstadt must be approved by the General Meeting of Merck KGaA
in April 2018. Following approval by the General Meeting, the three
business sectors are to be spun off with retroactive effect from Jan-
uary 1, 2018.
Effects of company agreements on
the net assets, financial position
and results of operations
The Statement on Corporate Governance according to section 289a
HGB is contained in the Corporate Governance section of this report.
Statement on Corporate Governance
The management report of Merck KGaA has been combined with the
Group management report. The annual financial statements and the
combined management reports of the Merck Group and Merck KGaA
for 2017 are being filed with the electronic German Federal Gazette
(elektronischer Bundesanzeiger) and are available on the website of
the German company register.
Merck KGaA in accordance with the
German Commercial Code (HGB)
Additional information on
Additional information on Merck KGaA in accordance with the German Commercial Code (HGB)
Combined Management Report
- Volume increase in all businesses; strong dynamics particularly in Advanced
Technologies and IC Materials
160
The company is not authorized to acquire its own shares.
Moreover, the share capital is contingently increased by up to
€ 16,801,491.20 composed of up to 12,924,224 no par value bearer
shares (Contingent Capital II). This increase in contingent capital is
only to be implemented insofar as the bearers or creditors of option
or conversion rights or the conversion obligations on warrant bonds,
option participation certificates, option participation bonds, convertible
bonds, convertible participation certificates or convertible participation
bonds issued against contributions that are issued or guaranteed by
the company or a subordinate Group company on the basis of the
authorization resolution of the Annual General Meeting of May 9, 2014
to May 8, 2019, utilize their option or conversion rights or, to fulfill
their conversion obligation insofar as they are obliged to fulfill their
conversion obligation, or insofar as the company exercises an option,
wholly or in part, of granting shares in the company instead of paying
the sum of money due and to the extent that in each case a cash
settlement is not granted, or own shares or other forms of fulfillment
are used. Each issue of new shares shall take place at the determined
option or conversion price, pursuant to the aforementioned authoriza-
tion resolution. The new shares participate in the profit from the
beginning of the fiscal year in which they are created; insofar as this
is legally permissible, the Executive Board may, with the approval of
the Supervisory Board, and in deviation from section 60 (2) AktG,
stipulate that the new shares also participate in the profit for a past
fiscal year. The Executive Board is authorized, with the approval of
the Supervisory Board and of E. Merck, to stipulate the further details
of the implementation of the increase in contingent capital.
The Articles of Association also encompass contingent capital. The
share capital is contingently increased by up to € 66,406,298.40
divided into 51,081,768 shares (Contingent Capital I). The contingent
capital increase serves to grant exchange rights to E. Merck KG in
accordance with Article 33 of the Articles of Association to enable the
conversion of its equity interest. The shares carry dividend rights
from the beginning of the fiscal year following the year in which the
conversion option is exercised.
Furthermore, the Executive Board is authorized, with the approval
of the Supervisory Board, to determine the additional details of the
capital increase and its implementation, including the content of
rights attached to the shares as well as the terms and conditions of
the share issue.
To the extent that the subscription right is not excluded under the
above provisions, it may also be granted to the limited liability share-
holders by way of an indirect subscription right pursuant to section
186 (5) AktG or, in part, by way of a direct subscription right, and
otherwise by way of an indirect subscription right pursuant to section
186 (5) AktG.
The sum of shares issued on the basis of the Authorized Capital 2017
under exclusion of the limited liability shareholders' subscription right
must not exceed a proportional amount of 20% of the share capital,
by taking into account other shares of the company which, during
the term of the Authorized Capital 2017, are sold or issued under
exclusion of the subscription right or are to be issued under bonds
issued after April 28, 2017 under exclusion of the subscription right;
this limitation shall apply both at the time of this authorization taking
effect and at the time of this authorization being exercised.
Lastly, with the approval of the Supervisory Board, the subscription
right of the limited liability shareholders can be excluded in order to
exclude fractional amounts from the subscription right.
Moreover, with the approval of the Supervisory Board, the sub-
scription right of the limited liability shareholders can be excluded if
and to the extent this is necessary to grant the holders or creditors
of conversion or option rights and/or the holders or creditors of
financing instruments carrying conversion or option obligations,
which were or are issued by the company or by a domestic or foreign
company in which the company directly or indirectly holds the majority
of the votes and capital, a subscription right to the extent to which
they would be entitled after the exercise of the conversion or option
rights or after the performance of a conversion or option obligation.
It is likewise possible to exclude, with the approval of the Supervisory
Board, the subscription right of the limited liability shareholders in
order to enable E. Merck KG to exercise its right pursuant to Article 33
of the Articles of Association to convert, in full or in part, its equity
interest into share capital.
159
Report in accordance with section 315 (4) of the German Commercial Code (HGB)
Combined Management Report
The company has not entered into any material agreements subject
to a change of control pursuant to a takeover offer nor has it entered
into any compensation agreements with the members of the Executive
Board or employees in the event of a takeover offer.
Key assumptions
- Moderately negative
foreign exchange effect
- Double-digit
percentage decline
905.8
- Positive development resulting from expected sales growth
- Negative foreign exchange effect, particularly owing to the development of
the U.S. dollar
- No significant portfolio effect from the acquisition of Natrix Separations
- Research Solutions will also contribute positively to organic sales development,
albeit to a smaller extent
followed by Applied Solutions
- Process Solutions is likely to remain the strongest growth driver,
Key assumptions
foreign exchange effect
- Moderately negative
a similar dynamic as in 2017
Organic earnings growth with
- Moderately negative
foreign exchange effect
-
- Solid organic growth,
slightly above expected
market growth
Business free
cash flow
1,785.8
EBITDA pre
5,881.5
Net sales
Forecast for 2018
Actual results
2017
€ million
FORECAST FOR THE LIFE SCIENCE BUSINESS SECTOR
155
Report on Expected Developments
Combined Management Report
1,401.7
The real estate and properties of Merck KGaA are rented based on
a general rental agreement with effect on December 15, 2017 from
Merck KGaA to Merck Real Estate GmbH. A combined control and
profit and loss transfer agreement exists between Merck KGaA and
Merck Real Estate GmbH. Therefore, Merck Real Estate GmbH is one
of the companies in fiscal unity with Merck KGaA.
-
Negative foreign exchange effect, particularly owing to the development of
the U.S. dollar
979.8
EBITDA pre
Business free
cash flow
- Organic percentage decline
in the mid teens range
- Moderately negative
foreign exchange effect
Organically slightly to
moderately below the
year-earlier level
2,446.0
Net sales
Forecast for 2018
Actual results
2017
€ million
FORECAST FOR THE PERFORMANCE MATERIALS BUSINESS SECTOR
Report on Expected Developments
- Continuation of the planned realization of synergies from the
Sigma-Aldrich acquisition
Combined Management Report
We expect our Life Science business free cash flow to be slightly
below the previous year's level. The higher EBITDA pre will be more
than offset by higher inventory levels. These result primarily from
expected dynamic sales growth and a changed product mix.
BUSINESS FREE CASH FLOW
EBITDA pre of the Life Science business sector in 2018 is likely to see
dynamic growth similar to 2017 on a currency-adjusted basis (2017:
+8%). This development is in line with the expected development of
sales. Furthermore, in 2018 we will assign high priority to continuing
the planned realization of cost and sales synergies from the Sigma-
Aldrich acquisition. After already having realized synergies of around
€ 185 million up until 2017, for 2018 we expect further synergies as
planned that are likely to have an additional effect of around € 95 mil-
lion on earnings. We assume that in 2018 we will achieve our planned
synergy target of € 280 million for the Sigma-Aldrich acquisition.
However, in 2018 organic growth of EBITDA pre of the Life Science
business sector is expected to be lowered by moderately negative
foreign exchange effects.
EBITDA PRE
For the Life Science business sector, compared with 2017 we forecast
further solid organic net sales growth in 2018, which should be
slightly above expected market growth. In the medium term, we see
annual market growth at approximately 4%. We assume that all
business units will contribute positively to organic growth. In 2018,
the Process Solutions business unit is again likely to remain the
strongest driver of organic growth, followed by Applied Solutions.
The Research Solutions business unit should also contribute to the
positive sales development, yet to a lesser extent. Additionally, the
topline synergies from the Sigma-Aldrich acquisition will contribute
to growth as planned. At the end of 2017, we acquired Natrix
Separations. The consolidation will not lead to a significant portfolio
effect. We assume a moderately negative foreign exchange effect
primarily owing to the development of the U.S. dollar.
NET SALES
- Higher inventories reflect the expected sales growth and changed product mix
-
the prior-year level
Slightly below
-
- Improved EBITDA pre
156
Within the scope of this reorganization, 111 employees of Merck KGaA
were taken on by Merck Real Estate GmbH. The transferred assets and
liabilities are presented in the overview at the end of this section. The
impact on the income statement of Merck KGaA was only immaterial
in 2017.
SEPARATION OF THE CONSUMER HEALTH BUSINESS
By way of the transfer agreement dated August 31, 2017, Merck KGaA
transferred to Merck Consumer Health GmbH, Darmstadt, with retro-
active effect from January 1, 2017 and via Merck Consumer Health
Holding Germany GmbH, its Consumer Health business along with
all the allocable business assets, rights and duties in the course of a
so-called chain transfer. The separation serves to prepare the strategic
repositioning of the Consumer Health business within the Merck Group.
342
4,465
96.5%
112
116
228
4,807
-0.6%
-8
1,407
1,399
9.4%
67
7.7%
710
7.7%
172
2,232
2,404
in %
€ million
2016
2017
Change
Total sales
Other sales
Performance Materials
777
Life Science
Other sales mainly included intragroup cross-charging for IT services
and other administration services. The increase was due to higher
ongoing costs for IT projects.
Group sales
4,500
307
4,807
4,063
437
10.8%
402
4,465
-95
-23.6%
342
7.7%
Change
The share of sales with other Group companies (Group sales)
amounted to 93.6% in 2017 (2016: 91.0%).
2017
€ million
in %
4,341
2016
2017
Change
Total
Germany
Outside Germany
€ million
Total
Sales to third parties
2016
Healthcare
€ million
In 2017, Merck KGaA sales increased by € 342 million. The increase
resulted from the Healthcare and Life Science business sectors as well
as other sales. By contrast, sales of the Performance Materials business
sector declined slightly:
7.5
1.5
0.4
4.6
1.4
0.0
Real Estate
Consumer Health
Merck
Merck
Total assets
Other receivables and other assets
0.4
Trade accounts receivable
B. Current assets
Construction in progress
Plant and machinery, other facilities
Buildings
Software
A. Tangible assets
Transferred assets
€ million
The following overview presents the assets and liabilities transferred
from Merck KGaA to Merck Consumer Health GmbH with retroactive
effect from January 1, 2017.
The operations of Merck Consumer Health GmbH were immediately
leased back to Merck KGaA after the transfer to Merck KGaA. The
lease fee amounted to € 1.3 million in 2017. Additionally, the effects
on the income statement of the company are not material. Employees
were not transferred to Merck Consumer Health GmbH.
Additional information on Merck KGaA in accordance with the German Commercial Code (HGB) 161
Combined Management Report
Inventories
4.4
0.5
1.4
Business development
Additional information on Merck KGaA in accordance with the German Commercial Code (HGB)
Combined Management Report
162
-1.6
11.3
2.0
2.5
1.0
1.0
Total transferred assets less liabilities
Total liabilities
Other liabilities
Trade accounts payable
B. Liabilities
2.0
1.5
1.4
1.5
Other provisions
0.6
Provisions for pensions and other post-employment benefits
A. Provisions
Transferred liabilities
0.4
13.8
6.3
€ million
€ million
At 90.3% (2016: 89.4%), the share of exports in 2017 was slightly
above the previous year's level.
80
176
1.1%
1,763
1,504
259
688
635
53
8.4%
181
16,310
291
-37.7%
892
576
316
54.8%
1
2
-1
- 50.0%
28
-110
16,486
16.9%
170
Provisions
Provisions for pensions and other post-employment benefits
Other provisions
Liabilities
Financial obligations
Trade accounts payable
Other liabilities
Deferred income
Change
Dec. 31, 2017
18,148
Dec. 31, 2016
€ million
in %
17,563
585
3.3%
490
250
240
95.9%
1,173
1,003
28
Net equity
0
19,095
1,500
0.0%
260
32
12.3%
11,009
480
4.4%
18
2
1,500
292
11,489
16
19,940
19,095
845
4.4%
The net assets and financial position of Merck KGaA changed only
slightly in comparison with the previous year. With a 4.4% increase
in total assets, the equity ratio amounted to 26.7% (2016: 27.7%).
At the Darmstadt site, the construction project to expand global
headquarters made further progress. This significantly contributed
to the increase in tangible assets.
The increase in financial assets was due to a payment made to the
capital reserve of Merck 12. Allgemeine Beteiligungs-GmbH in 2017.
The increase in current assets (+€ 259 million) was mainly attributable
to higher receivables from affiliates for short-term loans. By contrast,
tax receivables declined.
The increase in other provisions (+€ 158 million) was mainly due
to higher provisions for income taxes and for legal risks.
The rise in other liabilities resulted primarily from the clearing
account with Merck Financial Services GmbH, Darmstadt.
3,990
800.0%
4.0%
512
12,769
845
0.0%
4.4%
Change
Dec. 31, 2017
Dec. 31, 2016
€ million
in %
5,328
5,290
38
0.7%
1,312
1,034
278
26.9%
200
120
150.5%
1,112
954
158
16.6%
13,281
19,940
€ million
17.2%
Prepaid expenses
185
27
14.3%
Cost of materials
-1,505
-1,488
-17
1.1%
Personnel expenses
-1,258
-1,055
-203
19.2%
Depreciation, amortization, write-downs and impairment losses
-183
-176
-7
4.2%
Other operating expenses
-1,801
-1,726
-75
4.3%
212
Investment income/Write-downs of financial assets
Other income
343
351
8.8%
467
4,807
475
-8
-1.7%
4,465
342
7.7%
Combined Management Report
Additional information on Merck KGaA in accordance with the German Commercial Code (HGB) 163
In the Healthcare business sector, the increase in sales was primarily
due to an agreement on a one-time payment for future license pay-
ments. Sales of products, on the other hand, remained almost
unchanged. The increase in sales of cardiovascular therapies
(+14.8%) was approximately offset by a decline in sales of the
oncology drug Erbitux (-7.5%). Thyroid therapies generated a slight
rise in sales (+2.5%). Overall, the business sector recorded sales
declines in the region of Europe, offset by a sales increase in the
Asia-Pacific region.
In Performance Materials, sales by the Display Materials business unit
did not reach the previous year's level. The sales increases in the other
two business units Pigments & Functional Materials (+10.6%) and
Advanced Technologies (+8.3%) did not compensate for this. Sales
declines were recorded particularly in the Asia-Pacific region. This
was offset by a slight increase in the regions of Europe and North and
Latin America.
In 2017, sales by the Life Science business sector increased by
9.4%. Growth was generated by all three business units, whereby
Process Solutions accounted for the largest share of growth (+14%).
The largest sales increases were recorded in the regions of Europe,
North and Latin America, as well as Asia-Pacific.
RESULTS OF OPERATIONS
Change
€ million
Sales
LIABILITIES
4,807
2016
4,465
€ million
in %
7.7%
847
2017
188
The increase in other income was mainly attributable to higher income
from increased inventories of work in progress and finished goods.
The cost of materials increased slightly. The cost of materials in
relation to sales amounted to 31.3% (2016: 33.3%).
The increase in personnel expenses was due to higher pension
expenses, on the one hand. The increase in pension expenses
resulted from an adjustment in 2016 of the actuarial interest rate
used for the measurement of pension provisions. Due to the law on
implementation of the directive on credit agreements relating to
residential immovable property and on the amendment of provisions
of commercial law, in 2016 the specified period for measurement of
the average market interest rate was extended from seven to ten
years. This resulted in lower pension expenses in 2016. On the other
hand, wages and salaries increased as a result of the collectively agreed
pay increase and the higher number of employees.
The rise in other operating expenses was due to increased sales
and marketing activities as well as higher expenses in connection with
provisions for litigation risks.
Investment income improved mainly as a result of a higher
dividend payment from Merck Holding GmbH, Gernsheim.
The financial result improved overall owing to higher interest
income from plan assets, which are offset against the interest com-
ponent of the addition to pension provisions.
164
Combined Management Report
Additional information on Merck KGaA in accordance with the German Commercial Code (HGB)
NET ASSETS AND FINANCIAL POSITION
ASSETS
€ million
Fixed assets
Intangible assets
Tangible assets
Financial assets
Current assets
Inventories
Trade accounts receivable
Receivables and other assets
Cash and cash equivalents
659
196.9%
9.8%
15
Depreciation, amortization, write-downs and impairment losses
increased slightly by 4.2% as a result of higher fixed assets.
171
28.6%
Financial result
- 201
-243
41
-17.1%
156
Profit transfers
Taxes
Profit after profit transfers and taxes/Net income
917
621
Profit before profit transfers and taxes
47.7%
-533
-400
-153
-128
38.2%
-193
296
-65
200
Objectives of the Supervisory Board with respect to its
composition and profile of skills and expertise
Corporate Governance
Capital structure and corporate bodies of Merck KGaA
169
Capital structure and
€ 565,211,241.95
Total capital of Merck KGaA
Executive Board of Merck KGaA
General partners with no equity interest
Report of the Supervisory Board
€ 168,014,927.60
The general partner
E. Merck KG holds
the equity interest
Shareholders hold
the share capital
corporate bodies of Merck KGaA
198
The financial resources for the company continue to be provided
by Merck Financial Services GmbH, Darmstadt.
170
offset by sales increases in the Pigments & Functional Materials
(+10.6%) and Advanced Technologies (+8.3%) business units.
A further rise in net income was mainly due to higher sales and
improved investment income. The increase in investment income
was mainly attributable to a higher dividend payment from Merck
Holding GmbH, Gernsheim. On the expenses side, this was offset by
higher expenses in connection with legal risks, resulting in an overall
increase in net income of 9.8%.
€ 397,196,314.35
Forecast 2018
For fiscal 2018, slight sales increases are expected for the Life
Science and Healthcare business sectors. Sales by the Performance
Materials business sector, however, are expected to decline slightly.
As in 2016, the financing costs of the Sigma-Aldrich acquisition
continue to adversely affect net income. Nevertheless, positive
investment income and dividend payments from subsidiaries will lead
again to a slight increase in net income. Merck Financial Services
GmbH, Darmstadt, will provide the company with sufficient financial
resources and thus ensure liquidity.
Currently no risks can be identified that could jeopardize the
continued existence of the company.
CORPORATE
GOVERNANCE
167-202
3
CORPORATE
GOVERNANCE
167-202
169
Capital structure and corporate bodies of Merck KGaA
Statement on Corporate Governance
General Meeting
In particular, the Annual General Meeting passes resolutions con-
cerning the approval of the annual financial statements, the appro-
priation of net retained profit, the approval of the actions of the
Executive Board members and the Supervisory Board members, as
well as the election of the auditor. Changes to the Articles of Association
likewise require the adoption of a resolution by the General Meeting.
The shareholders of Merck KGaA exercise their rights at the General
Meeting. They may exercise their voting rights personally, through
an authorized representative or through a proxy appointed by the
company. The proxy is in attendance throughout the duration of the
General Meeting. All the documents and information concerning
upcoming General Meetings (including a summary explanation of
shareholder rights) are also posted on our website. Moreover, the
General Meeting is webcast live on the Internet from its commencement
until the end of the speech by the Chairman of the Executive Board.
The introductory speeches by the Chairman of the Executive Board
and the Chairman of the Supervisory Board are recorded in order to
make them available to interested members of the public at any time
after the meeting. In this way, we are satisfying the high transparency
requirements of the Merck Group.
Board of Partners of
171
THE GENERAL MEETING OF MERCK KGAA
The twenty-second General Meeting of Merck KGaA was held on April 8,
2017 in Frankfurt am Main, Germany. At 64.03%, the proportion of
share capital represented at the meeting was slightly higher than in
the previous year. In 2016, the proportion of share capital represented
was 61.92%.
DECLARATION OF CONFORMITY
In accordance with section 161 AktG, applying the provisions of the
German Corporate Governance Code correspondingly, the Executive
Board and the Supervisory Board issued the following Declaration of
Conformity with the recommendations of the Government Commission
of the German Corporate Governance Code:
"Declaration of the Executive Board and the Supervisory Board of
Merck KGaA on the recommendations of the Government Commission
of the German Corporate Governance Code pursuant to section 161
AktG.
Statement on Corporate Governance
Since the last Declaration of Conformity on February 24, 2017,
we have complied with the recommendations of the Government
Commission of the German Corporate Governance Code during the
period of validity of the versions dated May 5, 2015 and February 7,
2017 published in the official section of the German Federal Gazette
with the following exceptions:
Contrary to section 5.3.2 of the German Corporate Governance
Code, the Supervisory Board has not established an audit committee.
However, an audit committee does exist in the form of the Finance
Committee of the Board of Partners of E. Merck KG, which to a large
extent exercises the duties described in section 5.3.2 of the Code.
Due to the relatively limited authority of the supervisory board of a
KGaA in comparison with that of an AG, this therefore satisfies the
requirements of the German Corporate Governance Code.
Contrary to section 5.4.1 para 2 sentence 1 of the German Corpo-
rate Governance Code, previously neither an age limit nor a regular
limit on the length of Supervisory Board membership was taken into
account when proposing candidates for election to the Supervisory
Board. The age and length of membership of Supervisory Board
members are not criteria for their qualifications and competence.
Therefore, as in the past, we do not wish to forego the many years
of experience of Supervisory Board members. Rather, a good balance
among Supervisory Board members in terms of age and length of
membership is crucial to the successful work of the Supervisory
Board. Taking these principles into account, both a limit on age and
length of membership shall nevertheless apply.
Contrary to section 7.1.2 sentence 4 of the German Corporate
Governance Code, owing to scheduling difficulties, the interim report
for the first quarter was only made publicly accessible slightly after
the allotted 45-day time limit from the end of the reporting period.
In the future, the recommendation shall be complied with in full.
Darmstadt, February 28, 2018
For the Executive Board
In view of future compliance with the current recommendations
of the Government Commission of the German Corporate Governance
Code, the Executive Board and the Supervisory Board declare the
following: With the exception of the aforementioned deviations from
section 5.3.2 (audit committee), the company will comply with the
recommendations of the Code in the version dated February 24, 2017."
Continued high competitive pressure in the Liquid Crystals business
led to a slight decline in Performance Materials sales (-0.6%). The
decline in the Display Materials business unit (-4.8%) was not fully
Contrary to section 4.2.5 para 3 sentence 2 of the German Corporate
Governance Code, the model tables only show the current service
costs; any past service costs are shown in the footnotes. The chosen
reporting serves better comparability with other companies and thus
the transparency and understandability of the Compensation Report
aimed for by the code (see section 4.2.5 para 1 sentence 3 of the
German Corporate Governance Code).
Corporate Governance
Based on the provisions of the German Stock Corporation Act,
the Articles of Association of Merck KGaA and the rules of procedure
of the various committees, Merck KGaA has a set of rules for the
Executive Board and its supervision that meet the requirements of
the German Corporate Governance Code. The investors, who bear
the entrepreneurial risk, are protected as provided for by the German
Corporate Governance Code.
The general partner E. Merck KG holds around 70% of the total capital
of Merck KGaA (equity interest); the shareholders hold the remainder,
which is divided into shares (share capital). E. Merck KG is excluded
from the management of business activities. The general partners with
no equity interest (Executive Board) manage the business activities.
Nevertheless, due to its substantial capital investment and unlimited
personal liability, E. Merck KG has a strong interest in the businesses
of Merck KGaA operating efficiently in compliance with procedures,
and exercises its influence accordingly. Merck KGaA's participation
in the profit/loss of E. Merck KG in accordance with Articles 26 et
seq. of the Articles of Association further harmonizes the interests
of the shareholders and of E. Merck KG. E. Merck KG appoints and
dismisses the Executive Board. In addition, E. Merck KG has created
bodies - complementing the expertise and activities of the Supervisory
Board - to monitor and advise the Executive Board. This task applies
primarily to the Board of Partners of E. Merck KG.
MONITORING
Further information can be found under "Merck KGaA" on page 170.
MONITORING
E. Merck KG
170
Corporate Governance
Statement on Corporate Governance
Statement on Corporate Governance
The Statement on Corporate Governance contains the Declaration
of Conformity, relevant information on practices within the com-
pany, a description of the procedures of the corporate bodies, as
well as targets for the percentage of positions held by women as
well as the diversity policy.
Joint report of the Executive Board
and the Supervisory Board according
to section 3.10 of the German
Corporate Governance Code including
the Declaration of Conformity
The German Corporate Governance Code is geared toward the con-
ditions found in a German stock corporation ("Aktiengesellschaft" or
"AG") and does not take into consideration the special characteristics
of a corporation with general partners ("Kommanditgesellschaft auf
Aktien" or "KGaA") such as Merck KGaA. Given the structural differences
between an AG and a KGaA, several recommendations of the German
Corporate Governance Code are to be applied to a KGaA only in a
modified form. Major differences between the two legal forms exist
in terms of liability and management. While, in the case of an AG,
only the AG is liable as a legal entity, the general partners of a KGaA
also have unlimited personal liability for the company's obligations
(section 278 (1) of the German Stock Corporation Act - "AktG"). At
Merck KGaA, this pertains to both E. Merck KG - which pursuant to
Article 8 (5) of the Articles of Association is excluded from management
and representation - as well as to the managing general partners, who
together make up the Executive Board of Merck KGaA. The members
of the Executive Board of Merck KGaA are therefore subject to unlimited
personal liability. Unlike an AG, their executive authority is not con-
ferred by the Supervisory Board, but rather by their status as general
partners.
Consequently, in addition to other responsibilities typical of the
supervisory board of an AG (see description of the procedures of the
Supervisory Board on page 192 et seq.), the supervisory board of a
KGaA does not have the authority to appoint the management board,
draw up management board contracts or specify compensation of
the management board. This legal form also involves special features
with regard to the General Meeting. For example, in a KGaA, many
of the resolutions made require the consent of the general partners
(section 285 (2) AktG), including in particular the adoption of the
annual financial statements (section 286 (1) AktG).
Merck KGaA applies the German Corporate Governance Code analo-
gously where these regulations are compatible with the legal form of
a KGaA. In order to enable shareholders to compare the situation at
other companies more easily, to a broad extent we base corporate
governance on the conduct recommendations made by the Government
Commission of the German Corporate Governance Code and forego
having our own, equally permissible, code. The recommendations of
the Code in the past two versions dated May 5, 2015 and February 7,
2017,
the intent and meaning of which are applied, were complied with
in the period between the last Declaration of Conformity issued on
February 24, 2017 with three exceptions. In the future, the recom-
mendations of the Code will again be adhered to with one exception.
Further details can be found on page 171.
For a clearer understanding, the following gives a general expla-
nation of the application of German company law at Merck KGaA with
additional references to the General Meeting and shareholder rights.
MERCK KGAA
Supervisory Board
Sales by the Life Science business sector increased significantly
(+9.4%). All business units, Research Solutions (+6.6%), Applied
Solutions (+6.7%) and Process Solutions (+14.0%), contributed to
sales growth.
REGULATORY REQUIREMENTS AND
IN 2017 FROM THE PREVIOUSLY REPORTED GUIDANCE:
In 2016, sales were forecast to increase slightly in all three business
sectors in fiscal 2017.
39
-4
-10.3%
220
223
-3
-1.3%
Other R&D spending that cannot be allocated to the individual business sectors
Total
22
6
16
266.7%
685
751
-66
35
- 8.8%
-15.5%
483
development spending. The Performance Materials business sector
focuses its research activities on developing new and improved basic
materials and mixtures for LC displays, as well as for innovative OLED
applications. To strengthen the Pigments business, new effect pigments
for the automotive, cosmetics and printing ink sectors have been
developed. In the Life Science business sector, research activities
focused in particular on technologies for laboratory and life science
applications, and new developments were driven forward. These
included improved test kits, chromatography methods, substrates
for separating active substances, and innovations in the fields of
microbiology and hygiene monitoring.
For the Supervisory Board
In 2017, research and development spending on projects of Merck KGaA
and other Group companies totaled € 685 million (2016: € 751 million).
A large portion was also incurred by companies outside the Merck
Group. In Darmstadt, Healthcare mainly focuses on oncology as well
as autoimmune and inflammatory diseases. The decline of € 75 million
in R&D spending by the Healthcare business sector was reflected in
the decline of € 66 million in overall R&D spending (-8.8%). At the
same time, the Healthcare business sector accounted for 59.6%
(2016: 64.3%) and thus the largest proportion of research and
Research and development
165
Additional information on Merck KGaA in accordance with the German Commercial Code (HGB)
Combined Management Report
Healthcare
Life Science
Performance Materials
2017
2016
€ million
in %
408
-75
The sales increase in the Healthcare business sector (+7.7%)
was mainly the result of higher license income. Sales of products
increased slightly over the previous year's level as additional sales
of cardiovascular therapies (+14.8%) offset the decline in sales of
the oncology drug Erbitux (-7.5%).
The ratio of research and development spending to sales was 14.3%
(2016: 16.8%). Overall, the average number of employees working
in research and development was 2,515. Merck KGaA is one of the
main research sites of the Merck Group, accounting for a share of
32.0% (2016: 38.0%) of total Group research and development
spending. The decrease in this share was due on the one hand to
lower research and development costs of Merck KGaA and on the other
hand to higher research and development costs of the Merck Group.
For 2017, we are proposing to the General Meeting the payment of a
dividend of € 1.25 per share.
648
624
574
531
128
118
10,473
9,744
166
Combined Management Report
Additional information on Merck KGaA in accordance with the German Commercial Code (HGB)
Risks and opportunities
Merck KGaA is largely subject to the same opportunities and risks
as the Merck Group. More information can be found in the Report on
Risks and Opportunities.
Forecast for Merck KGaA
DEVIATIONS OF ACTUAL BUSINESS DEVELOPMENTS
2,320
Dividend
2,515
3,072
Personnel
As of December 31, 2017, Merck KGaA had 10,677 employees, which
was an increase over the previous year (2016: 9,988).
Average number of employees by functional area:
PERSONNEL
Average number of employees during the year
Production
Administration
Research
Logistics
Sales and marketing
Other
Total
2017
2016
3,536
3,270
2,881
s. Stefan Oschmann
Three-year average of the profit after tax
172
Three years
mance indicator
Period
Limit
Key perfor-
Three-year average of the profit after tax of the
E. Merck Group
PROFIT SHARING
Profit sharing
Statement on Corporate Governance
s. Wolfgang Büchele
Corporate Governance
Moreover, the members of the Executive Board receive performance-
independent additional benefits. These consist mainly of contributions
to insurance policies, personal security expenses as well as a company
car, which they may use privately.
Additional benefits
PERFORMANCE-RELATED COMPENSATION
Performance-related compensation comprises profit sharing as well
as the Merck Long-Term Incentive Plan. Both performance-related
compensation components are based on multi-year steering para-
meters. The regulatory requirements of the German Stock Corporation
Act and the German Corporate Governance Code are taken into
account, and particular recognition is given for sustainable corporate
development.
The fixed compensation received by the members of the Executive
Board comprises firmly agreed and performance-independent amounts
that are paid in the form of 12 equivalent monthly installments.
Fixed compensation
AND ADDITIONAL BENEFITS
PERFORMANCE-INDEPENDENT COMPENSATION
174
Within the scope of profit sharing, at the end of a fiscal year the
members of the Executive Board receive individually fixed per mille
rates based on the three-year average of the profit after tax of the
E. Merck Group. The current and the two preceding years are included
in the calculation. The Personnel Committee of E. Merck KG decides
at its equitable discretion whether to consider exceptional factors of
particular importance. The use of profit after tax as the key perfor-
mance indicator, which also serves as the basis for dividend payments,
ensures very close alignment with the shareholder interests. The
amount of the individually fixed per mille profit-sharing rates is stag-
gered by intervals. Through staggering, the achievement of an average
profit after tax of more than € 1 billion is more strongly incentivized
than amounts below € 1 billion. However, insofar as the average
profit after tax is more than € 1.5 billion, the amount greater than
€ 1.5 billion is not taken into account when determining profit sharing.
To appropriately take into account the individual performance of the
Executive Board members, since fiscal 2017 the Personnel Committee
has been able to adjust the payment by applying a factor ranging
from 0.7 to 1.3. The performance factor makes it possible to recognize
superb performance of a member of the Executive Board by multiplying
profit sharing by a value greater than 1.0 up to 1.3. Similarly, multi-
plying by a value less than 1 down to 0.7 can lower profit sharing if
the case calls for it. The maximum profit-sharing payment is set indi-
vidually.
Individual
profit-sharing
Payout 2017
(€)
=
Individual
performance
factor
0.7-1.3
Until the end of 2017 E. Merck KG had the possibility in exceptional
cases to grant at its own or equitable discretion set amounts for
one-time payments to the Personnel Committee responsible for the
compensation of Executive Board members. One-time payments
made it possible to recognize outstanding performance or successes
of an Executive Board member that had a significantly positive eco-
nomic impact on the Merck Group.
One-time payments until the end of fiscal 2017
3
FY 2017
Profit after tax
Profit after tax
FY 2016
FY 2015
+
Profit after tax
of the E. Merck Group
rate in per
mille
X
X
Change
¹Excluding additional benefits, company pension and one-time payments.
Fixed compensation
Individual, absolute maximum amount
Performance-
compensation
Performance-
related
COMPENSATION ELEMENTS AND COMPENSATION STRUCTURE1
the Merck Long-Term Incentive Plan. It is complemented by contribu-
tions to the company pension plan as well as additional benefits and
possible one-time payments. The components of the compensation
system are as follows:
THE COMPONENTS OF THE COMPENSATION SYSTEM
The compensation system for the Executive Board basically comprises
the three main components fixed compensation, profit sharing and
OVERVIEW OF THE STRUCTURE AND
173
Statement on Corporate Governance
Corporate Governance
The compensation system for fiscal 2017 was presented to the
General Meeting in April 2017 for approval. However, majority
approval was not granted. To account for the suggestions made by
our shareholders, with support from an independent compensation
consultant the compensation system has been further revised with
effect from 2018, taking into consideration the regulatory requirements
and the internal company strategy. The descriptions of the planned
changes to the respective compensation elements can be found in
the section entitled "Outlook".
In this context, the Personnel Committee of E. Merck KG has identified
the need for change in order to conform even more thoroughly with
the new organizational positioning and the principles of sustainable,
performance-oriented corporate governance. As of January 1, 2017,
the new Merck Long-Term Incentive Plan and the Share Ownership
Guideline were introduced. Moreover, the company pensions for Belén
Garijo, Kai Beckmann and Marcus Kuhnert were changed from defined-
benefit to defined-contribution pension obligations. Furthermore, for
profit sharing, the Personnel Committee resolved to individually
assess as of 2017 the performance of each Executive Board member
using a performance factor ranging from 0.7 to 1.3.
• Distribution of responsibilities within the Executive Board
Granting of loans and salary advances
Assumption of honorary offices, board positions and other sideline
activities
•
Merck Long-Term Incentive Plan
• Contents of Executive Board member contracts
LONG-TERM INTERESTS OF OUR SHAREHOLDERS
The long-term interests of our shareholders are taken into account
through a significantly high amount of variable, percentage-related
compensation as a proportion of total compensation as well as the
compensation system's strong focus on the share price. The per-
formance of the Executive Board members should be properly
recognized, with the failure to meet targets leading to a noticeable
reduction in performance-related compensation.
The execution of the long-term Group strategy is promoted through
the selection of appropriate, ambitious key performance indicators
for performance-related compensation. Against this background,
our performance-related compensation components (profit sharing
and Merck Long-Term Incentive Plan) orient towards the key per-
formance indicators of the Group.
LONG-TERM GROUP STRATEGY
PRINCIPLES OF GOOD CORPORATE GOVERNANCE
The design of the compensation system and the determination of
individual compensation orient towards the German Stock Corpo-
ration Act and the German Corporate Governance Code. Within
the regulatory framework conditions, the objective is to offer the
Executive Board members a competitive compensation package in
line with market practice.
With respect to the specific components of compensation, the set-
ting of individual compensation, the selection of the key performance
indicators as well as the definition of payment and allocation rules,
the following principles are either followed or taken into consideration:
Furthermore, Executive Board compensation orients towards the
external peer environment of Merck KGaA, meaning in a comparison
with other German blue-chip companies as well as international com-
petitors. The relationship between Executive Board compensation and
the compensation of top management and the workforce as a whole
continues to be taken into account, also in a multi-year assessment.
The Personnel Committee regularly commissions an independent
compensation consultant to review the appropriateness of the com-
pensation.
The compensation paid to the members of the Executive Board
takes into account the responsibilities and duties of the individual
Executive Board members, their status as personally liable partners,
their individual performance, the economic situation, as well as the
performance and future prospects of the company.
As the world's oldest pharmaceutical and chemical company, Merck
attaches great importance to responsible governance and entrepre-
neurship. This is also reflected by the compensation of the members
of the Executive Board of Merck KGaA. Unlike management board
members of stock corporations, they are not merely employed members
of a corporate board. Rather, they are personally liable general partners
of both Merck KGaA and the general partner E. Merck KG, and in this
capacity they receive profit sharing from E. Merck KG. Owing to the
legal form as a KGaA (corporation with general partners), the stipula-
tions of the German Corporate Governance Code concerning the
compensation of management board members of publicly listed German
stock corporations as well as the individual disclosure thereof do not
apply to the Executive Board members of Merck KGaA. Nevertheless,
we have decided to comply with the requirements of the German
Corporate Governance Code.
COMPENSATION PHILOSOPHY
(The compensation report is part of the audited consolidated financial
statements.)
independent
compensation
Compensation report
Statement on Corporate Governance
Corporate Governance
In our company, unlike publicly listed German stock corporations, it
is not the Supervisory Board, but the Board of Partners of E. Merck KG
that decides on the amount and composition of compensation
received by our Executive Board members. The Board of Partners
has assigned this task to its Personnel Committee. The Personnel
Committee is thus primarily responsible for the followings topics as
they relate to our Executive Board and the compensation thereof:
• The design and review of performance-independent and performance-
related compensation components
• Performance Share Plan based on virtual shares (Merck Share Units)
€ million
• Key performance indicators: relative share price development versus the
DAX® (50%), EBITDA pre margin (25%), organic sales growth (25%)
• Absolute maximum of 250% of the individual grant
• Key performance indicator: Three-year average of the profit after tax of the
E. Merck Group
• Consideration of individual performance via the performance factor in a range
from 0.7 to 1.3
Individual, absolute maximum amount
Profit sharing
in-house research.
Additionally, we
collaborate closely
with start-ups and
universities around
the world."
29.4%
27.9%
-3.0%
-133
4,415
4,282
16.5%
4,414
1.8%
44
2,481
2,525
2.0%
Consolidated Statement of Changes in
Net Equity
103
16.5%
4,490
-76
-1.7%
Science
Healthcare
Life
Merck
Business sectors
1 Not defined by International Financial Reporting Standards (IFRS).
3,318
3,318
-0.8%
-0.05
Review of Forecast against Actual
Business Developments
6.21
59.5%
2.23
3.75
5.98
59.9%
977
1,633
2,610
29.9%
28.8%
6.16
212
110
and new approaches
come from our
Y
Curious Minds
CURIOUS
MINDS
Young people as the source of impetus and ideas: They are experts
in their respective fields, international aspiring young scientists,
founders, unconventional thinkers. They succinctly and self-confidently
outline their expectations of a better future and the Executive Board
explains what Merck is doing in this respect.
Online
Videos of the full
interviews can be
found at
ar.merckgroup.com/2017/magazine/
curious-minds
Magazine
CURIOUS
9
10
Magazine
STEFAN OSCHMANN
Chairman of the Executive Board, CEO of Merck
SIMON CLARK
"Things only improve if
there are people who
have crazy ideas and try
out something new."
"We are infinitely
curious - and have
been for 350 years.
Many fresh, un-
conventional ideas
MINDS
8
* The management report of Merck KGaA has been
combined with the Group management report and
published in both the 2017 Merck Annual Report and
the annual financial statements of Merck KGaA. The
authoritative German versions of the annual financial
statements and the combined management report of
the Merck Group and Merck KGaA for 2017 have been
filed with the electronic German Federal Gazette and
are available on the website of the German company
register.
Additional information on Merck KGaA
in accordance with the German
Commercial Code (HGB)
Course of Business and Economic
Position
299 Responsibility Statement
110
Merck Group
300 Independent Auditor's Report
121
Healthcare
129
Life Science
134
Performance Materials
306
308
Business Development 2013-2017
Information and Service
139
Corporate and Other
140
Report on Risks and Opportunities
303
152 Report on Expected Developments
158 Report in accordance with section 315
(4) of the German Commercial Code
(HGB)
160
Notes to the Consolidated Financial
Statements
Financial Calendar for 2018
MAGAZINE
210
Operating result (EBIT)¹
Net sales
€ million
Key figures
MERCK GROUP
Key figures for 2017
€ 15 million, we are continuing to build on our
expertise as the market and technology
leader in liquid crystals for displays by moving
into other applications beyond televisions,
laptops, smartphones, and tablet PCs.
Margin (% of net sales) 1
We open our new production facility for liquid
crystal window modules in Veldhoven, a town near
Eindhoven. With an investment of around
November 30
We exhibit at Europe's most important motor
show with our own stand for the first time.
Our presentation centers on high-tech materials
for lighting, antennas, displays and surfaces.
Show (IAA) in Frankfurt
Debut at the International Motor
September 12
in this key global science region. The new facility
serves as a regional hub for scientific advances
and customer collaboration. The Greater Boston
area is a hotbed of life science innovation.
We open a new Life Science Center in Burlington,
north of Boston, to strengthen our presence
Liquid crystal window modules facility
in the Netherlands
New Life Science Center in Burlington,
Massachusetts
EBITDA¹
EBITDA pre¹
2016
4,414
2017
15,327
2017
€ million
MERCK GROUP
EBITDA pre¹
Margin (% of net sales)¹
€ million
MERCK GROUP
1 Not defined by International Financial Reporting Standards (IFRS).
Business free cash flow¹
Earnings per share pre (€)¹
Earnings per share (€)
Profit after tax
Margin (% of net sales)¹
Net sales
October 23
THE FUTURE
DRIVING
July 21
Highlights of 2017
Less than two months later, the FDA
grants the next approval for BavencioⓇ
for the treatment of patients with
advanced or metastatic urothelial cancer.
BavencioⓇ receives accelerated
approval in the United States for
bladder cancer
May 9
Big Data partnership with Palantir
We want to use the advanced data analytics
capabilities of the U.S. company Palantir to
more rapidly develop and deliver medicines
and commercialize new products. This could
also play a part in the development of en-
tirely new therapeutic options for patients in
the future. Initially, we will use Palantir's
technology in cancer treatment and patient
services. Later on it can be used in other
areas of the company.
January 12
New Performance Materials
The U.S. Food and Drug Administration
(FDA) grants the first approval of an
oncology treatment for metastatic Merkel
cell carcinoma.
March 23
We enter into a licensing agreement with
Vertex Pharmaceuticals for four promising R&D
DDR programs. The addition of the DDR port-
folio in-licensed from Vertex to our own in-house
DDR platform has positioned us as one of the
key players in the DDR field.
response (DDR)
Merck builds portfolio in DNA damage
January 11
Highlights of 2017
Table of contents
FDA grants accelerated approval
of BavencioⓇ in rare and aggressive
form of skin cancer
application laboratory in Shanghai
We open an applications laboratory in China through
which we provide comprehensive, customized
services for our quality products. This also effectively
allows us to seek and foster creative collaboration
with customers for new applications and
formulations.
August 25
We are preparing strategic options for
Consumer Health. These include both a full or
partial sale of the business as well as strategic
partnerships. We are thus focusing on our
innovation-driven Biopharma pipeline and are
initiating the next stage of the successful further
development of the Consumer Health business.
Merck examines strategic options for
Consumer Health
September 5
The European Commission approves our oncology
medicine BavencioⓇ in this rare and aggressive form
of skin cancer.
EU approval of BavencioⓇ in Merkel cell
carcinoma
September 21
Nasivin
Merck divests Biosimilars business
The closing of the Biosimilars sale to Fresenius
announced on September 1 is in line with our
strategy to focus the Healthcare business sector on
the pipeline of innovative medicines in oncology,
immuno-oncology and immunology. Merck receives
an upfront payment of € 156 million and is entitled
to milestone payments of up to € 500 million, plus
royalties on future product sales.
September 1
The European Patent Office grants Merck the patent
for its CRISPR technology used in a genomic inte-
gration method for eukaryotic cells. Merck was awarded
similar patents by the Australian, Canadian and
Singapore patent offices over the course of 2017.
Patent for CRISPR technology
August 3
At the first Seoul Biennale of Architecture and
Urbanism, together with our collaboration partners
OLEDWorks, OPVIUS and Kolon, we present a
new textile façade concept combining OPV (organic
photovoltaics) and OLED (organic light-emitting
diode) technologies.
We light up Seoul
August 31
MavencladⓇ (cladribine tablets) is approved for MS
patients in the EU, and is the first oral short-course
treatment for highly active relapsing multiple
sclerosis.
European Commission gives the green light
for MavencladⓇ
15,024
Sector-Specific Environment
2016
2015
198
170
169
167-202
Corporate Governance
People at Merck
094
Capital structure and corporate bodies
of Merck KGaA
Research and Development
Corporate Responsibility
074
Internal Management System
070
Chemical processes are driving fast technological
change in the fascinating world of atoms and molecules.
Merck offers a broad portfolio of specialty chemicals
that can be encountered almost everywhere: whether in
consumer electronics, architecture, automobiles, or
even the universe.
064 Objectives and Strategies
Merck
083
057
Statement on Corporate Governance
200 Objectives of the Supervisory Board
with respect to its composition and
profile of skills and expertise
Macroeconomic and
100
Consolidated Cash Flow Statement
209
Report on Economic Position
100
Consolidated Balance Sheet
Report of the Supervisory Board
208
Consolidated Statement of
207
Consolidated Income Statement
206
203-298
Financial Statements
Consolidated
Comprehensive Income
Fundamental Information
about the Group
057
34-41
in %
€ million
2016
2017
Change
3,253
2013 -
15,327
10,735
3,388
2014
11,363
2014
3,630
2015
12,845
2013
15,024
Curious Minds
08-15
Welcome to space
55-164
Management Report*
Combined
052 Merck Shares
050 The Executive Board
045 Letter from Stefan Oschmann
42-54
To Our Shareholders
REPORT
Working closely with the global scientific community,
our Life Science business sector is developing numerous
innovative products and solutions for biotech and
pharmaceutical research. The new tools and processes
that we offer are helping our customers to capture the
potential of genome medicine.
28-33
New ways of
identifying disease
At Merck, patients are at the forefront. That's why we
invest substantial amounts in new therapies - for
example to improve the treatment of cancer or multiple
sclerosis (MS). At our research and development hubs
in Darmstadt, Boston, Beijing, and Tokyo, around 3,000
employees work in global networks for the benefit of
patients.
16-27
An insatiable passion
for research
Young people as the source of impetus and ideas:
They are experts in their respective fields, international
aspiring young scientists, founders, unconventional
thinkers. They succinctly and self-confidently outline
their expectations of a better future and the Executive
Board explains what Merck is doing in this respect.
4,490
Performance
Materials
EBITDA pre
margin
Statement on Corporate Governance
Belén Garijo
2016
1,067
6
2,683
1,700
19,336
-376
1,316
840
2017
800
21
2,200
1,320
13,804
5,072
5,928
1,779
19,555
4,288
91
(since April 30, 2016)
2016
533
50
1,098
1,150
13,081
891
2,572
438
2017
1,100
49
3,000
1,870
1,256
4,277
-385
Marcus Kuhnert
Bernd Reckmann
2017
(until April 29, 2016)
Corporate Governance
For 2017, in addition to the current service costs of € 396 thousand, there were past service benefits of € 2,424 thousand (total service benefits: € 2,028 thousand) for Kai Beckmann.
1 For 2016, in addition to current service costs of € 852 thousand, there were past service costs of € 3,506 thousand (total service cost: € 4,358 thousand) for Stefan Oschmann due to the
increase in the pensionable compensation and percentage entitlement in connection with his appointment as Chairman of the Executive Board.
6,500
1,000
4,456
168
168
168
157
2,729
396
7,407
396
1,432
396
5,193
6,332
2,847
1,256
4,799
17,061
2016
800
20
1,956
1,320
15,014
1,022
3,798
1,518
Karl-Ludwig Kley
2017
(until August 31, 2016)
2016
867
14
2,756
1,500
1,162
13,804
1,320
2,200
3,700
2,255
23,581
2,146
7,310
-375
Stefan Oschmann
2016
1,267
24
3,278
2,000
22,748
1,549
6,118
2,279
Udit Batra
164
2017
1,300
Current members
Performance-independent
components
Performance-related components
Total
Expense (+)/
Income (-)
recorded in
the period for
share-based
compensation³
Profit sharing
Fixed
compensation benefits
Additional
(without a
long-term
incentive
effect)
Merck Long-Term Incentive Plan
(with a long-term incentive effect)
Grant value
(€ thousand) (€ thousand) (€ thousand) (€ thousand)
Number of
MSUS
Time value²
(€ thousand)
(€ thousand)
(€ thousand)
2017
832
1,000
2,800
1,361
4,797
-388
Kai Beckmann
2016
Total
31
2,238
1,430
16,265
1,107
4,376
2,062
Walter Galinat
2017
800
32
14,954
12
1,430
36
1,705
17,830
1,623
5,435
-335
(since April 30, 2016)
2016
667
4
1,398
1,700
19,336
1,316
3,385
648
2017
1,000
2,400
Pursuant to the German Commercial Code (HGB), the total compen-
sation of the members of the Executive Board of Merck KGaA is as
follows, broken down by performance-independent and performance-
related compensation components:
4,288
7,011
2016
400
17
1,353
1,000
11,374
774
1,464
2,544
Total
2017
2016
6,000
6,601
314
166
16,300
16,760
9,900
11,800
1,898
1,464
1,464
671
5,638
2,146
LTI 2017 (2017 to 2019)
1,316
1,549
LTI 2016 (2016 to 2018)
Multi-year variable compensation
2,800
2,800
1,398
3,700
3,700
3,278
Profit sharing
1,012
1,012
1,012
103,528
9,421
32,035
-1,768
1,267
2017 2017 (min.) 2017 (max.)
1,300
1,300
1,300
2016
667
2017
1,000
2017 (min.) 2017 (max.)
1,000
1,000
Additional benefits
24
164
164
164
4
12
12
12
Fixed compensation
1,623
2016
Member of the Executive Board
134,215
9,137
32,664
12,530
1 Number of the potential MSUS subject to target achievement. For details see page 175/176 et seq. The actual number of MSUs to be granted after the expiration of the three-year performance
cycle may deviate from this.
2 Time value on the date of the grant (date of the legally binding entitlement). The amount of a payment is thus not predefined. Payment is subject to target achievement and is only made on a
specified date after the expiration of the three-year performance cycle. The time value of the obligations was calculated using a Monte Carlo simulation based on the previously described KPIs.
The expected volatilities are based on the implicit volatility of Merck shares and the DAX® in accordance with the remaining term of the LTIP tranche. The dividend payments incorporated into the
valuation model orient towards medium-term dividend expectations.
3 In accordance with IFRS the expense recorded for 2017 includes the values for the 2015, 2016 and 2017 LTIP tranches. In accordance with IFRS the expense recorded for 2016 includes the
values for the 2014, 2015 and 2016 LTIP tranches.
184
Corporate Governance
Statement on Corporate Governance
INFORMATION IN ACCORDANCE WITH THE REQUIREMENTS
OF THE GERMAN CORPORATE GOVERNANCE CODE
In accordance with the requirements of the German Corporate
Governance Code, the following tables present the compensation
granted for 2017, including additional benefits and the achievable
minimum and maximum values of the variable compensation com-
ponents, as well as the allocation of the respective compensation
components for fiscal 2017.
BENEFITS GRANTED FOR THE FISCAL YEAR
Stefan Oschmann
Chairman of the Executive Board
Udit Batra
Benefits granted (€ thousand)
4,263
Total
6,118
Profit sharing
832
832
832
583
1,036
1,036
1,036
1,031
Total
32
32
32
50
36
36
36
2,238
31
2,400
1,098
1,036
4,797
4,376
205
4,581
Total compensation
Current service cost¹
Total
3,300
1,256
3,575
1,361
LTI 2017 (2017 to 2019)
891
1,107
LTI 2016 (2016 to 2018)
Multi-year variable compensation
2,200
2,200
2,400
2,572
Additional benefits
800
2,865
8,711
6,970
Total compensation
254
1,401
1,401
1,401
852
Current service cost¹
8,075
1,012
5,435
3,385
10,802
1,464
7,310
12,203
800
3,639
379
1,391
800
533
1,000
2017 (min.) 2017 (max.)
2017
2016
2017 2017 (min.) 2017 (max.)
1,000
1,000
1,000
Fixed compensation
2016
Benefits granted (€ thousand)
Member of the Executive Board
Walter Galinat
Member of the Executive Board
Kai Beckmann
8,454
379
379
5,814
TOTAL COMPENSATION
1,000
Statement on Corporate Governance
Maximum limit
Overall
183
11111
1,000
1,500
2,800
4,263
5,638
1,000
2,400
3,575
8,000
8,000
1,500
2,200
3,300
8,000
1,100
1,500
1,500
Incentive Plan
(€ thousand)
sharing limit
(€ thousand)
OVERALL COMPENSATION LIMIT
Compensation amounts are limited not only in terms of the perfor-
mance-related components of one-time payments, profit sharing and
the Merck Long Term Incentive Plan, but also overall. The maximum
limits are presented in the following table:
Executive Board member
Stefan Oschmann
Udit Batra
Kai Beckmann
Walter Galinat
Belén Garijo
3,700
Marcus Kuhnert
compensation
(€ thousand)
1,300
Maximum one-
time payment
(€ thousand)
2,000
Maximum limit
Maximum profit Merck Long-Term
Fixed
Statement on Corporate Governance
3,000
2,200
Service cost of pension
obligations earned in the
current year
Present value of the
defined-contribution
2016
2017
pension obligation
as of Dec. 31
2016
2017
400
254
Contribution
level
379
633
400
205
396
5,948
3,977
400
688
254
1,500
IFRS
Marcus Kuhnert³
4,675
3,300
8,000
8,000
PENSION OBLIGATIONS
Effective January 1, 2017, for the Executive Board members Kai
Beckmann, Belén Garijo, and Marcus Kuhnert the individual contractual
pension agreements were changed from defined-benefit to defined-
contribution pension obligations, maintaining the direct commitment
modality¹. A defined-contribution pension agreement is also in place
with Udit Batra. Within the scope of these defined-contribution pension
obligations, every year an amount of € 400,000 is paid into a benefit
account and interest is paid on this at standard market interest rates.
Once the respective Executive Board members reach the contractually
agreed age limit and are no longer employed by E. Merck KG, the
amount in the benefit account is paid out either in ten annual install-
ments or as a one-time payment. The balance in the benefit account
is disbursed as a one-time payment, possibly topped up by additional
contributions (maximally ten contributions, up to the age of 60) in
the event of permanent disability, or in the event or death to surviving
dependents. The vested amount from the former defined-benefit
pension agreement was credited to the benefit account when the
changeover took place.
A defined-benefit pension obligation remains in place for Stefan
Oschmann and Walter Galinat. The old-age pension is determined in
accordance with a certain percentage of pensionable compensation.
The percentages can be found in the table below. The individual
contractual pension obligations grant Stefan Oschmann and Walter
Galinat entitlement to a lifelong old-age pension or surviving depend-
ents' pension in the event of reaching the individual contractually
agreed age limit, permanent disability, or death. As an alternative
to an old-age pension, the possibility also exists for the pension
obligation to be paid out as a lump sum calculated in accordance
with actuarial principles on reaching the individual contractually
agreed age limit.
Moreover, surviving dependents of the two Executive Board mem-
bers receive a surviving dependents' pension. For spouses, this
amounts to 60% of the pension entitlement. Dependent children are
entitled to either a half-orphan's or an orphan's pension maximally
until the age of 25.
1 For accounting purposes, this corresponds to a defined-benefit obligation within the meaning of IAS 19.8.
Total
Corporate Governance
179
The contribution amounts or pensionable compensation and the per-
centage obligation as well as the pension provisions and service costs
are listed in the following tables:
Defined-contribution obligations
€ thousand
Executive Board members as of Dec. 31, 2017
Udit Batra
Kai Beckmann¹
Belén Garijo²
Statement on Corporate Governance
398
Corporate Governance
of four years after having joined the Executive Board or after the
introduction of the rule. The Share Ownership Guideline promotes
even stronger alignment between the interests of the Executive
Board members and those of our shareholders and it additionally
raises the entrepreneurial responsibility of the Executive Board mem-
bers. Moreover, the introduction of the Share Ownership Guideline
takes into account the widespread practice of share ownership
among management and executive board members in international
peer comparisons.
• Relative share price development vs. the DAX® (5% weighting)
Cycle
Limit
Reference price
(share price for conversion into
numbers or for payment)
• EBITDA pre margin (25% weighting)
• Organic sales growth (25% weighting)
Three years
Key performance indicators
Absolute maximum amounting to 250% of the individual grant
The LTIP is based on a three-year performance, future-oriented per-
formance cycle. Consequently, this meets the new recommendation
added to the German Corporate Governance Code dated February 7,
2017 according to which the multi-year assessment basis of variable
compensation components is to essentially have forward-looking
aspects.
As part of the LTIP, the members of the Executive Board are eligible
to receive a certain number of virtual shares - Merck Share Units
(MSUS). The number of MSUs is calculated as follows:
176
Corporate Governance
Statement on Corporate Governance
At the beginning of the performance cycle, for each Executive Board
member the Personnel Committee sets an individual grant in euros.
This grant is then divided by the definitive reference share price at
the beginning of the performance cycle, resulting in the number of
MSUS they could be eligible to receive.
The final number of MSUs that are actually allocated to the Exec-
utive Board members after the performance cycle has expired
depends on the development of three weighted key performance
indicators over the three-year performance cycle:
a) the performance of the Merck share price compared with the
performance of the DAX® with a weighting of 50%,
Average closing price of Merck shares in XetraⓇ trading during the last 60 trading days prior to the beginning
or the end of the performance cycle
b) EBITDA pre margin, as a proportion of a defined target value
with a weighting of 25%, and
MERCK LONG-TERM INCENTIVE PLAN (LTIP)
• Clear failure to achieve targets for relevant key performance
indicators in the area of responsibility.
175
Outlook for fiscal 2018:
For fiscal 2018, the Personnel Committee decided to eliminate the contractually stipulated possibility of one-time payments to members
of the Executive Board within the scope of performance-related compensation. This adjustment measure serves primarily to take our
international shareholder structure into account.
Moreover, the Personnel Committee resolved to define criteria applicable to the adjustment of profit sharing by applying the factor
in a range of between 0.7 and 1.3. Insofar as the adjustment increases or decreases the profit sharing of a member of the Executive Board,
this is to be published in the Compensation Report.
Adjustment criteria for increasing profit sharing could include the
following:
•
Extraordinary success in connection with M&A activities of the
Merck Group;
Extraordinary success in the sustainable strategic, technical,
product-related or structural further development or reorgani-
zation of the Merck Group;
Merck Long-Term Incentive Plan
Extraordinary performance in the execution of especially impor-
tant projects or the achievement of other exceptionally important
objectives in the area of responsibility;
Extraordinary contributions to meeting the expectations and
objectives of our stakeholders (for example employee satisfaction,
customer satisfaction, Corporate Social Responsibility, imple-
mentation of diversity requirements).
Adjustment criteria for lowering profit sharing could include the
following:
• Violations of internal rules and regulations (for instance the Merck
Code of Conduct), laws or other binding external requirements
in the area of responsibility; or
Significant breaches of duty of care within the meaning of sec-
tion 93 of the German Stock Corporation Act or other grossly
non-compliant or unethical behavior; or
• Behaviors or actions that are contradictory to our company values;
•
or
Failure to execute especially important projects or failing to
achieve other exceptionally important objectives in the area of
responsibility; or
Extraordinary performance leading to a clear overachievement
of targets for relevant key performance indicators in the area of
responsibility;
178
c) The organic sales growth of the Merck Group as a proportion
of a defined target value with a weighting of 25%.
FY 2017
Weighting: 25%
x
Reference
Merck share
price at
the end
0%-200%
Payout
(0%-250% of
the grant (€)
The Merck Long-Term Incentive Plan thus links two key performance
indicators derived from the strategy with an external, relative key
performance indicator. On the one hand, this creates an incentive to
achieve strategic objectives. On the other hand, the stronger share
price orientation takes into account the company's long-term devel-
opment prospects and the expectations of our shareholders. To pre-
vent distortions as a result of exceptional factors as well as to directly
reflect the performance of the Executive Board members, the EBITDA
pre margin is used.
Depending on the development of the KPIs, after the end of the
three-year performance cycle the members of the Executive Board
are definitively allocated between 0% and 150% of the MSUS they
could be eligible to receive. The value of these MSUS is paid out to
the Executive Board in the year after the three-year performance
cycle has ended. For this, the final allocated number of MSUS it
multiplied by the definitive reference share price at the end of the
performance cycle. The maximum increase in the share price is limited
to 200% of the reference price at the beginning of the performance
cycle, thus limiting participation in external effects that contribute
to share price increases. Apart from setting a limit on the final number
of allocated MSUS and on the applicable share price increase, the
overall LTIP payment is limited to 250% of the individual grant. If
targets are clearly missed, it is also possible that absolutely no pay-
ment is made from the Merck Long-Term Incentive Plan (0%).
Weighting: 25%
Corporate Governance
177
Outlook: Introduction of the clawback rule
Through their status as personally liable general partners of
Merck KGaA and of the general partner E. Merck KG, the Executive
Board members bear a very unique entrepreneurial responsibility.
This is also reflected by the penalty criteria set forth in profit
sharing and by the German statutory regulations on liability for
damages stipulated in section 93 of the German Stock Corporation
Act.
To incentivize the extent of entrepreneurial responsibility and
personal liability above and beyond this, effective January 1, 2018
a clawback clause has been added to the LTIP rules. This makes it
possible to withhold already allocated grants from the LTIP. Use can
be made of this possibility in cases such as violations of internal
rules and regulations (for instance the Merck Code of Conduct),
laws or other binding external requirements in the area of respon-
sibility; significant breaches of duty of care within the meaning of
section 93 of the German Stock Corporation Act; grossly non-
compliant or unethical behavior; or behaviors or actions that are
contradictory to our company values.
Outlook: Subsequent disclosure of the performance corridor
To further increase the transparency of the Executive Board com-
pensation system, in the future the performance corridor for the
key performance indicators used in the Merck Long-Term Incentive
Plan will be subsequently disclosed. However, the company will
continue to refrain from publishing this performance corridor in
advance as this could permit market- and competitively relevant
conclusions to be drawn about strategic objectives.
Share Ownership Guideline
A Share Ownership Guideline was introduced in 2017. This obligates
the Executive Board members, for the duration of their employment
relationship, to permanently hold Merck shares in an amount equal
to 100% of their annual gross fixed compensation. Owing to his
position as Chairman of the Executive Board, Stefan Oschmann is
obligated to hold a higher amount, or 200% of his annual gross fixed
compensation, in Merck shares. The duty to provide evidence of the
complete number of shares must be met no later than on expiration
Statement on Corporate Governance
FY 2016
Weighting: 50%
vs. the DAX®
FY 2018
FY 2019
Grant in €
Reference
Merck share
price at the
beginning
Performance cycle
Potential
Number of
actually
granted
MSUS
0%-150%
Performance
of the Merck
x
+
MSUS for
share price
+
Organic
sales
growth
the grant
number of
1,501
compensation
(€ thousand)
9,800
400
Performance
factor for
individual
performance
2017
2.15
1
1.63
1
1.39
1
1.28
1
1.74
1
1.28
1
182
Corporate Governance
Statement on Corporate Governance
Merck Long-Term Incentive Plan
Until the beginning of fiscal 2017, payment from the Merck Long-
Term Incentive Plan was based on the achievement of specific targets
with respect to the development of the Merck share price compared
with the DAX® as well as the development of the EBITDA pre margin
during the three-year performance cycle. The following table presents
Average
profit-sharing rate
in per mille 2017
In fiscal 2017, the individual performance factor was not used to
adjust profit sharing.
Marcus Kuhnert
Belén Garijo
(€ million)
Profit after tax of the E. Merck Group
Three-year average of the profit after tax of the E. Merck Group
(2014-2016)
Three-year average of the profit after tax of the E. Merck Group
(2015-2017)
2014
1,104
2015
1,066
2016
2017
the target values that lead to 100% target achievement relative to
the respective key performance indicator. Below the lower target
corridor limit, target achievement for the respective KPI is 0%. Above
the upper target corridor limit, target achievement no longer
increases.
1,559
1,243
1,724
The amount of the individually fixed per mille profit-sharing rates is
staggered by intervals. This staggering incentivizes the achievement
of an average profit after tax of more than € 1 billion more strongly
than amounts below € 1 billion. However, insofar as the average
profit after tax is more than € 1.5 billion, the amount greater than
€ 1.5 billion is not taken into account when determining the profit-
sharing payment. The average profit-sharing rates in per mille for
the members of the Executive Board in 2016 and 2017 were as
follows:
Member of the Executive Board
Stefan Oschmann
Udit Batra
Kai Beckmann
Walter Galinat
2,549
Key performance indicator
Key performance indicator¹
Lower target
corridor limit
Target
achievement
Merck LTIP
tranche 2014
Key performance indicator¹
Share price development relative to the DAX®
(external key performance indicator)
-20%
0%
50%
36.3%
136.3%
EBITDA pre margin
(internal key performance indicator)
25%
28%
31%
29.6%
126.7%
1The key performance indicator organic sales growth became a component of the Merck Long-Term Incentive Plan in 2017 and is therefore not relevant for target achievement of the tranche in
fiscal 2014.
Corporate Governance
value Merck LTIP
tranche 2014
Upper target
corridor limit
Target
Lower target
corridor limit
Target
Upper target
corridor limit
Actually achieved
value Merck LTIP
tranche 2013
Target
achievement
Merck LTIP
tranche 2013
(external key performance indicator)
EBITDA pre margin
(internal key performance indicator)
-20%
Share price development relative to the DAX®
0%
27%
50%
30%
30.4%
28.8%
130.5%
130.1%
1The key performance indicator organic sales growth became a component of the Merck Long-Term Incentive Plan in 2017 and is therefore not relevant for target achievement of the tranche in
fiscal 2013.
Actually achieved
24%
4,162
1,291
157
16,760
15,441
1,569
1,009
6,958
6,857
168
¹ For 2016, in addition to current service costs of € 852 thousand, there were past service costs of € 3,506 thousand (total service cost: € 4,358 thousand) due to the increase in the pensionable
compensation and percentage entitlement in connection with the appointment as Chairman of the Executive Board. The percentage entitlement for Stefan Oschmann increases as of 2017 until
retirement by two percentage points per year of service up to 70%.
Within the scope of profit sharing, at the end of a fiscal year the
members of the Executive Board receive individually fixed per mille
490
1,240
9,802
8,584
1,401
852
62
750
65
2017
180
Statement on Corporate Governance
Statement on Corporate Governance
Corporate Governance
The compensation system for our Executive Board is geared to suitably
rewarding the performance of Executive Board members in terms of
sustainable corporate development and the creation of shareholder
value whereas the failure to meet targets leads to a noticeable
decrease in performance-related compensation. In response to the
suggestions from our shareholders and to further increase the trans-
parency of the Executive Board compensation system, the following
tables present the average individual profit-sharing rates and the
performance corridors for the key performance indicators used in the
Merck Long-Term Incentive Plan.
PERFORMANCE-RELATED COMPENSATION IN 2017
The total compensation of the Executive Board of Merck KGaA
includes both the compensation received from E. Merck KG as well
as possibly also from subsidiaries consolidated in the Group financial
statements. Should members of the Executive Board be held liable
for financial losses while executing their duties, under certain circum-
stances this liability risk is covered by a D&O insurance policy from
Merck KGaA. The D&O insurance policy has a deductible in accordance
with the legal requirements and the recommendations of the German
Corporate Governance Code.
MISCELLANEOUS
MEMBERS AND THEIR SURVIVING DEPENDENTS
Payments to former members of the Executive Board or their surviving
dependents are made for a limited period of time and represent
continued payment of fixed compensation in the event of death as
well as pension payments. In fiscal 2017, these amounted to € 12,786
thousand (2016: € 11,850 thousand). Pension provisions for 2017
amounted to € 152,973 thousand (2016: € 143,073 thousand).
Corporate Governance
PAYMENTS TO FORMER EXECUTIVE BOARD
LOANS AND ADVANCES
The contracts of the Executive Board members further provide
for the continued payment of fixed compensation to surviving
dependents for a limited period of time in the event of death. Above
and beyond existing pension obligations, no further obligations exist
in the event of the termination of the contractual relationships of the
Executive Board members.
The employment contracts of Stefan Oschmann, Kai Beckmann
and Udit Batra each contain a post-contractual non-competition clause.
As compensation for each year of the two-year non-competition period,
an amount equal to 50% of the average contractual benefits paid to
the respective Executive Board member within the past 12 months
prior to leaving the company shall be provided. During the period of
the non-competition clause, other employment income and pension
payments will be credited to this compensation. Within certain time
limits, E. Merck KG has the possibility to dispense with adherence to
the non-competition clause with the consequence that the obligation
to make the compensation payments shall no longer exist. Owing to
the non-competition clause, Karl-Ludwig Kley received compensation
of € 936 thousand for 2016 and € 234 thousand for 2017.
If an Executive Board member's duties prematurely end due to
the termination of the employment contract either by the company
or the Executive Board member before the performance cycle of an
open tranche in the Merck Long-Term Incentive Plan expires, the
obligations resulting from the plan are no longer applicable.
In the event of the early termination of the employment relationship,
without notice for good cause, the employment contracts of the
Executive Board members stipulate a cap on severance pay in
accordance with the recommendation of the German Corporate
Governance Code. Pursuant to this, payments in connection with the
termination of an Executive Board member's duties shall not exceed
twice the annual total compensation or constitute compensation for
more than the remaining term of the employment contract (severance
cap).
OF DUTIES AS AN EXECUTIVE BOARD MEMBER
BENEFITS IN THE EVENT OF TERMINATION
In 2017, the members of the Executive Board received no advances
or loans.
pension obligation
as of Dec. 31
2016
Present value of the
defined-benefit
2017
315
426
868
2,512
1,600
181
rates based on the three-year average of the profit after tax of the
E. Merck Group. The current and the two preceding years are relevant
here.
1,462
1,599
8,571
Profit sharing
¹For 2017, in addition to current service costs of € 396 thousand, there were past service benefits of € 2,424 thousand (total service benefits: € 2,028 thousand).
2 For 2017, in addition to current service costs of € 398 thousand, there were past service costs of € 2,184 thousand (total service cost: € 2,582 thousand).
3 For 2017, in addition to current service costs of € 426 thousand, there were past service costs of € 1,178 thousand (total service cost: € 1,604 thousand).
Defined-benefit obligations
€ thousand
Executive Board members as of Dec. 31, 2017
Service cost of pension
obligations earned in the
current year
2016
Pensionable Percentage
compensation entitlement
IFRS
Stefan Oschmann¹
Total
Walter Galinat
11,284
1,267
1,300
667
1,000
1,000
21
Additional benefits
21
21
20
49
49
6
Additional benefits
2017 (min.) 2017 (max.)
800
1,000
49
1,149
Corporate Governance
800
800
800
1,100
2017
2016
2017 2017 (min.) 2017 (max.)
1,100
1,100
1,067
Fixed compensation
2016
Benefits granted (€ thousand)
Member of the Executive Board
Marcus Kuhnert
Member of the Executive Board
Belén Garijo
2 Since July 1, 2016.
Statement on Corporate Governance
2017
1,073
2016
2016
8,824
3,798
4,277
821
6,321
Current service cost¹
688
398
398
398
Total compensation
5,760
6,326
1,547
9,222
315
4,113
426
426
426
4,703
1,247
1,149
5,928
5,072
Total
1,149
1,149
820
821
821
821
Profit sharing
2,683
3,000
3,000
6,747
1,956
2,200
Multi-year variable compensation
LTI 2016 (2016 to 2018)
1,316
1,022
LTI 2017 (2017 to 2019)
1,779
4,675
1,256
3,300
2,200
2017
Karl-Ludwig Kley
Benefits granted (€ thousand)
Total
4,799
Current service cost
2,544
346
Total compensation
4,799
2,890
1 For 2017, in addition to current service costs of € 398 thousand there were past service costs of € 2,184 thousand (total service cost: € 2,582 thousand) for Belen Garijo.
For 2017, in addition to current service costs of € 426 thousand, there were past service costs of € 1,178 thousand (total service cost: € 1,604 thousand) for Marcus Kuhnert.
186
Corporate Governance
Statement on Corporate Governance
ALLOCATION FOR THE FISCAL YEAR
Stefan Oschmann
Udit Batra
Allocation (€ thousand)
Fixed compensation
Chairman of the Executive Board
2016
Member of the Executive Board
Kai Beckmann
Member of the Executive Board
2017
LTI 2017 (2017 to 2019)
774
1,162
LTI 2016 (2016 to 2018)
2016
left on: August 31, 2016
2017
Total
Member of the Executive Board
left on: April 29, 2016
2017 (min.) 2017 (max.)
2016
2017
2017 (min.) 2017 (max.)
Fixed compensation
Member of the Executive Board
867
Additional benefits
14
17
Total
881
417
Profit sharing
2,756
1,353
Multi-year variable compensation
400
Bernd Reckmann
Alexander Putz
164
Member of the Executive Board
Member of the Executive Board
left on: August 31, 2016
left on: April 29, 2016
Allocation (€ thousand)
Fixed compensation
2016
2017
867
2016
400
2017
Additional benefits
14
17
Total
881
417
Profit sharing
Bernd Reckmann
Karl-Ludwig Kley
4,313
3,091
LTI 2014 (2014 to 2016)
Total
Current service cost¹
Total compensation
292
140
1,194
1,681
3,172
2,756
4,048
2,776
866
3,887
157
1,838
168
3,340
688
4,736
398
5,741
315
426
5,343
1,353
Multi-year variable compensation
LTI 2013 (2013 to 2015)
in €
Wolfgang Büchele
(Chairman)
Michael Fletterich
(Vice Chairman)
Crocifissa Attardo
Mechthild Auge
Gabriele Eismann
Edeltraud Glänzer
€ 47,000. The Chairman receives double and the Vice Chairman
receives one and a half times this amount. Moreover, the members
receive additional compensation of € 750 per meeting. The individual
values are presented in the following table:
Michaela Freifrau von Glenck
Albrecht Merck
Dietmar Oeter
Helga Rübsamen-Schaeff
Karl-Heinz Scheider¹
Gregor Schulz
Theo Siegert
Tobias Thelen
Veit Ulshöfer²
Siegfried Karjetta
LTI 2013 (2013 to 2015)
The compensation of the Supervisory Board members is defined by
Article 20 of the Articles of Association of Merck KGaA. The members
of the Supervisory Board receive annual fixed compensation of
187
LTI 2014 (2014 to 2016)
Total
Current service cost
Total compensation
7,072
2,769
3,435
2,290
COMPENSATION OF THE SUPERVISORY
BOARD MEMBERS OF MERCK KGAA
2,769
7,072
4,060
346
4,406
2,077
1 For 2016, in addition to current service costs of € 852 thousand, there were past service costs of € 3,506 thousand (total service cost: € 4,358 thousand) for Stefan Oschmann
due to the increase in the pensionable compensation and percentage entitlement in connection with his appointment as Chairman of the Executive Board.
For 2017, in addition to current service costs of € 396 thousand, there were past service benefits of € 2,424 thousand (total service benefits: € 2,028 thousand) for Kai Beckmann.
For 2017, in addition to current service costs of € 398 thousand, there were past service costs of € 2,184 thousand (total service cost: € 2,582 thousand) for Belén Garijo.
For 2017, in addition to current service costs of € 426 thousand, there were past service costs of € 1,178 thousand (total service cost: € 1,604 thousand) for Marcus Kuhnert.
Corporate Governance
Statement on Corporate Governance
2,077
Multi-year variable compensation
2,200
1,956
LTI 2014 (2014 to 2016)
Total
Current service cost¹
Total compensation
2,077
402
2,077
6,859
7,241
2,290
2,069
5,559
5,513
853
1,401
254
7,712
8,642
2,323
4,214
379
4,593
2,290
Multi-year variable compensation
4
12
31
36
Total
1,291
1,464
671
LTI 2013 (2013 to 2015)
1,012
1,036
Profit sharing
3,278
3,700
1,398
2,800
2,238
2,400
1,031
24
205
5,764
50
32
6
49
20
21
Total
583
Additional benefits
832
1,149
820
821
Profit sharing
1,098
2,200
2,683
3,000
1,073
396
800
1,100
5,909
Walter Galinat
Belén Garijo
Marcus Kuhnert
Member of the Executive Board
Member of the Executive Board
Member of the Executive Board
Allocation (€ thousand)
800
Fixed compensation
2017
2016
2017
2016
2017
533
800
1,067
2016
185
Total
The combined management report of Merck KGaA and the Merck Group
does not contain a non-financial declaration. Instead, we prepare a
separate, combined non-financial (Group) report, which we issue
pursuant to sections 289b - 289e and 315b - 315c HGB. This is
available effective April 27, 2018 as an online version on our website
at http://reports.merckgroup.com/2017/cr-report/. It is integrated into
the 2017 Corporate Responsibility Report in accordance with DRS 20
subsection 252 (b). We have prepared an overview of the information
contained in the combined non-financial (Group) declaration at
https://www.merckgroup.com/nfr17.
Belén Garijo
Eppertshausen, Member of the Executive Board
Walter Galinat
Darmstadt, CEO Performance Materials
Kai Beckmann
Wellesley, Massachusetts (USA), CEO Life Science
Stefan Oschmann
Munich, Chairman
Member
MEMBERS OF THE EXECUTIVE BOARD OF MERCK KGAA
Information on memberships of statutory supervisory boards and
comparable German and foreign supervisory bodies (section 285
No. 10 HGB in conjunction with section 125 (1) sentence 5 AktG).
Procedures of the Executive Board,
Supervisory Board, Board of Partners
and its Committees
191
Statement on Corporate Governance
Frankfurt am Main, CEO Healthcare
Corporate Governance
One of our major climate protection objectives is to achieve a
20% reduction in our greenhouse gas emissions by 2020 measured
against the 2006 baseline.
At Merck, closed-loop thinking guides the way in which we address
environmental concerns and environmental protection issues. To this
end, we integrate precautionary measures into our planning processes.
Our Environment, Health and Safety Policy with its principles and
strategies implements the guidelines formulated by the national and
international associations of the chemical industry in the Responsible
Care guidelines. The Responsible Care Global Charter developed by
the International Council of Chemical Associations (ICCA) in 2006
puts even more emphasis than before on overall responsibility for
products, supply chains and the community. Merck signed this
expanded version of Responsible Care for the entire Group in Feb-
ruary 2007. In addition, Merck was one of the first companies in 2014
to sign the new version of the Responsible Care Global Charter, which
is currently being rolled out by Merck internationally. We report our
ecological, economic and social performance transparently in accor-
dance with the internationally recognized principles of the Global
Reporting Initiative (GRI), taking into account the requirements of
the German Sustainability Code and the principles of the UN Global
Compact.
AND SAFETY STANDARDS
ADHERENCE TO ENVIRONMENTAL
In its report to the General Meeting, the Supervisory Board dis-
closes any conflicts of interest involving its members and how they
were dealt with. Consultancy agreements as well as other service
and work contracts of a Supervisory Board member with Merck
require the approval of the Supervisory Board. In fiscal 2017, there
were neither conflicts of interest nor consultancy agreements or
other service or work contracts with Merck KGaA involving Supervisory
Board members.
The Chairman of the Executive Board, Stefan Oschmann, and the
Chief Financial Officer, Marcus Kuhnert, are both members of the
Executive Board of E. Merck KG. This does not, however, create
conflicts of interest.
Before an Executive Board member takes on honorary offices,
board positions or other sideline activities, this must be approved by
the Personnel Committee of the Board of Partners of E. Merck KG.
Within the framework of their work, all Executive Board and Super-
visory Board members of Merck KGaA are exclusively committed to
the interests of the company and neither pursue personal interests
nor grant unjustified advantages to third parties.
AVOIDANCE OF CONFLICTS OF INTEREST
The Executive Board, the Supervisory Board and the Finance Com-
mittee are regularly informed about the current risk portfolio of the
Group and the individual companies. More detailed information can
be found in the Report on Risks and Opportunities on page 140 et seq.
RISK AND OPPORTUNITY MANAGEMENT
The Executive Board informs the supervisory bodies at least once
a year about the key compliance issues.
Many guidelines specify how the sites and employees of the Merck
Group are to observe the principles in their daily work. The Group
function Environment, Health, Safety, Security & Quality steers these
global activities and ensures compliance with regulatory requirements,
standards and business needs throughout the entire Group. In this
way, Group-wide risks are minimized and continuous improvement
is promoted in the areas of Environment, Health, Safety, Security
and Quality. Corporate Responsibility reports are also published at
regular intervals.
The Compliance Office reports regularly to the Executive Board
and the Supervisory Board, informing them of the status of compliance
activities (including training status), compliance risks and serious
compliance violations.
Marcus Kuhnert
Memberships of
Merck KGaA Darmstadt/Gernsheim
Wehrheim, Full-time member of the Works Council of
Mechthild Auge
Darmstadt, Full-time member of the Works Council of
Merck KGaA Darmstadt/Gernsheim
Crocifissa Attardo
Gernsheim, Chairman of the Works Council of
Merck KGaA Darmstadt/Gernsheim, Vice Chairman
Michael Fletterich
Munich, Managing Director M+W Group GmbH, Stuttgart
Wolfgang Büchele
Member
Statement on Corporate Governance
Corporate Governance
Königstein, Chief Financial Officer
SUPERVISORY BOARD
The Executive Board passes its resolutions in meetings that are
normally held once a month.
The Executive Board informs the Board of Partners and the
Supervisory Board at least quarterly of the progress of business and
the situation of the company. In addition, the Executive Board informs
the aforementioned boards at least annually of the company's annual
plans and strategic considerations.
The Executive Board provides the Supervisory Board with regular,
up-to-date and comprehensive reports about all company-relevant
issues concerning strategy, planning, business developments, the
risk situation, risk management and compliance. The rules of proce-
dure of the Executive Board and of the Supervisory Board as well as
a Supervisory Board resolution regulate further details on the infor-
mation and reporting duties of the Executive Board vis-à-vis the
Supervisory Board.
The general partners with no equity interest (Executive Board) manage
the business activities in accordance with the laws, the Articles
of Association and the rules of procedure. They are appointed by
E. Merck KG in accordance with the consent of a simple majority of
the other general partners. The members of the Executive Board are
jointly responsible for the entire management of the company. Certain
tasks are assigned to individual Executive Board members based on
a responsibility distribution plan. Each Executive Board member
promptly informs the other members of any important actions or
operations in his respective business area. The Executive Board is
responsible for preparing the annual financial statements of
Merck KGaA and of the Merck Group as well as for approving the
quarterly and half-year financial statements of the Merck Group. In
addition, the Executive Board ensures that all legal provisions, official
regulations and the company's internal policies are abided by, and
works to achieve compliance with them by all the companies of the
Merck Group. A Group-wide guideline defines in detail which trans-
actions require prior Executive Board approval.
no board positions
(b) - Banco Bilbao Vizcaya Argentaria S.A., Bilbao, Spain
- L'Oréal S.A., Clichy, France
no board positions
(a) - Bundesdruckerei GmbH, Berlin
(b) EMD Millipore Corporation, Billerica, Massachusetts (USA) (President)
no board positions
(b) comparable German and foreign supervisory bodies of corporations
(a) statutory supervisory boards and
192
Gabriele Eismann
Further significant elements of the Compliance program include
requirements on locally identifying and assessing risks and reporting
these, both within the subsidiary abroad and to the Group functions.
Group Compliance regularly reviews and assesses the implementation
status of the Compliance program at the subsidiaries abroad. In coop-
eration with Group Internal Auditing, the Compliance Office regularly
reviews the implementation of Group-wide compliance measures at
the subsidiaries abroad. The audits regularly focus on the local com-
pliance structure, the compliance measures taken, as well as the
existence of corresponding compliance guidelines and processes.
Statement on Corporate Governance
It is Merck KGaA's objective to provide the latest information to all
shareholders, media, financial analysts and interested members of
the public, while creating the greatest possible transparency. For this
reason, Merck uses a wide range of communication platforms to
engage in a timely dialogue with all interested parties about the
situation of the company and business changes. Merck's principles
include providing factually correct, comprehensive and fair information.
REPORTING
corporate governance practices
Information on
Statement on Corporate Governance
Corporate Governance
188
As of December 31, 2017, the members of the Executive Board and
of the Supervisory Board either directly or indirectly held 116,447 shares
of Merck KGaA. Their total ownership represents less than 1% of the
issued shares of Merck KGaA. Transactions executed by members of
the Executive Board and of the Supervisory Board are disclosed on
the Merck website at www.merckgroup.com/en/investors/corporate-
governance/directors-dealings.html.
OWNERSHIP, PURCHASE OR SALE OF SHARES IN THE
COMPANY BY MEMBERS OF THE EXECUTIVE BOARD AND
OF THE SUPERVISORY BOARD
As a member of corporate bodies of E. Merck KG, Supervisory Board member Wolfgang Büchele received an additional payment of € 140,000 for performing this function in 2017 (2016: € 140,000).
As a member of corporate bodies of E. Merck KG, Supervisory Board member Michaela Freifrau von Glenck received an additional payment of € 80,000 for performing this function in 2017 (2016: € 80,000).
As a member of corporate bodies of E. Merck KG, Supervisory Board member Siegfried Karjetta received an additional payment of € 140,000 for performing this function in 2017 (2016: € 140,000).
As a member of corporate bodies of E. Merck KG, Supervisory Board member Albrecht Merck received an additional payment of € 120,000 for performing this function in 2017 (2016: € 120,000).
As a member of corporate bodies of E. Merck KG, Supervisory Board member Helga Rübsamen-Schaeff received an additional payment of € 150,000 for performing this function in 2017 (2016: € 150,000).
As a member of corporate bodies of E. Merck KG, Supervisory Board member Gregor Schulz received an additional payment of € 140,000 for performing this function in 2017 (2016: € 140,000).
As a member of corporate bodies of E. Merck KG, Supervisory Board member Theo Siegert received an additional payment of € 150,000 for performing this function in 2017 (2016: € 150,000).
As a member of corporate bodies of E. Merck KG, Supervisory Board member Tobias Thelen received an additional payment of € 140,000 for performing this function in 2017 (2016: € 140,000).
50,000.00 50,000.00
50,000.00 50,000.00
0.00 25,000.00
Information subject to disclosure requirements, as well as infor-
mation that is not, can be accessed worldwide on the Merck KGaA
website (www.merckgroup.com), which is the company's most impor-
tant publication platform. Apart from a detailed financial calendar,
quarterly statements and/or quarterly and half-year financial reports
covering the past three years are available here in German and English.
In addition, in line with the legal requirements, ad hoc announcements
are published on the website. These contain information on circum-
stances and facts that could impact the Merck share price.
70,500.00 70,500.00 3,000.00 3,000.00 73,500.00 73,500.00
47,000.00 47,000.00 3,000.00 3,000.00 50,000.00 50,000.00
47,000.00 47,000.00 3,000.00 3,000.00 50,000.00 50,000.00
47,000.00 47,000.00 3,000.00 3,000.00 50,000.00 50,000.00
47,000.00 47,000.00 2,250.00 3,000.00 49,250.00 50,000.00
47,000.00 47,000.00 3,000.00 3,000.00 50,000.00 50,000.00
47,000.00 47,000.00 3,000.00 3,000.00 50,000.00 50,000.00
47,000.00 47,000.00 3,000.00 3,000.00 50,000.00 50,000.00
47,000.00 47,000.00 3,000.00 3,000.00 50,000.00 50,000.00
47,000.00 47,000.00 2,250.00 2,250.00 49,250.00 49,250.00
47,000.00 47,000.00 2,250.00 2,250.00 49,250.00 49,250.00
0.00 23,500.00
0.00 1,500.00
47,000.00 47,000.00 3,000.00 3,000.00
47,000.00 47,000.00 3,000.00 3,000.00
47,000.00 47,000.00 3,000.00 3,000.00 50,000.00 50,000.00
47,000.00 23,500.00 3,000.00 1,500.00 50,000.00 25,000.00
822,500.00 822,500.00 45,750.00 46,500.00 868,250.00 869,000.00
3,000.00 3,000.00
94,000.00 94,000.00
2016
2017
2016
2017
2016
Total compensation
Compensation for
meeting attendance
2017
Fixed compensation
1 Until June 30, 2016.
97,000.00 97,000.00
Merck set up a central SpeakUp line, employees and certain business
partners have been able to report compliance violations by telephone
or via a Web-based application in their respective national language.
The SpeakUp line is available 24 hours a day, free of charge. Case
numbers enable anonymous, two-way communication. The reports
received are individually reviewed. If a compliance violation exists,
corresponding corrective action is taken based on concrete action
plans. If necessary, disciplinary measures are taken. These can range
from a simple warning up to the dismissal of the employee who
violated a compliance rule. In 2010, Merck set up a Compliance Case
Committee to guide these processes. The Compliance Case Committee
consists of leaders from various Group governance functions; they are
involved in reviewing compliance violations and introducing counter-
measures. The joint work in the Compliance Case Committee enables
processes between the various Group functions to be optimally coor-
dinated and designed efficiently.
Regular press conferences, investor meetings on the occasion of
investor conferences as well as road shows offer another platform
for dialogue. The company presentations prepared for this purpose
are also available on the Merck KGaA website. In addition, the Investor
Relations team is always available to private and institutional investors
who wish to receive further information.
DEALING WITH INSIDER INFORMATION
Corporate Governance
190
Within the scope of the global compliance program, a high degree
of importance is attached to regular compliance seminars of the Merck
Compliance Training Plan, which are conducted as Web-based training
courses and classroom sessions. By presenting various training topics,
particularly on the Code of Conduct, corruption, antitrust and com-
petition law as well as healthcare compliance and data privacy, they
serve to sensitize employees and management to the consequences
of compliance violations and to show ways of avoiding them. Since
Within the Group Compliance function in Darmstadt, a team is
occupied with continuously further developing the compliance program
and shaping company-internal compliance projects. In addition, the
Compliance organization is involved in the integration of new businesses
and in the event of potential divestments and acquisitions. It is also
part of the relevant due diligence processes and the subsequent
integration of a company.
Newcomer training seminars were introduced in 2010 for newly
appointed compliance officers. These seminars serve to build up
compliance expertise and strengthen cooperation within the Compliance
organization. This Group-wide network is used to steer the global
compliance program.
The role of the Group Compliance Officer is reflected in the sub-
sidiaries, which ensure via country representatives that compliance
measures are implemented in the countries. Since 2013, Compliance
tasks in the countries and on a regional basis have largely been
performed by full-time compliance officers. As a result, a higher level
of compliance expertise is based locally and the increasing tasks in
all business sectors are taken into account. At the same time, the
management structure was streamlined and the reporting lines for
the countries were consolidated regionally. Since the end of 2016,
the compliance officers in the countries have been reporting to the
dedicated compliance officers for the respective business sectors
(Healthcare, Life Science and Performance Materials). A separate
responsibility was also created for Group functions. Regular regional
compliance meetings are held to promote the exchange of information
within the Compliance organization.
A further focal area of the Compliance program is ensuring legally
and ethically correct dealings with medical professionals and adhering
to the transparency requirements. Since October 2013, the Group
Compliance Officer has agreed extensive measures with the affected
areas of the company in order to establish an internal framework of
rules as well as the corresponding approval and documentation pro-
cesses that ensure correct publication. We of course also ensure
compliance with the respectively valid data protection regulations.
In 2014, we began appointing compliance officers for the various
business sectors. In particular, they are responsible for business-specific
compliance input and they evaluate sector-specific risks that are
incorporated in the design of the Compliance program.
in 2002. This employee is responsible for setting up, maintaining and
further developing our global compliance program. By taking appro-
priate measures, the Group Compliance Officer and his team, including
regional compliance officers, help to lower the risk of serious legal
violations of, for instance, anti-trust law, anticorruption rules, or legal
regulations and requirements of industry codes in the healthcare
sector.
The Compliance Office monitors observance of the Code of Conduct
with support from corresponding monitoring and training programs
throughout the Group. All employees are called upon to report potential
compliance violations to their supervisor, Legal, HR or other relevant
departments. Merck created the position of Group Compliance Officer
To Merck, compliance means observing legal and company internal
regulations and the basic ethical principles anchored in the company
values. With the Code of Conduct and the various unit-specific ethical
compliance rules, the values are integrated into daily work and business
practice. The Code of Conduct is binding on all employees, both at
headquarters and in the subsidiaries. We also expect our business
associates worldwide to accept these principles or to have their own
comparable principles. While supplier management ensures compliant
behavior of suppliers, global business partner risk management
encompasses the relations with sales-related business associates
such as distributors and wholesalers.
The Code of Conduct explains the company principles for dealings
with business associates, shareholders, colleagues and employees
and within the scope of our responsibility for society. Thus, it supports
all employees in acting ethically - not only in their dealings with one
another, but also outside the company. The Code of Conduct is thus the
main set of rules of our compliance program. In the newly published
version, Merck has aligned its Code of Conduct even more closely
with the Merck values. Additionally, it has expanded the Code of
Conduct to include further important topics such as data privacy,
Healthcare compliance and bioethics.
To ensure the greatest possible transparency, all documents con-
cerning the General Meeting are available on the company website.
Additionally, some parts of the General Meeting are webcast live on
the Internet.
With its Code of Conduct, a revised version of which was issued at
the end of 2017, Merck has established a set of rules and regulations
intended to help our employees to act responsibly and to make the
right decisions in their daily work.
VALUES AND COMPLIANCE
The report on gender and salary equality pursuant to section 21
in conjunction with sections 25 and 22 of the German Transparency
of Pay Act for fiscal 2016 is included as an appendix to the combined
management report of Merck KGaA.
FURTHER REPORTS
189
Statement on Corporate Governance
Corporate Governance
Since 1995, KPMG AG Wirtschaftsprüfungsgesellschaft, Berlin,
has been the audit firm for the statutory audit of the annual financial
statements and consolidated financial statements of Merck KGaA. The
auditor responsible for auditing the consolidated financial statements
changes regularly in accordance with the statutory requirements.
Bodo Rackwitz is currently leading the audit engagement and has
been the auditor in charge of the engagement since fiscal 2015. The
Supervisory Board had KPMG AG Wirtschaftsprüfungsgesellschaft,
Berlin, provide a statement regarding the scope of the business,
financial, personal, and other relationships between KPMG AG, its
bodies and head auditors, and Merck KGaA, its Group companies and
the members of their bodies (independence declaration). The statement
also covers the scope of the services provided by KPMG AG in the
previous fiscal year as well as the services (other than auditing services)
that are contracted for the upcoming year (especially consultancy
services) for Merck KGaA and its subsidiaries. Having examined the
declaration, the Supervisory Board has found no grounds to doubt
the independence of KPMG AG Wirtschaftsprüfungsgesellschaft, Berlin.
Neither party identified any conflicts of interest.
The Supervisory Board commissioned KPMG AG Wirtschaftsprü-
fungsgesellschaft, Berlin, to audit the consolidated financial statements
and the combined management report for 2017. Moreover, the Super-
visory Board agreed with KPMG AG Wirtschaftsprüfungsgesellschaft,
Berlin, that the auditor shall inform the Supervisory Board without
delay of any grounds for disqualification or bias occurring during the
audit if these cannot be immediately rectified. Additionally, the auditor
shall immediately report to the Supervisory Board any findings and
issues which emerge during the audit that have a direct bearing upon
the tasks of the Supervisory Board. The auditor shall inform the Super-
visory Board or note in the audit report any circumstances determined
during the audit that would render inaccurate the Declaration of
Conformity made by the Executive Board and the Supervisory Board.
It has also been agreed with the auditor that in order to assess
whether the Executive Board has fulfilled its obligations in accordance
with section 91 (2) AktG, the audit will also cover the company's
early warning risk identification system. Moreover, the auditor is
required to examine and evaluate the accounting-relevant internal
control system insofar as this is necessary and appropriate for
assessing the accuracy of financial reporting.
-
ACCOUNTING AND AUDITS OF FINANCIAL STATEMENTS
Merck KGaA prepares its consolidated financial statements and com-
bined management report in accordance with International Financial
Reporting Standards (IFRS), as applicable in the EU, as well as the
supplementary rules applicable under section 315e (1) of the German
Commercial Code (HGB) and as stipulated by our Articles of Association.
The consolidated financial statements and the combined management
report are prepared by the Executive Board and examined by an
auditor, taking into account the generally accepted standards for the
audit of financial statements promulgated by the Institute of Public
Auditors in Germany (Institut der Wirtschaftsprüfer – IDW).
In order to ensure a high level of protection for insider information,
in 2011 the Executive Board issued internal insider guidelines appli-
cable throughout the Merck Group worldwide. The guidelines inform
employees about their responsibilities under insider trading laws and
give clear instructions for compliant behavior. In addition, they
describe the function of the insider committee in detail. Moreover,
our Code of Conduct, which is binding on all employees, also contains
an explicit, detailed reference to the ban on using insider information.
Within the scope of obligatory training courses on the Code of Conduct
as well as specific training courses on insider law, all employees are
instructed on the stipulations of insider trading.
Dealing properly with insider information is very important to us. Our
insider committee examines the existence of insider information,
ensures compliance with legal obligations and prepares any necessary
measures. The members of the insider committee are appointed by
the Executive Board; at least two members work in Group Legal &
Compliance. The insider committee meets at regular intervals, yet
also meets when circumstances require. The Chief Financial Officer
is vested with the authority to make the final decision on handling
potential insider information.
Based on a corporate culture that places the fundamental company
values - courage, achievement, responsibility, respect, integrity and
transparency - at the center of our entrepreneurial actions, our Code
of Conduct (https://www.merckgroup.com/en/company/who-we-
are/mission-strategy-and-values.html) helps those involved in the
business process to implement the values when dealing with one
another on a daily basis.
Seeheim-Jugenheim, Senior Operational Product Manager
Udit Batra
Hannover, Vice Chairperson of IG Bergbau, Chemie, Energie (IG BCE),
Hannover
Theo Siegert
Umkirch, Pediatrician
Gregor Schulz
Cures GmbH, Wuppertal
Langenburg, Chairperson of the Advisory Board of AiCuris Antiinfective
Helga Rübsamen-Schaeff
Bad Dürkheim
Schriesheim, Commercial Director of the Castel Peter Winery,
Albrecht Merck
Darmstadt, Physician
Siegfried Karjetta
Munich, Managing Director of M+V Group GmbH, Stuttgart
Düsseldorf, Managing Partner of
Wolfgang Büchele
Darmstadt, Chairman of the Executive Board and General Partner of
Frank Stangenberg-Haverkamp
and General Partner of E. Merck KG, Chairman
Vienna, Austria, Vice Chairman of the Executive Board
Johannes Baillou
Member
Statement on Corporate Governance
Corporate Governance
The Board of Partners has nine members.
194
Some of the responsibilities that lie with the supervisory board of a
German stock corporation are fulfilled at Merck by E. Merck KG. This
applies primarily to the Board of Partners of E. Merck KG. Therefore,
the Board of Partners and the composition and procedures of its
committees are described in the following.
BOARD OF PARTNERS OF E. MERCK KG
E. Merck KG, Vice Chairman
The German Stock Corporation Act prescribes that the Supervisory
Board of a publicly listed company must have at least one member
who has professional expertise in accounting or auditing. Theo Siegert
satisfies these requirements and is furthermore the Chairman of the
Finance Committee of the Board of Partners of E. Merck KG.
de Haen-Carstanjen & Söhne, Düsseldorf
Munich, Managing Partner of Altmann Analytik GmbH & Co. KG, Munich
The Personnel Committee meets at least twice a year. Further
meetings are convened as and when necessary. Meetings of the
Personnel Committee are attended by the Chairman of the Executive
Board of Merck KGaA unless the Committee decides otherwise. The
Personnel Committee is responsible for, among other things, the
following decisions concerning members and former members of the
Executive Board: contents of and entry into employment contracts and
pension contracts, granting of loans and advance payments, changes
to the compensation structure and adaptation of compensation,
approval for taking on honorary offices, board positions and other
sideline activities, as well as division of responsibilities within the
Executive Board of Merck KGaA. The Personnel Committee passes its
resolutions by a simple majority - in matters concerning the Chairman
of the Executive Board unanimity is required. The Chairman of the
Committee regularly informs the Board of Partners of its activities.
The Personnel Committee has four members. These are Johannes
Baillou (Chairman), Wolfgang Büchele, Theo Siegert, and Frank
Stangenberg-Haverkamp.
PERSONNEL COMMITTEE
The Board of Partners may confer the responsibility for individual
duties to committees. Currently the Board of Partners has three com-
mittees in place: the Personnel Committee, the Finance Committee,
and the Research and Development Committee.
The Board of Partners supervises the Executive Board in its manage-
ment of the company. It informs itself about the business matters of
Merck KGaA, and may inspect and examine the company's accounts
and other business documents, and the assets for this purpose.
According to Article 13 (4) of the Articles of Association of Merck KGaA,
the Executive Board requires the approval of E. Merck KG for trans-
actions that are beyond the scope of the Group's ordinary business
activities. For such transactions to be approved, approval must first
be obtained from the Board of Partners of E. Merck KG. The Board
of Partners convenes as and when necessary; however, it normally
meets four times a year. The members of the Executive Board of
Merck KGaA are invited to all meetings of the Board of Partners,
unless the Board of Partners resolves otherwise in individual cases.
The members of the Board of Partners may convene a joint meeting
with the Supervisory Board of Merck KGaA if so agreed by the chairmen
of the two boards.
(a) Merck KGaA, Darmstadt
(b) - DKSH Holding Ltd., Zurich, Switzerland
- Henkel AG & Co KGaA, Düsseldorf
- E.ON SE, Düsseldorf
(a) Merck KGaA, Darmstadt
(a) Merck KGaA, Darmstadt
Supervisory Board of Bonn University Hospital
Tobias Thelen
- Merck KGaA, Darmstadt
- 4SC AG, Martinsried
(a) - Merck KGaA, Darmstadt
(a) Merck KGaA, Darmstadt
(b) Kemira Oyj, Helsinki, Finland
(a) Merck KGaA, Darmstadt
- Travel Asset Group Ltd., London, United Kingdom (Chairman)
Oras Invest Ltd, Helsinki, Finland
(b)
Edeltraud Glänzer
no board positions
(b) comparable German and foreign supervisory bodies of corporations
(a) other statutory supervisory boards and
Memberships of
(a)
The rules of procedure prescribe that the Supervisory Board may
form committees as and when necessary. The Supervisory Board has
formed a Nomination Committee comprising three shareholder repre-
sentatives. Its members are Albrecht Merck, Wolfgang Büchele and
Theo Siegert. The Nomination Committee is responsible for proposing
to the Supervisory Board suitable candidates for its proposal to the
Annual General Meeting. Apart from legal requirements and the
recommendations of the German Corporate Governance Code, the
"Objectives of the Supervisory Board with respect to its composition",
"Profile of skills and expertise" and the "Diversity Policy" are to be
taken into consideration as well. Owing to the aforementioned limited
authority, and since a corresponding need has not yet arisen, the
Supervisory Board currently has no further committees.
(a) - Fortas AG, Rösrath (Chairman)
of the Group. The adoption of the annual financial statements is not
the responsibility of the Supervisory Board, but of the General Meeting.
The Supervisory Board normally meets four times a year. Further
meetings may be convened if requested by a member of either the
Supervisory Board or the Executive Board. As a rule, resolutions of
the Supervisory Board are passed at meetings. At the instruction of
the chairman, in exceptional cases a resolution may be passed by
other means, details of which are given in the rules of procedure.
(a) other statutory supervisory boards and
Memberships of
2 Members appointed according to Article 6 (5) of the Articles of Association.
1 Internal board position.
Sachsenheim, Global Head of Research and Bioinformatics
Munich, Managing Partner of Altmann Analytik GmbH & Co. KG, Munich
Veit Ulshöfer
Tobias Thelen²
de Haen-Carstanjen & Söhne, Düsseldorf
Düsseldorf, Managing Partner of
Theo Siegert
Umkirch, Pediatrician
Gregor Schulz
(b) comparable German and foreign supervisory bodies of corporations
Cures GmbH, Wuppertal
Helga Rübsamen-Schaeff
Michelstadt, Full-time member of the Works Council of
Alexander Putz
Seeheim-Jugenheim, Vice President Corporate Quality Assurance
Dietmar Oeter
Bad Dürkheim
Schriesheim, Commercial Director of the Castel Peter Winery,
Albrecht Merck
Darmstadt, Physician
Siegfried Karjetta²
Zurich, Switzerland, Retired teacher
The members of the Board of Partners of E. Merck KG and of the
Supervisory Board may be convened to a joint meeting if so agreed
by the chairmen of the two boards.
Langenburg, Chairperson of the Advisory Board of AiCuris Antiinfective
(b) - E. Merck KG, Darmstadt¹
Merck KGaA Darmstadt/Gernsheim
no board positions
The Supervisory Board must monitor the Executive Board in
terms of legality, regularity, usefulness, and economic efficiency. In
particular, the Supervisory Board has the duty to examine the reports
provided by the Executive Board. This includes regular reports on
the intended business policy, as well as other fundamental issues
pertaining to corporate planning, especially financial, investment and
HR planning; the profitability of the Merck Group; the progress of
business; the risk situation; risk management (including compliance);
and the internal auditing system. In addition, by means of consul-
tation with the Executive Board, it creates the basis for supervision
of the management of the company by the Supervisory Board accord-
ing to section 111 (1) of the German Stock Corporation Act (AktG).
The Supervisory Board examines the annual financial state- ments
as well as the consolidated financial statements and the combined
management report, taking into account in each case the reports of
the auditor. Moreover, the Supervisory Board discusses the quarterly
releases and the half-year financial report, taking into account in the
latter case the report of the auditor on the audit review of the
abridged financial statements and the interim management report
- Kemira Oyj, Helsinki, Finland
The Supervisory Board performs a monitoring function. It supervises
the management of the company by the Executive Board. In com-
parison with the supervisory board of a German stock corporation,
the role of the supervisory board of a corporation with general partners
(KGaA) is limited. This is due to the fact that the members of the
Executive Board are personally liable partners and therefore are
themselves responsible for the management of the company. In
particular, the Supervisory Board is not responsible for appointing
and dismissing general partners or for regulating the terms and
conditions of their contracts. This is the responsibility of E. Merck KG.
Nor does the Supervisory Board have the authority to issue rules of
procedure for the Executive Board or a catalogue of business transac-
tions requiring approval. This authority likewise belongs to E. Merck KG
(Article 13 (3) sentence 1 and (4) sentence 1 of the Articles of Asso-
ciation). However, the fact that the Supervisory Board has no possi-
bilities to directly influence the Executive Board restricts neither its
information rights nor audit duties.
193
Statement on Corporate Governance
Corporate Governance
no board positions
- DKSH Holding Ltd., Zurich, Switzerland
(b) E. Merck KG, Darmstadt¹
- Henkel AG & Co KGaA, Düsseldorf
(a) - E.ON SE, Düsseldorf
(b) E. Merck KG, Darmstadt¹
(b) E. Merck KG, Darmstadt¹
(b) E. Merck KG, Darmstadt¹
(a) 4SC AG, Martinsried
no board positions
no board positions
no board positions
Michaela Freifrau von Glenck
(b) E. Merck KG, Darmstadt¹
(b) E. Merck KG, Darmstadt¹
b) - Merck BKK (rotating chairperson)
no board positions
- Evonik Industries AG, Essen (Vice Chairperson)
(a) B. Braun Melsungen AG, Melsungen
no board positions
- Supervisory Board of Bonn University Hospital
According to section 5.4.1 of the German Corporate Governance
Code, the Supervisory Board shall specify concrete objectives regarding
its composition and prepare a profile of skills and expertise for the
entire board. Within the scope of the company-specific situation, the
composition of the Supervisory Board shall appropriately reflect the
international activities of the enterprise, potential conflicts of interest,
the number of independent Supervisory Board members, an age limit
to be specified for the members of the Supervisory Board, a regular
limit to be specified for the length of Supervisory Board membership,
as well as diversity.
Objectives of the Supervisory Board
with respect to its composition and
profile of skills and expertise
GENERAL NOTES ON THE COMPOSITION
Objectives of the Supervisory Board with respect to its composition and profile of skills and expertise
Corporate Governance
INITIAL SITUATION
OF THE SUPERVISORY BOARD
BOARD REGARDING ITS COMPOSITION
For the Supervisory Board of Merck KGaA, professional qualifications
and personal expertise are the two most important prerequisites for
appointments to seats on the Supervisory Board. When proposing
Supervisory Board candidates for election or delegation, the Super-
visory Board will always give top priority to these prerequisites, which
are essential for fulfilling its legal duties. Overall, the Supervisory
Board's policy is to optimally meet its monitoring and advisory duties
by having diversity among its members. Diversity includes, in par-
ticular, internationality as well as different experience backgrounds
and career paths. The proportion of women on the Supervisory Board
is also considered to be an aspect of diversity. When preparing pro-
posals for election or delegation, due consideration shall be given in
individual cases to the extent to which different, yet complementary
professional profiles, career and life experiences as well as appro-
priate representation of both genders can benefit the work of the
Supervisory Board. Additionally, the Supervisory Board shall support
the Executive Board in its efforts to increase diversity within the
company.
OBJECTIVES OF THE SUPERVISORY
In accordance with section 5.4.1 (2) of the German Corporate
Governance Code, the Supervisory Board has specified the following
objectives regarding its composition and reports on the status of
implementation below:
The Supervisory Board shall have at least three members with busi-
ness experience in the main sales markets of Merck KGaA. Currently,
the main sales markets of Merck KGaA are Europe, North and Latin
America, and Asia-Pacific. The present composition of the Supervisory
Board satisfies this objective. More than three Supervisory Board
members have entrepreneurial experience in Europe, in a large range
of countries. More than three Supervisory Board members have expe-
rience in management positions in companies that operate globally.
200
Internationality
The Supervisory Board of Merck KGaA currently comprises 16 mem-
bers, eight of whom represent the shareholders and a further eight
who represent the employees. The eight employee representative
members are elected by employee delegates pursuant to the provisions
of the German Co-determination Act (Mitbestimmungsgesetz - “Mit-
bestG"). These consist of six company employees, including a senior
executive, as well as two union representatives. The Supervisory
Board has no statutory proposal right with respect to electing the
delegates or employee representatives. Owing to a delegation right
of E. Merck Beteiligungen KG, two of the eight shareholder represen-
tatives are specified. The Supervisory Board likewise has no statutory
proposal right with respect to exercising this delegation right. The
remaining six shareholder representatives are elected by the General
Meeting. In accordance with section 124 (3) sentence 1 AktG, the
Supervisory Board shall propose to the General Meeting Supervisory
Board members for election. These proposals require a majority of
the votes of the shareholder representative members of the Super-
visory Board. The next scheduled election to the Supervisory Board
shall take place at the 2019 General Meeting. The General Meeting
is not required to follow the election proposals. The appointment
objectives and competency requirements that the Supervisory Board
sets forth below therefore do not represent requirements to be met
by those eligible to elect or to delegate members. Instead, they are
intended to express the objectives pursued by the Supervisory Board
in office with regard to its advisory and monitoring functions.
Wolfgang Büchele
Chairman
• Measurement of the variable purchase price receivable from the
divestment of the Biosimilars business activities.
Darmstadt, February 28, 2018
For the consolidated financial statements prepared in accordance with
International Financial Reporting Standards, as well as the combined
management report, the auditors issued the unqualified auditor's
report reproduced in the Annual Report of the Merck Group. The audit
opinion for the consolidated financial statements contained the fol-
lowing audit topics of special importance:
Corporate Governance
• Goodwill impairment tests
•
Recognition and measurement of income tax liabilities and deferred
tax liabilities
• Measurement of provisions for patent disputes
In addition, the auditor audited the calculation of Merck KGaA's par-
ticipation in the profit of E. Merck KG in accordance with Article 27 (2)
of the Articles of Association as well as the separate combined non-
financial (Group) report. The annual financial statements of Merck KGaA,
the consolidated financial statements of the Merck Group, the com-
bined management report for Merck KGaA and the Merck Group, the
proposal by the Executive Board for the appropriation of the net
retained profit, as well as the separate combined non-financial
(Group) report were presented and distributed to the Supervisory
Board, together with the auditor's reports.
The Supervisory Board of Merck KGaA
In accordance with Article 14 (2) of the Articles of Association,
the Supervisory Board also examined the annual financial statements
of Merck KGaA, the proposal for the appropriation of net retained profit
and the auditor's report presented in accordance with Article 27 (2) of
the Articles of Association. It also examined the consolidated financial
statements of the Merck Group as well as the combined management
report for Merck KGaA and the Merck Group, and took note of the
auditor's report of KPMG AG Wirtschaftsprüfungsgesellschaft, Berlin.
The Supervisory Board paid special attention to the aforementioned
key audit matters contained in the respective audit opinion, to the
respectively resulting risks for the financial statements, to the
respectively described audit procedure as well as to the respective
conclusions drawn by the auditors. Furthermore, the Supervisory
Board also examined the separate combined non-financial (Group)
report and the memorandum on a limited assurance engagement
prepared by the auditor on behalf of the Supervisory Board. The
discussion of the relevant agenda item at the Supervisory Board's
meeting on February 28, 2018 to approve the financial statements
was also attended by the auditors who sign the audit opinion on the
annual financial statements of Merck KGaA and the consolidated
financial statements of the Merck Group as well as the separate
combined non-financial (Group) report. These auditors furthermore
reported on their audit at this meeting.
presented by the auditor in accordance with Article 27 (2) of the
Articles of Association as well as the separate combined non-financial
(Group) report. The Supervisory Board gave its consent to the pro-
posal of the Executive Board for the appropriation of net retained
profit.
CORPORATE GOVERNANCE AND
DECLARATION OF CONFORMITY
Corporate governance is a topic of high priority for the Supervisory
Board. In its own estimation, the Supervisory Board has an adequate
number of independent members. There were no conflicts of interest,
as defined by the German Corporate Governance Code, involving
Supervisory Board members during 2017.
After addressing corporate governance topics in detail, the Exec-
utive Board and Supervisory Board resolved to adopt and issue the
updated Declaration of Conformity on February 14, 2018 (Executive
Board) and on February 28, 2018 (Supervisory Board) and jointly
issued it on February 28, 2018 in accordance with section 161 of the
German Stock Corporation Act. The statement is permanently available
on the website of Merck KGaA (https://www.merckgroup.com/en/
investors/corporate-governance.html). More information about cor-
porate governance at Merck KGaA, including the compensation of the
Executive Board and Supervisory Board, is given in the Statement
on Corporate Governance on pages 170 et seq. of the Annual Report.
COMMITTEES
Apart from the Nomination Committee, the Supervisory Board of
Merck KGaA currently has no further committees on account of the
special features that apply to the Supervisory Board of a corporation
with general partners (KGaA) under German company law and
because a corresponding need for this has not emerged to date. The
members of the Nomination Committee did not convene in fiscal 2017.
No report is given on the work of further committees.
PERSONNEL MATTERS
With the exception of Helga Rübsamen-Schaeff, who was excused
and absent from the meeting on February 24, 2017, Edeltraud Glänzer,
who was excused and absent from the meeting on May 12, 2017, and
Alexander Putz, who was excused and absent from the meeting on
July 28, 2017, all the Supervisory Board members attended all the
Supervisory Board meetings.
The Supervisory Board took note of and approved the results of
the audit. On completion of its examination, the Supervisory Board
raised no objections and thus approved the annual financial state-
ments for Merck KGaA, the consolidated financial statements of the
Merck Group and the combined management report of Merck KGaA
and the Merck Group prepared by the Executive Board, the report
Objectives of the Supervisory Board with respect to its composition and profile of skills and expertise 201
208
Six women are currently members of the Supervisory Board of
Merck KGaA. Accordingly, women make up 37.5% of the Supervisory
Board. When nominating candidates for election to the Supervisory
Board or making proposals for delegations, the Supervisory Board
shall examine whether the percentage of women can be increased
by suitable candidates. The Supervisory Board considers the 37.5%
share of women members to be satisfactory at the present time. This
applies both owing to the percentage of women in leadership positions
at Merck as well as the fact that the supervisory boards of other
companies have a comparable percentage of women.
203-298
206
Consolidated Income Statement
207
Consolidated Statement of Comprehensive Income
Consolidated Balance Sheet
209
CONSOLIDATED
FINANCIAL
STATEMENTS
Consolidated Cash Flow Statement
Consolidated Statement of Changes in Net Equity
212
Notes to the Consolidated Financial Statements
(Chairman), Johannes Baillou, Wolfgang Büchele, and Tobias Thelen.
The Finance Committee has four members. These are Theo Siegert percentage of management positions
199
Stipulations to promote the
210
203-298
CONSOLIDATED
FINANCIAL
STATEMENTS
Experience in other supervisory or control boards
Lastly, the Supervisory Board shall have at least four members who
have experience as members of other supervisory or control boards
(whereby possible membership of the Board of Partners of E. Merck KG
is not taken into account). This requirement is also met at the present
time.
Number of independent members/
no material conflicts of interest
The Supervisory Board shall have an appropriate number of independ-
ent members. Assuming that the status of being an employee repre-
sentative per se does not justify doubts with respect to the indepen-
dence criteria within the meaning of section 5.4.2 of the German
Corporate Governance Code, as a rule all employee representatives
shall be independent within the meaning of the Code. In any case,
at least four of the shareholder representatives on the Supervisory
Board shall be independent. According to the Articles of Association
of Merck KGaA, six members representing the shareholders are to be
elected by the General Meeting and two members are to be delegated.
Taking this and the special ownership structure of Merck into account,
the Supervisory Board considers four shareholder representatives to
be an appropriate number of independent members. In the Supervisory
Board's estimation, the objectives concerning independent members
are met at the present time. The Supervisory Board considers the
following members to be independent: Crocifissa Attardo, Mechthild
Auge, Wolfgang Büchele, Gabriele Eismann, Michael Fletterich, Edeltraud
Glänzer, Michaela Freifrau von Glenck, Siegfried Karjetta, Albrecht
Merck, Dietmar Oeter, Alexander Putz, Helga Rübsamen-Schaeff,
Gregor Schulz, Theo Siegert, Tobias Thelen, and Veit Ulshöfer. In
particular, the Supervisory Board does not believe that membership
of the Board of Partners of E. Merck KG conflicts with independence.
The Board of Partners exists complementary to the competencies
and the activities of the Supervisory Board. It is not to be expected
that this will lead to material and not merely temporary conflicts of
interest. It should also be taken into account that due to its substantial
capital investment and unlimited personal liability, E. Merck KG has
a strong interest in the businesses of Merck KGaA operating efficiently
and in compliance with procedures, counteracting from the outset
conflicts of interest between E. Merck KG and Merck KGaA and thus
also corresponding conflicts of interest between the members of the
respective corporate boards. Moreover, no one shall be proposed for
election to the Supervisory Board who simultaneously serves on a
board of or advises a major competitor of the company, or owing to
another function, e.g. advisor to major contract partners of the com-
pany, could potentially become involved in a conflict of interest. No
Supervisory Board member serves on a board of or advises a major
competitor. No Supervisory Board member performs a function that
could lead to a lasting conflict of interest.
Age limit
As a rule, the members of the Supervisory Board shall not exceed
the age of 75. This objective is met at the present time.
Regular limit on the length of Supervisory Board membership
The objective of the Supervisory Board regarding its composition is
that as a rule, all members belong to the board for an uninterrupted
period of no more than 15 years (corresponds to three regular terms
of office). With one exception, this objective is also met at the present
time.
PROFILE OF SKILLS AND EXPERTISE
Additionally, in accordance with 5.4.1 (2) of the German Corporate
Governance Code, the Supervisory Board has prepared a profile of
skills and expertise and reports on the status of implementation below.
In-depth knowledge of the fields relevant to the company
The Supervisory Board shall have at least four members with in-depth
knowledge and experience in fields that are important to the company,
including at least one expert for the Healthcare and Life Science/
Performance Materials sectors, respectively. This requirement is met
at the present time. At present, the Supervisory Board has more
than four members who have in-depth knowledge and experience of
Healthcare and Life Science/Performance Materials sectors. Likewise,
more than four Supervisory Board members have leadership experience
in companies that also operate or exclusively operate in the Healthcare
and/or Life Science/Performance Materials sectors.
Management experience
The Supervisory Board shall have at least three members who have
experience in managing or supervising a medium- or large-sized
company. The Supervisory Board has more than three members who
have the corresponding experience. This includes both Supervisory
Board members who were or still are management board members
or directors in such companies, as well as Supervisory Board members
who have gained experience in supervisory boards of German and/
or foreign companies of this size.
202
Corporate Governance
Objectives of the Supervisory Board with respect to its composition and profile of skills and expertise
Knowledge of business administration
The Supervisory Board shall have at least four members who have
in-depth knowledge of business administration. This requirement is
met at the present time.
Women on the Supervisory Board
Report of the Supervisory Board
AGE
• Measurement of provisions for patent disputes
-
We believe that our innovative strength is driven by a diverse workforce
and that an inclusive working environment sustainably contributes to
entrepreneurial success. That is why we are furthering a culture of
diversity independent of age, gender, disability, ethnic or cultural
background, religion, industry experience, and educational background.
The diversity policy to strategically steer the topics of diversity and
inclusion at Merck thus focuses on the following key criteria:
Management
Experience
Gender
Internationality/
Global Mindset
Age
Merck is pursuing a Group-wide, global diversity program. At Merck,
diversity stands for a culture of inclusion, mutual esteem and respect.
To demonstrate this open and dynamic company culture, we promote
diversity throughout the Group and do so at all levels, including
the Executive Board and Supervisory Board.
Industry
Experience
Our Group-wide diversity policy encompasses both voluntary as well
as legally defined objectives that we continuously and sustainably
work on to achieve.
In this context, it should be noted that with respect to the Executive
Board of Merck KGaA, many rules can only be applied correspondingly.
This is because the Executive Board comprises personally liable general
partners of Merck KGaA and is not a management board with
employed members of a corporate body (for details, please also see
the "Joint Report of the Executive Board and the Supervisory Board"
page 170 et seq.). In addition to the aspects presented in the following,
reference is made to the objectives of the Supervisory Board with
respect to its composition and the competency profile of the Super-
visory Board (see the information on the "Objectives of the Super-
visory Board with respect to its composition and profile of skills and
expertise" on page 200 et seq.). The statements made there are part
of the diversity policy for the Supervisory Board presented here.
The Finance Committee holds at least four meetings a year, at
least one of which is a joint meeting with the auditor of Merck KGaA.
Further meetings are convened as and when necessary. Meetings of
the Finance Committee are attended by the Chief Financial Officer
of Merck KGaA. Other members of the Executive Board of Merck KGaA
may attend the meetings upon request by the Finance Committee.
These meetings regularly include the Chairman of the Executive Board.
The Finance Committee is responsible for, among other things,
analyzing and discussing the annual financial statements, the consol-
idated financial statements and the respective reports of the auditor,
as well as the half-year financial report (including the report of the
auditors for the audit review of the abridged financial statements
and interim management report contained in the half-year report)
and the quarterly statements. Moreover, the Finance Committee rec-
ommends to the Chairman of the Supervisory Board annual audit
focuses for the auditors of the annual financial statements. It also
recommends to the Supervisory Board an auditor for the annual
financial statements as well as auditors for the audit review of the
abridged financial statements and interim management report con-
tained in the half-year financial report for the Supervisory Board's
corresponding suggestion to the General Meeting. In addition, the
Finance Committee is concerned with the net assets, financial position,
results of operations and liquidity of Merck, as well as accounting,
internal auditing, risk management and compliance issues. Upon
request of the Board of Partners, the Finance Committee examines
investment projects that must be approved by the Board of Partners
and provides recommendations pertaining thereto. It passes its reso-
lutions with a simple majority. The Committee Chairman regularly
informs the Board of Partners of the activities of the Finance Committee.
Our boards are to have a balanced age structure. This permits future-
oriented and consistent succession planning and is a key element of
sustainable company management and monitoring. Our diversity
policy aims for an age range of at least ten years between the youn-
gest and the oldest member of the respective board.
In their current composition, both boards meet this objective. The
age range of the Executive Board is 15 years; that of the Supervisory
Board is 30 years.
In addition, maximum age limits apply to both boards (for the Super-
visory Board please see the information regarding the "Objectives of
the Supervisory Board with respect to its composition and profile of
skills and expertise" on page 200 et seq.). For Executive Board mem-
bers, a maximum age of 70 applies.
Corporate Governance
Educational
Background
Statement on Corporate Governance
Diversity policy pursuant to
section 289f (2) No. 6 of the
German Commercial Code
Statement on Corporate Governance
FINANCE COMMITTEE
The Research and Development Committee is convened as and
when necessary, but holds at least two meetings a year. Meetings of
the Research and Development Committee are attended by members
of the Executive Board of Merck KGaA upon request of the Committee.
These meetings regularly include the Chairman of the Executive
Board as well as the CEO Healthcare, the CEO Life Science and the
CEO Performance Materials. The Research and Development Commit-
tee is responsible, among other things, for reviewing and discussing
the research activities of the Healthcare as well as Life Science/
Performance Materials business sectors. It passes its resolutions with
a simple majority. The Chairperson of the Committee reports to the
Board of Partners on the insights gained from the meetings held.
held by women pursuant to section 76
(4) and section 111 (5) AktG (German
Stock Corporation Act)
STIPULATIONS PURSUANT TO SECTION 76 (4) AKTG
(TARGET FOR THE PERCENTAGE OF POSITIONS HELD
BY WOMEN ON THE TWO UPPER MANAGEMENT LEVELS
BELOW THE EXECUTIVE BOARD)
We foster diversity within the company, which also includes ensuring
a balance of genders in management. To this end, we pursue both
voluntary and statutory objectives, and we work continuously and
sustainably on achieving them.
On December 15, 2016, the Executive Board of Merck KGaA set
the new targets for the percentage of positions held by women on
the two management levels below the Executive Board as follows:
• First management level below the Executive Board: 21% of posi-
tions held by women
• Second management level below the Executive Board: 26% of
positions held by women
that of a stock corporation nor does the Supervisory Board have
personnel authority over the Executive Board. Instead, the Executive
Board consists of personally liable general partners (see also page 192
et seq. for the description of Supervisory Board procedures).
The deadline set for reaching the new targets is December 31, 2021.
The first management level comprises all managers of Merck KGaA
with a direct reporting line to the Executive Board of Merck KGaA or
who belong to the global executive group. The second management
level comprises all managers of Merck KGaA who report to managers
with a direct reporting line to the Executive Board of Merck KGaA or
the global executive group.
STIPULATIONS PURSUANT TO SECTION 111 (5) AKTG
(TARGET FOR THE PERCENTAGE OF POSITIONS ON THE
SUPERVISORY BOARD HELD BY WOMEN)
Pursuant to section 111 (5) AktG, the Supervisory Board of companies
that are listed or subject to co-determination stipulates binding targets
for the percentage of positions on the Supervisory Board and on the
Management Board held by women. However, for Merck KGaA, stip-
ulations pursuant to section 111 (5) AktG need not be set for the
following reasons:
The statutory target of 30% pursuant to section 96 (2) AktG is
already applied on the Supervisory Board of Merck KGaA. This elimi-
nates the obligation to stipulate a further target for the percentage of
positions held by women on the Supervisory Board (see section 111 (5)
sentence 5 AktG).
The obligation to stipulate a target for the percentage of positions
held by women on the Management Board pursuant to section 111 (5)
AktG is not applicable to the legal form of a corporation with general
partners (Kommanditgesellschaft auf Aktien) as a corporation with
general partners neither has a management board comparable to
1 Merck has changed its employee grading from Global Grades to a role-based approach. The relevant group continues to represent approximately 6% of the entire workforce; see the
section entitled "Diversity and Management" on page 97 et seq.).
196
Corporate Governance
In addition, as a global company with correspondingly aligned
global (leadership) structures, Merck continues to pursue a (voluntary)
global target of maintaining the proportion of leadership positions
held by women (managers, experts and project managers in roles 4
and above)¹ at a stable level of 30% in the period until 2021.
197
GENDER
Gender diversity also plays a crucial role since it enables us to benefit
from a larger talent pool, and allows us as a company to develop a
better understanding of important customer groups. We have set
ourselves the (global) strategic objective of maintaining the proportion
of women in leadership positions (managers, experts and project
managers in role 4 and higher¹) at a stable level of 30% by 2021
(please also refer to the description on page 97 under "Diversity and
Management").
Report of the Supervisory Board
Report of the Supervisory Board
The Supervisory Board again properly executed its duties in 2017 in
accordance with the law as well as the company's Articles of Asso-
ciation and rules of procedure. In particular, the Supervisory Board
monitored the work of the Executive Board diligently and regularly.
COOPERATION WITH THE EXECUTIVE BOARD
The cooperation with the Executive Board was characterized by inten-
sive, trustworthy exchange. During fiscal 2017, the Executive Board
provided the Supervisory Board with regular written and verbal reports
on the business development of Merck KGaA and the Merck Group. In
particular, the Supervisory Board was informed about the market
and sales situation of the company against the background of mac-
roeconomic development, the financial position of the company and
its subsidiaries, along with their earnings development, as well as
corporate planning. Within the scope of quarterly reporting, the sales
and operating results were presented for the Merck Group as a whole,
and broken down by business sector. Aside from the Supervisory
Board meetings, the Chairman of the Supervisory Board also main-
tained and continues to maintain a regular exchange of information
with the Chairman of the Executive Board.
KEY TOPICS OF THE SUPERVISORY BOARD MEETINGS
Four Supervisory Board meetings were held in fiscal 2017. At these
meetings, the Supervisory Board intensely discussed the reports of
the Executive Board and company developments and strategic issues
together with the Executive Board.
At the meeting held on February 24, 2017, the Executive Board
first intensively addressed the annual financial statements and con-
solidated financial statements for 2016, the combined management
report as well as the proposal for the appropriation of the net retained
profit. The auditor explained the audit report, including the focus
areas of the audit. The Executive Board reported on the financial
statements. Furthermore, the Supervisory Board resolved upon the
report and the objectives of the Supervisory Board with respect to
its composition, the Declaration of Conformity with the German
Corporate Governance Code as well as the Statement on Corporate
Governance, which simultaneously includes the joint report on
Corporate Governance of the Executive Board and Supervisory Board.
The Supervisory Board also approved the proposals to be made to the
General Meeting. The Executive Board reported on business perfor-
mance in 2016 and presented the plans for fiscal 2017. The Super-
visory Board also took note of the written risk report as well as the
report from Group Internal Auditing for 2016 and approved the per-
formance of certain non-audit services by the auditor of the annual
financial statements.
Corporate Governance
The meeting held on May 12, 2017 focused on current business
developments in the first quarter of 2017. The report of the Research
and Development Committee Life Science/Performance Materials of
the Board of Partners of E. Merck KG was a further focus of the
meeting. The Supervisory Board also dealt with the Compliance and
Data Protection Report for 2016. In conclusion, the Executive Board
presented the "Vision and Future Darmstadt" project, regarding the
plans for the future of the Darmstadt site.
At its fourth meeting on November 8, 2017, the Supervisory Board
dealt with the report of the Executive Board on the third quarter of
2017. Additional topics of focus were the 2017 status reports of Group
Internal Auditing and on compliance and data protection as well as
the report of the Research and Development Committee Healthcare.
Furthermore, the Group Executive Conference and the results of the
efficiency review of the Supervisory Board were reported on and dis-
cussed. In addition, the implementation of new Corporate Governance
requirements was discussed and the performance of various non-audit
services by the auditor of the annual financial statements was
approved.
ANNUAL FINANCIAL STATEMENTS
The annual financial statements of Merck KGaA, the consolidated
financial statements of the Merck Group, and the combined manage-
ment report for Merck KGaA and the Merck Group, including the
accounts, were audited by KPMG AG Wirtschaftsprüfungsgesellschaft,
Berlin.
The auditors issued an unqualified audit opinion on the annual
financial statements of Merck KGaA in accordance with German
Auditing Standards. The audit opinion for the annual financial state-
ments contained the following key audit matters, in other words those
matters that, in the professional judgment of the auditor, were of most
significance in the audit of the annual financial statements:
•
Impairment testing of interests in associates
Recognition and measurement of provisions for tax liabilities
At its meeting on July 28, 2017, the Supervisory Board focused
intensively on the report of the Executive Board on business perfor-
mance in the second quarter of 2017. In addition, the auditor explained
the half-year financial report. Risk management within the company
was a further topic. The Head of Risk Management presented the
status report for the first half of 2017. No risks that threaten the
continued existence of the company were identified. In addition, the
list of permitted non-audit services was updated, an external audit of
the non-financial declaration was resolved upon and various develop-
ments in the Corporate Governance area were discussed.
198
2 Merck also has employees at sites which are not fully consolidated subsidiaries. These figures refer to all people directly employed by Merck and therefore may deviate from figures in the
financial section of this report.
1 Merck has changed its role architecture from Global Grades to a role-based approach.
Additionally, Merck continues to pursue representation of both
genders as an objective for the Executive Board. With Ms. Belén
Garijo as CEO Healthcare, at Merck a woman is currently responsible
for our largest business sector in terms of sales.
The statutory 30% quota pursuant to section 96 para 2 of the
German Stock Corporation Act has already been applied to the
Supervisory Board of Merck KGaA. We consider further targets to be
dispensable here.
INTERNATIONALITY AND GLOBAL MINDSET
As a global science and technology company with key sales markets on
five continents and around 50,000 employees at sites in 662 countries,
internationality and a global mindset are key success factors for us.
According to our diversity policy, the Executive Board's internation-
ality derives from leadership experience or national origin, relative
to our key sales markets or those locations that are organizationally and
culturally relevant to our employee development efforts. For both
criteria, Europe, North America and Asia-Pacific are currently the key
regions.
The Executive Board meets this objective with management
experience in the named regions, for instance in the following coun-
tries: France, Spain, Switzerland, the United States, Singapore,
India, Taiwan, Malaysia, and Australia. One-third of the Executive
Board members are not German citizens.
MANAGEMENT EXPERIENCE
The key prerequisites for high-performance leadership teams are
both the diversity of the individual competency profiles and a balance
between a Group-internal and external management perspective.
Therefore, as a whole the Executive Board must have in-depth knowl-
edge and experience in the following key areas of importance to the
company: Strategy & Planning, Finance & Accounting, Sales & Oper-
ations, Human Resources, Legal & Compliance as well as Information
Technology. In addition, for the composition of the Executive Board
it is important to ensure a good balance of members from within and
outside the company. Our diversity policy seeks to derive inspiration
and innovation from outside the company and to identify the latest
trends of relevance to the core businesses of the company while
ensuring the sustainability and continuity in line with our corporate
culture. We have therefore set ourselves the global objective of filling
two-thirds of our leadership positions with candidates from within
the company.
The current Executive Board meets both the aforementioned
objectives: All required aspects of the competency profile are covered
by at least one member of the Executive Board. Likewise, four members
of the Executive Board possess multiple years of experience working
within the Merck Group prior to their appointment to the Executive
Board.
INDUSTRY EXPERIENCE
To efficiently lead and manage the Group, the Executive Board must
have in-depth knowledge of the key industries and business sectors
that the company operates in. In accordance with the diversity policy,
there should be at least one member of the Executive Board with
in-depth expertise of Healthcare, Life Science or Performance Materials,
respectively.
Currently, the Executive Board has the full breadth of the sector-
specific experience required.
EDUCATIONAL BACKGROUND
In order to translate the tremendous innovative potential of a science
and technology company into sustainable business success, interdis-
ciplinary educational backgrounds are a key element of our diversity
policy both for the Executive Board and for the Supervisory Board.
The current composition of both boards illustrates this interdisciplinary
aspect to a very high degree.
The members of the Executive Board bring together expertise in
the fields of veterinary medicine, industrial engineering and manage-
ment as well as medicine (pharmacology) and information technology,
among others. In addition, one member of the Executive Board joined
Merck as an apprentice. More than 80% of the members of the Exec-
utive Board hold doctorates from universities either in Germany or
abroad.
Moreover, the members of the Supervisory Board have a back-
ground in one or more the following fields of specialization: chemistry,
biochemistry, nutrition, human medicine, business administration
and economics, education, and physics, among others.
More than one-half of our Supervisory Board members are uni-
versity graduates and hold doctorates.
Corporate Governance
195
RESEARCH AND DEVELOPMENT COMMITTEE
Corporate Governance
The Research and Development Committee has four members. These
are Helga Rübsamen-Schaeff (Chairperson), Johannes Baillou, Siegfried
Karjetta, and Gregor Schulz.
Statement on Corporate Governance
Total equity
Remeasurement
of defined
benefit plans
-1,160
7,025
1,629
-344
1,629
-344
-136
-466
Changes in scope of consolidation/Other
Balance as of December 31, 2016
Balance as of January 1, 2017
Profit after tax
Other comprehensive income
Comprehensive income
3,814
Dividend payments
(share premium) Retained earnings/
Merck KGaA Net retained profit
397
Consolidated Statement of Changes in Net Equity
Consolidated Statement of Changes in Net Equity
For details see Note (25) "Equity".
Equity capital
Retained earnings
€ million
Balance as of January 1, 2016
Profit after tax
Other comprehensive income
Comprehensive income
Dividend payments
Profit transfer to/from E. Merck KG
including changes in reserves
Transactions with no change of control
General
partner's equity Subscribed capital
Merck KGaA
Merck KGaA
168
Capital reserves
-176
Changes in scope of consolidation/Other
Balance as of December 31, 2017
Consolidated Financial Statements
3,814
9,901
-1,358
Consolidated Financial Statements
Consolidated Statement of Changes in Net Equity
211
Gains/losses recognized in equity
Derivative
Available-for-sale
financial assets
financial
instruments
Currency Equity attributable
translation
difference
to Merck KGaA
shareholders
Non-controlling
interests
168
397
1
-593
3
397
168
3,814
8,049
-1,501
397
5
168
8,049
-1,501
2,600
142
2,600
142
-155
3,814
-3
210
589
-392
-132
4
2
-919
-716
44
2,518
21
-344
-17
-156
185
457
11
5
-219
-3
2,696
14
1,633
1,758
1,934
-184
23
-221
-73
→ 34
234
103
-51
-1,256
-587
-346
-451
-3
76
939
156
→ 35
-1,908
Changes in cash and cash equivalents due to currency translation
Cash and cash equivalents as of January 1
Changes in cash and cash equivalents due to changes in scope of consolidation
Cash and cash equivalents as of December 31
-320
107
-30
-1,870
8
832
- 8
589
939
Plus cash and cash equivalents included in assets held for sale
Cash and cash equivalents as of December 31 (consolidated balance sheet)
→ 24
939
364
→ 36
-496
-1,147
-503
24
-155
-4
-136
-3
-466
-1,424
-461
881
-314
-729
-932
-272
147
236
349
Profit transfer to/from E. Merck KG
including changes in reserves
Transactions with no change of control
8,635
35,621
2016
35,621
Total assets¹
7,670
7,455
12
→ 4
939
38,258
589
403
490
→ 23
Assets held for sale
Cash and cash equivalents
Income tax receivables
672
→ 24
Total equity
→ 25
Equity capital
→ 27
Other non-current provisions
→ 26
Provisions for pensions and other post-employment benefits
14,050
61
63
14,066
Non-controlling interests
13,989
14,003
Equity attributable to Merck KGaA shareholders
3,062
10,362
565
565
12,357
1,082
Gains/losses recognized in equity
Reserves
731
-20
Other current assets¹
145
444
→ 19
4,231
4,512
→ 18
9,980
8,317
→ 17
15,015
13,582
→ 16
Dec. 31, 2016
Dec. 31, 2017
Note
Deferred tax assets
Other non-current assets
Non-current financial assets
218
2,257
788
→ 20
131
90
→ 19
Current financial assets
2,889
2,923
→ 22
Trade accounts receivable
2,609
2,632
→ 21
Inventories¹
Current assets¹
30,589
28,166
1,013
1,106
- 14
205
2,610
2,313
834
→ 28
thereof: from discontinued operations
Net cash flows from operating activities
Other non-cash income and expenses
Neutralization of gains/losses on disposal of assets
Changes in other assets and liabilities
Changes in provisions
Changes in trade accounts payable
Payments for investments in intangible assets
Changes in trade accounts receivable
Depreciation/amortization/impairment losses/reversals of impairments
Profit after tax
€ million
Consolidated Cash Flow Statement
209
Consolidated Cash Flow Statement
Consolidated Financial Statements
Changes in inventories
Payments from the disposal of intangible assets
Payments for investments in property, plant and equipment
Payments from the disposal of property, plant and equipment
2017
Note
Changes in cash and cash equivalents
thereof: from discontinued operations
Net cash flows from financing activities
Payments from new borrowings of other current and non-current financial liabilities
Repayments of other current and non-current financial liabilities
Repayment of bonds
Payments from new borrowings of financial liabilities from E. Merck KG
Repayments of financial liabilities to E. Merck KG
Dividend payments to E. Merck KG
Dividend payments to non-controlling interests
Dividend payments to Merck KGaA shareholders
thereof: from discontinued operations
Net cash flows from investing activities
Payments from divestment of assets held for sale
Payments from divestments less transferred cash and cash equivalents
Payments from other divestments
Payments for acquisitions less acquired cash and cash equivalents
Payments from the disposal of other financial assets
Payments for investments in financial assets
38,258
9,089
2,714
8
Income tax liabilities
Trade accounts payable
Current financial liabilities
Current provisions
Current liabilities¹
15,119
12,919
2,724
1,489
→ 14
Deferred tax liabilities¹
439
354
→ 29
Other non-current liabilities
8,809
8,033
Other current liabilities¹
Non-current financial liabilities
Liabilities directly related to assets held for sale
1 Previous year's figures have been adjusted, see Note (4) "Acquisitions and divestments".
→ 4
1,950
2,175
→ 29
883
1,059
→ 31
2,048
2,195
- 30
3,788
2,790
28
->
412
414
→ 27
Total equity and liabilities¹
12,787
Non-current liabilities¹
12,855
Changes recognized in equity
Exchange differences on translating foreign operations
Changes taken directly to equity
Reclassification to profit or loss
Changes recognized in equity
Note
2017
Tax effect
2016
1,633
→ 26
141
-424
2
79
142
2,610
-344
Reclassification to assets
Fair value adjustments
€ million
Profit after tax
Items of other comprehensive income that will not be reclassified
to profit or loss in subsequent periods:
Remeasurement of the net defined benefit liability
Changes in remeasurement
Tax effect
Reclassification to profit or loss
Changes recognized in equity
to profit or loss in subsequent periods:
Available-for-sale financial assets
Fair value adjustments
Reclassification to profit or loss
Tax effect
Changes recognized in equity
Derivative financial instruments
Items of other comprehensive income that may be reclassified
142
-344
49
521
Other comprehensive income
Comprehensive income
-1,843
177
767
1,810
-1,985
of which: attributable to Merck KGaA shareholders
1,804
of which: attributable to non-controlling interests
→ 25
6
6
208
Consolidated Financial Statements
761
517
-2,062
-74
8
-31
-1
1
7
19
88
-90
12
65
-31
10
69
-15
-2,011
591
-51
Consolidated Statement of Comprehensive Income
207
Consolidated Statement of Comprehensive Income
Consolidated Financial Statements
(-181)
10,007
9,823
-4,702
-4,526
(-1,017)
(-1,032)
(-179)
Administration expenses
-854
Research and development costs
→ 10
-2,140
-1,976
(of which: amortization of intangible assets)¹
(-5)
-930
-5,201
-5,320
→ 8
206
Consolidated Financial Statements
Consolidated Income Statement
Consolidated Income Statement
€ million
Net sales
Cost of sales
(of which: amortization of intangible assets)¹
Gross profit
Marketing and selling expenses
(of which: amortization of intangible assets)¹
Note
2017
2016
→ 7
15,327
15,024
(-4)
Consolidated Balance Sheet
Other operating income
1,227
of which: attributable to Merck KGaA shareholders (net income)
of which: attributable to non-controlling interests
2,600
1,629
→ 25
10
4
Earnings per share (in €)
1,633
basic
¹Excluding amortization of internally generated or separately acquired software.
2 Not defined by International Financial Reporting Standards (IFRS).
→ 15
5.98
3.75
5.98
3.75
diluted
2,610
-521
386
996
Other operating expenses
Operating result (EBIT)²
→ 12
-937
-981
2,525
2,481
Financial result
Profit before income tax
→ 13
- 300
2,224
-326
2,154
Income tax
Profit after tax
→ 14
→ 11
68
Consolidated Balance Sheet
Non-current assets¹
-121
31
1
-593
-593
- 159
-4
1,171
-155
6
761
-2,057
69
7
-1,843
-4
767
-1,839
14,003
14,066
statements.
The amendments had no material effects on the consolidated financial
• Annual Improvements to IFRSS 2014-2016 Cycle: Amendment to
IFRS 12 "Disclosure of Interests in Other Entities"
•
The following rules take effect as of fiscal 2017:
Amendment to IAS 7 "Statement of Cash Flows"
Amendments to IAS 12 "Income Taxes"
In comparison with the previous year, there were no material changes
to accounting and measurement principles. The accounting and
measurement policies used in the consolidated financial statements
are presented in Notes (51) "Measurement policies" to (69) "Share-
based compensation programs".
These consolidated financial statements have been prepared in
accordance with the International Financial Reporting Standards in
force on the reporting date as issued by the International Accounting
Standards Board and the IFRS Interpretations Committee (IFRS and
IAS, as well as IFRIC and SIC) and as adopted by the European Union
as well as the additionally applicable provisions of section 315e of the
German Commercial Code (HGB). The fiscal year corresponds to the
calendar year. These financial statements have been prepared in
euros, the reporting currency. The figures reported in the consolidated
financial statements have been rounded, which may lead to individual
values not adding up to the totals presented.
63
(2) Reporting principles
(1) Company information
General
Consolidated Financial Statements
Notes to the
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
212
The accompanying consolidated financial statements as of Decem-
ber 31, 2017 have been prepared with MERCK Kommanditgesellschaft
auf Aktien (Merck KGaA), Frankfurter Strasse 250, 64293 Darmstadt
as parent company. Merck KGaA, which manages the operations of
the Merck Group, is registered under HRB 6164 with the Commer-
cial Register of Darmstadt. In accordance with the provisions of the
German financial reporting disclosure law (Publizitätsgesetz), con-
solidated financial statements are also prepared for E. Merck Kom-
manditgesellschaft (E. Merck KG), the ultimate parent company and
general partner of Merck KGaA with an equity interest of 70.274%
as of December 31, 2017 (December 31, 2016: 70.274%). These
consolidated financial statements include Merck KGaA and its sub-
sidiaries. The authoritative German versions of these financial
statements are filed with the German Federal Gazette (Bundesan-
zeiger) and can be accessed at www.bundesanzeiger.de.
-2,057
69
7
-136
1,810
6
1,804
515
-15
19
-3
177
175
515
-15
19
1,633
4
1,629
2
-139
-466
-466
2,610
10
2,600
14,050
61
13,989
3,229
-191
24
14,050
61
13,989
3,229
-191
24
-10
-10
The following rules take effect as of fiscal 2018:
• IFRS 9 "Financial Instruments"
• IFRS 15 "Revenue from Contracts with Customers"
• Amendment to IFRS 4 "Insurance Contracts"
• costs of obtaining or fulfilling a contract
consignment arrangements
•
• revenue recognition over time for long-term service contracts and
customer-specific construction contracts
• variable consideration
Moreover, the new rules of IFRS 15 in the following areas are of no
or only of very minor relevance for Merck:
1
•
4
-20
Expected effect on Group equity
as of January 1, 2018, in € million¹
(increase (+)/decrease (-))
1 Before taking deferred taxes into consideration.
In individual cases, payments to customers will be presented in the consolidated
income statement as sales deductions rather than operating expenses.
In the Life Science business sector, there are multiple-element arrangements with
service elements to minor extent. In future, the transaction price will have to be
allocated in some cases in a different manner than previously.
In individual cases, contracts with customers provide for minimum purchase
quantities. In such cases, in accordance with IFRS 15, the expected transaction
price attributable to the minimum purchase quantity has to be allocated to the
individual supplies. However, under IAS 18, revenue is recognized in the amount
of the invoiced selling price for the individual supplies.
Out-licensing intellectual property may, in some cases, lead to an earlier revenue
recognition as compared with IAS 18 if the outlicensed intellectual property meets
the criteria of right-of-use asset (recognition of revenue at a point in time), rather
than an access right (recognition over a period of time) and the consideration is
not paid in the form of sales- or usage-based royalties.
17
principal-agent relationships
⚫ bill-and-hold arrangements
•
Goodwill¹
Property, plant and equipment¹
• Costs of obtaining a contract are expensed as incurred if the amor-
tization period is one year or less.
• The promised amount of consideration is not adjusted for the
effects of a significant financing component if the period between
the fulfillment of a performance obligation and the payment by the
customer amounts to up to one year
Possibility of applying the modified retrospective method where
the cumulative effect of initially applying IFRS 15 as of January 1,
2018 is recognized as an adjustment of Group equity
•
Merck will make use of the following practical expedients of
IFRS 15:
The implementation of the new rules in the systems and processes
of the Group companies commenced in 2016 and was completed in
the course of 2017. The necessary system adaptations related in
particular to the expanded disclosure requirements in the Notes to
the Consolidated Financial Statements.
Collaboration agreements are within the scope of IFRS 15 only if
there is a customer-supplier relationship. This is normally not the case
for the existing collaborations, most of which relate to the Healthcare
business sector.
• gross presentation of rights of return granted by recognition of an
asset for expected physical returns by customers
separate performance obligations from transportation or other
logistics services
repurchase agreements
•
•
barter transactions
•
financing components
In the case of specific supplies of goods, the transfer of control and thus the date
of revenue recognition in accordance with IFRS 15 will occur later than the transfer
of risks and rewards within the meaning of IAS 18. This affects in particular over-
seas shipping transports in the Healthcare business sector.
€ million
Accounting change
Presentation of payments to
customers as sales deduction
The existing hedge accounting relationships can remain in place also after the first-
time application of the requirements of IFRS 9. For hedging relationships where Merck
uses options, only the intrinsic value of options will be designated as the hedged item.
For hedging relationships where Merck uses forward contracts, only the spot element
will be designated as the hedged item. Changes in the fair value of the forward
element in forward contracts or in the time value component of option contracts will
initially be recorded in a new hedging cost reserve within Group equity. The further
accounting treatment of these amounts depends on the type of hedged transaction.
In future, loss allowances for trade accounts receivable are determined on the
basis of their lifetime expected credit losses. The first-time application of IFRS 9
will lead to an increase in allowances for losses from expected credit risks of
financial assets, particularly trade accounts receivable.
In individual cases, the classification of financial assets will change, with subse-
quent measurement being recorded either in other comprehensive income or in the
consolidated income statement. The expected material effect on Merck is repre-
sented by the change from previous classification as available for sale debt instru-
ments to future classification as "measured at fair value through profit or loss".
For all material equity instruments existing as of January 1, 2018, and not held for
trading, Merck will make the election to recognize future changes in fair value in
other comprehensive income and to continue to present these changes in equity
after the disposal of the financial instrument.
Accounting change
Designation of hedging
instruments
Measurement of trade accounts
receivable and other financial
assets
Measurement of equity
instruments
1 Before taking deferred taxes into consideration.
Classification of financial assets
lights the major subject areas for Merck and their estimated impact
on Group equity as of January 1, 2018, before taking into account
deferred taxes.
Over the past two years, an in-depth analysis of the impact of the
new IFRS 9 rules was performed with respect to the accounting
practices and processes in place at Merck. The following table high-
213
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
We did not opt for early application of any of these rules.
• Amendments to IFRS 15 "Revenue from Contracts with Customers"
• Annual Improvements to IFRSS 2014 - 2016 Cycle: Amendments
to IFRS 1 "First-time Adoption of International Financial Reporting
Standards" and to IAS 28 "Investments in Associates and Joint
Ventures"
Subject area
Expected effect on Group equity
as of January 1, 2018, in € million¹
(increase (+)/decrease (-))
-5 to -10
1
Multiple-element arrangements
Long-term supply contracts with
minimum purchase quantities
(take-or-pay contracts)
Out-licensing of intellectual
property
Date of the transfer of control
within the context of product
sales
Subject area
The expected adjustment effects on Group equity as of January 1,
2018, before taking into account deferred taxes, can be summarized
as follows.
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
214
Merck generates more than 95% of its revenues from contracts
on the sale of goods that usually have a simple structure and nor-
mally do not constitute long-term contracts. Based on the knowledge
as of the date of preparing these consolidated financial statements,
the initial application of IFRS 15 is not expected to have any material
impact on the consolidated income statement for 2018.
Since the beginning of 2015, a cross-functional project team has been
analyzing the effects of the new rules on revenue recognition of
IFRS 15, using quantitative and qualitative analyses, surveys and
contract analyses to do so.
The implementation of the new IFRS 9 rules in the systems and pro-
cesses of Group companies was correspondingly prepared in 2016
and 2017. The necessary adjustments to the system relate in parti-
cular to the new impairment rules, the new classification of financial
assets and expanded disclosure requirements in the notes to the
consolidated financial statements.
Possibility of modified initial application to record the cumulative
adjustment from initial application as of January 1, 2018. Com-
parative information for prior periods as regards classification and
measurement as well as impairment is not disclosed under IFRS 9.
Application of the simplified impairment model in accordance with
IFRS 9 for the recognition of lifetime expected credit losses of
contract assets as well as trade receivables, lease receivables,
receivables from licenses and commission receivables.
•
•
Merck will make use of the following practical expedients provided
by IFRS 9:
In addition, the implementation of IFRS 9 will change the presentation
of financial instruments in the consolidated income statement and
the consolidated balance sheet.
rather than operating expenses
Other intangible assets¹
1 Previous year's figure has been adjusted, see Note (4) "Acquisitions and divestments".
Notes to the Consolidated Financial Statements
Biopharma
€ million
The carrying amounts of goodwill were allocated to the following
cash-generating units or groups of cash-generating units on which
level the impairment tests were performed:
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
222
1 Previous year's figure has been adjusted, see Note (4) "Acquisitions and divestments".
Owing to the termination of development projects in the Health-
care business sector, in 2017 impairment losses of other intangible
assets not yet available for use were recorded in the amount of
€ 17 million (2016: € 12 million).
The goodwill (carrying amount as of December 31, 2017: € 13,582 mil-
lion/December 31, 2016: € 15,015 million¹) and other intangible
assets not yet available for use (carrying amount as of December 31,
2017: € 421 million/December 31, 2016: € 181 million) reported in
the consolidated financial statements are tested for impairment at
least once a year or when a triggering event arises.
IMPAIRMENT TESTS OF GOODWILL AND INTANGIBLE
ASSETS NOT YET AVAILABLE FOR USE
Insofar as sales deductions were not already made on payments
received, Merck determined the level of sales deductions on the basis
of current experience and recognizes them as a liability (carrying
amount on December 31, 2017: € 435 million/December 31, 2016:
€ 443 million). The sales deductions reduce gross sales. Adjustments
of liabilities can lead to subsequent increases or reductions in net
sales in later periods.
The most significant portion of these deductions from sales was
attributable to the Healthcare business sector. The most substantial
sales deductions in this business sector relate to government rebate
programs in North America.
Merck grants its customers various kinds of rebates and discounts.
In addition, expected returns, state compulsory charges and rebates
from health plans and programs are also deducted from sales.
SALES DEDUCTIONS
39
-6
-52
47
-47
54
6
-42
10%
Change in probability of regulatory approval
unchanged
-10%
Consumer Health
Life Science¹
Performance Materials
Goodwill¹
Net cash flows
Most recent financial medium-term planning approved by the Executive Board and used for internal purposes
4 years
Performance Materials
Life Science
Biopharma (including Allergopharma; in 2016 also including Biosimilars¹)
Consumer Health
Value in use
Determination of the value
of the key assumptions
Detailed planning period
Key assumptions
Planning basis
Measurement basis
Impairment test level
When conducting the impairment tests the following parameters
were used:
As in 2016, no impairment losses for goodwill were recorded in the
year under review.
unchanged (6.5%)
7.0%
The identified cash-generating units or groups of cash-generating
units represented the lowest level at which goodwill was monitored
by management.
15,015
1,452
1,278
13,582
11,752
10,519
251
251
1,560
Dec. 31, 2016
1,534
Dec. 31, 2017
1 Previous year's figures have been adjusted, see Note (4) "Acquisitions and divestments".
The changes in the carrying amounts over the previous year were
mainly attributable to currency effects.
6.0%
Change of discount rate
€ million
material significance
(5) Collaborations of
219
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
to be performed, as well as tiered royalties on product sales. Addi-
tionally, Merck received an advance payment of € 45 million for ser-
vices to be performed at short notice. As of 2018, Merck will receive
further payments for services performed, partly from future mile-
stone payments. The fair values determined by an independent
external expert for the contingent consideration components of the
business activities being divested were classified as available-for-sale
financial assets. A sensitivity analysis of the measurement of the
contingent consideration can be found in Note (6) "Management
judgments and sources of estimation uncertainty". The calculated
disposal gain amounted to € 319 million and was recorded under
other operating income. Revenue from the provision of services is
mainly recorded as part of net sales.
As compensation for the sale of the business activities, Merck
received an upfront payment of € 156 million. According to the agreed
terms of the transaction, Merck is entitled to future milestone pay-
ments of up to € 497 million, which will partly be covered by services
On August 31, 2017, Merck completed the divestment of the Bio-
similars business to subsidiaries of Fresenius SE & Co. KGaA. Since
fiscal 2016, the Biosimilars business, which is part of the Healthcare
business sector, had been reported as a disposal group and consists
of allocable goodwill, inventories, property, plant and equipment,
pension obligations, and intangible assets. In addition to the divest-
ment of the business activities, the contract parties entered into
supply and services agreements, which include drug development
support and manufacturing services.
DIVESTMENT OF THE BIOSIMILARS BUSINESS
38,258
7
38,251
STRATEGIC ALLIANCE WITH PFIZER INC., USA,
7,139
1,950
3
1,947
9,089
3
9,086
12,395
12,395
2,724
4
2,720
15,119
7,139
Long-term growth rate after the detailed planning period
TO CO-DEVELOP AND CO-COMMERCIALIZE ACTIVE
INGREDIENTS IN IMMUNO-ONCOLOGY
According to the collaboration agreement, during the development
period each company will bear one-half of the development expenses.
In the commercialization phase, Merck realizes the vast majority of
sales from the commercialization of BavencioⓇ while Pfizer realizes
the vast majority of sales from the commercialization of its anti-PD-1
antibody. At the same time, Merck and Pfizer evenly split defined
income and expense components. The execution of the collaboration
agreement is not being structured through a separate vehicle.
The most significant contingent consideration is the future pur-
chase price claim from the disposal of the Biosimilars business (see
Note (4) "Acquisitions and divestments"). It was determined by an
external expert and amounted to € 228 million. If, in the context of
determining the fair value of this contingent consideration at the date
of transaction, the probability of approval as well as the discount
factor of the three major development programs had been estimated
to be lower or higher to the extent presented below, this would have
led to the following changes in the measurement and the correspond-
ing effects on the profit before tax:
bilities of success of the individual milestone events, the sales plan-
ning assumed to derive the royalties as well as the discount factor
used. Any change in these material input factors may lead to signif-
icant changes in the value of the recognized financial assets or finan-
cial liabilities.
To the extent that, in the context of the divestment or the acquisition
of businesses, contingent consideration is contractually agreed with
the acquirer or seller, the fair value of the transaction is recognized in
the balance sheet as a financial asset classified as available for sale
or financial liability. As of December 31, 2017, Merck reported finan-
cial assets from contingent consideration in the amount of € 277 mil-
lion (December 31, 2016: € 51 million) and financial liabilities from
contingent consideration amounting to € 3 million (December 31,
2016: € 1 million). The assets mainly were based on contractual
entitlements from potential future milestone payments and royalties
in connection with the disposal of the Biosimilars business in 2017
as well as the disposal of the KuvanⓇ business in 2016. The deter-
mination of the fair value of contingent consideration is, to large
extent, subject to judgment. The most significant parameters for the
measurement of contingent consideration are the estimated proba-
CONTINGENT CONSIDERATION
221
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
RECOGNITION AND MEASUREMENT OF ASSETS,
LIABILITIES AND CONTINGENT LIABILITIES ACQUIRED
IN THE CONTEXT OF BUSINESS COMBINATIONS
The recognition and measurement of assets, liabilities and contingent
liabilities at fair value during purchase price allocations involve the
use of estimates. The expertise of external valuation experts is nor-
mally obtained here. The fair values of the assets and liabilities
recognized as part of the purchase price allocations for BioControl
Systems, Inc., USA, Grzybowski Scientific Inventions, USA, as well
as Natrix Separations, Inc., Canada, can be found in Note (4) "Acqui-
sitions and divestments".
The preparation of the consolidated financial statements requires
Merck to make discretionary decisions and assumptions as well as
estimates to a certain extent. The discretionary decisions, assump-
tions relating to the future and sources of estimation uncertainty
described below are associated with the greatest potential effects on
these consolidated financial statements.
sources of estimation uncertainty
(6) Management judgments and
On June 4, 2017, Merck announced a strategic collaboration with
F-star Delta Ltd, Cambridge, United Kingdom (F-star), for the devel-
opment and commercialization of bispecific immuno-oncology anti-
bodies. Merck has the option, upon delivery of pre-defined data
packages by F-star, to fully acquire the company that owns five
bispecific programs, including the preclinical lead asset FS118. In
return, Merck made upfront payments to F-star and its shareholders
totaling € 60 million, which were capitalized in 2017. Moreover, pay-
ments to finance R&D and for the achievement of certain milestones
in an amount totaling up to € 55 million will be made during the first
two years. The milestone payments will be capitalized when they are
incurred. R&D financing will be recorded under research and devel-
opment expenses. If the option is exercised and defined milestones
are reached, Merck will incur further payment obligations of up to
€ 715 million.
On November 17, 2014 Merck formed a global strategic alliance with
Pfizer Inc., USA, (Pfizer) to co-develop and co-commercialize the anti-
PD-L1 antibody avelumab. In 2017, this antibody was approved for
the first time under the trade name BavencioⓇ for the treatment of
patients with metastatic Merkel cell carcinoma (in the United States,
the European Union, Iceland, Japan, Canada, Liechtenstein, Norway,
and Switzerland) as well as patients with locally advanced or meta-
static urothelial cancer (in the United States). This antibody is also
being studied in multiple clinical trials as a potential treatment for
further tumor types. The active ingredient is to be developed as a
single agent as well as in various combinations with a broad portfolio
of approved and investigational active ingredients. As part of the
strategic alliance, the two companies have combined resources and
expertise to also co-develop and co-commercialize Pfizer's anti-PD-1
antibody. The overriding objective of the strategic alliance is sharing
the development risks and to accelerate the two companies' presence
in immuno-oncology.
F-STAR DELTA LTD., UNITED KINGDOM
On March 30, 2017, Merck announced an agreement with a subsidiary
of Avillion LLP, London, United Kingdom (Avillion), to develop the anti-
IL-17-A/F-Nanobody® M1095. Merck acquired full, exclusive rights to
anti-IL-17 A/F NanobodyⓇ through a global development and com-
mercialization license from Ablynx nv, Ghent, Belgium, in 2013. This
NanobodyⓇ is an investigational therapy which has completed Phase I
development. As part of the cooperation, Avillion will be responsible
for developing anti-IL-17 A/F NanobodyⓇ from Phase II through
Phase III in plaque psoriasis. Avillion will also finance the clinical
program through to regulatory submission. During the development
stages, Merck recognizes a financial liability for potential repayment
obligations to Avillion and records a corresponding expense as
research and development costs.
DEVELOPMENT AGREEMENT WITH AVILLION LLP,
UNITED KINGDOM, TO DEVELOP MERCK'S
ANTI-IL-17 A/F NANOBODY®
In March 2015, Merck and Intrexon Corporation, USA, entered into
an exclusive strategic collaboration and license agreement to develop
and commercialize Chimeric Antigen Receptor T-cell (CAR-T) cancer
therapies. The agreement provided Merck exclusive access to Intrex-
on's proprietary and complementary suite of technologies to engineer
T-cells with optimized and inducible gene expression. Intrexon will be
responsible for all platform and product developments until the inves-
tigational new drug application is submitted for regulatory approval.
Merck will select targets of interest for which CAR-T products will be
developed. Merck will also lead the regulatory submission process
and pre-submission interactions with the regulatory authorities, as
well as clinical development and commercialization. Intrexon received
an upfront payment of US$ 115 million. This amount was recognized
as part of intangible assets not yet available for use (carrying amount
as of December 31, 2017: € 104 million/December 31, 2016:
€ 104 million). For the first two targets of interest selected by Merck,
Intrexon will receive research funding and is eligible to receive up to
US$ 826 million development, regulatory and commercial milestones,
as well as tiered royalties on product sales. In addition, Intrexon is
also eligible to receive further payments upon achievement of certain
technology development milestones.
AGREEMENT WITH INTREXON CORPORATION, USA,
ON THE JOINT DEVELOPMENT AND COMMERCIALIZATION
OF CAR-T CANCER THERAPIES
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
220
In March 2013, Merck established an agreement with Bristol-Myers
Squibb Company, USA, (BMS) for the co-commercialization of the
antidiabetic agent GlucophageⓇ (active ingredient: metformin hydro-
chloride) for the treatment of type 2 diabetes in China. Based on this
agreement, as of fiscal 2017 Merck took over the exclusive distribu-
tion of GlucophageⓇ in China. Instead of commission income, Merck
has recorded sales of Glucophage in China and has made license
payments to BMS since then. In fiscal 2017, Merck generated sales
of € 279 million with GlucophageⓇ in China (2016: commission
income amounting to € 104 million).
AGREEMENT WITH BRISTOL-MYERS SQUIBB COMPANY,
USA FOR THE CO-COMMERCIALIZATION OF
GLUCOPHAGE® IN CHINA
On the date of the closing of the collaboration agreement, both
the upfront payment received and the value of the right to co-promote
XalkoriⓇ were recognized in the balance sheet as deferred income
under other liabilities. Both amounts are being recognized as income
over the expected period during which Merck is to meet certain
obligations and will be presented under other operating income
(2017: € 191 million/2016: € 191 million). More information on the
exercise of management judgments and estimation uncertainties in
this regard can be found in Note (6) "Management judgments and
sources of estimation uncertainty.” In fiscal 2017, Merck generated
sales of € 21 million with Bavencio® (2016: €0 million), recorded
research and development expenses of € 264 million (2016: € 245 mil-
lion) and received milestone payments amounting to € 124 million
(2016: €0 million), which were recorded under other operating
income.
metastatic NSCLC in patients whose tumors are ROS1-positive. During
co-promotion of Xalkori®, Merck receives from Pfizer a profit share,
which is reported in net sales. In 2017, this profit share income
amounted to € 72 million (2016: € 64 million). At initial recognition,
the right was measured at fair value by an independent external
expert using the multi-period excess earnings method. The right was
capitalized when it was granted and is being amortized over the term
of the agreement. The residual book value of this intangible asset of
December 31, 2017 was € 93 million (December 31, 2016: € 153 mil-
lion). The need to recognize an impairment loss arose for XalkoriⓇ
in both 2017 and 2016. More information on the impairments rec-
ognized can be found in Note (6) "Management judgments and
sources of estimation uncertainty."
Under the terms of the agreement, in 2014 Pfizer made an upfront
cash payment of US$ 850 million (€ 678 million) to Merck after the
closing. Pfizer also committed to make further payments of up to
US$ 2 billion to Merck subject to the achievement of defined regulatory
and commercial milestones. Based on the collaboration agreement,
Merck additionally received the right to co-promote for multiple years
Xalkori® (crizotinib), a kinase inhibitor indicated for the treatment of
patients with metastatic non-small cell lung cancer (NSCLC) whose
tumors are anaplastic lymphoma kinase (ALK)-positive. In the United
States and Europe, Xalkori® is also indicated for the treatment of
IMMUNO-ONCOLOGY COLLABORATION WITH
Discount rate after tax (weighted average cost of capital after tax - WACC)
Net cash flows
• Sales growth
> 2.0
> 5%
> 5%
> 2.0
> 2.0
> 2.0
> 2.0
> 5%
> 5%
> 2.0
> 2.0
> 2.0
> 2.0
> 2.0
in percentage points
in percentage points
2016
2017
2016
2017
2016
2017
Decrease in
net cash flows
Increase in cost of
capital after tax
Decrease in long-term
growth rate
Performance Materials
in %
Life Science
> 1.5
> 5%
OTHER PROVISIONS AND CONTINGENT LIABILITIES
As a global company for high-tech products, Merck is exposed to a
multitude of litigation risks. In particular, these include risks from
product liability, competition and antitrust law, pharmaceutical law,
patent law, tax law and environmental protection. Merck is engaged
in legal proceedings and official investigations, the outcomes of which
are uncertain. A description of the most important legal matters as
of the balance sheet date can be found in Notes (27) "Other provi-
sions" and (40) "Contingent liabilities". The provisions recognized
for legal disputes mainly relate to the Healthcare and Performance
Materials business sectors and amounted to € 526 million as of the
balance sheet date (December 31, 2016: € 483 million).
IDENTIFICATION OF IMPAIRMENT OR REVERSALS
OF IMPAIRMENT OF NON-FINANCIAL ASSETS
Discretionary decisions are required in the identification of objective
evidence of impairment as well as in the identification of a reversal
of impairment of other intangible assets and property, plant and
equipment. As of December 31, 2017, the carrying amounts of these
assets totaled € 12,829 million (December 31, 2016: € 14,211 mil-
lion¹). External and internal information is used to identify indications
of impairment and reversals of impairment. For example, the approval
of a competing product in the Healthcare business sector or the
closure of a site can be an indicator of impairment.
Key indicators for the identification of impaired receivables and
the subsequent recoverability tests are, in particular, payment default
or delay in the payment of interest or principal, negative changes in
economic framework conditions as well as considerable financial
difficulties of a debtor. These estimates are discretionary.
On every balance sheet date, Merck reviews whether there is any
objective evidence that a financial asset is impaired and, if this is the
case, recognizes allowances to the extent estimated as necessary.
Particularly important in this context are allowances on trade accounts
receivable, whose carrying amount was € 2,923 million as of Decem-
ber 31, 2017 (December 31, 2016: € 2,889 million).
IMPAIRMENT OF FINANCIAL ASSETS
In addition, the intangible asset in connection with the co-pro-
motion right for Xalkori® (crizotinib), a medicine to treat patients with
ALK-positive metastatic non-small cell lung cancer, was subjected to
an impairment test, as in the prior year owing to negative develop-
ments in the market environment. This test led to an impairment
loss of € 33 million (2016: € 71 million) on the intangible asset, which
was reported under other operating expenses. Within the scope of the
impairment test, the recoverable amount was determined using a
discount rate before tax of 7.5%. This included an asset-specific risk
premium.
In 2017 impairment losses for the biopharmaceutical production facil-
ity in Corsier-sur-Vevey, Switzerland, were reversed in the amount of
€ 69 million to depreciated historical cost. The impairment loss rever-
sal was recorded under other operating income and allocated to the
Healthcare business sector. The impairment loss reversal was recorded
under other operating income and allocated to the Healthcare business
sector. The decision to reverse the impairment loss was due to
improved expectations for the capacity utilization of the production
facility, particularly owing to the recent approvals of the immuno-
oncology medicine BavencioⓇ, which is to be produced in this facility.
An impairment loss of € 165 million was originally recognized for the
facility in 2011.
If the consideration that was received as part of the strategic
alliance with Pfizer Inc., USA, in November 2014 and deferred as a
liability had been recognized in the income statement over a shorter
period reduced by one year, in 2017 this would have increased other
operating income and thus profit before tax would have increased by
€ 96 million (2016: € 64 million). Recognition over a period extended
by one year would have lowered other operating income and profit
before tax by € 48 million (2016: € 38 million).
Merck regularly receives upfront and milestone payments as part
of research and development collaborations or out-licensing agree-
ments. In this context, income may only be recognized if Merck has
transferred all material risks and rewards of an intangible asset to
the acquirer, has no interest in the remaining business activities and
has no material continuing commitment. If these criteria are not
deemed to be met, the received payments are deferred and recog-
nized over the period in which Merck is expected to fulfill its perfor-
mance obligations. Both the assessment of the criteria for income
recognition and the determination of the appropriate period during
which income is recognized are subject to judgment.
Merck is regularly a partner of research and development collabo-
rations with research institutions, biotechnology companies or other
contract parties. These collaborations are aimed at developing
marketable products. Merck also enters into in-licensing agreements
regarding intellectual property of contract partners. Such agreements
typically involve making upfront payments and payments for the
achievement of certain milestones related to development and com-
mercialization. In this context, Merck has to judge to what extent
upfront or milestone payments represent remuneration for services
received (research and development expense) or whether such pay-
ments result in an in-licensing of an intangible asset that has to be
capitalized. This assessment is regularly subject to judgment.
ASSETS
RESEARCH AND DEVELOPMENT COLLABORATIONS
AS WELL AS IN- AND OUT-LICENSING OF INTANGIBLE
> 1.5
Notes to the Consolidated Financial Statements
224
1 Previous year's figure has been adjusted, see Note (4) "Acquisitions and divestments".
In fiscal 2017, a reduction of the useful life of the intangible asset
reported in connection with the drug RebifⓇ by one year would have
lowered profit before tax by € 184 million (2016: € 123 million). An
extension of the useful life by one year would have increased profit
before tax by € 92 million (2016: € 74 million).
If the amortization of intangible assets from customer relationships,
brands, trademarks, marketing authorizations, patents, licenses and
similar rights had been 10% higher, for example due to shortened
remaining useful lives, profit before tax would have been € 120 mil-
lion lower in fiscal 2017 (2016: € 122 million).
DETERMINATION OF THE AMORTIZATION OF
INTANGIBLE ASSETS WITH FINITE USEFUL LIVES
In addition to goodwill and intangible assets not yet available for use,
Merck has a significant amount of intangible assets with finite useful
lives. This relates in particular to intangible assets from customer
relationships, brands, trademarks, marketing authorizations, pat-
ents, licenses and similar rights (carrying amount as of Decem-
ber 31, 2017: € 7,549 million/December 31, 2016: € 9,516 million¹).
Substantial assumptions and estimates are required to determine
the appropriate level of amortization of these intangible assets. This
related in particular to the determination of the underlying remaining
useful life, which Merck reviews regularly and adjusts if necessary.
Merck considers factors including the typical product life cycles for
each asset and publicly available information about the estimated
useful lives of similar assets.
> 5%
> 5%
> 2.0
> 2.0
> 2.0
> 2.0
> 5%
Consolidated Financial Statements
4
Consumer Health
externally available forecasts and the recoverable amounts determined
were validated using valuation multiples based on peer group infor-
mation. In addition, sensitivity analyses of the key assumptions were
performed as part of the impairment tests. Overall, no change of a
significant assumption deemed possible by management would have
resulted in an impairment. The following table presents the amount by
which key assumptions would have to change before an impairment
would need to be recognized as a result of the impairment tests:
2016
2017
Cost of capital before tax
Cost of capital after tax
Long-term growth rate
Performance Materials
Life Science
Consumer Health
Biopharma
The long-term growth rates and weighted average costs of capital
(WACC) used to conduct the goodwill impairment tests were as
follows:
223
Notes to the Consolidated Financial Statements
2017
Consolidated Financial Statements
Derived from market data and the respective peer group
• Cost of debt and capital structure
Range as recommended by the Technical Committee for Business Valuation
and Commerce of the Institute of Public Auditors in Germany (Institut der
Wirtschaftsprüfer e.V. - IDW)
Consolidated Financial Statements
Risk-free interest rate: Derived from the returns of long-term government bonds
Beta factor:
Derived from the respective peer group
Cost of equity
Discount rate after taxes (weighted average cost of capital after tax - WACC)
Based on long-term inflation expectations and expected long-term sector growth
Long-term growth rate after the detailed planning period
Based on past experiences, adjusted for expected changes
⚫ Profit margins
Based on internal planning, taking into consideration internal and external market information and
market estimations, e.g. regarding market shares, excluding approvals of new compounds from the
development pipeline and other expansion investments
1 Biosimilars was not yet reported as a disposal group when the impairment test was performed.
Biopharma
2016
2016
In all the impairment tests performed, the recoverable amount was
more than 10% higher than the carrying amount of the respective
cash-generating unit or group of cash-generating units. Irrespective
of this, the planning data used were checked for plausibility against
Net cash flows were discounted using cost of capital after tax. The
aforementioned cost of capital before tax was subsequently derived
iteratively. All of the aforementioned assumptions are considered a
source of estimation uncertainty due to their inherent uncertainty.
7.9%
7.5%
6.1%
5.9%
0.50%
0.50%
7.5%
8.4%
6.1%
6.8%
2017
1.75%
7.2%
8.2%
5.9%
6.6%
2.00%
2.00%
8.1%
8.9%
6.1%
6.7%
0.00%
0.00%
1.75%
15,115
Market risk premium:
of which:
672
-2
674
2,609
2
2,607
7,670
7,670
1,362
1,362
4,231
1
4,230
9,980
55
9,925
15,015
-49
15,064
30,589
Post adjustment
BioControl
Systems, Inc.
7
Pre adjustment
30,582
Dec. 31, 2016
Total equity and liabilities
Unadjusted current liabilities
Other current liabilities
4,389
4,389
38,251
7
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
(4) Acquisitions and divestments
ACQUISITIONS IN THE FISCAL YEAR
On May 8, 2017, Merck acquired all of the shares in Grzybowski
Scientific Inventions Ltd. (GSI) headquartered in Evanston, USA. GSI
developed Chematica, a computer-aided retro-synthesis tool. The
software uses advanced reaction rules and proprietary algorithms to
identify synthesis pathways that meet user-defined constraints. GSI
is being integrated into the Life Science business sector. The purchase
price comprises fixed compensation of US$ 7 million (€ 7 million) as
well as milestone payments of up to US$ 1 million (€ 1 million).
On September 15, 2017 Merck acquired a 100% interest in Natrix
Separations, Inc. (Natrix). The company, which is headquartered in
Burlington, Canada, supplies hydrogel membrane products for single-
use chromatography. Natrix is being integrated into the Life Science
business sector. The purchase price comprises fixed compensation
of around US$ 14 million (€ 12 million) as well as milestone pay-
ments of up to US$ 8 million (€ 7 million).
As of December 31, 2017, the purchase price allocations for GSI
and Natrix had not been completed in respect of intangible assets and
deferred taxes. The most significant impact from the preliminary pur-
chase price allocations resulted, in both cases, from the remeasure-
ment of technology-related intangible assets. Both acquisitions only
contributed immaterially to the sales and earnings of the Merck Group.
ACQUISITION IN THE PREVIOUS YEAR
BioControl Systems, Inc., USA
Effective December 21, 2016, Merck acquired a 100% interest in
BioControl Systems, Inc., Bellevue, USA (BioControl), a company
that develops, manufactures and commercializes materials and
systems to check food safety. BioControl was integrated into the
Life Science business sector. The purchase price amounted to
US$ 169 million (€ 161 million). The purchase price allocation had
not been completed by December 31, 2016; therefore, the acquired
assets and liabilities were measured at preliminary carrying values
in 2016. The corresponding adjustments to the year-earlier figures
in the consolidated balance sheet due to the completed purchase
price allocations are presented under "Adjustment of the consoli-
dated balance sheet for 2016 due to the completion of the purchase
price allocation in 2017". The acquired assets and liabilities were
measured at fair values in the balance sheet as follows:
€ million
Non-current assets
of which:
Other intangible assets (excluding goodwill)
Other non-current assets
Current assets
Cash and cash equivalents
Inventories
Receivables
Other current assets
Assets
Non-current liabilities
Deferred tax liabilities
Current liabilities
14,050
14,050
38,258
Property, plant and equipment
216
Current liabilities
Deferred tax liabilities
The development of goodwill, which is carried in U.S. dollars, during
the period from December 31, 2016 to December 31, 2017 was as
follows:
Within the scope of the acquisition, no contingent consideration
was agreed upon which Merck would possibly have to pay in the
future. The selling shareholders did not contractually indemnify
Merck for the outcome of a contingency or uncertainty related to the
acquired assets or liabilities.
Costs of € 4 million directly related to the acquisition of the company
were incurred almost in full in 2016 and were recorded under other
operating expenses.
The positive difference of € 94 million was recognized as goodwill. This
comprised anticipated synergies from the integration of BioControl
into the Life Science business sector as well as intangible assets that
are not recognizable, such as the expertise of the workforce. Good-
will is allocated to the Life Science business sector and is deductible
for tax purposes.
The most significant impact of the purchase price allocation resulted
from the remeasurement of customer-related and technology-related
intangible assets which are amortized over a period of 13 years.
217
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
94
161
Purchase price for the acquisition of shares
Positive difference (goodwill)
67
8
3
3
4
4
75
15
1
5
6
4
59
1
2
56
Fair values on the
acquisition date
€ million
Goodwill on December 31, 2016¹
Exchange rate effects
Goodwill on December 31, 2017
1 Previous year's figure has been adjusted.
of which:
Non-current liabilities
Total equity
Total assets
Unadjusted current assets
Other current assets
Inventories
of which:
Current assets
Property, plant and equipment
Unadjusted non-current assets
Other intangible assets
Goodwill
Other current liabilities and provisions
Unadjusted non-current liabilities
Non-current assets
PREVIOUS-YEAR ADJUSTMENT
The purchase price allocation for BioControl was completed in 2017.
The values in the consolidated balance sheet as of December 31,
2016 were retroactively adjusted as follows:
FOR 2016 DUE TO THE COMPLETION OF THE PURCHASE
PRICE ALLOCATION IN 2017
ADJUSTMENT OF THE CONSOLIDATED BALANCE SHEET
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
218
85
-9
94
of goodwill
Development
No material contingent liabilities were identified in the course of the
preliminary purchase price allocation.
€ million
the consolidated financial statements as well as all of the share-
holdings of Merck KGaA (see Note (70) "List of shareholdings").
The list of shareholdings presents all of the companies included in
Overall, the impact of subsidiaries not consolidated due to immate-
riality on sales, profit after tax, assets and equity was less than 1%
relative to the entire Merck Group. The interests in subsidiaries not
consolidated due to immateriality were classified as available-for-sale
financial assets and presented under non-current financial assets
(see Note (19) "Financial Assets").
The scope of consolidation changed as follows in the reporting period:
(3) Changes in the scope
of consolidation
From today's perspective, the new rules are not expected to have any
material effects on the consolidated financial statements.
• Amendment to IFRS 10 "Consolidated Financial Statements"
• Annual Improvements to IFRSS 2015-2017 Cycle
• Amendment to IAS 40 "Investment Property"
• Amendment to IFRS 2 "Share-based Payment"
• Amendment to IFRS 9 "Financial Instruments"
tures"
• Amendments to IAS 28 "Investments in Associates and Joint Ven-
• IFRIC 22 "Foreign Currency Transactions and Advance Consideration"
• IFRIC 23 "Uncertainty over Income Tax Treatments"
• IFRS 17 "Insurance Contracts"
As of the balance sheet date, the following standards were published
by the International Accounting Standards Board and the IFRS Inter-
pretations Committee, but not yet endorsed by the European Union:
• IFRS 14 "Regulatory Deferral Accounts"
The implementation of IFRS 16 will mean that as a lessee, for all
leases Merck will generally be required to recognize a liability and a
corresponding right of use in its balance sheet. The possibility to
classify a lease as an operating lease and to recognize the associated
expenses in the period in which they are incurred will no longer exist.
Merck will make use of the option under IFRS 16 to continue to
refrain from recognizing rights of use and the corresponding liabilities
from leases of low-value assets in its balance sheet. At the time of
initial application, Merck will also make use of the transition relief
provided by IFRS 16 to recognize the cumulative transition effect
instead of adjusting the prior-year periods retroactively. In order to
determine the impact of IFRS 16, around 7,000 leases have been
identified and analyzed to date. According to the current status of
the analysis, with the transition to IFRS 16, the increase in the bal-
ance sheet total will be less than 2%.
The impact of IFRS 16 on the consolidated financial statements is
currently being examined. The standard will not be applied early.
The following standard is required to be applied as of fiscal 2019:
⚫ IFRS 16 "Leases"
215
Acquired net assets
Fully consolidated companies as of December 31, 2016
Additions
Liabilities
Establishments
Retirements
57
48
314
8
2
2
-10
Fully consolidated companies as of December 31, 2017
Non-consolidated subsidiaries as of December 31, 2016
Non-consolidated subsidiaries as of December 31, 2017
Loss of control
Immateriality
Divestments
Liquidations/Mergers
Materiality
Acquisitions
313
59
2016
568
317
352
483
97
87
95
12
18
10
23
101
2017
1,227
996
The income from milestone payments, rights and royalties of € 568 mil-
lion (2016: € 317 million) primarily resulted from the collaboration
agreement entered into with Pfizer Inc., USA, in 2014 in the field of
immuno-oncology. This related to milestone payments received in
the amount of € 124 million due to the marketing authorizations of
BavencioⓇ in 2017 as well as to the pro rata recognition of deferred
income from the upfront payment as well as the value of the right
to co-promote XalkoriⓇ in the amount of € 191 million (2016:
€ 191 million) (see Note (5) "Collaborations of material signifi-
cance"). Income from royalties was mainly due to an agreement
about a one-off payment of € 116 million as settlement for license
payments due in the future as well as due to a license for interferon
beta products (Biogen Inc., USA) in the amount of € 87 million.
1
Gains from the release of provisions for litigation
Remaining other operating income
Other operating income
Notes to the Consolidated Financial Statements
Income from milestone payments, rights and royalties
Gains on disposal of businesses and non-current assets
Reversals of allowances for receivables
-614
-1,017
-1,032
-227
-177
-263
-4,702
-140
-4,526
Amortization of intangible assets was mainly attributable to customer
relationships, marketing authorizations, licenses and similar rights,
brands and trademarks, which could be functionally allocated to
Marketing and Selling.
Reversals of impairment losses on non-current assets
Income from miscellaneous services
€ 90 million (2016: € 97 million) of royalty, license and commission
expenses related to the commercialization of ErbituxⓇ outside the
United States and Canada, while € 44 million of the license expenses
arose in connection with the amended commercialization structure
for GlucophageⓇ in China with the distribution partner Bristol-Myers
Squibb (see Note (5) "Collaborations of material significance").
Research and development costs totaled € 2,140 million in 2017
(2016: € 1,976 million).
Reimbursements for research and development amounting to
€ 29 million (2016: € 84 million) were offset against research and
development costs. This figure also included government subsidies
of € 6 million (2016: € 3 million). As in the previous year, the
reimbursements were mainly from the strategic alliance with Pfizer
Inc., USA, in the field of immuno-oncology.
The breakdown of research and development costs by region is
presented in the Segment Reporting (see Note (32) "Information by
business sector/country and region").
Consolidated Financial Statements
The gains on disposal of businesses and non-current assets of
€ 352 million (2016: € 483 million) were mainly attributable to the
sale of the Biosimilars business activities (€ 319 million). The gains
in the prior year related to the sale of the rights to Kuvan® (€ 330 mil-
lion), the deconsolidation of the Venezuelan entities (€ 50 million)
as well as the disposal of other equity investments.
229
(11) Other operating income
Other operating income was as follows:
€ million
(10) Research and development costs
The reversals of allowances for receivables in the amount of € 97 mil-
lion (2016: € 59 million) included receivables from Mylan Inc., USA,
in the amount of € 20 million in connection with the sales of the
Generics business in 2007. Moreover, in fiscal 2017, the improved
solvency, above all in relation to customers from the Middle East,
resulted in reversals of allowances for receivables.
€ million
The remaining other operating income included, among other
things, gains in the amount of € 47 million (2016: €0 million) from
the reclassification of foreign exchange differences from equity to
profit or loss due to capital decreases at subsidiaries.
-193
- 108
-104
-86
-134
-77
-22
-55
-68
-41
-65
-40
-39
-52
-27
-39
-25
-22
-24
-160
The reversals of impairment losses on non-current assets of
€ 87 million (2016: € 1 million) were attributable to the biopharma-
ceutical production plant in Corsier-sur-Vevey, Switzerland, due to
improved expectations as regards capacity utilization, primarily owing
to the marketing authorizations for Bavencio® (€ 69 million), as well
as to the intangible asset for cladribine as a result of the marketing
authorization of MavencladⓇ (€ 17 million).
2016
Remaining other operating expenses
Other operating expenses
230
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
(12) Other operating expenses
The breakdown of other operating expenses was as follows:
Integration costs/IT costs
Litigation
Impairment losses
Restructuring costs
Non-income-related taxes
Premiums, fees and contributions
Employee bonus for the 350-year anniversary
Allowances for receivables
Profit share expenses
Costs of examining strategic options for the Consumer Health business
Expenses for miscellaneous services
Project costs
Acquisition costs
Exchange rate differences from operating activities (net)
2017
Losses on disposal of businesses and non-current assets
€ million
-14
168
386
-521
IMPACT OF TAX REFORM IN THE UNITED STATES
On December 22, 2017, extensive changes in tax legislation were
enacted in the United States as a result of the U.S. tax reform "Tax
Cuts and Jobs Act". The changes resulting from the U.S. tax reform
are very complex and extensive and relate to both current taxes and
the measurement of deferred taxes in fiscal 2017. They were ana-
lyzed by Merck and had the following material effects:
• The remeasurement of deferred taxes resulting from measurement
differences of assets and liabilities using the changed Federal Tax
Rate of 21% (previously 35%) led to deferred tax income of
€ 619 million. This was mainly the result of measurement differ-
ences in relation to intangible assets recognized primarily in con-
nection with the acquisition of Sigma-Aldrich Corporation, USA, in
fiscal 2015 in the United States.
• The reversal of deferred tax liabilities from outside basis differ-
ences for planned dividend payouts resulted in tax income in the
amount of € 401 million.
The new rules for the taxation of gains from foreign subsidiaries
(tax toll charge) led to additional taxes to be paid on prior-period
income which had not been subject to taxes and increased current
tax expenses by € 114 million (see Note (29) "Other liabilities").
TAX RECONCILIATION
The following table presents the tax reconciliation from theoretical
income tax expense to income tax expense according to the consol-
idated income statement. The theoretical income tax expense is
determined by applying the statutory tax rate of a corporation head-
quartered in Darmstadt. As a result of the increase in the trade tax
rate of the city of Darmstadt to 454% in 2017 (2016: 425%), the
tax rate increased by one percentage point to 31.7% (2016: 30.7%).
€ million
Profit before income tax
2017
2016
2,224
2,154
1,179
Tax rate
-19
-671
-326
Financial result
Currency differences from financing activities mainly included gains
or losses from hedging intragroup transactions in foreign currency.
232
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
(14) Income tax
€ million
Current income taxes in the period
Income taxes for previous periods
Deferred taxes in the period
Income tax
2017
2016
-780
-12
31.7%
30.7%
Theoretical income tax expense
401
-114
Income tax expense according to consolidated income statement
Effective tax rate according to consolidated income statement
386
-521
- 17.3%
24.2%
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
233
Income taxes consisted of corporation and trade taxes for the com-
panies domiciled in Germany as well as comparable income taxes for
foreign companies.
The higher tax credits arose primarily in the United States due
to the consideration of dividend income. However, this dividend
income was also taxable in the United States; the related tax expense
of € 227 million was included under "Tax effect of non-deductible
expenses/Tax-free income/Other tax effects." This item also includes
the effects of U.S. tax reform on deferred taxes.
After eliminating the effects of U.S. tax reform, the effective tax rate
for the Group was in the lower range of the expected bandwidth
between 23% and 25%.
DEFERRED TAXES AS REPORTED IN THE
CONSOLIDATED INCOME STATEMENT
619
-43
730
1
-705
-661
Tax rate differences
248
235
Tax effect of companies with a negative contribution to consolidated profit
Income taxes for previous periods
-72
-300
-38
-19
Tax credits
196
4
Tax effect on tax loss carryforwards
Tax effect of non-deductible expenses/Tax-free income/Other tax effects
thereof: from the U.S. tax reform (deferred taxes on temporary differences)
thereof: from the U.S. tax reform (deferred taxes on outside basis differences)
thereof: from the U.S. tax reform (one-time transition tax on foreign earnings)
1
-12
-4
22
-52
The restructuring costs and impairment losses as well as personnel
expenses for the one-time bonus as part of the company's 350th
anniversary contained in other operating expenses were allocable to
functional costs as follows:
2017
2016
-77
-22
-30
-3
-43
-19
€ million
Restructuring costs
thereof: marketing and selling expenses
thereof: administration expenses
thereof: research and development costs
thereof: other operating expenses
Impairment losses
231
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
Additionally, other operating expenses also included special
environmental protection costs as well as personnel expenses not
allocable to the functional areas.
-15
-7
-11
-6
-7
-3
-57
thereof: cost of sales
-225
-937
-981
Integration and IT costs amounting to € 160 million (2016: € 193 mil-
lion) were incurred for the global harmonization of the IT landscape
and in connection with the integration of acquired and existing busi-
nesses. In 2016, this related mainly to the Sigma-Aldrich integration.
Litigation expenses amounting to € 108 million (2016: € 104 mil-
lion) arose primarily in connection with the antitrust review proceed-
ings for the Sigma-Aldrich acquisition (see Note (50) "Subsequent
Events").
The restructuring costs amounting to € 77 million (2016: € 22 mil-
lion) arose mainly in connection with the planned closure of German
sites of the Life Science business sector as well as the relocation of
the shared service organization. These related mainly to personnel
measures. In addition, restructuring costs arose in connection with
the reorganization of businesses in the Healthcare business sector.
In 2016, restructuring costs were primarily incurred in connection
with the "Fit for 2018" transformation and growth program and also
related mainly to personnel measures.
On the occasion of the 350th anniversary of the company in
2018, a promise of a one-time bonus was made to Merck employees.
This led to an expense of € 40 million in other operating expenses.
-192
-680
thereof: marketing and selling expenses
Employee bonus for the 350-year anniversary
thereof: marketing and selling expenses
thereof: administration expenses
thereof: research and development costs
-14
- 14
-5
2017
2016
26
20
-283
-277
-13
-13
-271
-270
Interest component of the additions to pension provisions and other non-current provisions
Currency differences from financing activities
-52
-33
-2
-93
-33
thereof: other operating expenses
3
-40
-12
-22
-5
-1
(13) Financial result
thereof: administration expenses
thereof: research and development costs
thereof: other operating expenses
€ million
Interest expenses and similar expenses
Interest expenses from interest rate derivatives
Interest result
-86
-134
-6
-19
Interest income and similar income
-598
Change in Merck share price
-903
23
2,727
71
1,555
111
Liabilities
Assets
Liabilities
Dec. 31, 2016¹
Dec. 31, 2017
Assets
Property, plant and equipment
€ million
98
Change in deferred tax assets (consolidated balance sheet)
Changes in scope of consolidation/currency translation/other changes
Deferred taxes (consolidated income statement)
1 Previous year's figures have been adjusted, see Note (4) "Acquisitions and divestments".
2017
2016¹
93
-37
1,235
202
15
-85
-164
88
Change in deferred tax liabilities (consolidated balance sheet)
Change in deferred taxes credited/debited to equity
25
114
Current and non-current financial assets
9
69
Current and non-current liabilities
41
355
35
190
Current and non-current other provisions
85
460
92
485
Provisions for pensions and other post-employment benefits
2
27
2
21
Current and non-current receivables/Other assets
14
589
14
554
Inventories
11
4
41
5
1,179
168
Deferred taxes for remeasurements of the net liability from defined
benefit pension plans and other benefit commitments recognized in
other comprehensive income led to an increase in equity of € 2 million
(2016: increase in equity of € 79 million). Fair value changes of
available-for-sale financial assets and of derivatives used for hedging
purposes recognized in other comprehensive income resulted in a
decrease in equity from deferred taxes in the amount of € 32 million
(2016: increase in equity of € 11 million). The aforementioned effects
on equity are reported in the statement of comprehensive income.
The item "Changes in scope of consolidation/currency translation/
other changes" primarily includes currency translation effects of
€ -196 million (2016: € 9 million) that mainly result from exchange
rate changes between the euro and the U.S. dollar.
269
288
13
230
243
Recognized deferred tax assets
on tax loss carryforwards
Not recognized deferred tax assets
on tax loss carryforwards
7
25
32
2
74
76
12
2
244
256
11
156
167
234
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
The vast majority of the tax loss carryforwards either has no expiry
date or can be utilized for up to 20 years. In 2017, the income tax
expense was reduced by € 1 million (2016: € 1 million) due to the
utilization of tax loss carryforwards from prior years for which no
deferred tax asset had been recognized in prior periods.
DEFERRED TAXES AS REPORTED IN THE
CONSOLIDATED BALANCE SHEET
Deferred tax assets and liabilities correspond to the following balance
sheet items:
19
106
Recognized deferred tax assets
637
CHANGES IN TAX LOSS CARRYFORWARDS
Tax loss carryforwards were structured as follows:
€ million
Tax loss carryforwards
Dec. 31, 2017
Dec. 31, 2016
Germany
117
Abroad
1,054
Total
1,171
Germany
88
Abroad
959
Total
1,047
Tax loss carryforwards for which
a deferred tax asset is recognized
56
160
216
13
།
322
335
Tax loss carryforwards for which
no deferred tax asset is recognized
61
894
955
75
712
13
Tax loss carryforwards
Tax refund claims/Other
Only on the basis of this information will candidates be able to
submit binding offers that can be analyzed by Merck based on its
price expectations. Only in the case of subsequent negotiations with
potential candidates will it be possible to define the transaction in
more specific terms, i.e. material changes are not unlikely until nego-
tiations are completed.
On September 5, 2017, Merck announced that it is preparing stra-
tegic options for its Consumer Health business. Potential candidates
were approached and, in November 2017, they were sent information
about the Consumer Health business. They were requested to submit
non-binding offers in the course of December 2017. The analysis of
these offers had not been completed by December 31, 2017. Based
on these offers, the Executive Board is currently analyzing which
strategic options are to be pursued. In addition, if a disposal is
intended, the structure of the business to be potentially divested has
to be defined. The analysis of the strategic options had not been
completed as of the date of preparation.
227
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
1 Previous year's figure has been adjusted, see Note (4) "Acquisitions and divestments".
The assessment as to when a non-current asset, disposal group or
discontinued operation meets the prerequisites of IFRS 5 for a clas-
sification as "held for sale" is subject to significant discretionary
judgment. Even in the case of an existing management decision to
review a disposal, an assessment subject to uncertainties has to be
made as to the probability that a corresponding disposal will occur
during the year or not.
ASSETS HELD FOR SALE, DISPOSAL GROUPS AND
DISCONTINUED OPERATIONS
More information on management judgments made in connection
with the accounting treatment of the U.S. tax reform can be found
in Note (14) "Income Taxes".
With regard to deferred tax items, there are degrees of uncertainty
concerning the date on which an asset is realized or a liability settled
and concerning the tax rate applicable on this date. This particularly
relates to deferred tax liabilities recognized in the context of the acqui-
sitions of the Sigma-Aldrich Corporation, the Millipore Corporation,
Serono SA, and AZ Electronic Materials S.A. The recognition of
deferred tax assets from loss carryforwards requires an estimate of
the probability of the future realizability of loss carryforwards. Factors
considered in this estimate are results history, results planning and
the existing tax planning of the respective Group company.
The recognized income tax liabilities and provisions are partially
based on estimates and interpretations of tax laws and ordinances in
different jurisdictions.
INCOME TAXES
To determine the sensitivities, in principle each of the observed
parameters was varied while keeping the measurement assumptions
otherwise constant. The amounts for social security vary in line with
the salary trend. Further information on the existing pension obliga-
tions is provided in Note (26) "Provisions for pensions and other
post-employment benefits" and under "Accounting and measure-
ment policies" in Note (67) "Provisions for pensions and other post-
employment benefits".
-209
-198
280
256
-138
-133
160
155
518
508
-441
-438
Dec. 31, 2016
Dec. 31, 2017
Against this background, the Executive Board's view as of Decem-
ber 31, 2017 is that a disposal of the Consumer Health business
within the next 12 months cannot be regarded as highly likely.
the expected rate of future salary increases is 50 basis points higher
the expected rate of future salary increases is 50 basis points lower
the expected rate of future pension increases is 50 basis points higher
the expected rate of future pension increases is 50 basis points lower
The carrying amount of the assets of the Consumer Health business
as of December 31, 2017 was € 647 million. The corresponding lia-
bilities amounted to € 192 million as of December 31, 2017. In fiscal
2017, the Consumer Health business generated net sales of € 911 mil-
lion and profit after tax of € 99 million (calculated on the basis of the
operating result (EBIT) and the income tax rates applicable in the
individual jurisdictions).
Merck makes other judgments, assumptions and estimates in the
following areas:
-852
-1,063
2016
2017
-1,033
¹Excluding amortization of internally generated or separately acquired software.
Marketing and selling expenses
Other marketing and selling expenses
Royalty and license expenses
Amortization of intangible assets¹
Logistics
Sales promotion
Internal sales services
Sales force
€ million
Marketing and selling expenses comprised the following:
(9) Marketing and selling expenses
Cost of sales primarily included the cost of manufactured products
sold as well as merchandise sold. Cost comprises overheads and, if
necessary, inventory write-downs, in addition to directly attributable
costs, such as the cost of materials, personnel and energy, as well
as depreciation/amortization. On the occasion of the 350th anniver-
sary of the company in 2018, a promise of a one-time bonus was
made to Merck employees. This led to an expense of € 13 million
within cost of sales.
(8) Cost of sales
Net sales were generated primarily from the sale of goods and to a
limited degree also included revenues from services rendered, com-
mission income as well as profit-sharing from collaborations. Merck
Group net sales totaled € 15,327 million in 2017 (2016: € 15,024 mil-
lion), which represented an increase of 2.0% compared with 2016.
The breakdown of net sales is presented in the Segment Reporting
in Note (32) "Information by business sector/country and region".
(7) Net sales
Notes to the Consolidated Income Statement
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
228
• Determination of the fair value of plan assets.
• Determination of the fair value of financial instruments classified
as available-for-sale and of derivative financial instruments
• Cash flow hedging for highly probable forecast transactions
OTHER JUDGMENTS, ASSUMPTIONS AND
SOURCES OF ESTIMATION UNCERTAINTY
-630
the discount rate is 50 basis points lower
Increase (+)/decrease (-) in the present value of all defined benefit obligations if
Basic earnings per share are calculated by dividing the profit after
tax (net income of the Group) attributable to the shareholders of
(15) Earnings per share
Temporary differences relating to the retained earnings of sub-
sidiaries, for which no deferred taxes are recognized, amounted to
€ 2,856 million (December 31, 2016: € 5,669 million).
The significant decline in deferred tax liabilities in the item "Tax
refund claims/other" resulted from planned dividend payouts in the
United States that will generally be tax-exempt in future pursuant
to the U.S. tax reform and will therefore no longer represent a future
tax burden for Merck. Deferred tax liabilities from outside basis dif-
ferences for planned dividend payouts were recorded in the amount
of € 17 million (December 31, 2016: € 466 million).
In addition to deferred tax assets on tax loss carryforwards amount-
ing to € 32 million (December 31, 2016: € 76 million), deferred tax
assets of € 1,074 million were recognized for temporary differences
(December 31, 2016: € 937 million).
2,724
1,013
1,489
1,106
-751
-751
-442
-442
3,475
1,764
1,931
1,548
467
50
86
58
76
32
1 Previous year's figures have been adjusted, see Note (4) "Acquisitions and divestments".
Deferred taxes (consolidated balance sheet)
Offset deferred tax assets and liabilities
Deferred taxes (before offsetting)
Merck KGaA by the weighted average number of theoretical shares
outstanding. The use of a theoretical number of shares takes into
account the fact that the general partner's capital is not represented
by shares. The share capital of € 168 million was divided into
129,242,252 shares. Accordingly, the general partner's capital of
€ 397 million was divided into 305,535,626 theoretical shares. Over-
all, the total capital thus amounted to € 565 million or 434,777,878
theoretical shares outstanding. The weighted average (basic) number
of shares in 2017 was likewise 434,777,878.
the discount rate is 50 basis points higher
The calculation of diluted earnings per share has to take into
account a potential dilution effect arising from the announced free
grant of Merck shares to eligible employees on the occasion of the
350th anniversary of the company in 2018. While the necessary
shares will be purchased in 2018 on the market and an issue of new
shares is not planned, the announced Merck share grant led to an
increase in the weighted average (diluted) number of shares by
1,149 shares to 434,779,027 shares in accordance with IAS 33.
However, this did not lead to an arithmetical dilution effect on the
indicator so that diluted earnings per share were equivalent to basic
earnings per share.
Notes to the Consolidated Financial Statements
€ million
The following overview shows how the present value of all defined
benefit obligations would have been impacted by changes to relevant
actuarial assumptions.
culation of the defined benefit obligation, e.g. discount rates, salary
and pension trends, which were used to calculate the benefit obliga-
tion, were determined on a country-by-country basis in line with the
economic conditions prevailing in each country; the latest country-
specific actuarial mortality table was used in each case. The respective
discount rates are generally determined on the basis of the returns
on high-quality corporate bonds issued with adequate maturities and
currencies. For euro-denominated obligations, bonds with ratings of
at least "AA" from one of the three rating agencies Standard & Poor's,
Moody's or Fitch, and a euro swap rate of adequate duration served
as the basis for the data.
Merck maintains several defined benefit pension plans, particularly
in Germany, Switzerland and the United Kingdom. The amount
recorded in the consolidated balance sheet for provisions for pensions
and other post-employment benefits amounted to € 2,257 million as
of the balance sheet date (December 31, 2016: € 2,313 million). The
present value of the defined benefit obligations was € 4,707 million
as of December 31, 2017 (December 31, 2016: € 4,698 million). The
determination of the present value of the obligation from these defined
benefit pension plans primarily requires discretionary judgment as
regards the selection of methods to determine discount rates as well
as estimates of future salary increases and future pension increases.
The actuarial assumptions which are used as the basis for the cal-
PROVISIONS FOR PENSIONS AND OTHER
POST-EMPLOYMENT BENEFITS
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
226
provisions will not be subject to any value fluctuations between
December 31, 2017 and the payout date and was therefore not
included in the sensitivity analysis.
Sensitivities were determined in general on the basis of the respec-
tive observed parameters, with all other measurement assumptions
remaining unchanged. The 2015 tranche reported under current
16
10%
-10%
-2
15
10%
-10%
Increase (+)/
decrease (-)
in the provision
Change in DAX®
Intangible assets
€ million
Provisions for employee benefits included amongst others obligations
from long-term variable compensation programs in the form of cash-
settled share-based compensation programs. The amounts disbursed
to the beneficiaries largely depend on long-term indicators of company
performance and the share price development. The strongest influ-
ence comes from price fluctuations of Merck share in relation to the
DAX®. More information can be found in Notes (27) "Other provisions"
and (69) "Share-based compensation programs". The amount rec-
ognized in the consolidated balance sheet as of December 31, 2017,
as non-current provisions, which comprises the 2016 and 2017
tranches from long-term variable compensation programs, amounted
to € 22 million. The following overview shows the amounts by which
the non-current provisions would have been impacted by changes in
the DAX® (increase or decrease by 10%, respectively) and the closing
price of Merck shares, as of December 31, 2017 (increase or decrease
by 10%, respectively). The amounts stated would have led to a cor-
responding reduction or increase in profit before tax.
SHARE-BASED COMPENSATION PROGRAMS
Apart from provisions, contingent liabilities are also subject to esti-
mation uncertainties and discretionary judgments. Accordingly, con-
tingent liabilities from legal and tax disputes are subject to the same
estimation uncertainties and discretionary judgment as provisions
for litigation. Therefore, the existence and the amount of the outflow
of resources, which is not remote, are subject to estimation uncer-
tainties similarly to the date on which a potential obligation arises.
In the event of the discontinuation of clinical development projects,
Merck is regularly required to bear unavoidable subsequent costs for
a certain future period of time. The measurement of these provisions
requires estimates regarding the length of time and the amount of
the follow-on costs.
The calculation of the present value of the future settlement
amount requires, among other things, estimates of the future settle-
ment date, the actual severity of the identified contamination, the
applicable remediation methods, the associated future costs, and the
discount rate. The measurement is carried out regularly in consultation
with independent experts. The determination of the future settlement
amount of the provisions for environmental protection measures is
subject to a considerable degree of uncertainty.
To a certain extent, Merck is obliged to take measures to protect
the environment and reported provisions for environmental protection
of € 137 million as of December 31, 2017 (December 31, 2016:
€ 142 million). The underlying obligations were located mainly in
Germany and Latin America. Provisions were recognized primarily
for obligations from soil remediation and groundwater protection in
connection with the discontinued crop protection business.
To assess a reporting obligation in relation to provisions and to quan-
tify pending outflows of resources, Merck draws on the knowledge of
the legal department as well as other outside counsel. In spite of this,
both the assessment of the existence of a present obligation and the
estimate of the probability of a future outflow of resources are highly
subject to uncertainty. Equally, the measurement of provisions is to
be considered a major source of estimation uncertainty.
225
Consolidated Financial Statements
The reconciliation between deferred taxes in the consolidated balance
sheet and deferred taxes in the consolidated income statement is
presented in the following table:
The calculation of the reported assets and liabilities from current and
deferred income taxes requires extensive discretionary judgments,
assumptions and estimates. Income tax liabilities were € 1,059 mil-
lion as of December 31, 2017 (December 31, 2016: € 883 million).
The carrying amounts of deferred tax assets amounted to € 1,106 mil-
lion (December 31, 2016: € 1,013 million), the carrying amounts of
deferred tax liabilities were € 1,489 million as of December 31, 2017
(December 31, 2016: € 2,724 million¹).
864
276
1
6
2
1
7
3
4
270
Dec. 31, 2016
Dec. 31, 2017
258
Other receivables
277
Impaired
up to 24 months
up to 12 months
up to 6 months
up to 3 months
Past due, but not impaired
Neither past due nor impaired
€ million
The carrying amounts of other receivables from third parties were
as follows:
The changes in non-current assets from derivatives (operative)
(€ 62 million; December 31, 2016: € 5 million) were mainly attrib-
utable to the purchase of an option on equity instruments.
Other receivables also comprised license receivables in the amount
of € 28 million (December 31, 2016: € 38 million).
Other receivables included current receivables from related parties
amounting to € 141 million (December 31, 2016: € 124 million). They
resulted from refund claims to companies from taxes paid for the
account of such companies.
1 Previous year's figures have been adjusted, see Note (4) "Acquisitions and divestments".
over 2 years
In 2017, a reversal of an impairment loss for other receivables was
recognized in the amount of € 20 million (2016: €0 million). The
reversal was made in connection with contractual refund claims from
the sale of the Generics business in 2007.
As in the prior year, there were no new allowances for other receiv-
ables in 2017.
(21) Inventories
Past due, but not impaired
Neither past due nor impaired
€ million
The maturity structure of the carrying amounts of trade accounts
receivable was as follows:
(22) Trade accounts receivable
As of the balance sheet date, no inventories were pledged as
security for liabilities.
The lower write-downs and the higher reversal of write-downs
recorded in prior periods in relation to inventories were mainly due
to process optimization measures in the supply chains of the Life
Science business sector due to the further advanced Sigma-Aldrich
integration and the related improved availability and usability of
finished goods and goods for resale.
Write-downs of inventories in 2017 amounted to € 154 million (2016:
€ 236 million); reversals amounted to € 110 million (2016: € 59 mil-
lion).
2,609
2,632
1,415
1,355
694
795
501
Dec. 31, 2016¹
Dec. 31, 2017
481
1 Previous year's figures have been adjusted, see Note (4) "Acquisitions and divestments".
Inventories
Finished goods/goods for resale
Work in progress
Raw materials and supplies
€ million
243
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
This item comprised:
804
up to 3 months
131
936
205
277
38
239
Receivables from non-income related taxes
289
10
279
367
91
277
12
29
5
92
62
30
277
5
272
276
29
247
non-current Dec. 31, 2016¹
current¹
non-current Dec. 31, 2017
7
Prepaid expenses
99
8
205
731
Other assets
515
121
394
568
114
454
Non-financial items
199
81
118
184
69
115
Remaining other assets
-
1
1
Assets from defined benefit plans
82
12
234
22
71
107
672
up to 6 months
up to 12 months
up to 24 months
49
68
Technologies
thereof: acquisition of AZ Electronic Materials S.A.
Others
0.1 15.3
3.3-15.3
384
771
1,156
1,420
741
741
918
49
38
9
54
37
Not yet available for use
1 Previous year's figures have been adjusted, see Note (4) "Acquisitions and divestments".
421
421
181
The changes in the scope of consolidation in 2016 mainly included
the additions to intangible assets resulting from the acquisition of
BioControl Systems, Inc., USA. In fiscal 2017, the changes in the
scope of consolidation largely include additions to intangible assets
from the acquisition of Natrix Separations, Inc., Canada, and
Grzybowski Scientific Inventions Ltd., USA, as well as the changes
from the initial consolidation of Merck Window Technologies B.V.,
Netherlands. The acquisitions are detailed in Note (4) "Acquisitions
and divestments".
The net carrying amount of marketing authorizations, patents,
licenses, similar rights and other with finite useful lives amounting
to € 2,246 million (December 31, 2016: € 3,065 million¹) mainly
included the identified and capitalized intangible assets in connection
with the acquisition of the Sigma-Aldrich Corporation, AZ Electronic
Materials S.A., the Millipore Corporation, and Serono SA. The cap-
italized customer relationships under customer relationships, brands
and trademarks are mainly attributable to these acquisitions (Decem-
ber 31, 2017: € 5,303 million; December 31, 2016: € 6,451 million¹).
1 Previous year's figures have been adjusted, see Note (4) "Acquisitions and divestments".
6
Other marketing authorizations
92
62
9.9
695
695
Finite useful life
Rebif®
Gonal-fⓇ
XalkoriⓇ
Saizen®
1,074
390
780
2,246
3,065
2.0
737
737
1,105
1.0
95
95
190
4.0
93
93
153
2.0
62
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
239
The additions to intangible assets with finite useful lives amounted
to € 24 million in 2017 (2016: € 16 million), and were largely attrib-
utable to the Healthcare (€ 10 million) and Life Science (€ 9 million)
business sectors.
-9
-7
-18
Additions
17
36
32
669
8
32
20
50
232
392
Dec. 31, 2016
2,458
Dec. 31, 2017
2,391
December 31
Currency translation and other changes
Change in scope of consolidation
Reversals/Utilizations
Additions
January 1
€ million
The corresponding allowances developed as follows:
Trade accounts receivable
Impaired
over 2 years
-2
current
Changes in the scope of consolidation
592
In fiscal 2017, impairment losses on marketing authorizations,
patents, licenses, similar rights and other with finite useful lives
totaled € 50 million (2016: € 77 million), of which € 33 million related
to the Healthcare business sector. They referred to the co-promotion
right for XalkoriⓇ and were attributable to the revised profit forecasts.
In addition, technologies no longer used led to an impairment loss of
€ 17 million in the Performance Materials business sector. These items
were recorded in the consolidated income statement in impairment
losses under other operating expenses.
Reversals of impairment losses on intangible assets with finite
useful lives in the amount of € 17 million (2016: €0 million) were
recognized in fiscal 2017 in the Healthcare business sector. The
reversal up to amortized cost was attributable to the marketing
authorization of the multiple sclerosis drug MavencladⓇ. The item
was reported in the consolidated income statement under other oper-
ating income as reversals of impairment losses from non-current
assets.
The additions to marketing authorizations, patents, licenses, sim-
ilar rights and other not yet available for use amounted to € 263 mil-
lion in fiscal 2017 (2016: € 12 million) and were attributable almost
entirely to the Healthcare business sector. Above all, the additions
resulted from a license agreement with Vertex Pharmaceuticals Inc.,
USA, which comprised the purchase of two clinical as well as further
novel pre-clinical research programs in the areas of oncology and
immuno-oncology.
The impairment losses for marketing authorizations, patents,
licenses, similar rights and other not yet available for use amounted
to € 17 million (2016: € 12 million) and were related to the Health-
care business sector. Of that amount, € 13 million were attributable
to the partial impairment of a compound in connection with the
license agreement concluded with Vertex Pharmaceuticals Inc., USA.
The impairment was reported in the consolidated income statement
in impairment losses under other operating expenses.
The additions to software and software in development in the
amount of € 110 million (2016: € 107 million) were mainly attribut-
able to new ERP developments in the Life Science (€ 45 million) and
Healthcare (€ 42 million) business sectors.
The reclassification to assets held for sale were made in connection
with the disposal of the Biosimilars businesses (see Note (4) "Acqui-
sitions and divestments").
In 2017, borrowing costs of € 7 million (2016: € 3 million) directly
allocable to qualified assets were capitalized.
240
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
(18) Property, plant and equipment
Land, land rights
and buildings,
including buildings
Other facilities,
on third-party
€ million
Cost at January 1, 2016
land¹
Plant and
machinery¹
operating and
office equipment
Construction in
progress and
advance payments
to vendors and
contractors
Total¹
3,284
3,879
1,091
8,846
Financial items
Derivative assets (operative)
Other receivables
-24
2
49
Changes in the scope of consolidation
9,402
807
1,136
4,068
3,391
Cost at January 1, 2017
4,231
804
28
279
2,030
Net carrying amount as of December 31, 2016
-5,171
-38
41
1
-7
-858
-2,949
-1,361
December 31, 2016
-19
-13
1,119
Additions
30
54
3,514
December 31, 2017
-306
-40
-33
-103
-131
Currency translation
39
-2
41
Classification as held for sale or transfer to a disposal group
-5
-543
96
258
184
Transfers
-241
-16
-34
-142
-50
Disposals
936
818
35
Currency translation
1
41
Classification as held for sale or transfer to a disposal group
9,402
807
1,136
4,068
3,391
December 31, 2016
85
12
11
26
37
Currency translation
-42
-2
-41
Classification as held for sale or transfer to a disposal group
-8
-460
78
221
154
Transfers
-214
-4
-68
-82
-59
Accumulated depreciation and impairment losses
4,136
January 1, 2016
-2,732
1
1
Reversals of impairment losses
-3
3
Transfers
189
64
78
47
Disposals
-11
-2
-1
-4
Impairment losses
-529
-100
-281
-147
Depreciation
13
5
8
Changes in the scope of consolidation
-4,838
-817
-1,289
1,109
1,176
9,852
454
420
35
Dec. 31, 2016
non-current
current
non-current Dec. 31, 2017
current
6
5
1
1
43
1
5
Dec. 31, 2016
Dec. 31, 2017
Financial assets
Derivative assets (financial transactions)
Loans and receivables
Available-for-sale financial assets
€ million
(19) Financial assets
Net carrying amount of assets classified as finance lease
Other property, plant and equipment
Vehicles
4
191
233
47
€ million
Other assets comprised:
(20) Other assets
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
242
The loans and receivables contained in financial assets are neither
past due nor impaired.
Impairment losses were recognized for investments in companies
and other non-current financial assets held for sale in a total amount
of € 14 million (2016: € 5 million). Positive and negative fair value
adjustments recognized in equity offset each other in 2017 (2016:
€ 50 million). The prior-year amount included fair value adjustments
previously recognized in equity in the amount of € 31 million that
were reclassified to the consolidated income statement upon the
disposal of a minority shareholding.
Non-current available-for-sale financial assets mainly included
entitlements related to contingent consideration amounting to
€ 266 million (December 31, 2016: € 38 million) in connection with
the divestment of the Biosimilars business (see Note (4) "Acquisitions
and divestments") and KuvanⓇ. In addition, the item included invest-
ments in companies amounting to € 121 million (December 31,
2016: € 112 million) and investments in subsidiaries that were not
consolidated due to their minor significance in the amount of € 1 mil-
lion (December 31, 2016: € 24 million).
Current available-for-sale financial assets included bonds amounting
to € 26 million (December 31, 2016: € 29 million).
364
218
145
535
444
90
76
17
59
22
13
9
55
10
44
59
12
Land and buildings
€ million
The carrying amounts of assets classified as finance leases were as
follows:
Directly allocable borrowing costs on qualified assets in the
amount of € 5 million (2016: € 6 million) were capitalized.
Reversals of impairment losses
Transfers
209
32
138
39
Disposals
-5
-2
-2
Impairment losses
-516
-103
-266
-147
Depreciation
-9
21
2
-31
Changes in the scope of consolidation
-5,171
-858
-2,949
-1,361
January 1, 2017
Accumulated depreciation and impairment losses
35
1,026
35
-41
The reclassification to assets held for sale were made in connection
with the disposal of the Biosimilars businesses (see Note (4) "Acqui-
sitions and divestments").
In 2017, impairment losses amounted to € 5 million (2016: € 11 mil-
lion). They mainly related to assets attributable to the Life Science
business sector. Reversals of impairment losses were immaterial
overall. The reversals of impairment losses in fiscal 2017 in the
amount of € 69 million (2016: € 1 million) were fully attributable to
the Healthcare business sector and the write-up of the biopharma-
ceutical production plant in Corsier-sur-Vevey, Switzerland. As a
result of improved expectations regarding capacity utilization of the
production plant, mainly due to the authorizations of the immuno-
oncology product BavencioⓇ, which is to be produced in this plant, a
write-up to the amortized remaining carrying amount was recog-
nized. The plant was impaired in fiscal 2011 by € 165 million.
Material additions to construction in progress were attributable
to the expansion of global headquarters, the construction of an Inno-
vation Center and a new laboratory building at the Darmstadt site
as well as the construction of a new Life Science facility in the United
States. In addition, investments were made in production sites in
China, Italy, the United States and Germany. Transfers relating to
construction in progress mainly included completed subprojects
within the context of the construction works at Group headquarters
in Darmstadt as well as investments in the United States, France,
China, and Switzerland.
Changes in the scope of consolidation in 2016 mainly included the
additions to property, plant and equipment from the acquisition of
BioControl Systems, Inc., USA, as well as the disposals owing to the
divestment of the Pakistani subsidiaries and the deconsolidation of
the Venezuelan entities. A detailed presentation of these acquisitions
can be found in Note (4) "Acquisitions and divestments". In fiscal 2017,
the changes in the scope of consolidation in particular comprise
additions to property, plant and equipment from the first-time con-
solidation of Merck Wohnungs- und Grundstücksverwaltungsgesell-
schaft mbH and Merck Window Technologies B.V., the Netherlands.
241
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
¹ Previous year's figures have been adjusted, see Note (4) "Acquisitions and divestments".
4,512
1,022
291
1,158
2,042
Net carrying amount as of December 31, 2017
-5,340
122
-40
69
-886
-2,978
-1,472
December 31, 2017
21
63
37
Currency translation
1
Classification as held for sale or transfer to a disposal group
Disposals
881
870
-1
-2
-10
-13
Transfers
-3
7
4
Classification as held for sale or transfer to a disposal group
8
-2
Currency translation
236
76
5
317
December 31, 2016
8,011
10,824
Disposals
766
136
12
rights and other¹
ment²
Advance
payments²
Total¹
Not yet
€ million
Finite
useful life
available
for use
Cost at January 1, 2016
Changes in scope of consolidation
7,743
35
10,712
757
529
21
19,741
56
Additions
16
107
639
20,239
Accumulated amortization and impairment losses, January 1, 2016
Currency translation
December 31, 2016
-30
-1,560
-32
-7,759
-585
-6
-356
-69
-10,259
Net carrying amount as of December 31, 2016
6,451
3,065
181
283
9,980
1 Previous year's figures have been adjusted, see Note (4) "Acquisitions and divestments".
2 As of 2017, software in development and software are shown in one category; previous year's figures have been adjusted.
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
237
Customer
relationships,
Classification as held for sale or transfer to a disposal group
Reversals of impairment losses
3
Transfers
-1,052
-6,896
-574
-289
-8,811
Changes in scope of consolidation
Amortization
Impairment losses
-464
-17
in develop-
-754
-1,277
-77
-12
-12
-118
Disposals
2
10
12
-59
patents, licenses, similar
Marketing authorizations, and software
Software
Changes in scope of consolidation
Additions
Disposals
Transfers
Classification as held for sale or transfer to a disposal group
Currency translation
December 31, 2017
Accumulated amortization and impairment losses, January 1, 2017
Changes in scope of consolidation
Impairment losses
Disposals
Transfers
Reversals of impairment losses
Classification as held for sale or transfer to a disposal group
Currency translation
December 31, 2017
Goodwill¹
Healthcare
Life Science
Cost at January 1, 2017
Net carrying amount as of December 31, 2016
December 31, 2016
Currency translation
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
235
Notes to the Consolidated Balance Sheet
(16) Goodwill
€ million
Cost at January 1, 2016
Changes in scope of consolidation
Additions
Performance
Materials
Disposals
Classification as held for sale or transfer to a disposal group
Currency translation
December 31, 2016
Accumulated amortization and impairment losses, January 1, 2016
Changes in scope of consolidation
Impairment losses
Disposals
Transfers
Reversals of impairment losses
Classification as held for sale or transfer to a disposal group
Transfers
Software
Total
-3
-1,250
10,519
-174
-25
-1,425
1,278
13,582
Net carrying amount as of December 31, 2017
1,785
10,519
1,278
13,582
1 Previous year's figures have been adjusted, see Note (4) "Acquisitions and divestments".
236
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
Goodwill was incurred mainly in connection with the acquisition of the
Sigma-Aldrich Corporation, AZ Electronic Materials S.A., the Millipore
Corporation, and Serono SA. The changes in goodwill caused by
foreign exchange rates resulted almost exclusively from translating
the goodwill from the acquisitions of the Sigma-Aldrich Corporation,
AZ Electronic Materials S.A. and the Millipore Corporation, part of
which is carried in U.S. dollars, into the reporting currency. Further
information about changes in the scope of consolidation due to the
acquisition of BioControl Systems, Inc. can be found in Note (4)
"Acquisitions and divestments."
The reclassification to assets held for sale referred to the disposal of
the Biosimilars business activities (see Note (4) "Acquisitions and
divestments").
As in the prior year, goodwill was not subject to impairment in
fiscal 2017. The assumptions used for the goodwill impairment tests
are presented in Note (6) "Management judgments and sources of
estimation uncertainty."
(17) Other intangible assets
Customer
relationships,
brands and
trademarks
1,785
-1
-25
17
11,272
92
1,397
14,492
89
9
387
1,811
11,752
55
1,452
1,823
443
1,811
11,752
1,452
15,015
1,811
11,752
1,452
15,015
17
15,015
Marketing authorizations, and software
-2
Cost at January 1, 2017
51
1
1
3
7
1
17
17
Classification as held for sale or transfer to a disposal group
Currency translation
December 31, 2017
142
100
1
-1,868
-8,438
-596
15
-357
258
11,260
168
2,923
2,889
2017
(24) Cash and cash equivalents
Income tax receivables amounted to € 490 million (December 31,
2016: € 403 million). Tax receivables resulted primarily from tax
prepayments that exceeded the actual amount of tax payable for
2017 and prior fiscal years, and from refund claims for prior years.
(23) Tax receivables
In the period from January 1 to December 31, 2017, trade accounts
receivable in Italy with a nominal value of € 25 million were sold for
€ 24 million. Previous impairments in this context amounting to
€ 1 million were reversed and disclosed under other operating income.
The sold receivables do not involve any further rights of recovery
against Merck.
In fiscal 2017, previously recognized allowances were reversed as a
result of the improved solvency of customers, particularly in the
Middle East. The increase in allowances from changes in the scope
of consolidation in 2016 resulted from the receivables attributable
to the deconsolidated Venezuelan entities, for which impairment
losses in the full amount had been recognized.
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
244
-464
2,246
-367
37
-302
76
99
-52
-39
-165
-464
2016
-20
This item comprised:
421
8,317
5,135
165
5,303
6,451
0.5 19.9
4,265
157
4,422
5,342
18.9 - 19.9
3,536
157
3,693
4,425
0.5-9.5
681
681
859
1.0 - 9.9
3
2016¹
2017
Total
Dec. 31,
Net carrying amount as of December 31, 2017
5,303
1 Previous year's figures have been adjusted, see Note (4) "Acquisitions and divestments".
2 As of 2017, software in development and software are shown in one category; previous year's figures have been adjusted.
238
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
€ million
The carrying amounts of customer relationships, brands and trade-
marks as well as marketing authorizations, patents, licenses, similar
rights and other were attributable to the business sectors as follows:
€ million
348
Customer relationships, brands and trademarks
Customer relationships
thereof: acquisition of Sigma-Aldrich Corporation
Marketing authorizations, patents, licenses, similar rights and other
Remaining
useful life
Total
in years
Healthcare
Life Science
Performance
Materials
Dec. 31,
thereof: acquisition of Sigma-Aldrich Corporation
thereof: acquisition of Millipore Corporation
Brands and trademarks
€ million
753
Short-term cash investments (up to 3 months)
Advance
payments²
ment²
rights and other¹
patents, licenses, similar
brands and
trademarks
December 31, 2017
Currency translation
Classification as held for sale or transfer to a disposal group
Transfers
Disposals
-8
Additions
Changes in scope of consolidation
8
4
2
2
-838
-190
Total¹
Not yet
Finite
available
Cash, bank balances and cheques
6
-2
-32
-27
-5
-1
398
110
-1
263
20
21
20,239
639
766
10,824
8,011
-1
for use
useful life
24
-25
in develop-
7,171
1
5
27
33
2
-2
The total capital of the company consists of the share capital com-
posed of shares and the equity interest held by the general partner
E. Merck KG. As of the balance sheet date, the company's share
capital amounting to € 168 million was divided into 129,242,251
no-par value bearer shares plus one registered share and is disclosed
as subscribed capital. Each share therefore corresponds to € 1.30 of
the share capital. The amount resulting from the issue of shares by
Merck KGaA exceeding the nominal amount was recognized in the
capital reserves. The equity interest held by the general partner
amounted to € 397 million. As in the prior year, the share capital did
not change in fiscal 2017.
EQUITY CAPITAL
(25) Equity
-67
The maximum default risk is equivalent to the carrying value of
the cash and cash equivalents.
Changes in cash and cash equivalents as defined by IAS 7 are pre-
sented in the consolidated cash flow statement.
939
277
108
589
-1,053
481
Dec. 31, 2016
Dec. 31, 2017
Cash and cash equivalents
Cash and cash equivalents included restricted cash amounting to
€ 250 million (December 31, 2016: € 238 million). This relates
mainly to cash and cash equivalents with subsidiaries which the
Group only had restricted access to owing to foreign exchange con-
trols.
-17
662
-1,243
10,685
-50
1,017
19,577
Accumulated amortization and impairment losses, January 1, 2017
-1,560
-7,759
-585
-356
10,259
705
Amortization
Impairment losses
Disposals
Transfers
Reversals of impairment losses
-451
-41
Changes in scope of consolidation
-751
95.63
10,669.76
9,403.99
87.92
3 years
Jan. 1, 2017 -
Dec. 31, 2019
2017 tranche
74.53
2016 tranche
3 years
Jan. 1, 2015 -
Dec. 31, 2017
2015 tranche
Status as on Dec. 31, 2017
10,822.06
Potential number offered for the first time in 2017
Forfeited
Jan. 1, 2016 -
Dec. 31, 2018
3 years
609,799
21,447
588,352
The value of the provisions was € 45 million as of December 31, 2017
(December 31, 2016: € 133 million). In fiscal 2017, net income of
€ 13 million resulted (2016: net expense of € 76 million). The three-
year tranche issued in 2014 ended at the end of 2016 and was paid
out in 2017 in the amount of € 75 million.
763,463
24,392
Status as on Dec. 31, 2016
3
Other mainly included provisions for other guarantees, for uncertain
commitments from contributions, duties and fees as well as for
interest and penalties from tax audits.
OTHER
ACCEPTANCE AND FOLLOW-ON OBLIGATIONS
Provisions for acceptance and follow-on obligations primarily took
into account costs stemming from discontinued research projects as
well as obligation surpluses from onerous contracts. Utilizations and
releases were mainly attributable to research projects discontinued
in previous years.
Provisions for environmental protection, particularly for obligations
from soil remediation and groundwater protection, mainly existed in
connection with the crop protection business that was discontinued
in 1987 in Germany and Latin America.
ENVIRONMENTAL PROTECTION
With respect to provisions for pensions and other post-employ-
ment benefits, see Note (26) "Provisions for pensions and other
post-employment benefits".
Provisions for employee benefits also included obligations for the
partial retirement program and other severance pay that were not
set up in connection with restructuring programs as well as obliga-
tions in connection with long-term working hour accounts and anni-
versary bonuses.
Provisions for employee benefits included an amount of € 51 mil-
lion for the promise of a one-time bonus for employees on the occa-
sion of the company's 350th anniversary in 2018.
828,727
24,897
31,105
707,966
17,227
535,434
853,624
739,071
552,661
35,691
Forfeited
Consolidated Financial Statements
Status as on Dec. 31, 2015
526
92
254
137
26
166
thereof: current
104
26
87
27
26
145
1,202
414
thereof: non-current
December 31, 2017
-8
1
-10
-20
-33
-193
10
1
-1
9
421
Currency translation
-1
-17
-1
-2
-9
-31
Changes in scope of consolidation/Other
-2
Potential number offered for the first time in 2016
66
111
The utilization of restructuring provisions in the amount of
€ 27 million was mainly attributable to the "Fit for 2018" transfor-
mation and growth program, which was introduced in 2012. The aim
of this program was to secure the competitiveness and the growth
of the Merck Group over the long term. The provisions in this context
mainly consist of commitments to employees from partial and early
retirement arrangements. Further payment outflows within the scope
of this program are largely expected up until 2019.
254
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
PROVISIONS FOR EMPLOYEE BENEFITS/
SHARE-BASED PAYMENT
Provisions for employee benefits include obligations from long-term
variable compensation programs. More information on these compen-
sation programs can be found in Note (69) "Share-based compen-
sation programs". The following table presents the key parameters
as well as the development of the potential number of Merck Share
Units ("MSUS") for the individual tranches:
Performance cycle
Term
Reference price of Merck shares in €
(60-day average Merck share price prior to the start of the performance cycle)
DAX® value
(60-day average of the DAX® prior to the start of the performance cycle)
Potential number of MSUS
Potential number offered for the first time in 2015
Forfeited
The addition to restructuring provisions in the amount of € 53 mil-
lion was mainly attributable to the following measures. The Life
Science business sector will make relocations and gradually close
operations in the course of the years 2019 to 2022 at various German
sites. In addition, shared service functions in Finance have been relo-
cated from Darmstadt to Wrocław, Poland, and Manila, the Philippines.
Outflows of resources are expected within the next three years.
Provisions for restructuring mainly included commitments to employees
in connection with restructuring projects and provisions for onerous
contracts. These were recognized once detailed restructuring plans
had been prepared and communicated.
RESTRUCTURING
In addition to provisions for the mentioned litigation, provisions
existed as of the balance sheet date for various pending legal disputes.
22
788
LITIGATION
As of December 31, 2017, the provisions for legal disputes amounted
to € 526 million (December 31, 2016: € 483 million). The legal matters
described below represented the most significant legal risks.
Product-related and patent disputes
Rebif®: Merck is involved in a patent dispute with Biogen Inc., USA,
(Biogen) in the United States. Biogen claims that the sale of Rebif®
in the United States infringes on a Biogen patent. The disputed patent
was granted to Biogen in 2009 in the United States. Subsequently,
Biogen sued Merck and other pharmaceutical companies for infringe-
ment of this patent. Merck defended itself against all allegations and
brought a countersuit claiming that the patent was invalid and not
infringed on by Merck's actions. A Markman hearing took place in
January 2012, leading to a decision in the first quarter of 2016. A first-
instance ruling is now expected for 2018. Court-ordered mediation
proceedings did not lead to an agreement. Merck has taken appro-
priate accounting measures. Cash outflow is not expected to occur
within the next 12 months.
PS-VA liquid crystals mixtures: In the Performance Materials business
sector, Merck is involved in a legal dispute with JNC Corporation,
Japan, (JNC). JNC claims that by manufacturing and marketing cer-
tain liquid crystals mixtures, Merck has infringed JNC patents. Merck
168
maintains that JNC's patent infringement assertion is invalid owing
to relevant prior art and has filed the corresponding nullity actions,
which in three cases were already successful in first-instance pro-
ceedings. JNC has filed complaints in each case. In a correction trial,
a decision in favor of JNC was issued in the second instance. Both
Merck and the Korean Patent Office have filed complaints with the
Korean Supreme Court. In parallel, JNC filed two patent infringement
suits. In 2017, a first-instance decision was issued in favor of Merck,
which JNC then appealed. Merck has taken appropriate accounting
measures. Based on current judgment, an outflow of resources is not
likely to occur within the next 12 months.
Antitrust review proceedings for the Sigma-Aldrich acquisition: On
July 6, 2017, Merck received notice from the European Commission
(EU Commission), in which the EU Commission informed Merck of
its preliminary conclusion that Merck and Sigma-Aldrich allegedly
transmitted incorrect and/or misleading information within the scope
of the acquisition of Sigma-Aldrich. The EU Commission had received
registration of the merger on April 21, 2015 and granted clearance
on June 15, 2015 subject to the condition that Merck and Sigma-
Aldrich divest parts of the European solvents and inorganic chemicals
businesses of Sigma-Aldrich in order to resolve antitrust concerns.
Notes to the Consolidated Financial Statements
253
According to the preliminary viewpoint of the EU Commission com-
municated in the letter dated July 6, 2017, Merck and Sigma-Aldrich
withheld in this connection important information about an innova-
tion project allegedly relevant for certain laboratory chemicals of
significance to the analysis by the EU Commission. According to the
EU Commission, the innovation project should have been included
in the remedies package. A meeting of the cooperation procedure
between the EU Commission and Merck took place on February 5,
2018 (see Note (50) "Subsequent events"). The ongoing investiga-
tions are limited to the examination of violations of EU merger con-
trol procedures and do not affect the validity of the EU Commission's
decision to approve the merger. Based on the estimations by the
Executive Board, a provision was set up. An outflow of resources is
expected in 2018.
RaptivaⓇ: In December 2011, the Brazilian federal state of São Paulo
sued Merck for damages because of alleged collusion between various
pharmaceutical companies and an association of patients suffering
from psoriasis and vitiligo. The collusion is alleged to have aimed at
an increase in the sales of the involved companies' drugs to the det-
riment of patients and state coffers. Moreover, in connection with the
product RaptivaⓇ, patients have filed suit to receive compensatory
damages. Merck has taken appropriate accounting measures for
these legal disputes. These are different legal disputes. An outflow
of resources is not expected to occur within the next 12 months.
Paroxetine: In connection with the divested generics business, the
Group is subject to antitrust investigations by the British Competition
and Market Authority ("CMA") in the United Kingdom. In March 2013,
the CMA informed Merck of the assumption that a settlement agree-
ment entered into in 2002 between Generics (UK) Ltd. and several
subsidiaries of GlaxoSmithKline plc., United Kingdom, in connection
with the antidepressant drug paroxetine violates British and Euro-
pean competition law. As the owner of Generics (UK) Ltd. at the time,
Merck was allegedly involved in the settlement negotiations and is
therefore liable. The investigations into Generics (UK) Ltd. started
in 2011, without this being known to Merck. On February 11, 2016,
the CMA imposed a fine in this matter. Merck took legal action against
this fine. Merck has taken appropriate accounting measures. Accord-
ing to current estimation, a decision and outflow of resources are
considered likely in 2018.
Trademark rights/breach of agreement: Merck is involved in various
legal disputes with Merck & Co., Inc. of the United States (outside
the United States and Canada: Merck Sharp & Dohme Corp. (MSD)),
among other things due to breach of the co-existence agreement
between the two companies and/or trademark/name right infringe-
ment regarding the use of the designation "Merck". In this context,
Merck has sued MSD in various countries and has been sued by MSD
in the United States. As in 2016, Merck did not consider recourse and
a related outflow of resources to be likely as of the balance sheet date
(see Note (40) "Contingent liabilities"). Merck has taken appropriate
accounting measures solely for any costs of legal defense. An outflow
of resources solely for the costs of external legal counsel is expected
for 2018.
Antitrust and other proceedings
Interest portion
43
-69
1,211
73
23
760
378
2
3,300
105
92
105
497
2
2,710
Total
Dec. 31, 2017
Dec. 31, 2017
Dec. 31, 2017
37
Other countries
Switzerland
Dec. 31, 2017
Germany
Dec. 31, 2017
3.66% 3.59%
3.10% 1.94% 1.68%
2016
2.99% 3.08%
Other countries
2.56% 2.69%
2.00% 2.53%
3.04%
2017
2016
2017
2016
2017 2016
2017
1.90% 1.90% 0.70% 0.60%
2.51% 2.51% 1.80% 1.80%
1.75% 1.75%
United Kingdom
Switzerland
Germany
United Kingdom
Present value of defined benefit obligations
44
9
11
18
-8
2016
-140
-160
2017
Total amount recognized as expenses (-)/income (+)
Interest income
Interest expense
Other effects recognized in income
Gains (+) or losses (-) on settlement
Past service cost
Current service cost
€ million
7
In the reporting period, the following items were recognized in
income:
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
Pension plans in the United Kingdom accounted for € 504 million
of the defined benefit obligations (December 31, 2016: € 549 million)
as well as for € 469 million of the plan assets (December 31, 2016:
€ 460 million). These obligations resulted primarily from benefit plans
which are based on years of service and final salary and were closed
to newly hired employees in 2006. The agreed benefits comprise old-
age, disability and surviving dependent benefits. The employer and
the employees make contributions to the plans. Statutory minimum
funding obligations exist.
Pension plans in Switzerland accounted for € 761 million of the defined
benefit obligations (December 31, 2016: € 808 million) as well as for
€ 648 million of the plan assets (December 31, 2016: € 648 million).
The agreed benefits comprise old-age, disability and surviving depend-
ent benefits. The employer and the employees make contributions to
the plans. Statutory minimum funding obligations exist.
Companies in Germany accounted for € 3,097 million of the
defined benefit obligations (December 31, 2016: € 2,990 million) as
well as for € 1,178 million of the plan assets (December 31, 2016:
€ 1,116 million). Of these amounts the vast majority in each case
were attributable to plans that encompass old-age, disability and sur-
viving dependent pensions. On the one hand, these obligations were
based on benefit rules comprising benefit commitments dependent
upon years of service and final salary from which newly hired employ-
ees have been excluded. On the other hand, the benefit rules appli-
cable to employees newly hired since January 1, 2005 comprise a
direct commitment that is not based on the final salary. The benefit
entitlement results from the cumulative total of annually determined
pension components that are calculated on the basis of a defined
benefit expense and an age-dependent annuity table. Statutory mini-
mum funding obligations do not exist.
The main benefit rules are as follows:
4,707
345
504
761
3,097
29
29
9
249
-3
Medical plan
Installments
Fair value of the plan assets
Present value of all defined benefit obligations
€ million
The value recognized in the consolidated balance sheet for pen-
sions and other post-employment benefits was derived as follows:
In order to limit the risks of changing capital market conditions
and other developments, for many years now newly hired employees
have been offered plans that are not based on final salary.
Depending on the legal, economic and fiscal circumstances prevailing
in each country, different retirement benefit systems are provided
for the employees. Generally, these systems are based on the years
of service and salaries of the employees. Pension obligations include
both defined benefit and defined contribution plans and comprise both
obligations from current pensions and accrued benefits for pensions
payable in the future. Defined benefit plans are funded and unfunded.
(26) Provisions for pensions and other
post-employment benefits
On the occasion of the 350th anniversary of the company in 2018,
a promise of a one-time grant in the form of Merck shares in the
amount of € 350 per person was made to Merck employees in Ger-
many. The Merck shares required to issue such awarded shares in
2018 will be purchased by third parties on the market on behalf of
Merck and subsequently transferred to the entitled employees.
Accordingly, it is not intended to issue new shares. In fiscal 2017,
in accordance with IFRS 2, the award led to personnel expenses of
€ 1 million as well as to a corresponding increase in retained earnings
in equity which was recorded in the item "Other".
OTHER CHANGES IN EQUITY
The net equity and profit attributable to non-controlling interests
mainly related to the minority interests in the publicly traded compa-
nies Merck Ltd., India, and P.T. Merck Tbk, Indonesia, as well as in the
company Merck Ltd., Thailand.
The calculation of non-controlling interests was based on the stated
equity of the subsidiaries concerned after any adjustment required
to ensure compliance with the accounting policies of the Merck
Group, as well as pro rata consolidation entries.
NON-CONTROLLING INTERESTS
The proposed withdrawal of E. Merck KG in the amount of
€ 515 million (2016: € 392 million) results from the total amount of
the profit transfer to E. Merck KG, including changes in reserves, and
the result of E. Merck KG before reciprocal profit transfer.
Merck & Cie is a partnership under Swiss law that is controlled
by Merck KGaA, but distributes its operating result directly to
E. Merck KG. This distribution is a payment to shareholders and is
therefore also presented under changes in equity.
Funded status
Based on the assumed appropriation of profits, the profit transfer to
E. Merck KG for 2017, including changes in reserves, amounted to
€ -593 million. This consisted of the profit transfer to E. Merck KG
(€ -548 million), the result transfer from E. Merck KG to Merck KGaA
(€ -5 million), the change in profit carried forward of E. Merck KG
(€ 22 million) as well as the profit transfer from Merck & Cie to
E. Merck KG (€ - 63 million). For 2016 the profit transfer to E. Merck KG
including changes in reserves amounted to € -466 million. This con-
sisted of the profit transfer to E. Merck KG (€ - 398 million), the result
transfer from E. Merck KG to Merck KGaA (€ -2 million), the change
in profit carried forward of E. Merck KG (€ 2 million) as well as the
profit transfer from Merck & Cie to E. Merck KG (€ - 68 million).
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
-392
-68
-515
-63
Profit transfer to E. Merck KG/
withdrawal by E. Merck KG
-6
-16
Result of E. Merck KG before reciprocal
profit transfer adjusted for trade tax
-466
-398
-68
-593
247
Other
Dec. 31, 2017
4,707
-2,452
2,255
Lump sum
Annuity
Benefit not based on final salary
Installments
Lump sum
Annuity
Benefit based on final salary
€ million
The defined benefit obligations were based on the following types
of benefits provided by the respective plan:
These were average values weighted by the present value of the
respective benefit obligation.
Future pension increases
Future salary increases
Discount rate
The calculation of the defined benefit obligations was based on the
following actuarial parameters:
Dec. 31, 2016
4,698
Notes to the Consolidated Financial Statements
248
2,313
2,257
1
2,313
1
2,256
1
Provisions for pensions and other post-employment benefits
Assets from defined benefit plans
Net defined benefit liability recognized in the balance sheet
Effects of asset ceilings
2,312
-2,386
Consolidated Financial Statements
-86
-92
43
4,311
4,707
401
4,306
11
-7
18
13
-20
3
6
-20
3
obligations on December 31
387
Present value of the defined benefit
to assets held for sale
Reclassification to liabilities directly related
Other effects recognized in income
-2
Changes in the scope of consolidation
-109
-8
-101
-127
-15
-112
Pension payments
10
10
Other changes
13
4,698
Consolidated Financial Statements
-33
-23
-62
-46
2,323
2,386
2016
2017
Interest expense
Currency translation differences recognized in equity
Effects of the asset ceilings on January 1
€ million
The actual return on plan assets amounted to € 164 million in 2017
(2016: € 120 million).
Fair value of the plan assets on December 31
250
Other changes
Plan administration costs paid from the plan assets recognized in income
Other effects recognized in income
Changes in the scope of consolidation
Pension payments from plan assets
Employee contributions
Employer contributions
Actuarial gains (+)/losses (−) arising from experience adjustments
Interest income from plan assets
Currency translation differences recognized in income
Currency translation differences recognized in equity
Fair value of the plan assets on January 1
€ million
The fair value of the plan assets changed in the reporting period as
follows:
A sensitivity analysis of the key parameters is given in Note (6)
"Management judgments and sources of estimation uncertainty".
Notes to the Consolidated Financial Statements
Reclassification to liabilities directly related to assets held for sale
13
Contributions by plan participants
492
Currency translation differences recognized
-64
2
-66
-67
-6
-61
Currency translation differences recognized
in equity
4,153
343
3,810
4,698
387
Present value of the defined benefit
obligations on January 1
in income
2016
Funded benefit
obligations
2017
tions funded
by provisions
obligations
Funded benefit
Benefit obliga-
Benefit obliga-
€ million
During the reporting period, the present value of the defined benefit
obligations changed as follows:
areas.
With the exception of the net balance of interest expense on the
defined benefit obligations and interest income from the plan assets,
which is recorded under the financial result, the expenses for defined
benefit pension systems were allocated to the individual functional
-155
-211
51
tions funded
by provisions
-40
-40
4
35
457
-20
-1
-19
Actuarial gains (-)/losses (+)
92
8
84
86
8
78
Interest expense
-11
-11
Gains (-) or losses (+) on settlement
-18
Current service cost
140
20
160
124
16
-531
16
140
Past service cost
7
1
8
-18
4
-63
4,311
Profit transfer to E. Merck KG
Cash and cash equivalents
Equity instruments
Debt instruments
Direct investments in real estate
Investment funds
Insurance contracts
Other
Fair value of the plan assets
Dec. 31, 2017
Dec. 31, 2016
Quoted market No quoted market
price in an
Quoted market No quoted market
active market
price in an
active market
€ million
Total
price in an
active market
Total
77
77
72
72
814
814
729
729
957
957
968
968
price in an
active market
94
The fair value of the plan assets can be allocated to the following
categories:
It should be noted, however, that both the benefit obligations as well
as the plan assets fluctuate over time. This could lead to an increase
in underfunding. Depending on the statutory regulations, it could
become necessary in some countries to reduce underfunding through
additions of liquid assets. The reasons for such fluctuations could
include changes in market interest rates and thus the discount rate
as well as adjustments to other actuarial assumptions (e.g. life
expectancy, inflation rates).
11
-1,420
21
Remeasurements of defined benefit obligations
Actuarial gains (+)/losses (-) arising from changes in demographic assumptions
Actuarial gains (+)/losses (-) arising from changes in financial assumptions
Actuarial gains (+)/losses (-) arising from experience adjustments
5
4
8
-484
7
-12
Remeasurements of plan assets
Actuarial gains (+)/losses (-) arising from experience adjustments
In order to minimize such fluctuations, in managing its plan assets,
Merck also pays attention to potential fluctuations in liabilities. In the
ideal case, assets and liabilities develop in opposite directions when
exposed to exogenous factors, thus creating a natural defense against
these factors.
121
Effects of the asset ceilings
Actuarial gains (+)/losses (-)
-1
Reclassification within retained earnings
3
Cumulative actuarial gains (+)/losses (-) recognized in equity on December 31
-1,668
-1,820
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
251
Plan assets for funded defined benefit obligations primarily comprised
fixed-income securities, stocks, and investment funds. They did not
directly include financial instruments issued by Merck Group compa-
nies or real estate used by Group companies.
The plan assets serve exclusively to meet the defined benefit
obligations. Covering the benefit obligations with financial assets
represents a means of providing for future cash outflows, which occur
in some countries (e.g. Switzerland and the United Kingdom) on the
basis of legal requirements and in other countries (e.g. Germany) on
a voluntary basis.
The ratio of the fair value of the plan assets to the present value
of the defined benefit obligations is referred to as the degree of
pension plan funding. If the benefit obligations exceed the plan
assets, this represents underfunding of the pension fund.
69
-1,820
94
102
protection
obligations
Other
Total
483
73
336
142
45
167
1,246
92
53
128
Personnel
31
79
392
Utilizations
-15
-27
-115
-11
-7
-38
-214
Release
including changes in reserves
-5
-42
9
102
Litigation Restructuring
January 1, 2017
420
1
421
379
81
81
82
82
8
8
54
54
2,276
176
Additions
2,452
184
2,386
Employer contributions to plan assets and direct payments to ben-
eficiaries will probably amount to around € 32 million and € 75 mil-
lion in 2018. The weighted duration amounted to 21 years.
The cost of ongoing contributions for defined contribution plans
that are financed exclusively by external funds and for which the
companies of the Merck Group are only obliged to pay the contribu-
tions amounted to € 86 million (2016: € 54 million); this amount
was distributed to the individual functions. In addition, employer
contributions amounting to € 76 million (2016: € 67 million) were
transferred to the German statutory pension insurance system and
€ 46 million (2016: € 42 million) to statutory pension insurance
systems abroad.
252
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
(27) Other provisions
Other provisions developed as follows:
Acceptance
Environmental
and follow-on
€ million
2,202
Cumulative actuarial gains (+)/losses (-) recognized in equity on January 1
Currency translation differences
379
2017
16
39
Merck KGaA
156
E. Merck KG
394
Merck KGaA
171
E. Merck KG
537
2016
2017
Profit carried forward
Withdrawal by E. Merck KG
Dividend proposal
Transfer to revenue reserves
Retained earnings Merck KGaA
Withdrawal from revenue reserves
Profit carried forward previous year
Net income
37
€ million
The profit distribution to be resolved upon by shareholders also
defines the amount of that portion of net profit/loss freely available
to E. Merck KG. If the shareholders resolve to carry forward or to
allocate to retained earnings a portion of Merck KGaA's net retained
profit to which they are entitled, then E. Merck KG is obligated to
allocate to the profit brought forward/retained earnings of Merck KGaA
a comparable sum determined in accordance with the ratio of share
capital to general partner's capital. This ensures that the retained
APPROPRIATION OF PROFITS
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
246
The result of E. Merck KG on which the appropriation of profits
adjusted for trade tax is based amounted to € -16 million (2016:
€ -6 million). This resulted in a profit/loss transfer to Merck KGaA of
€ -5 million (2016: € -2 million). Merck KGaA's net income adjusted
for corporation tax, on which the appropriation of its profit is based,
amounted to € 780 million (2016: € 567 million). Merck KGaA trans-
ferred a gain in the amount of € 548 million of its profit to E. Merck KG
(2016: € 398 million). In addition, an expense from corporation
tax charges amounting to € 56 million resulted (2016: expense of
€ 11 million).
156
394
171
537
-11
-56
-2
2
earnings and the profit carried forward of Merck KGaA correspond
to the ownership ratios of the shareholders on the one hand and
E. Merck KG on the other hand. Consequently, for distributions to
E. Merck KG, only the amount is available that results after netting
the profit transfer of Merck KGaA with the amount either allocated
or withdrawn by E. Merck KG from retained earnings/profit carried
forward. This amount corresponds to the amount that is paid as a
dividend to the shareholders, and reflects their pro rata shareholding
in the company.
15
187
-515
Changes in reserves
2
2
2016
22
22
-2
-2
-5
-5
Total
-466
Merck KGaA
-398
-68
Merck & Cie
Total
-611
Merck KGaA
-548
-63
-392
60
-162
25
39
-155
16
For 2016, a dividend of € 1.20 per share was distributed. The divi-
dend proposal for fiscal 2017 will be € 1.25 per share, corresponding
to a total dividend payment of € 162 million (2016: € 155 million) to
shareholders. The amount withdrawn by E. Merck KG would amount
to € 515 million (2016: € 392 million). The withdrawal, which is high
-5
as compared to the proposed payout to the limited liability share-
holders, is due to the relatively strong increase in corporation tax in
the year under review.
€ million
Profit transfer to E. Merck KG
Profit transfer from E. Merck KG
2017
2016
Merck & Cie
APPROPRIATION OF PROFITS AND CHANGES IN RESERVES
5
171
Net income
E. Merck KG and Merck KGaA engage in reciprocal net profit trans-
fers. This makes it possible for E. Merck KG, the general partner of
Merck KGaA, and the shareholders to participate in the net profit/
loss of Merck KGaA in accordance with the ratio of the general part-
ner's equity interest and the share capital (70.274% or 29.726% of
the total capital).
E. MERCK KG'S SHARE OF NET PROFIT
245
Consolidated Financial Statements
51
121
69
36
35
13
10
-51
-38
-2
-2
-14
1
1
1
(29.726%)
€ million
1
1
The allocation of net profit/loss is based on the net income of
both E. Merck KG and Merck KGaA determined in accordance with
the provisions of the German Commercial Code. These results are
adjusted for trade tax and/or corporation tax and create the basis
2016
The development of cumulative actuarial gains (+) and losses (-)
was as follows:
Actuarial gains (-)/losses (+) arising from changes in the effects of the asset ceilings
Effects of the asset ceilings on December 31
In 2017, the effects of the asset ceilings in accordance with IAS 19.64
changed as follows:
2,386
2,452
3
2017
for the allocation of net profit/loss. The adjustment for corporation
tax is made to compensate for the difference in the tax treatment
between the general partner and the limited liability shareholders.
Corporation tax is only calculated on the income received by the
limited liability shareholders. Its equivalent is the income tax appli-
cable to the partners of E. Merck KG which has to be paid by them
directly. The adjustment thus ensures that the share in net profit
corresponds to the respective interests held by the two shareholder
groups. The reciprocal net profit/loss transfer between E. Merck KG
and Merck KGaA as stipulated by the Articles of Association was as
follows:
Notes to the Consolidated Financial Statements
Result of E. Merck KG
-16
780
€ million
567
Profit transfer to E. Merck KG
Ratio general partner's capital to total capital
(100%)
(70.274%)
-548
398
-398
Profit transfer from E. Merck KG
Ratio of share capital to total capital
Corporation tax
548
Basis for appropriation of profits
-6
56
Net income of Merck KGaA
Corporation tax
11
2016
E. Merck KG
Merck KGaA
2017
E. Merck KG
-6
-16
723
556
Merck KGaA
17,137
-701
1,016
927
548
623
1,187
1,385
Research and development costs
-1,864
2,554
2,895
Property, plant and equipment²
-1,697
14,694
Net sales by company location¹
2,839
238
3,810
3,858
-763
5,229
5,466
1,521
1,712
362
327
3,835
3,854
Goodwill and other intangible assets²
6,537
7,047
614
372
3,345
-1,050
15,024
-167
2017
2016
2017
2016
2,446
2,511
15,327
2016
689
-445
-492
2,525
237
226
232
2,481
823
-840
2017
Corporate and Other
-184
Number of employees
25,979
24,437
13,302
12,449
2,151
Merck Group
2,078
10,037
¹Excluding intersegment sales.
2 Previous year's figures have been adjusted, see Note (4) "Acquisitions and divestments".
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
259
Performance Materials
10,520
983
746
4,735
-3
-1
2,155
2,425
1,580
1,378
-206
-297
206
274
1,949
2,128
1,786
1,652
27.9%
-87
26
3
88
2016
2017
41
2016
6,999
6,855
5,882
31.0%
5,658
1,593
834
556
742
743
797
53
1,447
30.4%
29.2%
5,728
1,144
Europe
thereof: Germany
thereof: Switzerland
North America
€ million
Net sales by customer location¹
1,417
2017
2017
2016
2017
2016
2017
2016
4,756
2016
979
1,516
1,402
1,448
5,600
19,449
21,860
-2,456
-2,427
-953
359
1,648
315
254
310
47
55
47
1,629
1,723
327
25
-166
10,339
1,805
1,416
1,041
1,196
1,099
382
154
15,327
15,024
14,675
17,137
665
803
39
46
2
4,450
4,685
3,691
3,672
2017
2016
2017
2016
3,623
3,668
4,921
2
4,736
1,356
1,232
1,136
608
559
15,327
15,024
1,583
6
21,899
24,995
-12
-2,140
-1,976
11,294
10,754
3,324
3,080
-13
4,027
1,060
1,008
52,880
50,348
260
Consolidated Financial Statements
2017
4,112
2016
-21
-25
923
1,014
531
504
214
172
114
-21
110
49
4,512
4,231
-184
9,874
-75
-61
-26
45
2017
2016
2017
980
1,106
-301
-396
4,414
4,490
40.1%
75
44.1%
29.9%
3,629
4,146
326
200
29,131
31,805
28.8%
-314
132
99
26
17
4
2
86
134
-87
69
-5
1,077
-400
-465
4,282
4,415
33
29
947
1,758
-290
-106
906
1,011
-437
-485
3,318
3,318
thereof: USA
2,518
Asia-Pacific
Latin America
Middle East and Africa
Merck Group
2017
2016
2017
2016
thereof: China
- 259
2,696
-1,418
-4,002
-3,777
116
96
116
51
919
-1,677
716
13
13
25
392
132
969
1,054
14
Life Science
Loans from third parties and other financial liabilities
INFORMATION BY COUNTRY AND REGION
1.375%
550
€
1,328
1,508 March 2025
3.250%
1,600
USD
992
990
497
497
Dec. 20743
Dec. 20744
2.625%
1,000
Sept. 2022
547
548
USD
70
€
626
712 March 2020
2.400%
750
USD
€
1,347
4.500%
1,350
€
833
947 March 2022
2.950%
1,000
1,346 March 2020
3.375%
500
€
12,597
589
90
939
10,144
145
11,513
3 Merck has the right to prematurely repay this tranche of the hybrid bond issued in December 2014 for the first time in June 2021.
4 Merck has the right to prematurely repay this tranche of the hybrid bond issued in December 2014 for the first time in December 2024.
5 Not defined by International Financial Reporting Standards (IFRS).
10,823
256
Notes to the Consolidated Financial Statements
Merck repaid a USD bond with a volume of € 232 million in March
2017 and a eurobond with a volume of € 700 million in September
2017.
For the hybrid bond 2014/2074 issued by Merck KGaA in two
tranches, the rating agencies Standard & Poor's, Moody's and Scope
have given equity credit treatment to half of the issuance, thus
making the issuance more favorable to Merck's credit rating than a
classic bond issue. The bond is recognized in full as financial liabilities
in the balance sheet.
The financial liabilities of the Merck Group were not secured by
liens or similar forms of collateral. The loan agreements do not contain
any financial covenants. The Merck Group's average borrowing cost
as of the balance sheet date was 2.2% (December 31, 2016: 2.0%).
Information on liabilities to related parties can be found in Note
(47) "Related-party disclosures".
CAPITAL MANAGEMENT
The objective of capital management is to secure financial flexibility
in order to maintain long-term business operations and to realize
strategic options. Maintaining a stable investment grade rating,
ensuring liquidity, limiting financial risks as well as optimizing the
cost of capital are the objectives of our financial policy and set impor-
tant framework conditions for capital management. The responsible
committees decide on the capital structure of the balance sheet, the
appropriation of net retained profit and the dividend level. In this
context, net financial debt is one of the leading capital management
indicators.
Consolidated Financial Statements
4.250%
2 Interest rate: 0.23% spread over 3-month EURIBOR.
Net financial debt5
7,040
7,794
850
850
54
59
86
1 Interest rate: 0.35% spread over 3-month U.S. dollar LIBOR.
103
2
8,033
8,809
Financial liabilities
less:
Cash and cash equivalents
Current financial assets
2
€
800
0.750%
Bonds (current)
238 March 2017
variable¹
250
USD
699 Sept. 2017
variable²
USD bond 2015/2018
700
335
March 2018
1.700%
400
USD
335
937
€
Commercial paper
USD bond 2015/2017
Eurobond 2015/2017
million
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
255
(28) Financial liabilities/
Capital management
The composition of financial liabilities as well as a reconciliation to
net financial debt are presented in the following table:
Currency
Book value
Dec. 31, 2017
Nominal
Interest
volume
€ million
€ million
Maturity
rate %
Book value
Dec. 31, 2016
Traditionally, the capital market represents a major source of
financing for Merck, for instance via bond issues. As of December 31,
2017, there were liabilities of € 2.77 billion (December 31, 2016:
€ 3.47 billion) from a Debt Issuance Program most recently renewed
in 2015. In addition, Merck had access to a commercial paper program
to meet short-term capital requirements with a volume of € 2 billion,
of which € 838 million had been utilized as of December 31, 2017
(December 31, 2016: € 919 million).
838
Bank loans
Bonds (non-current)
Bank loans
Liabilities to related parties
Loans from third parties and other financial liabilities
Liabilities from derivatives (financial transactions)
Finance lease liabilities
Non-current financial liabilities
Hybrid bond 2014/2074
380 March 2018
400
USD
799
798
70
69
Sept. 2019
Dec. 2019
1.700%
918
Hybrid bond 2014/2074
USD bond 2015/2018
803
1,128
Liabilities to related parties
767
758
19
20
Eurobond 2015/2019
Eurobond 2009/2019
USD bond 2015/2020
Eurobond 2010/2020
USD bond 2015/2022
Eurobond 2015/2022
USD bond 2015/2025
Liabilities from derivatives (financial transactions)
25
Finance lease liabilities
1
1
Current financial liabilities
2,790
3,788
27
Healthcare
Loan agreements represent a further source of financing for Merck.
On the balance sheet date, the bank financing commitments vis-à-vis
the Merck Group were as follows:
Syndicated loan 2013
Liabilities from non-income related taxes
144
5
150
103
5
108
Other non-financial items
99
99
Non-financial items
1,112
315
1,427
955
12
12
25
25
996
48
1,044
Accruals for personnel expenses
665
665
603
391
603
278
211
489
237
386
623
Advance payments received from customers
Deferred income
Other liabilities
2,175
354
Operating result (EBIT)²
Depreciation and amortization
Impairment losses
Reversals of impairment losses
EBITDA²
Adjustments²
EBITDA pre (Segment result)²
Net sales¹
EBITDA pre margin (in % of net sales)²
Segment liabilities
Investments in property, plant and equipment4
Investments in intangible assets4
Net cash flows from operating activities
Business free cash flow²
1 Excluding intersegment sales.
2 Not defined by International Financial Reporting Standards (IFRS), see Note (33) "Information on Segment Reporting".
3 Previous year's figures have been adjusted, see Note (4) "Acquisitions and divestments".
4According to the consolidated cash flow statement.
Net operating assets², 3
1,102
€ million
(32) Information by business sector/country and region
2,529
1,950
439
1,345
2,389
1 Previous year's figures have been adjusted, see Note (4) "Acquisitions and divestments".
As of December 31, 2017, other financial liabilities included liabilities
to related companies amounting to € 584 million (December 31,
2016: € 457 million). These were profit entitlements of E. Merck KG.
Moreover, other financial liabilities included interest accruals of
€ 95 million (December 31, 2016: € 98 million) as well as payroll
liabilities of € 174 million (December 31, 2016: € 169 million). The
remaining amount of € 206 million (December 31, 2016: € 215 mil-
lion) recorded under other financial liabilities included, among other
things, liabilities to insurers as well as contractually agreed payment
obligations vis-à-vis other companies. Deferred income resulted mainly
from the collaboration agreement with Pfizer Inc., USA, in immuno-
oncology and was released further as planned on a pro rata basis in
2016.
Non-financial items include non-current obligations in the amount of
€ 99 million (December 31, 2016: €0 million) resulting from the new
legislation as regards the taxation of profit from foreign subsidiaries
in the context of the U.S. tax reform. This resulted in additional
taxation of past profits of foreign subsidiaries of U.S. parent compa-
nies. Merck will pay this tax payment in eight annual installments.
The non-current tax liability was recorded at nominal amount and
not discounted. The current portion of the obligation in the amount
of € 9 million was offset against existing income tax receivables.
Further information on the impact of the U.S. tax reform can be found
in Note (14) "Income taxes".
INFORMATION BY BUSINESS SECTOR
(30) Trade accounts payable
This item also included accrued amounts of € 653 million (Decem-
ber 31, 2016: € 544 million) for outstanding invoices and € 435 mil-
lion (December 31, 2016: € 443 million) in sales deductions.
(31) Tax liabilities
Tax liabilities and provisions for tax liabilities resulted in total income
tax liabilities of € 1,059 million as of December 31, 2017 (2016:
€ 883 million).
258
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
Segment Reporting
Trade accounts payable amounted to € 2,195 million (December
31, 2016: € 2,048 million).
39
1,063
Financial items
700
700
700
variable
2019
Bilateral credit agreement with banks
400
700
400
400
variable
2020
Bilateral credit agreement with banks
250
250
250
400
250
Bilateral credit agreement with banks
variable
Loan agreement with banking syndicate
for acquisition financing
Dec. 31, 2017
Financing
commitments
from banks
Dec. 31, 2016
Financing
commitments
Utilization
2018
from banks
2,000
2,000
Interest
variable
Maturity of
financing
commitments
2020
400
400
Utilization
€ million
variable
Various bank credit lines
1,038
21
Dec. 31, 2017
1,059
current¹
non-current
Dec. 31, 2016¹
925
non-current
14
Liabilities from derivatives (operational)
25
18
43
71
34
105
939
2022
current
€ million
581
303
336
228
variable
< 1 year
3,931
Other financial liabilities
1,653
1,978
There are no indications that the availability of credit lines already
extended was restricted.
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
257
(29) Other liabilities
Other liabilities comprise the following:
4,086
(33) Information on
-973
Segmentation was performed in accordance with the organizational
and reporting structure of the Merck Group that applied during 2017.
The combination into segments is based on the business models of
the business sectors and led to homogeneous risk structures within
the segments. Resource allocation and the assessment of the earning
power of the business sectors was performed by the Executive Board
as the main decision-maker.
-1,047
4,490
4,414
2016
2017
2 Not defined by International Financial Reporting Standards (IFRS).
1 Previous year's figures have been adjusted, see Note (4) "Acquisitions and divestments".
Operating assets (net)²
Segment liabilities
Other operating liabilities
Trade accounts payable
Operating assets (gross)²
Assets held for sale
Non-operating receivables, income tax receivables, deferred taxes and net defined benefit assets
Monetary assets (cash and cash equivalents, current financial assets, loans, securities)
-859
-23
1
-24
35,582
33,133
-12
-1,542
-1,123
Dec. 31, 2016¹
38,258
-1,739
Assets
-749
Dec. 31, 2017
3,318
3,318
12
-2
-149
-177
35,621
€ million
The reconciliation of operating assets presented in the Segment
Reporting from the total assets of the Merck Group was as follows:
2 Previous year's figures have been adjusted, see Note (4) "Acquisitions and divestments".
-2
-88
-19
Impairment losses
-75
149
-162
-3
-48
reversals of impairment losses¹
Adjustments before impairment losses/
-11
-2
-153
-153
304
-12
-2,195
-4
Reversals of impairment losses
1 Not defined by International Financial Reporting Standards (IFRS).
Elimination first-time consolidation of BioControl Systems²
Business free cash flow¹
Elimination first-time consolidation of Sigma-Aldrich
Changes in trade accounts receivable as well as receivables from royalties
and licenses according to the consolidated balance sheet
Investments in property, plant and equipment, software as well as advance payments for intangible assets
Changes in inventories according to the consolidated balance sheet²
EBITDA pre¹
€ million
-115
Business free cash flow was determined as follows:
-191
145
-5
-163
-136
-31
Adjustments (total)¹
1 Not defined by International Financial Reporting Standards (IFRS).
-2,048
-1,806
-1,729
-546
147
3,136
-314
349
729
7,794
-38
937
7,375
-425
-932
8,731
2017
Dec. 31,
Other
changes
-932
Fair Value
changes
-16
497
Segment Reporting
"Other changes" relate mainly to the reclassification of bonds owing
to a change from long-term to short-term. The changes reported for
derivative assets (current and non-current) under repayments cor-
respond to the repayment of other current and non-current financial
liabilities in the amount of € 496 million reported under cash outflows
from financing activities.
12
10,823
2,683
765
-354
12,597
-400
354
-25
-50
62
-16
-463
-1,792
335
304
Foreign
exchange
movement
Jan. 1, 2017
(35) Net cash flows from
investing activities
The neutralization of the profits/losses from the disposal of assets
and other disposals mainly comprises the gain on the sale of the
Biosimilars business. In 2016, this item mainly comprised the gain
on the sale of the rights to KuvanⓇ.
The changes of other assets and liabilities include the adjustment
of deferred taxes as a result of the U.S. tax reform.
In 2017, tax payments totaled € 702 million (2016: € 841 million).
Tax refunds totaled € 73 million (2016: € 63 million). Interest paid
totaled € 297 million (2016: € 327 million). Interest received
amounted to € 28 million (2016: € 22 million).
operating activities
(34) Net cash flows from
The cash flows reported by Group companies in non-functional
currencies are in principle translated at average exchange rates.
Cash and cash equivalents are translated at the closing rates. The
impact of foreign exchange rate changes is disclosed separately
under changes in cash and cash equivalents.
The payments for investments in intangible assets primarily included
payments for a license agreement with Vertex Pharmaceuticals Inc.,
USA, for the acquisition of two clinical and additional novel pre-clinical
research programs in the area of oncology and immuno-oncology.
The consolidated cash flow statement presents the changes in cash
and cash equivalents as a result of cash inflows and outflows from
operating, investing and financing activities. Further information on
cash flows can be found in the explanation of cash and cash equiv-
alents (see Note (24) "Cash and cash equivalents"). The amount of
undrawn borrowing facilities that could be tapped for future operating
activities and to meet obligations is disclosed in Note (28) "Financial
liabilities/Capital management".
263
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
31,805
29,131
-3,777
-4,002
Notes to the Consolidated Cash Flow Statement
Payments Repayments consolidation.
Payments for acquisitions comprised the acquisitions of
Grzybowski Scientific Inventions Ltd., USA, (€ 7 million) and Natrix
Separations, Inc., Canada (€ 8 million). In 2016, this item mainly
included the acquisition of BioControl Systems, Inc., USA, amounting
to € 156 million.
Cash inflows from the divestment of assets held for sale included
the upfront payment amounting to € 156 million for the divestment
of the Biosimilars business. In 2016, cash inflows of € 340 million
resulted from the sale of the rights to KuvanⓇ.
in scope of
Changes
Derivative assets (current and non-current)
Other current and non-current financial liabilities
Financial liabilities
Financial liabilities to E. Merck KG
thereof: non-current
thereof: current
Net cash outflows from investments in current and non-current
financial assets amounting to € 219 million (2016: € 344 million)
mainly resulted from the purchase of short-term investments in secu-
rities not classified as cash and cash equivalents. Additionally, this
item included payments for the purchase of an equity instrument
option.
Bonds
The change in financial debt was as follows:
the repayment of other current and non-current financial debt mainly
related to the repayment of bank loans to finance the acquisition of
the Sigma-Aldrich Corporation, USA.
Net cash flows from financing activities contained the repayment of
two bonds amounting to € 932 million (2016: € 272 million). In 2016,
(36) Net cash flows from
financing activities
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
264
€ million
Other adjustments
7,040
of businesses
310
-193
-189
-22
-84
2016
2017
1 Not defined by International Financial Reporting Standards (IFRS).
Adjustments (total)¹
Reversals of impairment losses
Adjustments before impairment losses/reversals of impairment losses¹
Impairment losses
Other adjustments
Acquisition-related adjustments
Gains (+)/losses (-) on the divestment of businesses
Integration costs/IT costs
304
-63
-153
-106
thereof:
Integration costs/IT costs
Restructuring costs
2017
€ million
The adjustments were included in the consolidated income statement
under cost of sales as well as under other operating expenses and
income and were allocable to functional costs as follows:
Other adjustments amounting to € 106 million (2016: € 11 million)
were largely attributable to the promise of a one-time bonus for
employees on the occasion of the company's 350th anniversary
(€ 53 million) as well as to expenses in connection with the analysis
of strategic options for the Consumer Health business (€ 24 million).
Restructuring costs
The gains from the divestment of businesses amounting to
€ 310 million (2016: € 304 million) resulted mainly from the divest-
ment of the Biosimilars business and were included in other operating
income.
-191
87
-114
-115
-68
-75
-132
-11
The adjustments of € 189 million recorded under integration costs/
IT costs (2016: € 193 million) were largely incurred in connection
with the integration of the Sigma-Aldrich Corporation, USA, (€ 95 mil-
lion) as well as expenses for ERP systems (€ 64 million). These
amounts were recorded under other operating expenses.
€ million
The adjustments made comprised the following:
261
EBITDA pre of the Merck Group¹
-396
-301
Corporate and Other
4,887
4,715
EBITDA pre of the operating businesses¹
4,414
2016
€ million
The following table presents the reconciliation of EBITDA pre of all
operating businesses to the profit before income tax of the Merck
Group:
In 2017, only the Life Science business sector generated intragroup
sales between business sectors. These resulted mainly from transac-
tions with the Healthcare business sector in an amount of € 55 mil-
lion (2016: € 46 million) and with the Performance Materials business
sector in an amount of € 2 million (2016: € 2 million). Transfer prices
for intragroup sales are determined on an arm's length basis.
the reportable segments presented. This related mainly to central
Group functions. Moreover, the column served the reconciliation to
the Group numbers. As these are steered at Group level, the expenses
and income as well as cash flows attributable to the financial result
and income taxes were also presented under Corporate and Other.
Apart from sales, the success of a segment is mainly determined
by EBITDA pre (segment result) and business free cash flow. EBITDA
pre and business free cash flow are performance indicators not
defined by International Financial Reporting Standards. However,
they represent important variables used to steer the Merck Group.
To permit a better understanding of operational performance, EBITDA
pre excludes depreciation and amortization, impairment losses, and
reversals of impairment losses as well as adjustments presented in
the following. Among other things, business free cash flow is also
used for internal target agreements.
Corporate and Other included income and expenses, assets and
liabilities as well as cash flows that could not be directly allocated to
Acquisition-related adjustments
The Healthcare business sector comprises the businesses with
prescription and over-the-counter pharmaceuticals and biopharma-
ceuticals as well as allergy products and medical devices. The cus-
tomers of this business sector mainly comprise wholesalers, hospitals
and pharmacies. The Life Science business sector offers solutions to
research and analytical laboratories in the pharmaceutical/biotech-
nology industry or in academic institutions, and customers manufac-
turing large- and small-molecule drugs. In accordance with the field
of activity, the customers of this business sector largely include com-
panies of the pharmaceuticals and biotech sector as well as retailers,
corporate customers and universities. The Performance Materials
business sector consists of the entire specialty chemicals business
and primarily services industrial companies. The fields of activity of
the individual segments are described in detail in the sections about
the business sectors in the combined management report.
2017
cost of sales
4,490
-1,758
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
2,154
2,224
¹ Not defined by International Financial Reporting Standards (IFRS).
Profit before income tax
-326
Depreciation/amortization/impairment losses/reversals of impairment losses
-300
2,481
2,525
Operating result (EBIT)¹
-75
-132
Adjustments¹
-1,934
Financial result
thereof:
marketing
and selling
Neither in 2017 nor in 2016 did any single customer account for
more than 10% of Group sales.
-13
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
262
1 Not defined by International Financial Reporting Standards (IFRS).
-114
222
-21
-246
-90
23
Adjustments (total)¹
87
87
Reversals of impairment losses
-68
€ million
2016
Restructuring costs
Integration costs/IT costs
thereof:
administration
Gains (+)/losses (-) on the divestment
-2
-133
-12
-22
Total
-14
operating income
and expense
thereof:
research and
development
costs
-19
-3
thereof:
administration
thereof:
marketing
and selling
cost of sales
thereof:
thereof: other
-16
-45
-6
Acquisition-related adjustments
310
310
Gains (+)/losses (-) on the divestment
of businesses
-189
-3
-132
-21
-31
-84
3
Total
thereof: other
operating income
and expense
thereof:
research and
development
-33
costs
-43
-25
-1
-5
-193
-63
-132
Impairment losses
-56
-5
235
-57
-59
reversals of impairment losses¹
-246
-106
-11
Other adjustments
-5
-66
-11
-13
Adjustments before impairment losses/
Repayment
3,523
250
245
1
Interest
Interest
Repayment
4,314
600
759
5
1,978
11
1,855
224
9,650
Interest
Repayment
1,128
Trade accounts payable
481
2,048
95
18
233
Liabilities from derivatives
55
10
22
2,048
6
Loans from third parties and other financial liabilities
14
467
Other financial liabilities¹
1,215
1,215
Liabilities to related parties
80
amount
1-5 years
Bank loans
15
155
54
4
19
1
73
21
453
474
1,352
70
1,352
2,195
2,195
52
Carrying
59
4
Bonds and commercial paper
Dec. 31, 2016
€ million
> 5 years
Cash flows
<1 year
Cash flows
Cash flows
1,839
143
6,179
657
6,046
243
1
18
2
Non-financial
17
35
35
47
47
Available for sale
Loans and receivables
Held to maturity
9
9
Derivatives without a hedging relationship
Held for trading (non-derivatives)
44
47
90
589
Derivatives with a hedging relationship
Trade accounts receivable
2,923
2,923
Derivatives with a hedging relationship
276
1,839
276
Loans and receivables
46
46
589
Derivatives without a hedging relationship
92
276
936
Remaining current and non-current assets¹
2,923
2,923
Loans and receivables
568
34
Current financial assets
items
The credit risk of customers is monitored using established credit
management processes that take the individual customer risks into
account. This is done in particular by continuously analyzing the age
structure of trade accounts receivable. Merck continuously reviews
and monitors open positions of all trading partners in the affected
countries and takes risk-mitigating measures if necessary. If there
is objective evidence that particular accounts receivable are fully or
partially impaired, respective impairment losses are recognized to
Merck limits credit risk by only entering into financial contracts with
banks and industrial companies with good credit ratings. Moreover,
the broad-based business structure with a large number of different
customers results in a diversification of credit risks within the Merck
Group. The credit risk from financial contracts is monitored daily on
the basis of rating information as well as market information on credit
default swap rates.
CREDIT RISKS
1 Previous year's figures have been adjusted, see Note (4) "Acquisitions and divestments".
3,775
263
5,019
845
6,832
259
15,689
2
1
4
Financing lease liabilities
270
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
provide for credit defaults. On the balance sheet date, the theoretically
maximum default risk corresponded to the net carrying amounts less
any compensation from credit insurance.
according to
IAS 17
Fair value
At cost
cost
2017
Amortized
Dec. 31,
Cash and cash equivalents
Carrying
amount
Carrying
Subsequent measurement
according to IAS 39
Assets
€ million
The following table presents the reconciliation of the balance sheet
items to categories of financial instruments pursuant to the disclosures
required by IFRS 7 and provides information on the measurement
of fair value:
(39) Other disclosures on
financial instruments
There were no indications of impairment for financial assets
neither past due nor impaired on the balance sheet date.
amount
143
Exchange rate -10%
Repayment
5,234
850
KRW
JPY
CNY
CHF
Dec. 31, 2016
€ million
(EUR appreciation)
Exchange rate -10%
(EUR depreciation)
Exchange rate +10%
Dec. 31, 2017
€ million
eration here. By contrast, the effects of cash flow hedges are taken
into consideration in the equity of the Group and are included in the
following table.
The following table shows the effects of exchange rate movements
of the key currencies against the euro in relation to the net income
and equity of the Group on the balance sheet date. The effects of
planned cash flows of the next 12 months are not taken into consid-
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
268
TWD
Balance sheet items in the aforementioned currencies were econom-
ically hedged in full in both 2017 and 2016 by derivatives if they did
not correspond to the functional currency of the respective company.
Accordingly, they do not affect the net exposure presented above.
USD
39
JPY
CNY
CHF
147
31
15
17
36
-31
Consolidated income statement
Equity
-172
-38
-18
-19
-44
Consolidated income statement
Equity
• Derivatives to hedge these planned cash flows. Usually, the hedging
ratio is 30%-70%.
• Planned cash flows in the next 12 months in the respective currency
as well as
The net exposure of each of the aforementioned currencies consists
of the following components:
€ million
The following table presents the net exposure of the Merck Group
in relation to exchange rate fluctuations of the major currencies
against the euro:
Owing to its international business focus, Merck is exposed to foreign-
exchange-related transaction risks within the scope of both its busi-
ness activities and financing activities. Different strategies are used
to limit or eliminate these risks. Foreign exchange risks from trans-
actions already recognized on the balance sheet are eliminated as
far as possible through the use of forward exchange contracts. Foreign
exchange risks arising from forecast transactions are analyzed regu-
larly and reduced if necessary through forward exchange contracts or
currency options by applying the hedge accounting rules. The Merck
Group is exposed to currency translation risks since the majority of
Merck's subsidiaries are located outside the eurozone and have func-
tional currencies other than the reporting currency. The financial
statements of these companies are translated into euros. Exchange
differences resulting from currency translation of the assets and
liabilities of these companies are recognized in equity. These effects
are not taken into consideration in the following tables.
FOREIGN EXCHANGE RISKS
The Report on Risks and Opportunities included in the combined
management report provides further information on the manage-
ment of financial risks.
Merck uses derivative financial instruments (hereinafter "deriva-
tives") to hedge risks from currency and interest rate positions.
Merck uses marketable forward exchange contracts, options and
interest rate swaps as hedging instruments. Depending on the nature
of the hedged item, changes in the fair values of derivatives are
recorded in the consolidated income statement either in the operating
result or in the financial result. The strategy to hedge interest rate
and foreign exchange rate fluctuations arising from forecast trans-
actions and transactions already recognized in the balance sheet is
set by a risk committee, which meets on a regular basis. Extensive
guidelines regulate the use of derivatives. There is a ban on specu-
lation. Derivative transactions are subject to continuous risk man-
agement procedures. Trading, settlement and control functions are
strictly separated. Derivatives are only entered into with banks that
Ihave a good credit rating. Related default risks are continuously
monitored.
Market fluctuations with respect to foreign exchange and interest
rates represent significant profit and cash flow risks for Merck. Merck
aggregates these Group-wide risks and steers them centrally, also by
using derivatives. Merck uses scenario analyses to estimate existing
risks of foreign exchange and interest rate fluctuations. Merck is not
subject to any material risk concentration from financial transactions.
(38) Management of financial risks
267
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
statement.
Forward starting payer interest rate swaps for which the hedging
relationship was terminated voluntarily were entered into in 2015 with
a nominal volume of € 550 million. In line with the hedged item run-
ning until 2022, in 2017 an amount of € 13 million (2016: € 13 million)
was reclassified from Other Comprehensive Income under the line
item "Reclassification to profit or loss" within "Derivative financial
instruments" to the financial result. The original transactions as well
as the offsetting transactions are now classified as "held for trading".
The changes in fair value are reflected in the consolidated income
45
Intragroup financing as well as receivables and payables in non-
functional currency were hedged exclusively using forward exchange
contracts. Overall, balance sheet items amounting to € 4,376 million
(December 31, 2016: € 6,912 million) were hedged. In this context,
the hedging transactions in 2017 were exclusively purely economic
hedges for which hedge accounting is not applied.
Net exposure Dec. 31, 2017
Net exposure Dec. 31, 2016
CHF
CNY
1,009
165
217
154
412
-267
1,215
KRW
135
75
449
-184
USD
TWD
KRW
JPY
115
TWD
USD
(EUR depreciation)
Liabilities to related parties
Trade accounts payable
Bank loans
Bonds and commercial paper
Dec. 31, 2017
€ million
The following tables present the contractual cash flows such as
repayments and interest on financial liabilities and derivative financial
instruments with a negative fair value as well as the settlement
amount of trade accounts payable:
Liquidity risks are monitored and reported to management on a
regular basis.
establishing the required financial flexibility and by effective cash
management. Information on bonds issued by the Merck Group and
other sources of financing can be found in Note (28) "Financial
liabilities/Capital management".
The liquidity risk, meaning the risk that Merck cannot meet its
payment obligations resulting from financial liabilities, is limited by
LIQUIDITY RISKS
The shares in publicly listed companies amounting to € 16 million
(December 31, 2016: € 8 million) are generally exposed to a risk of
fluctuations in fair value. A 10% change in the value of the stock
market would impact equity by € 2 million (December 31, 2016:
€ 1 million). This change in value would initially be recognized in
equity and then in profit or loss at the time of disposal.
SHARE PRICE RISKS
269
Notes to the Consolidated Financial Statements
Other financial liabilities
Loans from third parties and other financial liabilities
Liabilities from derivatives
Financing lease liabilities
4
590
Interest
Repayment
1,171
803
18
1,653
210
Consolidated Financial Statements
8,213
amount
Carrying
> 5 years
Cash flows
Cash flows
1-5 years
<1 year
Cash flows
Interest
Interest Repayment
-100 basis
points
22
+100 basis
INTEREST RATE RISKS
159
32
25
38
-20
Consolidated income statement
Equity
(EUR appreciation)
Exchange rate +10%
-148
-26
-26
-31
17
Consolidated income statement
Equity
The Merck Group's exposure to interest rate changes comprises the
following:
€ million
Short-term or variable interest rate monetary deposits
Short-term or variable interest rate monetary borrowings
Net interest rate exposure
Dec. 31, 2017
684
-100 basis
points
16
+100 basis
points
-26
2016
2017
The scenario calculations here assumed that for material variable
interest-bearing loan agreements, the risk-free interest rate compo-
nent (EURIBOR) cannot fall below 0%.
Effects on equity
Effects on consolidated income statement
points
-36
Change in market interest rate
borrowings, all debt instruments classified as "available for sale",
except contingent consideration, as well as all derivatives are pre-
sented in the following table.
The effects of a parallel shift in the yield curve by +100 or 100 basis
points on the consolidated income statement as well as on equity
relative to all short-term or variable monetary deposits and monetary
-3,502
-2,957
-4,587
-3,641
Dec. 31, 2016
1,085
€ million
45
Notes to the Consolidated Financial Statements
568
Counterparty credit risk was taken into consideration for all valu-
ations. In the case of non-derivative financial instruments, such as
other liabilities or interest-bearing securities, this was reflected using
risk-adequate premiums on the discount rate, while discounts on
market value (so-called credit valuation adjustments and debit valu-
ation adjustments) were used for derivatives.
components would not have had a material impact on profit before
tax or on other comprehensive income since the corresponding calcu-
lations assume a limited planning horizon and the determination of
the fair values does not include a calculation of a terminal value. If
the discount rate used for the determination of the fair value of the
interest in the partnership had been one percentage point higher,
other comprehensive income would have decreased by € 2 million.
By contrast, a decline in the discount rate by one percentage point
would have increased other comprehensive income by € 2 million.
Level 3 liabilities consisted of contingent consideration from
acquisitions of corporations. These were reported as other liabilities
and amounted to € 3 million as of the balance sheet date.
A sensitivity analysis of the measurement of the contingent con-
sideration components from the disposal of the Biosimilars business
is set out in Note (6) "Management judgments and sources of esti-
mation uncertainty". An increase or decrease in the discount rates
used to calculate the fair values of the other contingent consideration
The fair value of the interest in one partnership was determined
through an internally performed valuation using the discounted cash
flow method. Expected future cash flows based on the company's
latest medium-term planning were taken into account. The planning
relates to a period of five years. Cash flows for periods beyond this
were included in the terminal value calculation by applying a long-
term growth rate of 0.5% (December 31, 2016: 0.5%). The after-tax
discount rate used was 7.0% (December 31, 2016: 7.0%). To calcu-
late the fair values of the contingent consideration components, the
expected future milestone events and revenues were weighted using
the probability of occurrence and discounted using after-tax discount
rates of between 6.5% and 7.6% (December 31, 2016: 7.1%). The
determination of the fair values of the fund investments was based
on the fair values of companies in which the funds were invested. The
fair value of the option on equity instruments was determined on the
basis of the last available transaction price.
Level 3 assets were classified as "available for sale" and as a deriva-
tive without hedge accounting relationship, respectively. They included
unlisted equity instruments, an interest in a partnership, contingent
consideration from the sale of business activities and a corporation,
equity investments in unlisted funds as well as an option on equity
instruments. The fair values of unlisted equity instruments were
derived from observable prices taken from equity refinancing trans-
actions that occurred sufficiently close to the reporting date.
273
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
The fair value of the liabilities classified as other liabilities was
determined by discounting future cash flows using market interest
rates. The calculation of the fair value of forward exchange contracts
and currency options used spot and forward rates observable in the
market as well as foreign exchange volatilities applying recognized
mathematical principles. The fair value of interest rate swaps is deter-
mined with standard market valuation models using interest rate
curves available in the market.
comprised stocks and bonds and were classified as available for sale,
Level 1 liabilities comprised issued bonds and were classified as other
liabilities. Level 2 assets and liabilities were primarily liabilities to
banks classified as other liabilities as well as derivatives with and
without hedging relationships.
The fair value of financial assets and liabilities was based on the
official market prices and market values quoted on the balance sheet
date (Level 1 assets and liabilities) as well as mathematical calculation
models with inputs observable in the market on the balance sheet
date (Level 2 assets and liabilities) as well as measurement models
and refinancing tranches (Level 3 assets and liabilities). Level 1 assets
In 2017, foreign exchange losses of € - 3 million resulting from
receivables and payables in operating business, their economic hedg-
ing, as well as hedging of forecast transactions in operating business
were recorded (2016: foreign exchange losses of € -57 million).
Foreign exchange gains of € 22 million resulting from financial bal-
ance sheet items and their economic hedging were recorded (2016:
foreign exchange losses of € -4 million).
34
69
2
-287
The fair values of investments in equity instruments classified as
available for sale with a carrying amount of € 4 million (December 31,
2016: € 59 million) could not be reliably determined since there was
no quoted price for an identical instrument in an active market and it
was not possible to make a reliable estimate of fair value. They were
measured at cost. Financial investments primarily included invest-
ments in equity instruments in various non-operating subsidiaries.
There is currently no intention to sell these financial instruments.
59
The amounts of the financial instruments recognized at fair value
in the balance sheet and the disclosed fair values for financial instru-
ments were determined as follows:
Dec. 31, 2017
43
45
thereof: derivatives with a hedging relationship
3,511
67
7,719
53
7,719
53
Liabilities
Assets
thereof: available for sale
Fair value determined using inputs observable in the market (Level 2)
thereof: other liabilities
Fair value determined by official prices and quoted market values (Level 1)
thereof: available for sale
€ million
-52
-5
18
Disposal
gains/losses
Held to maturity
Held for trading
Financial instruments of the category
2016
€ million
Other liabilities
Available for sale
Loans and receivables
Held to maturity
Held for trading
Financial instruments of the category
2017
€ million
included derivatives that were not in a hedging relationship. Dividends
were not allocated to net gains and losses on financial instruments.
The net gains and losses on financial instruments by category
(excluding amounts recognized in other comprehensive income) were
as follows:
Net gains and losses on financial instruments included measurement
results from fair value adjustments recognized in profit or loss, impair-
ments and reversals of impairments, disposal gains/losses as well as
the recognition of premiums and discounts. In the following table, the
financial instruments of the held-for-trading category include interest
as a component of fair value adjustments. At Merck, this category only
Loans and receivables
Available for sale
Other liabilities
Interest result
Fair value
adjustments
Reversals of
impairment
Impairments
Interest result
Net gains or losses
-203
-294
thereof: derivatives without a hedging relationship
97
5
21
Disposal
gains/losses
Fair value
adjustments
Reversals of
impairment
Net gains or losses
Impairments
-39
-14
Forecast transactions and firm purchase commitments in nonfunc-
tional currency are hedged using forward exchange contracts and
currency options which are due within the next 36 months. Overall,
forecast transactions and firm purchase commitments in non-func-
tional currency were hedged in the amount of € 3,258 million (Decem-
ber 31, 2016: € 2,741 million).
22
thereof: other liabilities
75
1
75
33
3,744
131
77
102
11
46
3,978
134
9,058
54
9,058
1
54
2017
74
Balance sheet netting of financial instruments is not possible. From
an economic perspective, netting is only possible for derivatives. This
possibility results from the framework agreements on derivatives
trading which Merck enters into with commercial banks. Merck does
not offset financial assets and financial liabilities in its balance sheet.
Additions to Level 3 particularly comprised contingent consideration
from the disposal of the Biosimilars business (see Note (4) "Acqui-
sitions and divestments"). The transfer to Level 3 mainly referred to
investments in unlisted equity instruments where equity refinancing
transactions at customary terms occurred sufficiently close to the
reporting date. The gains and losses from Level 3 assets recognized
in other comprehensive income were reported in the consolidated
statement of comprehensive income under the item "fair value
adjustments" related to "available-for-sale financial assets”.
74
440
-1
-2
-3
5
4
-6
16
68
46
302
11
2016
Liabilities
Assets
Net book values as of December 31
Dec. 31, 2016
€ million
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
274
3
thereof: other liabilities
46
thereof: derivatives without a hedging relationship
397
thereof: available for sale
3
443
Fair value determined using inputs unobservable in the market (Level 3)
3,355
Fair value determined by official prices and quoted market values (Level 1)
thereof: available for sale
thereof: other liabilities
Fair value determined using inputs observable in the market (Level 2)
Transfers from Level 3 to Level 1/Level 2
Disposals
Gains (+)/losses (-) recognized in consolidated statement of comprehensive income
Currency translation
Gains (+)/losses (-) recognized in consolidated income statement
Fair value changes
Transfers to Level 3 from previous measurement at cost/Level 1/Level 2
Additions due to acquisitions/disposals
113
Net book values as of January 1
The changes in financial assets and liabilities assigned to Level 3 and
measured at fair value were as follows:
thereof: other liabilities
Fair value determined using inputs unobservable in the market (Level 3)
thereof: available for sale
thereof: other liabilities
thereof: derivatives without a hedging relationship
thereof: derivatives with a hedging relationship
thereof: available for sale
€ million
Consolidated Financial Statements
272
1,345
Carrying
1,427
1,427
43
43
1,059
1,059
1,427
43
1,059
2,529
2,195
2,195
2,195
2,195
Consolidated Financial Statements
4
Notes to the Consolidated Financial Statements
Subsequent measurement
939
items
IAS 17
Fair value
At cost
cost
2016
Non-financial
amount
according to
Amortized
amount
Dec. 31,
Dec. 31,
20172
Fair value,
Carrying
according to IAS 39
271
1 Previous year's figures have been adjusted, see Note (4) "Acquisitions and divestments".
2The exemption provisions under IFRS 7.29a were applied for information on specific fair values.
Non-financial items
Derivatives with a hedging relationship
4
420
12
12
Available for sale
Loans and receivables
Held to maturity
13
13
Derivatives without a hedging relationship
429
12
444
Non-current financial assets
568
416
Derivatives with a hedging relationship
Liabilities
Current and non-current financial liabilities
Other financial liabilities¹
Derivatives without a hedging relationship
Remaining current and non-current liabilities¹
Other financial liabilities
Trade accounts payable
Finance lease liabilities
Derivatives with a hedging relationship
939
10,707
Other financial liabilities
113
4
113
10,707
10,823
113
Derivatives without a hedging relationship
10,707
145
44
9
128
132
12,465
128
128
12,465
4
128
12,465
12,597
113
11,074
132
59
191
416
10
12,802
4
2,048
2,048
1,345
102
102
102
43
939
939
10
3
3
1,345
105
939
2,389
2,048
2,048
3
Non-financial items¹
17
17
803
2,889
2,889
2,889
2,889
43
59
Fair value
Dec. 31,
20162
43
43
35
44
44
59
101
59
277
12
514
46
13
149
59
10
218
514
514
17
11
11
45
277
277
1
1
1
11
576
14,120
153
Remaining
maturity more
than 1 year
1,311
49
Total
Dec. 31, 2017
Remaining
maturity less
than 1 year
Remaining
maturity more
than 1 year
Total
Dec. 31, 2016
1,100
239
7,347
288
1,100
784
9,339
162
314
1,100
1,100
8,555
6,035
Remaining
maturity less
than 1 year
Interest rate swaps
-87
4,376
6,912
-18
32
46
8,735
10,753
-42
-146
Cash flow hedges included currency hedges in a nominal volume
of € 1,898 million (December 31, 2016: € 1,795 million) with a
remaining term of up to one year and hedges in a nominal volume of
€ 1,360 million (December 31, 2016: € 946 million) with a remaining
term of more than one year.
The maturities of the derivatives (nominal volume) were as follows
as of the balance sheet date:
€ million
Forward exchange contracts
Currency options
6,274
2,460
8,735
8,707
KRW
GBP
Dec. 31, 2017
4,046
Dec. 31, 2016
5,031
903
701
717
444
406
411
800
266
158
214
JPY
-73
TWD
CHF
2,046
10,753
266
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
Currency hedging served to economically protect the company from
the foreign exchange risks of the following types of transaction:
• Forecast transactions in non-functional currency, the expected
probability of which is very high for the next 36 months,
.
Off-balance sheet firm purchase commitments of the next 36 months
in non-functional currency,
•
Intragroup financing in non-functional currency as well as
• Receivables and liabilities in non-functional currency
Exchange rate fluctuations of mainly the following currencies against
the euro were hedged:
Nominal volume € million
USD
CNY
1,100
1,211
-55
1,100
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
265
Other Disclosures
(37) Derivative financial instruments
The following derivatives were held by the Merck Group as of the
balance sheet date:
Cash flow hedge
Interest
Currency
Fair value hedge
Interest
Currency
No hedge accounting
Interest
€ million
Nominal volume
Currency
Equity
-45
8,012
5,477
-91
2,741
3,258
3
-91
3
Dec. 31, 2016
Dec. 31, 2017
Dec. 31, 2016
2,741
Dec. 31, 2017
3,258
Fair value
of life around the
Member of the Executive Board, CEO Life Science
UDIT BATRA
Magazine
12
world?"
"Our 350th anniversary is testament
of what can be achieved if you
have a clear goal, a learning mind-
set to constantly challenge your
assumptions, and the courage to
take the risk to redefine yourself."
ing the quality
"To stay passionate, we
always have to think of
we discover and
develop new medi-
cines to help
patients and their
families. What
"Fueled by passion,
11
Curious Minds
BELÉN GARIJO
the future, of the potential
result of our work."
SAMUEL CUNHA
JAKOB FUTORJANSKI
"Only if we know why we
are doing something,
can we master the great
challenges of our time."
better purpose is
there than improv-
EVA AMSEN
Member of the Executive Board, CEO Healthcare
KAI BECKMANN
becoming increasingly
important."
"For scientists it is import-
ant to exchange ideas not
only with their colleagues,
but also with people from
totally different fields - for
example, with artists.”
resources responsibly is
"Handling our natural
SIMONE STREY
"Creativity and curiosity are the
key factors for innovation. To
achieve good results, it's impor-
tant to provide researchers with
the resources they need - and we
do this at Merck. We invest
based on robust clinical data and
viable business cases."
Member of the Executive Board, Chief Financial Officer
MARCUS KUHNERT
Magazine
INÉS DAWSON
"Research and creativity
should go hand in hand,
as not all problems have
a clear solution."
to make a key
contribution to this."
our technologies,
we will continue
easier than ever
before. With
and country borders
are inspiring. In
the age of digitali-
zation, this is
"Diversity and
intensive exchanges
across business
13
14
Curious Minds
Member of the Executive Board, CEO Performance Materials
263
Other financial obligations were recognized at nominal value.
The maturities of liabilities from lease agreements were as follows:
€ million
Dec. 31, 2017
Present value of future payments from finance leases
Future operating lease payments
Future finance lease payments
Dec. 31, 2017
Dec. 31, 2016
more than 5 years
247
Interest component of finance leases
in 1-5 years
63
€ million
The expected maturities of these obligations were as follows:
Moreover, within the scope of collaboration agreements, individual
research and development or commercialization budgets were con-
tractually set, upon the basis of which collaboration partners can
commit Merck to make payments in the amount of up to € 1,360 mil-
lion (2016: € 1,370 million).
Obligations to acquire intangible assets existed in particular owing
to contingent consideration and within the scope of research and
development collaborations. Here Merck has obligations to make
milestone payments when certain objectives are reached. In the
unlikely event that all contract partners achieve all milestones, Merck
would be obligated to pay up to € 1,968 million (December 31, 2016:
€ 1,456 million) for the acquisition of intangible assets.
3,891
4,308
208
309
236
362
530
187
151
2,826
Obligations to acquire intangible assets and payment obligations from collaboration agreements
within one year
1,572
5 years
1,509
2
Dec. 31, 2016
1
Present value of future payments from finance lease
Total
more than
5 years
1-5 years
within 1 year
Dec. 31, 2016
€ million
277
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
530
1,176
106
137
4
3
1
4
2
1
Total
1-5 years
within 1 year
more than
2,826
3,328
1,387
287
Dec. 31, 2017
3,328
€ million
Remaining other financial obligations
-233
88
Net presentation
Netting
presentation
Gross
-155
-155
113
113
Net presentation
Netting
presentation
Gross
(40) Contingent liabilities
Derivative financial liabilities
Derivative financial assets
Dec. 31, 2016
€ million
Derivative financial liabilities
Derivative financial assets
Dec. 31, 2017
€ million
The following table presents the potential netting volume of the
reported derivative financial assets and liabilities:
275
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
14,790
4
88
-233
Contingent liabilities from legal disputes and tax matters
Other contingent liabilities
Potential netting volume
due to
Long-term purchase commitments
Future operating lease payments
Obligations to acquire intangible assets and payment obligations from collaboration agreements
Obligations to acquire property, plant and equipment
€ million
Other financial obligations comprised the following:
(41) Other financial obligations
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
276
Contingent liabilities pertaining to tax matters included various
non-German income and non-income-related tax matters that mainly
related to intragroup business transfers as well as legal disputes
attributable to the determination of earnings under tax law, customs
regulations, excise tax matters, and transfer pricing adjustments.
In addition, there were contingent liabilities from various legal dis-
putes with Merck & Co. of the United States (outside the United States
and Canada: Merck Sharp & Dohme (MSD)), among other things due
to breach of the co-existence agreement between the two companies
and/or trademark/name right infringement regarding the use of the
designation "Merck." An outflow of resources - except costs for legal
defense was not deemed sufficiently probable as of the balance
sheet date to justify the recognition of a provision. Since the contin-
gent liability from these legal disputes could not be reliably quantified
as of the balance sheet date, this matter was not taken into account
in the table presented above.
In addition, Bristol-Myers Squibb Co., USA, E.R. Squibb & Sons
L.L.C., USA, Ono Pharmaceutical Co., Ltd., Japan, and a private indi-
vidual filed suit in the United States District Court of Delaware
against Merck and Pfizer Inc., USA, (Pfizer) based on the allegation
that BavencioⓇ infringes a U.S. patent relating to methods of treating
tumors with anti-PD-L1 antibodies. Both Merck and Pfizer Inc. have
initiated legal steps to defend themselves. The criteria for the recog-
nition of a provision were not satisfied since utilization is currently not
considered probable.
Contingent liabilities from legal disputes included potential obliga-
tions, for which the probability of an outflow of resources did not
suffice to recognize a provision as of the balance sheet date. These
mainly related to obligations under civil law and antitrust law. The
potential civil law obligations primarily related to potential liabilities
to pay damages due to a legal dispute under antitrust law. It was
possible that Merck would be subject to claims for compensation for
damages asserted by health insurance companies due to excessively
high drug prices in case of a valid judgment under antitrust law.
2
Other financial obligations
1
66
Dec. 31, 2017
Potential net
amount
24
-170
-64
64
due to financial
collateral
due to
master netting
agreements
Potential netting volume
54
-96
60
-60
Potential net
amount
due to financial
collateral
agreements
master netting
Dec. 31, 2016
73
Interest component of finance leases
9,272
Future operating lease payments
The ongoing investigations are limited to the examination of
violations of EU merger control procedures and do not affect the
validity of the EU Commission's decision to approve the merger.
Subsequent to the balance sheet date, no further events of
special importance occurred that could have a material impact on
the net assets, financial position and results of operations.
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
281
Accounting and Measurement Policies
Based on management's updated assessment, the existing pro-
vision was increased to a mid double-digit million amount. The
expense was recorded under other operating expenses and allo-
cated to the Life Science business sector.
(51) Measurement policies
sheet are measured as follows:
Balance sheet item
Assets
Goodwill
Other intangible assets
With finite useful life
The main assets and liabilities disclosed in the consolidated balance
of significance to the analysis by the EU Commission. According to the
EU Commission, the innovation project should have been included in
the remedies package. A meeting of the cooperation procedure
between the EU Commission and Merck took place on February 5,
2018.
In connection with the antitrust review proceedings for the Sigma-
Aldrich acquisition, on July 6, 2017, Merck received notice from the
European Commission (EU Commission), in which the EU Commission
informed Merck of its preliminary conclusion that Merck and Sigma-
Aldrich allegedly transmitted incorrect and/or misleading information
within the scope of the acquisition of Sigma-Aldrich. The EU Commis-
sion received registration of the merger on April 21, 2015 and granted
clearance on June 15, 2015 subject to the condition that Merck and
Sigma-Aldrich divest parts of the European solvents and inorganic
chemicals businesses of Sigma-Aldrich in order to resolve antitrust
concerns. According to the preliminary viewpoint of the EU Commis-
sion communicated in the letter dated July 6, 2017, Merck and Sigma-
Aldrich withheld in this connection important information about an
innovation project allegedly relevant for certain laboratory chemicals
(50) Subsequent events
From January to December 2017, Merck KGaA performed services for
E. Merck KG with a value of € 0.9 million (2016: € 1.0 million), for
Emanuel-Merck-Vermögens-KG with a value of € 0.2 million (2016:
€ 0.2 million) and for E. Merck Beteiligungen KG with a value of
€ 0.1 million (2016: € 0.1 million). During the same period, E. Merck KG
performed services for Merck KGaA with a value of € 0.5 million (2016:
€ 0.5 million).
As of December 31, 2017, there were receivables from the
Venezuelan entities deconsolidated as of February 29, 2016 with a
carrying amount of € 22.7 million (December 31, 2016: € 25.7 million)
after impairment losses and liabilities with a carrying amount of
€ 21.5 million (December 31, 2016: € 24.2 million). Merck no longer
makes any deliveries to Venezuelan entities. From March to Decem-
ber 2016, essential drugs to treat cancer and multiple sclerosis were
provided to patients to a certain extent. Revenues are recognized
when payment is received and were consequently not included in the
stated receivables. From January to December 2017, the Merck Group
did not generate any revenues from these deliveries (March to Decem-
ber 2016: € 0.4 million). During the prior-year period, the cost of sales
of these deliveries totaled € 13.7 million.
As of December 31, 2017, there were receivables of € 8.3 million
(December 31, 2016: € 18.8 million) and liabilities of € 9.1 million
(December 31, 2016: € 12.1 million) vis-à-vis non-consolidated sub-
sidiaries. From January to December 2017, the Merck Group gener-
ated revenues of € 0.1 million (December 31, 2016: € 0.9 million)
with these companies. During the same period, expenses amounting
to € 0.8 million (December 31, 2016: € 6.1 million) were incurred as
a result of transactions with these companies.
Information on pension funds that are classified as defined bene-
fit plans in accordance with IAS 19 can be found in Note (26) "Pro-
visions for pensions and other post-employment benefits".
Information on Executive Board and Supervisory Board compen-
sation can be found in Note (48) "Executive Board and Supervisory
Board compensation". Activities above and beyond those set forth in
Note (48) such as, for example, the provision of services or the grant-
ing of loans, between companies of the Merck Group and members
of the Executive Board or the Supervisory Board of Merck KGaA, the
Executive Board or the Board of Partners of E. Merck KG or members
of their immediate families took place neither in 2017 nor 2016.
(48) Executive Board and Supervisory
Board compensation
The compensation of the Executive Board of Merck KGaA is paid by
the general partner, E. Merck KG. Furthermore, companies included
in these consolidated financial statements recorded expenses for the
period from January to December 2017 in the amount of € 3.5 million
(2016: € 3.0 million) for services provided by members of the Execu-
tive Board of Merck KGaA at those companies.
For the period from January to December 2017, fixed salaries
of € 6.0 million (2016: € 6.6 million), variable compensation of
€ 16.3 million (2016: € 16.8 million), and additional benefits of
€ 0.3 million (2016: € 0.2 million) were recorded for members of
the Executive Board of Merck KGaA by E. Merck KG and by companies
included in these consolidated financial statements. Furthermore,
releases of provisions for the Long-Term Incentive Plan for members
of the Executive Board of Merck KGaA resulted in income of € 1.8 mil-
lion (2016: expense of € 12.5 million from additions to provisions),
and additions to the pension provisions for members of the Executive
Board of Merck KGaA included current service costs of € 3.2 million
(2016: € 2.8 million) and past service costs of € 0.9 million (2016:
€ 3.5 million).
The compensation of the Supervisory Board amounting to
€ 868.3 thousand (2016: € 869.0 thousand) consisted of a fixed
portion of € 822.5 thousand (2016: € 822.5 thousand) and meeting
attendance compensation of € 45.8 thousand (2016: € 46.5 thou-
sand).
Further individualized information and details can be found in the
Compensation Report on pages 172 et seq.
(49) Information on preparation
and approval
The Executive Board of Merck KGaA prepared the consolidated
financial statements on February 14, 2018 and approved them for
forwarding to the Supervisory Board. The Supervisory Board has
the responsibility to examine the consolidated financial statements
and to declare whether it approves them.
280
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
With indefinite useful life or not yet available for use
Property, plant and equipment
Financial assets (current/non-current)
Held-to-maturity investments
Fair value
Amortized cost
Amortized cost
Undiscounted measurement based on tax rates that are expected to apply
to the period when the asset is realized or the liability is settled
Lower of cost and net realizable value
Amortized cost
Expected tax refunds based on tax rates that have been enacted
or substantively enacted by the end of the reporting period
Nominal value
Lower of carrying amount and fair value less costs to sell
282
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
Balance sheet item
Equity and liabilities
Provisions for pensions and other post-employment benefits
Other provisions (current/non-current)
Fair value
279
Amortized cost
Amortized cost
Available-for-sale financial assets
Loans and receivables
Derivative assets (financial transactions)
Derivative assets (operational)
Receivables from non-income related taxes
Other receivables
Deferred tax assets
Inventories
Trade accounts receivable
Income tax receivables
Cash and cash equivalents
Assets held for sale
Measurement principle
Acquisition cost (subsequent measurement: impairment-only approach)
Amortized cost
Amortized cost (subsequent measurement: impairment-only approach)
Amortized cost
Fair value
Financial liabilities (current/non-current)
Notes to the Consolidated Financial Statements
As of December 31, 2017, there were liabilities by Merck Financial
Services GmbH, Merck KGaA and Merck & Cie, Switzerland, to
E. Merck KG in the amount of € 1,349.2 million (December 31, 2016:
€ 1,186.3 million). The balances result mainly from mutual profit
transfers between Merck KGaA and E. Merck KG as well as the profit
transfer by Merck & Cie, Switzerland, to E. Merck KG. They included
financial liabilities of € 764.8 million (December 31, 2016: € 729.2 mil-
lion) which were subject to standard market interest rates. In addition,
as of December 31, 2017, Merck KGaA had receivables from E. Merck
Beteiligungen KG in the amount of € 140.9 million (December 31,
2016: € 123.7 million). Merck Financial Services GmbH had receiv-
ables from Merck Pensionstreuhandverein e.V. in the amount of
€ 0.1 million (December 31, 2016: € 0.1 million) and from Merck
Capital Asset Management Ltd., Malta, in the amount of € 0.0 million
(December 31, 2016: € 2.5 million). These included financial receiv-
ables of € 0.1 million (December 31, 2016: € 2.5 million), which were
subject to standard market interest rates. Neither collateral nor guar-
antees existed for any of the balances either in favor or to the dis-
advantage of the Merck Group.
thereof:
thereof:
Merck Group
KPMG Germany
Merck Group
KPMG Germany
2016
8.5
8.2
2.2
0.3
0.2
0.3
0.2
2.4
2017
Audits of financial statements
Other audit-related services
Tax consultancy services
Other services
€ million
6,786
6,240
3,726
3,873
15,073
15,109
1,563
1,352
51,990
50,242
278
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
(44) Auditor's fees
The costs of the auditors (KPMG) of the financial statements of the
Merck Group consisted of the following:
0.6
0.4
0.7
0.5
•
Biochrom GmbH, Berlin
• Chemitra GmbH, Darmstadt
⚫ Litec-LLL GmbH, Greifswald
• Merck Accounting Solutions & Services Europe GmbH, Darmstadt
• Merck Chemicals GmbH, Darmstadt
• Merck Consumer Health Holding GmbH, Darmstadt
• Merck Export GmbH, Darmstadt
• Merck Life Science GmbH, Eppelheim
• Merck Patent GmbH, Darmstadt
• Merck Selbstmedikation GmbH, Darmstadt
• Merck Serono GmbH, Darmstadt
• Merck Versicherungsvermittlung GmbH, Darmstadt
(47) Related-party disclosures
Related parties in respect of the Merck Group are E. Merck KG,
Emanuel-Merck-Vermögens-KG and E. Merck Beteiligungen KG. In
principle, direct or indirect subsidiaries of Merck KGaA, associates of
the Merck Group, jointly controlled companies where the Merck
Group is involved, as well as pension funds that are classified as
defined benefit plans in accordance with IAS 19 are also related
parties within the meaning of IAS 24. This also includes the com-
panies Merck Capital Asset Management Ltd., Malta, and Merck
Pensionstreuhandverein e.V. Members of the Executive Board and
the Supervisory Board of Merck KGaA, the Executive Board and the
Board of Partners of E. Merck KG as well as close members of their
families are also related parties.
Allergopharma Verwaltungs GmbH, Darmstadt
Consolidated Financial Statements
Allergopharma GmbH & Co. KG, Reinbek
•
1.0
0.9
1.4
8,878
Future finance lease payments
1.3
10.4
3.9
10.6
4.2
Other audit-related services pertain to various statutory or contrac-
tually agreed audits. Tax consultancy services encompass services
in connection with the preparation of tax returns, also for employees
delegated abroad. Other services comprises particularly advisory
services for employees delegated abroad.
(45) Corporate governance
The Statement of Compliance in accordance with section 161 of the
German Stock Corporation Act (Aktiengesetz) was published in the
corporate governance section of the website www.merckgroup.com/
investors → corporate governance in March 2017 and thus made per-
manently available.
(46) Companies opting for exemption
under section 264 (3) HGB or
section 264b HGB
The following companies, which have been consolidated in these
financial statements, opted for exemption:
•
Bonds and commercial paper
Other assets
Finance lease liabilities
1.168
1,275.923
35.538
1.195
1.090
1,279.345
35.571
1.102
123.070
134.669
121.127
Dec. 31, 2016
0.857
7.343
Dec. 31, 2017
0.887
7.791
2016
0.816
7.343
7.621
126.921
1.112
1,275.143
34.398
1.130
0.874
2017
Closing rate
Average annual rate
U.S. dollar (USD)
Taiwan dollar (TWD)
Bank loans
Liabilities to related parties
1.075
1,265.450
34.004
1.051
(54) Recognition of net sales
and other income
Goodwill is allocated to cash-generating units or groups of cash-
generating units and tested for impairment either annually or if there
are indications of impairment. The carrying amounts of the cash-
generating units or groups of cash-generating units are compared
with their recoverable amounts and impairment losses are recognized
where the recoverable amount is lower than the carrying amount.
The recoverable amount of a cash-generating unit is determined as
the higher of fair value less costs of disposal and value in use esti-
mated using the discounted cash flow method.
(56) Goodwill
Reimbursements for R&D are offset against research and devel-
opment costs.
The costs of research cannot be capitalized and are expensed in
full in the period in which they are incurred. As internally generated
intangible assets, it is necessary to capitalize development expenses
if the cost of the internally generated intangible asset can be reliably
determined and the asset can be expected to lead to future economic
benefits. The condition for this is that the necessary resources are
available for the development of the asset, technical feasibility of the
asset is given, its completion and use are intended, and marketability
is given. Owing to the high risks up to the time that pharmaceutical
products are approved, these criteria are not met in the Healthcare
business sector. Costs incurred after regulatory approval are usually
insignificant and are therefore not recognized as intangible assets.
In the Life Science and Performance Materials business sectors,
development expenses are capitalized as soon as the aforementioned
criteria have been met.
Research and development costs comprise the costs of research
departments and process development, the expenses incurred as a
result of research and development collaborations as well as the
costs of clinical trials (both before and after approval is granted).
(55) Research and development costs
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
Loans from third parties and other financial liabilities
284
Dividend income is recognized when the shareholders' right to
receive the dividend is established. This is normally the date of the
dividend resolution.
Royalty and license income is recognized when the contractual
obligation has been met.
Revenues from multiple-element arrangements (e.g. sales of
goods in combination with services) are recognized when the respec-
tive contract element is delivered or rendered.
In addition to revenue from the sale of goods, net sales also
include commission income, profit-sharing and in the Life Science
business sector revenue from services, but the volume involved is
insignificant. In the case of long-term service agreements, Merck
records revenues on a pro rata basis over the term of the agreement
or in accordance with the services rendered.
In the Healthcare business sector, products are often sold to pharma-
ceutical wholesalers and to a lesser extent directly to pharmacies or
hospitals. In the Life Science and Performance Materials business
sectors, products are largely sold to business customers, and to a
lesser extent to distributors.
Net sales are recognized net of sales-related taxes and sales
deductions. When sales are recognized, estimated amounts are taken
into account for expected sales deductions, for example rebates,
discounts and returns. The vast majority of Group sales are gener-
ated by the sale of goods.
Net sales are deemed realized once the goods are delivered or
the services have been rendered and the significant risks and rewards
of ownership have been transferred to the purchaser. In the case of
sales of equipment in the Life Science business sector, these pre-
conditions are only met after installation has been successfully
completed to the extent that the installation requires specialized
knowledge, does not represent a clear ancillary service and the rele-
vant equipment can only be used by the customer once successfully
set up.
Net sales and other income are recognized when the amount of
revenue can be measured reliably, it is probable that the economic
benefits will flow to the entity and when the following preconditions
have been met.
Interest income is recognized in the period in which it is earned.
(57) Other intangible assets
Liabilities from derivatives (financial transactions)
Other liabilities (current/non-current)
Expected tax payments based on tax rates that have been enacted
or substantively enacted by the end of the reporting period
Fair value
(52) Consolidation methods
The consolidated financial statements are based on the single-entity
financial statements of the consolidated companies as of the balance
sheet date, which were prepared applying consistent accounting
policies in accordance with IFRS.
Acquisitions are accounted for using the purchase method in
accordance with IFRS 3. Subsidiaries acquired and consolidated for
the first time were measured at the carrying values at the time of
acquisition. Differences resulting in this context are recognized as
assets and liabilities to the extent that their fair values differ from
the values carried in the financial statements. Any remaining positive
difference is recognized as goodwill within intangible assets.
In cases where a company was not acquired in full, non-controlling
interests are measured using the fair value of the proportionate share
of net assets. The option to measure non-controlling interests at fair
value on the date of their acquisition (full goodwill method) was not
utilized.
When additional shares in non-controlling interests are acquired, the
purchase price amount that exceeds the carrying amount of this
interest is recognized immediately in equity.
IFRS 11 is applied for joint arrangements. A joint arrangement
exists when, on the basis of a contractual arrangement, Merck and
third parties jointly control business activities. Joint control means
that decisions about the relevant activities require unanimous con-
sent. Joint arrangements are either joint operations or joint ventures.
Revenues and expenses as well as assets and liabilities from joint
operations are included in the consolidated financial statements on
a pro rata basis in accordance with Merck's rights and obligations.
By contrast, interests in joint ventures as well as in material associates
over which Merck has significant influence are included in accordance
with IAS 28 using the equity method of accounting.
Intragroup sales, expenses and income, as well as all receivables
and payables between the consolidated companies, are eliminated.
The effects of intragroup deliveries reported under non-current assets
and inventories are adjusted by eliminating any intragroup profits.
In accordance with IAS 12, deferred taxes are applied to these con-
solidation measures.
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
283
(53) Currency translation
The functional currency concept applies to the translation of financial
statements of consolidated companies prepared in foreign curren-
cies. The subsidiaries of the Merck Group generally conduct their
operations independently. The functional currency of these companies
is normally the respective local currency. Assets and liabilities are
measured at the closing rate, and income and expenses are measured
at weighted average annual rates in euros, the reporting currency.
Any currency translation differences arising during consolidation of
Group companies are recognized in equity. If Group companies are
deconsolidated, existing currency differences are reversed and reclas-
sified to profit or loss.
When the financial statements of consolidated companies are pre-
pared, business transactions that are conducted in currencies other
than the functional currency are recorded using the current exchange
rate on the date of the transaction. Foreign currency monetary items
(cash and cash equivalents, receivables and payables) in the year-
end financial statements of the consolidated companies prepared in
the functional currency are translated at the respective closing rates.
Exchange differences from the translation of monetary items are
recognized in the income statement with the exception of net invest-
ments in a foreign operation. Hedged items are likewise carried at
the closing rate. The resulting gains or losses are eliminated in the
consolidated income statement against offsetting amounts from the
fair value measurement of derivatives.
Currency translation was based on the following key exchange
rates:
1€ =
Undiscounted measurement based on tax rates that are expected to apply
to the period when the asset is realized or the liability is settled
Amortized cost
Settlement amount
Japanese yen (JPY)
Settlement amount
Liabilities from derivatives (operational)
Liabilities from non-income-related taxes
Other liabilities
Measurement principle
Projected unit credit method
Present value of the expenditures expected to be required to settle
the obligation
Amortized cost
Amortized cost
South Korean won (KRW)
Amortized cost
Amortized cost
Fair value
Amortized cost
Deferred tax liabilities
Trade accounts payable
Income tax liabilities
Liabilities directly related to assets held for sale
Fair value
Swiss franc (CHF)
British pound (GBP)
Acquired intangible assets are recognized at cost and are classified as
assets with finite and indefinite useful lives. Self-developed intangible
assets are only capitalized if the requirements specified by IAS 38
have been met. Intangible assets acquired in the course of business
combinations are recognized at fair value on the acquisition date.
If the development of intangible assets takes a substantial period of
time, the directly attributable borrowing costs incurred up until com-
pletion are capitalized as part of the costs.
lion) and were largely reported under cost of sales.
555
304
226
4,843
4,356
As of December 31, 2017, the Merck Group had 52,880 employees The breakdown of personnel by function was as follows:
(December 31, 2016: 50,348). The average number of employees
during the year was 51,990 (2016: 50,242).
Production
586
Administration
Supply Chain
Marketing and Sales
Other
Average number of employees
(43) Material costs
Material costs in 2017 amounted to € 2,463 million (2016: € 2,358 mil-
INTANGIBLE ASSETS WITH INDEFINITE USEFUL LIVES
AND INTANGIBLE ASSETS NOT YET AVAILABLE FOR USE
Intangible assets with indefinite useful lives and intangible assets
not yet available for use are not amortized; however they are tested
for impairment when a triggering event arises or at least once a
year. Here, the respective carrying amounts are compared with the
recoverable amount and impairments are recognized as required.
Impairment losses other than goodwill recognized on indefinite-life
intangible assets and intangible assets not yet available for use are
reversed if the original reasons for impairment no longer apply.
Research and Development
3,575
3,953
2016
Operating leasing agreements related mainly to leasing arrangements
to lease real estate, company fleet vehicles as well as operating and
office equipment. The payments resulting from operating leasing
agreements amounted to € 146 million (2016: € 132 million) and were
recorded as an expense in the reporting period.
(42) Personnel expenses/Headcount
Personnel expenses comprised the following:
€ million
Wages and salaries
Pension expenses
Compulsory social security contributions and special financial assistance
Personnel expenses
2
2
112
221
29
29
4
362
2017
2017
2016
Chinese renminbi (CNY)
15,570
INTANGIBLE ASSETS WITH FINITE USEFUL LIVES
Intangible assets with a finite useful life are amortized using the
straight-line method. The useful lives of customer relationships,
brand names and trademarks as well as marketing authorizations,
acquired patents, licenses and similar rights, and software are between
three and 24 years. Amortization of intangible assets and software is
allocated to the functional costs in the consolidated income statement.
An impairment test is performed if there are indications of impairment.
Impairment losses are determined using the same methodology as
for indefinite-life intangible assets. Impairment losses are reversed
if the original reasons for impairment no longer apply.
The marketing authorizations, patents, licenses and similar rights,
and other not yet available for use primarily relates to rights that
Merck acquired for active ingredients, products or technologies that
are still in development stages. Owing to the uncertainty as to the
extent to which these projects will ultimately lead to the marketing of
marketable products, the period for which the resulting capitalized
assets would generate an economic benefit for the company cannot
yet be determined.
100.00
Latvia
Merck Serono SIA
Riga
100.00
Lithuania
Merck Serono, UAB
Italy
100.00
Luxembourg
AZ Electronic Materials (Luxembourg) S. a. r. I.
Luxembourg
100.00
100.00
Arklow
100.00
Arklow
Milan
Vilnius
Italy
99.74
Allergopharma S. p.A.
Rome
100.00
Italy
Italy
BioControl Italia S. r. I.
Istituto di Ricerche Biomediche Antoine Marxer RBM S. p.A.
Rome
Sigma-Aldrich S. r. I.
100.00
100.00
Italy
Merck S. p.A.
Vimodrone
100.00
Italy
Merck Serono S. p. A.
Rome
Colleretto Giacosa
Luxembourg
Belgium
Luxembourg
Pietà
100.00
Pietà
Merck Capital Ltd.
Merck Capital Holding Ltd.
Malta
Malta
100.00
Luxembourg
Sigma-Aldrich S. a. r. I.
Luxembourg
100.00
Luxembourg
Sigma-Aldrich Global S. a. r. l.
Luxembourg
100.00
Luxembourg
100.00
Netherlands
BioControl Systems B. V.
Nieuwerkerk Ad Ijssel
Merck Ventures B. V.
Netherlands
Netherlands
Netherlands
Netherlands
100.00
Schiphol-Rijk
Merck Holding Netherlands B. V.
Ridgefield Acquisition S. a. r.l.
Netherlands
Amsterdam Zuidoost
Merck Chemicals B. V.
Netherlands
100.00
Schiphol-Rijk
Merck B. V.
Netherlands
100.00
100.00
Luxembourg
100.00
Luxembourg
100.00
Luxembourg
Merck Finanz S. a. r. I.
Luxembourg
100.00
Luxembourg
Merck Finance S. a. r.l.
Luxembourg
Luxembourg
100.00
Merck Chemicals Holding S. a. r. l.
Luxembourg
100.00
Luxembourg
Mats Finance S. a. r.l.
Luxembourg
100.00
100.00
Luxembourg
AZ Electronic Materials S. a. r. l.
Merck Holding S. a. r.l.
100.00
Millipore International Holdings, S. a. r.l.
Luxembourg
100.00
Luxembourg
Millipart S. a. r.l.
Luxembourg
100.00
Luxembourg
Luxembourg
Millilux S. a. r.l.
100.00
Luxembourg
Merck Re S. A.
Luxembourg
100.00
Luxembourg
Merck Invest SCS
Luxembourg
Luxembourg
Arklow
Saint Quentin Fallavier
Sigma-Aldrich Ireland Ltd.
100.00
Lyon
BioControl Systems S. a. r. I.
France
100.00
Helsinki
Sigma-Aldrich Finland OY
Finland
100.00
Espoo
Merck OY
Finland
100.00
Espoo
Merck Life Science OY
Finland
100.00
France
Tallinn
Gonnon S. A. S.
100.00
France
100.00
Lyon
Merck Médication Familiale S. A. S.
France
100.00
Fontenay s/Bois
Merck Chimie S. A. S.
France
100.00
Lyon
Merck Biodevelopment S.A. S.
France
100.00
Lyon
Laboratoire Médiflor S. A. S.
France
Lyon
Merck Serono OÜ
Estonia
100.00
Zagreb
Merck spol.s.r.o.
Merck d.o.o.
Czech Republic
Czech Republic
Croatia
100.00
Sofia
Merck Bulgaria EAD
Bulgaria
100.00
Overijse
Sigma-Aldrich BVBA/SPRL
Belgium
100.00
Overijse
Merck N. V.-S. A.
100.00
Prague
100.00
Sigma-Aldrich spol.s.r.o.
100.00
Frederiksberg
Survac ApS
Denmark
100.00
Soborg
Sigma-Aldrich Denmark ApS
Denmark
Merck Performance Materials S. A. S.
100.00
Merck Life Science A/S
Denmark
100.00
Soborg
Merck A/S
Denmark
100.00
Prague
Soborg
Trosly-Breuil
100.00
France
Merck Serono (Ireland) Ltd.
Ireland
Merck Millipore Ltd.
Ireland
Sigma-Aldrich Kft.
Hungary
100.00
Budapest
Merck Kft.
Hungary
100.00
Maroussi, Athens
Merck A.E.
Greece
100.00
Saint Quentin Fallavier
Sigma-Aldrich Holding S. a. r.l.
Ireland
Millipore Cork Unlimited Company
Budapest
Carrigtwohill
Shrawdine Limited
Ireland
(%)
Thereof:
Merck KGaA
Equity interest
(%)
Registered Office
Company
Ireland
France
Country
Ireland
Consolidated Financial Statements
292
100.00
Carrigtwohill
100.00
100.00
100.00
Dublin
Notes to the Consolidated Financial Statements
Silverberry Limited
100.00
Sigma-Aldrich Chimie SNC
Sigma-Aldrich Chimie S. a. r. l.
France
100.00
Molsheim
Millipore S.A. S.
France
100.00
Lyon
Merck Serono S. A. S.
France
100.00
Lyon
Merck Santé S. A. S.
France
99.84
Lyon
Merck S.A.
Saint Quentin Fallavier
100.00
France
Overijse
Merck Window Technologies B. V.
Vienna
100.00
Austria
Merck KGaA & Co. Werk Spittal
Spittal
100.00
99.00
100.00
Austria
Vienna
100.00
Belgium
Merck Chemicals N.V./S.A.
Overijse
100.00
Belgium
Merck Consumer Healthcare N. V.-S.A.
Sigma-Aldrich Handels GmbH
Serono Tri Holdings B. V.
100.00
Amsterdam
Merck Serono Ltd.
United Kingdom
100.00
London
Merck Serono Europe Ltd.
United Kingdom
Feltham
100.00
Merck Performance Materials Services UK Ltd.
United Kingdom
100.00
Feltham
Merck Investments Ltd.
United Kingdom
Feltham
100.00
United Kingdom
Millipore (U.K.) Ltd.
United Kingdom
100.00
Gillingham
SAFC Hitech Limited
United Kingdom
100.00
Gillingham
SAFC Biosciences Limited
United Kingdom
100.00
Feltham
Millipore UK Holdings LLP
United Kingdom
100.00
Feltham
100.00
Feltham
Merck Holding Ltd.
United Kingdom
100.00
London
London
Aberdeen
BioReliance U.K. Acquisition Limited
BioReliance Limited
BioControl Systems Limited
United Kingdom
United Kingdom
United Kingdom
100.00
Feltham
AZ Electronic Materials (UK) Ltd.
United Kingdom
100.00
Gillingham
100.00
Seven Seas Limited
100.00
Epichem Group Limited
100.00
Feltham
Merck Consumer Health Care Ltd.
United Kingdom
100.00
Nottingham
Merck Chemicals Ltd.
United Kingdom
100.00
Tunbridge Wells
Lamberts Healthcare Ltd.
United Kingdom
100.00
100.00
Gillingham
United Kingdom
Feltham
100.00
United Kingdom
United States
United States
Country
United States
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
294
100.00
St. Louis
Aldrich Chemical Foreign Holding LLC
United States
100.00
Milwaukee
Aldrich Chemical Co. LLC
United States
100.00
Oakville
United States
Sigma-Aldrich Canada Co.
United States
Company
Rocklin
100.00
Rockville
100.00
Bellevue
100.00
Seattle
100.00
Urbana
Equity interest
(%)
Registered Office
Cerilliant Corporation
BioControl Systems, Inc.
BioReliance Corporation
Cell Marque Corporation
Amnis Corp.
Aldrich-APL, LLC
United States
Aldrich Chemical Co. Ltd.
Canada
Burlington
100.00
Gillingham
Sigma-Genosys Limited
United Kingdom
100.00
Gillingham
Sigma-Aldrich Holdings Ltd.
United Kingdom
100.00
Gillingham
Sigma-Aldrich Financial Services Limited
United Kingdom
100.00
Gillingham
Sigma-Aldrich Company Limited
North America
100.00
Canada
Toronto
Natrix Separations, Inc.
Canada
100.00
Toronto
Millipore (Canada) Ltd.
Canada
100.00
Mississauga
EMD Inc.
Canada
100.00
Toronto
EMD Crop BioScience Canada Inc.
Canada
100.00
EMD Chemicals Canada Inc.
Sigma-Aldrich B. V.
United Kingdom
Istanbul
100.00
Moscow
Merck d.o.o. Beograd
Sigma-Aldrich Rus LLC
Merck LLC
Serbia
Moscow
Russia
100.00
Bucharest
Merck Romania S.R.L.
Romania
100.00
Algés
Russia
100.00
Belgrade
100.00
293
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
100.00
Madrid
Merck Chemicals and Life Science S. A. U.
Spain
100.00
Ljubljana
Merck d.o.o.
Slovenia
100.00
Bratislava
Merck spol.s.r.o.
Slovakia
Merck, S. A.
Portugal
100.00
Algés
Oslo
Merck Life Science AS
Norway
100.00
Zwijndrecht
Sigma-Aldrich Chemie N.V.
Netherlands
100.00
Zwijndrecht
100.00
Schiphol-Rijk
100.00
100.00
Eindhoven
100.00
100.00
Country
Norway
Oslo
Laquifa Laboratorios S.A.
Portugal
100.00
Poznan
Sigma-Aldrich Sp.z.o.o.
Poland
100.00
Warsaw
Merck Sp.z.o.0.
Poland
100.00
Wroclaw
Merck Business Solutions Europe Sp.z.o.o.
Poland
100.00
Sigma-Aldrich Norway AS
Spain
Spain
Sweden
Coinsins
SeroMer Holding SA
Switzerland
100.00
Coinsins
Merck Serono SA
Switzerland
100.00
Coinsins
Merck Performance Materials (Suisse) SA
Switzerland
100.00
Schaffhausen
Merck Biosciences AG
Switzerland
100.00
100.00
Switzerland
Buchs
Merck Ilac Ecza ve Kimya Ticaret AS
Turkey
100.00
Buchs
Sigma-Aldrich Production GmbH
Switzerland
100.00
St. Gallen
Sigma-Aldrich International GmbH
Switzerland
100.00
Buchs
Sigma-Aldrich Chemie GmbH
Switzerland
100.00
Sigma-Aldrich (Switzerland) Holding AG
100.00
Zug
Switzerland
Thereof:
Merck KGaA
Equity interest
(%)
Registered Office
Ares Trading SA
Allergopharma AG
Sigma-Aldrich Sweden AB
Merck Chemicals and Life Science AB
Merck AB
Sigma-Aldrich Quimica S. L.
Merck, S. L. U.
Company
Switzerland
Sweden
Sweden
Switzerland
(%)
Merck (Schweiz) AG
Madrid
Madrid
51.63
51.63
Altdorf
Merck & Cie
Switzerland
100.00
Aubonne
100.00
Therwil
100.00
Stockholm
100.00
Solna
Solna
100.00
100.00
Vienna
FINANCIAL ASSETS AND FINANCIAL LIABILITIES
AT FAIR VALUE THROUGH PROFIT OR LOSS
"Financial assets and financial liabilities at fair value through profit
or loss" can be both non-derivative and derivative financial instru-
ments. Financial instruments in this category are subsequently
measured at fair value. Gains and losses on financial instruments in
this measurement category are recognized directly in the consolidated
income statement. This measurement category includes an option
to designate non-derivative financial instruments as "at fair value
through profit or loss" on initial recognition (fair value option) or as
"financial instruments held for trading". The fair value option was
applied neither during the fiscal year nor the previous year. Merck only
assigns derivatives to the "held for trading" measurement category.
Special accounting rules apply to derivatives that are designated as
hedging instruments in a hedging relationship.
Austria
100.00
Australia
Sigma-Aldrich Pty. Ltd.
Castle Hill
100.00
China
Beijing Skywing Technology Co., Ltd.
Beijing
100.00
China
Merck Chemicals (Shanghai) Co., Ltd.
Shanghai
100.00
China
Merck Display Materials (Shanghai) Co., Ltd.
Shanghai
100.00
Thereof:
Merck KGaA
(%)
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
285
(58) Property, plant and equipment
Merck Chemicals and Life Science GesmbH
Merck Gesellschaft mbH
and equipment takes a substantial period of time, the attributable
borrowing costs incurred up until completion are capitalized as part
of the costs. In accordance with IAS 20, costs are reduced by the
amount of government grants in those cases where government
grants or subsidies have been paid for the acquisition or manufacture
of assets (grants related to assets). Grants related to expenses which
no longer offset future expenses are recognized in profit or loss.
Property, plant and equipment is depreciated by the straight-line
method over the useful life of the asset concerned. Depreciation of
property, plant and equipment is based on the following useful lives:
Castle Hill
Sigma-Aldrich Oceania Pty. Ltd.
Australia
100.00
Milwaukee
100.00
United States
Sigma-Genosys of Texas LLC
The Woodlands
100.00
United States
Supelco, Inc.
Bellefonte
100.00
Asia-Pacific (APAC)
Australia
USEFUL LIFE OF PROPERTY, PLANT AND EQUIPMENT
Merck Pty. Ltd.
100.00
Australia
Merck Serono Australia Pty. Ltd.
Sydney
100.00
Australia
Proligo Australia Pty. Ltd.
Castle Hill
100.00
Australia
SAFC Biosciences Pty. Ltd.
Castle Hill
Bayswater
Production buildings
Administration buildings
Plant and machinery
At Merck, cash flow hedges normally relate to highly probable
forecast transactions in foreign currency and to future interest pay-
ments. In cash flow hedges, the effective portion of the gains and
losses on the hedging instrument taking deferred taxes into consid-
eration is recognized in equity until the hedged expected cash flows
affect profit or loss. This is also the case if the hedging relationship
expires or is terminated before the hedged transaction occurs and
the occurrence of the hedged item remains likely. The ineffective
portion of a cash flow hedge is recognized directly in profit or loss.
(63) Contingent consideration
For contingent consideration that was contractually agreed with the
acquirer or seller within the context of the disposal or the acquisition
of businesses within the meaning of IFRS 3, the fair value of the claims
or obligations at the transaction date is recognized in the balance
sheet as financial assets available for sale or financial liabilities.
Contingent consideration in connection with the purchase of
individual assets outside of business combinations is recorded as a
financial liability only when the consideration is contingent upon
future events that are beyond Merck's control.
In cases where the payment of contingent consideration is within
Merck's control, the liability is recognized only as from the date when
a non-contingent obligation arises.
Contingent consideration upon the purchase of individual assets
primarily relates to future milestone payments in connection with
in-licensed intellectual property in the Healthcare business sector.
Changes in the fair value of financial assets from contingent consider-
ation are recorded as other operating income or other operating
expenses, except for changes due to interest rate fluctuations and
the effect from the unwinding of the discount.
The effect from the unwinding of the discount is reported as part
of the interest result; changes due to interest rate fluctuations are
reported in the consolidated statement of comprehensive income as
"fair value adjustments".
(64) Other non-financial assets
and liabilities
Other non-financial assets are carried at amortized cost. Allowances
are recognized for any credit risks. Long-term non-interest bearing
and low-interest receivables and liabilities are carried at their present
value. Other non-financial liabilities are carried at the amount to be
repaid.
(65) Deferred taxes
Deferred tax assets and liabilities result from temporary differences
between the carrying amount of an asset or liability in the IFRS and
tax balance sheets of consolidated companies as well as from consol-
idation activities, insofar as the reversal of these differences will occur
in the future. In addition, deferred tax assets are recorded insofar
as their utilization is probable in the foreseeable future.
The hedging relationship must be effective at all times, i.e. the
change in fair value of the hedging instrument almost fully offsets
changes in the fair value of the hedged item. Merck uses the dollar
offset method as well as regression analyses to measure hedge
effectiveness. Derivatives that do not or no longer meet the docu-
mentation or effectiveness requirements for hedge accounting,
whose hedged item no longer exists, or for which hedge accounting
rules are not applied are classified as "financial assets and liabilities
at fair value through profit or loss". Changes in fair value are then
recognized in profit or loss.
Deferred taxes are not recorded for temporary differences from
the initial recognition of assets or liabilities to the extent that the
transaction affects neither the profit (before income tax) under IFRS
nor the taxable profit and the transaction is not a business combi-
nation.
Deferred tax liabilities are recognized for temporary differences
arising from interests in subsidiaries or associates, unless the Group
is able to control the reversal of the temporary differences and it is
probable that the temporary differences will not reverse in the fore-
seeable future.
Deferred tax assets and liabilities are calculated based on the
expected tax rates and tax laws applicable during the period in which
the asset is realized or a liability settled. The carrying amount of
deferred tax assets is reviewed each year on the balance sheet date
and its value is lowered if it is no longer probable that sufficient tax-
able income is available in order to realize the asset either in full or in
part. Deferred tax assets and liabilities are only offset on the balance
sheet date if they meet the requirements of IAS 12.
288
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
(66) Inventories
Inventories are carried at the lower of cost or net realizable value.
When determining cost, the "first-in, first-out" (FIFO) and weighted
average cost formulas are used. In addition to directly attributable
unit costs, manufacturing costs also include overheads attributable
to the production process, which are determined on the basis of
normal capacity utilization of the production facilities.
Inventories are written down if the net realizable value is lower
than the acquisition or manufacturing cost carried in the balance
sheet. Since the inventories are for the most part not manufactured
within the scope of long-term production processes, the manufac-
turing costs do not include any borrowing costs.
Inventory prepayments are recorded under other current assets.
(67) Provisions for pensions and
other post-employment benefits
Provisions for pensions and other post-employment benefits are
recorded in the balance sheet in accordance with IAS 19. The obliga-
tions under defined benefit plans are measured using the projected
unit credit method. Under the projected unit credit method, dynamic
parameters are taken into account in calculating the expected benefit
payments after an insured event occurs; these payments are spread
over the entire period of service of the participating employees.
Annual actuarial opinions are prepared for this purpose. Actuarial
gains and losses resulting from changes in actuarial assumptions
and/or experience adjustments (the effects of differences between
the previous actuarial assumptions and what has actually occurred)
are recognized immediately in equity as soon as they are incurred,
taking deferred taxes into account. Consequently, the consolidated
balance sheet discloses - after deduction of the plan assets - the full
scope of the obligations while avoiding the fluctuations in expenses
that can result especially when the calculation parameters change.
The actuarial gains and losses recorded in the respective reporting
period are presented separately in the Statement of Comprehensive
Income.
In addition, deferred tax liabilities are not recognized for tempo-
rary differences that arise in connection with the initial recognition
of goodwill.
Sigma-Aldrich, Inc.
Merck uses derivatives solely to economically hedge recognized
assets or liabilities and forecast transactions. The hedge accounting
rules in accordance with IFRS are applied to some of these hedges.
A distinction is made between fair value hedge accounting and cash
flow hedge accounting. Designation of a hedging relationship requires
a hedged item and a hedging instrument. Merck currently only uses
derivatives as hedging instruments.
287
Operating and office equipment; other facilities
Useful life
maximum of 33 years
maximum of 40 years
6 to 25 years
3 to 10 years
The useful lives of the assets are reviewed regularly and adjusted if
necessary. If indications of a decline in value exist, an impairment test
is performed. If the reasons for an impairment loss no longer exist, a
reversal of the impairment loss recognized in prior periods is recorded.
(59) Leasing
Where non-current assets are leased and economic ownership lies
with Merck (finance lease), the asset is recognized at the present value
of the minimum lease payments or the lower fair value in accordance
with IAS 17 and depreciated over its useful life. The corresponding
payment obligations from future lease payments are recorded as lia-
bilities. If an operating lease is concerned, the associated expenses
are recognized in the period in which they are incurred.
Upon initial recognition, financial assets and financial liabilities are
measured at fair value, taking into account any transaction costs,
if necessary.
Financial assets are derecognized in part or in full if the contractual
rights to the cash flows from the financial asset have expired or have
been fulfilled or if control and substantially all the risks and rewards
of ownership of the financial asset have been transferred to a third
party. Financial liabilities are derecognized if the contractual obli-
gations have been discharged, cancelled, or expired. Cash and cash
equivalents are carried at nominal value.
(61) Financial instruments:
Categories and classes
of financial instruments
(60) Financial instruments: Principles
A financial instrument is a contractual agreement that gives rise to
a financial asset of one entity and a financial liability or an equity
instrument of another entity. A distinction is made between non-
derivative and derivative financial instruments.
(62) Financial instruments:
Derivatives and hedge
accounting
Merck accounts for regular way purchases or sales of nonderivative
financial instruments at the settlement date and of derivatives at the
trade date. Financial assets and liabilities are recorded when a Group
company becomes contract party to the financial instrument.
286
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
HELD-TO-MATURITY INVESTMENTS
"Held-to-maturity investments" are non-derivative financial assets
with fixed or determinable payments and a fixed maturity that are
quoted in an active market. To be able to assign a financial asset to
this measurement category, the entity must have the positive inten-
tion and ability to hold it to maturity. These investments are subse-
quently measured at amortized cost using the effective rate method.
If there is objective evidence that such an asset is impaired, an
impairment loss is recognized in profit or loss. Subsequent reversals
of impairment losses are also recognized in profit or loss up to the
amount of the amortized cost. At Merck, this measurement category
is used for current financial assets.
LOANS AND RECEIVABLES
"Loans and receivables" are non-derivative financial assets with fixed
or determinable payments that are not quoted in an active market.
They are subsequently measured at amortized cost using the effective
rate method. If there is objective evidence that such assets are
impaired, an impairment loss is recognized in profit or loss. Subse-
quent reversals of impairment losses are also recognized in profit
or loss up to the amount of amortized cost. Long-term non-interest-
bearing and low-interest receivables are measured at their present
value. Merck primarily assigns trade receivables, loans, and miscella-
neous other current and non-current receivables to this measurement
category. Merck always uses a separate allowance account for impair-
ment losses on trade and other receivables. Amounts from the allow-
ance account are recognized in the carrying amount of the correspond-
ing receivable as soon as this is derecognized due to irrecoverability.
AVAILABLE-FOR-SALE FINANCIAL ASSETS
"Available-for-sale financial assets" are those non-derivative financial
assets that are not assigned to the measurement categories "financial
assets and financial liabilities at fair value through profit or loss",
"held-to-maturity investments" or "loans and receivables". Financial
assets in this category are subsequently measured at fair value.
Generally, changes in fair value are recognized immediately in equity
and are only transferred to the consolidated income statement when
the financial asset is derecognized. Changes in the fair values of
contingent consideration resulting from adjustments to cash flow
estimated are recognized in profit or loss. Further explanations on
the accounting treatment of contingent consideration can be found
in Note (63) "Contingent consideration". If there is substantial evidence
of an asset impairment, the accumulated loss recognized immediately
in equity is to be reclassified to the consolidated income statement,
even if the financial asset has not been derecognized. Reversals of
impairment losses on previously impaired equity instruments are
recognized immediately in equity.
Reversals of impairment losses on previously impaired debt
instruments are recognized in profit or loss up to the amount of the
impairment loss. Any amount in excess of this is recognized directly
in equity. Financial assets in this category for which no fair value is
available or fair value cannot be reliably determined are measured
at cost less any accumulated impairment losses. Impairment losses
on financial assets carried at cost may not be reversed. At Merck,
this measurement category is used in particular for interest-bearing
securities, financial assets, contingent consideration, and financial
investments in equity instruments as well as interests in subsidiaries
that are not consolidated due to secondary importance (affiliates).
Both interests in non-consolidated subsidiaries as well as to some
extent financial investments in equity instruments are measured at
cost.
OTHER LIABILITIES
Other liabilities are non-derivative financial liabilities that are sub-
sequently measured at amortized cost except for cases of contingent
consideration. Differences between the amount received and the
amount to be repaid are amortized to profit or loss over the maturity
of the instrument. Merck primarily assigns financial liabilities such
as issued bonds and bank loans, trade payables, and miscellaneous
other non-derivative current and non-current liabilities to this cate-
gory.
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
Financial assets and liabilities are classified into the following IAS 39
measurement categories and IFRS 7 classes. The classes required
to be disclosed in accordance with IFRS 7 consist of the measurement
categories set out here. Additionally, cash and cash equivalents with
an original maturity of up to 90 days, finance lease liabilities, and
derivatives designated as hedging instruments are also classes in
accordance with IFRS 7.
United States
100.00
Laramie
EMD Serono, Inc.
Rockland
100.00
United States
Grzybowski Scientific Inventions Ltd.
Evanston
100.00
United States
KL Acquisition Corp.
St. Louis
100.00
United States
United States
United States
Millipore Asia Ltd.
100.00
Millipore UK Holdings I, LLC
Wilmington
100.00
United States
United States
Ormet Circuits, Inc.
United States
United States
United States
United States
Millipore UK Holdings II, LLC
Research Organics, LLC
SAFC Biosciences, Inc.
SAFC Carlsbad, Inc.
Wilmington
Wilmington
100.00
EMD Serono Research & Development Institute, Inc.
100.00
United States
EMD Accounting Solutions & Services America, Inc.
Rockland
100.00
United States
EMD Finance LLC
Wilmington
100.00
United States
EMD Holding Corp.
Rockland
Billerica
100.00
EMD Millipore Corporation
Burlington
100.00
United States
EMD Performance Materials Corp.
Philadelphia
100.00
United States
EMD Serono Holding, Inc.
Rockland
100.00
United States
United States
(68) Other provisions and
100.00
100.00
St. Louis
100.00
United States
Sigma-Aldrich Finance Co.
St. Louis
100.00
United States
United States
United States
United States
Sigma-Aldrich Foreign Holding Co.
Sigma-Aldrich Lancaster, Inc.
Sigma-Aldrich Manufacturing LLC
Sigma-Aldrich Missouri Insurance Company
Sigma-Aldrich Corporation
St. Louis
St. Louis
100.00
St. Louis
100.00
St. Louis
100.00
United States
Sigma-Aldrich Research Biochemicals, Inc.
Natick
100.00
United States
Sigma-Aldrich RTC, Inc.
100.00
San Diego
United States
St. Louis
Cleveland
100.00
Lenexa
100.00
Carlsbad
100.00
United States
SAFC Hitech, Inc.
SAFC, Inc.
Haverhill
100.00
Madison
100.00
100.00
United States
Rockland
100.00
United States
Sigma Chemical Foreign Holding LLC
St. Louis
100.00
United States
Sigma Redevelopment Corporation
St. Louis
100.00
United States
Sigma-Aldrich Co. LLC
Serono Laboratories, Inc.
contingent liabilities
Property, plant and equipment is measured at cost less depreciation
and impairments plus reversals of impairments. The component
approach is applied here in accordance with IAS 16. Subsequent
costs are only capitalized if it is probable that future economic bene-
fits will arise for the Group and the cost of the asset can be measured
reliably. The cost of self-constructed property, plant and equipment
is calculated on the basis of the directly attributable unit costs and an
appropriate share of overheads. If the construction of property, plant
Measurement of other provisions is based on the settlement
amount with the highest probability or, if a large number of similar
cases exist with respect to the provision being measured, it is based
on the expected value of the settlement amounts. Long-term provi-
sions are discounted and carried at their present value as of the
balance sheet date if the discount rate effect is material. To the extent
that reimbursement claims exist as defined in IAS 37, they are rec-
ognized separately as an asset if their realization is virtually certain
and the asset recognition criteria have been met.
Germany
Merck Patent GmbH
Darmstadt
100.00
Germany
Merck Performance Materials GmbH
Wiesbaden
100.00
Germany
Merck Real Estate GmbH
Darmstadt
100.00
100.00
100.00
Merck Schuchardt OHG
Hohenbrunn
100.00
100.00
Germany
Merck Selbstmedikation GmbH
Darmstadt
100.00
Germany
Merck Serono GmbH
Darmstadt
100.00
Germany
100.00
100.00
Merck Life Science GmbH
100.00
Germany
Merck Financial Services GmbH
Darmstadt
100.00
100.00
Germany
Merck Financial Trading GmbH
Gernsheim
100.00
100.00
Germany
Eppelheim
Merck Holding GmbH
100.00
100.00
Germany
Merck International GmbH
Darmstadt
100.00
100.00
Germany
Merck Internationale Beteiligungen GmbH
Darmstadt
100.00
Germany
Gernsheim
100.00
Germany
Darmstadt
100.00
Germany
Sigma-Aldrich Grundstücks GmbH & Co. KG
Steinheim
100.00
Germany
Sigma-Aldrich Logistik GmbH
Steinheim
100.00
Germany
100.00
Sigma-Aldrich Produktions GmbH
Taufkirchen
Steinheim
Germany
Sigma-Aldrich Verwaltungs GmbH
Steinheim
100.00
100.00
Other European
Countries
Austria
Allergopharma Vertriebsgesellschaft m.b.H.
Vienna
100.00
Austria
100.00
Merck Versicherungsvermittlung GmbH
Sigma-Aldrich Chemie Holding GmbH
100.00
Provisions are recognized in the balance sheet if it is more likely than
not that a cash outflow will be required to settle the obligation and
the amount of the obligation can be measured reliably. The carrying
amount of other provisions takes into account the amounts required
to cover future payment obligations, recognizable risks and uncertain
obligations of the Merck Group to third parties.
100.00
Germany
Merck Vierte Allgemeine Beteiligungsgesellschaft mbH
Gernsheim
100.00
Germany
Merck Wohnungs- und Grundstücksverwaltungsgesellschaft mbH
Darmstadt
100.00
100.00
Consolidated Financial Statements
Germany
Notes to the Consolidated Financial Statements
Country
Company
Germany
Sigma-Aldrich Biochemie GmbH
Germany
Sigma-Aldrich Chemie GmbH
Registered Office
Steinheim
Steinheim
Equity interest
(%)
Thereof:
Merck KGaA
(%)
100.00
291
Darmstadt
100.00
Germany
(%)
Merck KGaA
(%)
Germany
Merck KGaA
Darmstadt
Parent
Company
Germany
Germany
AB Allgemeine Pensions GmbH & Co. KG
Allergopharma GmbH & Co. KG
Zossen
100.00
100.00
Registered Office
Reinbek
Germany
Allergopharma Verwaltungs GmbH
Darmstadt
100.00
100.00
Germany
Biochrom GmbH
Berlin
100.00
Germany
Chemitra GmbH
Darmstadt
100.00
100.00
Equity interest
Germany
Merck Export GmbH
Contingent liabilities comprise not only possible obligations arising
from past events and whose existence is subject to the occurrence
of uncertain future events, but also present obligations arising from
past events where an outflow of resources embodying economic
benefits is not probable or where the amount of the obligation cannot
be measured with reliability. Contingent liabilities that were not
assumed within the context of a business combination are not recog-
nized in the consolidated balance sheet. Unless the possibility of an
outflow of resources embodying economic benefits is remote, infor-
mation on the relevant contingent liabilities is disclosed in the notes.
In this context, the present value of the future settlement amount
is used as the basis for measurement. The settlement amount is
determined in accordance with the rules set out in IAS 37 and is
based on the best estimate.
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
289
(69) Share-based compensation
programs
-
Provisions have been set up for obligations from long-term variable
compensation programs (Merck Long-Term Incentive Plan). These
share-based compensation programs with cash settlement are
aligned not only with target achievement based on key performance
indicators, but above all also with the long-term performance of
Merck shares. Certain executives and employees could be eligible to
receive a certain number of virtual shares Merck Share Units
(MSUS) - at the end of a three-year performance cycle. The number
of MSUS that could be received depends on the individual grant
defined for the respective person and the average closing price of
Merck shares in XetraⓇ trading during the last 60 trading days prior
to January 1 of the respective performance cycle (reference price).
In order for members of top management to receive payment for
the 2015 and 2016 tranches, they must personally own an invest-
ment in Merck shares dependent on their respective fixed annual
compensation. For the 2017 tranche, an obligatory personal invest-
ment is not a precondition for a payout. The personal investment for
top management was defined in 2017 in a separate Share Ownership
Guideline.
When the three-year performance cycle ends, the number of
MSUS to then be granted is determined based on the development
of defined key performance indicators (KPIs).
For the 2015 and 2016 tranches, these are on the one hand the
performance of the Merck share price compared to the performance
of the DAX® with a weighting of 70%, and on the other hand the
development of the EBITDA pre margin during the performance cycle
as a proportion of a defined target value with a weighting of 30%.
Thereof:
As of fiscal 2017, the program conditions were modified. For the
2017 tranche, the performance of the Merck share price is compared
with the performance of the DAX® with a weighting of 50%, and the
development of the EBITDA pre margin during the performance cycle
as a proportion of a defined target value with a weighting of 25%.
The development of organic sales growth as a proportion of a defined
target value with a weighting of 25% is a new key performance indi-
cator now taken into account.
The fair value of the obligations is recalculated on each balance
sheet date by an external expert using a Monte Carlo simulation
based on the previously described KPIs. The expected volatilities are
based on the implicit volatility of Merck shares and the DAX® in
accordance with the remaining term of the respective tranche. The
dividend payments incorporated into the valuation model orient
towards medium-term dividend expectations.
The Executive Board members have their own Long-Term Incentive
Plan, the conditions of which largely correspond to the Long-Term
Incentive Plan described here. A description of the plan for the Exec-
utive Board can be found in the compensation report, which is part of
the Statement on Corporate Governance.
On the occasion of the 350th anniversary of the company in 2018,
a promise was made to grant Merck shares worth € 350 to every
eligible Merck Group employee. For the Merck share grant in 2018,
the required shares will be purchased on the stock market by a third
party on behalf of Merck and then transferred to the eligible employ-
ees. In accordance with IFRS 2, the promise led to personnel expenses
as well as to a corresponding increase in retained earnings in equity.
290
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
List of shareholdings
(70) List of shareholdings
The shareholdings of Merck KGaA as of December 31, 2017 are
presented in the following table:
Country
Company
I. Fully consolidated companies
Depending on the development of the KPIs, at the end of the respec-
tive performance cycle the eligible participants are granted between
0% and 150% of the MSUS they could be eligible to receive. Based
on the MSUS granted, the eligible participants receive a cash payment
at a specified point in time in the year after the three-year perfor-
mance cycle has ended. The value of a granted MSU, which is relevant
for payment, corresponds to the average closing price of Merck
shares in Xetra® trading during the last 60 trading days prior to
January 1 after the performance cycle. Whereas the payout for the
2015 tranche is limited to three times the reference price and the
payout for the 2016 tranche is limited to twice the reference price,
the payout for the 2017 tranche is limited to two and a half times
the individual grant.
100.00
Round Rock
Emedia Export Company mbH
Merck Accounting Solutions & Services Europe GmbH
Darmstadt
100.00
100.00
Germany
Merck Chemicals GmbH
Darmstadt
100.00
Germany
Merck China Chemicals Holding GmbH
Darmstadt
Germany
Germany
Merck Consumer Health GmbH
100.00
Germany
Merck Consumer Health Holding Germany GmbH
Darmstadt
100.00
100.00
Germany
Merck Consumer Health Holding GmbH
Darmstadt
100.00
100.00
Germany
Darmstadt
100.00
100.00
100.00
100.00
Darmstadt
Germany
IHS - Intelligent Healthcare Solutions GmbH
Darmstadt
100.00
Germany
Gernsheim
Greifswald
100.00
100.00
Germany
Germany
Germany
Litec-LLL GmbH
Darmstadt
Germany
Merck 12. Allgemeine Beteiligungs-GmbH
Merck 13. Allgemeine Beteiligungs-GmbH
Merck 15. Allgemeine Beteiligungs-GmbH
Merck 16. Allgemeine Beteiligungs-GmbH
Merck 20. Allgemeine Beteiligungs-GmbH
Merck 21. Allgemeine Beteiligungs-GmbH
Darmstadt
100.00
Darmstadt
100.00
Darmstadt
100.00
100.00
Darmstadt
Germany
Germany
100.00
Independent Auditor's Report
We have audited the consolidated financial statements of MERCK
Kommanditgesellschaft auf Aktien, Darmstadt, and its subsidiaries
(the Group) which comprise the consolidated balance sheet as at
December 31, 2017, the consolidated income statement, consoli-
dated statement of comprehensive income, consolidated statement
of changes in net equity and consolidated cash flow statement for
the financial year from January 1, 2017 to December 31, 2017, and
notes to the consolidated financial statements, including a summary
of significant accounting policies. In addition, we have audited the
combined management report at MERCK Kommanditgesellschaft auf
Aktien for the financial year from January 1, 2017 to December 31,
2017.
Key audit matters are those matters that, in our professional judg-
ment, were of most significance in our audit of the consolidated
financial statements for the financial year from January 1, 2017 to
December 31, 2017. These matters were addressed in the context
of our audit of the consolidated financial statements as a whole,
and in forming our opinion thereon; we do not provide a separate
opinion on these matters.
MEASUREMENT OF THE VARIABLE PURCHASE PRICE
RECEIVABLE FROM THE SALE OF THE BIOSIMILARS
BUSINESS ACTIVITIES
301
Key Audit Matters in the Audit of the
Consolidated Financial Statements
In our opinion, on the basis of the knowledge obtained in the audit,
Basis for the Opinions
Pursuant to Section 322 (3) sentence 1 HGB, we declare that our
audit has not led to any reservations relating to the legal compliance
of the consolidated financial statements and of the combined manage-
ment report.
⚫ the accompanying consolidated financial statements comply, in all
material respects, with the IFRSS as adopted by the EU, and the
additional requirements of German commercial law pursuant to
Section 315e (1) HGB [Handelsgesetzbuch: German Commercial
Code] and, in compliance with these requirements, give a true and
fair view of the assets, liabilities, and financial position of the Group
as of December 31, 2017 and of its financial performance for the
financial year from January 1, 2017 to December 31, 2017, and
⚫ the accompanying combined management report as a whole pro-
vides an appropriate view of the Group's position. In all material
respects, this combined management report is consistent with the
consolidated financial statements, complies with German legal
requirements and appropriately presents the opportunities and
risks of future development.
Explanatory notes on the sale of the Biosimilars business activities
can be found in note 4 and 6 of the notes to the consolidated financial
statements.
We conducted our audit of the consolidated financial statements
and of the combined management report in accordance with Section
317 HGB and the EU Audit Regulation No. 537/2014 (referred to
subsequently as "EU Audit Regulation") and in compliance with
German Generally Accepted Standards for Financial Statement
Audits promulgated by the Institut der Wirtschaftsprüfer [Institute
of Public Auditors in Germany] (IDW). Our responsibilities under
those requirements and principles are further described in the
"Auditor's Responsibilities for the Audit of the Consolidated Financial
Statements and of the Combined Management Report" section of our
auditor's report. We are independent of the group entities in accord-
ance with the requirements of European law and German commercial
and professional law, and we have fulfilled our other German pro-
fessional responsibilities in accordance with these requirements. In
addition, in accordance with Article 10 (2) point (f) of the EU Audit
Regulation, we declare that we have not provided non-audit services
prohibited under Article 5 (1) of the EU Audit Regulation. We believe
that the evidence we have obtained is sufficient and appropriate to
provide a basis for our opinions on the consolidated financial state-
ments and on the combined management report.
Financial statement risk
RECOGNITION AND MEASUREMENT OF INCOME TAX
LIABILITIES AND DEFERRED TAX LIABILITIES
Explanatory notes on the recognition and measurement of income
tax liabilities and deferred tax liabilities can be found in notes 6, 14,
31 and 40 of the notes to the consolidated financial statements.
For the purpose of determining the fair value of these variable pay-
ments, Merck made assumptions about the progress and expected
completion of clinical studies, on the success of potential product
launches, and on the potential earnings development of these pro-
ducts. In addition to the assessment of whether these events will
occur at all, Merck made assumptions about the timing of such
events. Furthermore, a distinction had to be made for the different
components of potentially realizable variable payments, namely
whether they represent payments for services still to be rendered by
Merck, or elements of the purchase price for the Biosimilars business
activities that were sold. The allocation of the purchase price receiv-
able (including variable components) to the respective contractual
components is to be made at relative fair values and the determina-
tion of the relative fair values is subject to judgment. An external
expert engaged by Merck reflected the contractual agreements and
the assumptions made in a binomial valuation model suitable for this
purpose.
In light of the extent of estimates and judgment included in the
assumptions as well as the complexity of the valuation model, there
is a risk for the consolidated financial statements that the reported
variable purchase price receivable and the resulting gain on disposal
from the sale of the Biosimilars business activities were not accurately
determined.
Our audit approach
In our audit of the variable purchase price receivable from the sale of
the Biosimilars business activities, we involved our valuation experts.
In a first step, we scrutinized the distinction whether the variable
earn-out payments represent payments for services still to be ren-
dered by Merck, or whether they represent components of the pur-
chase price for the Biosimilars business activities that were sold. For
this purpose, we referred to the contractual agreements to assess
whether the services to be rendered had been fully identified and
whether the purchase price components allocated to the services still
to be rendered were in line with their respective relative fair values.
In another step, we assessed the reasonableness of the key assump-
tions used for the measurement of the variable purchase price receiv-
able. In assessing the assumptions used to predict the progress and
the expected completion of clinical studies as well as the success of
potential product launches, we inspected external studies on the
subject matter of valuation of biosimilars development activities,
inspected documents on the clinical studies that were transferred to
Fresenius, and we performed inquiries of management and of
employees in the Company's controlling and the alliance manage-
ment departments. We used general and sector-specific market
expectations and market studies to assess the revenue forecasts
used in the valuation model. We compared the assumptions and
parameters underlying the capital costs used in the valuation model,
in particular the risk-free interest rate, the market risk premium and
the unlevered beta factor, with our own assumptions and publicly
available data.
To ensure the arithmetical accuracy of the valuation model and con-
formity of the applied valuation method with the applicable valuation
principles, we used a risk-based audit approach to recalculate the
Company's calculations on a sample basis. We also assessed whether
the contractual components were appropriately reflected in the valu-
ation model. Furthermore, we assessed the competence, capabilities
and objectivity of the external experts engaged by Merck.
Our conclusions
The valuation method used to determine and measure the variable
purchase price receivable from the sale of the Biosimilars business
activities is appropriate. The assumptions underlying the valuation
model are reasonable.
Financial statement risk
As of December 31, 2017, the balance sheet of the Company includes
current income tax liabilities in the amount of EUR 1,059 million and
deferred tax liabilities of EUR 1,489 million. In addition, other non-
current liabilities include EUR 99 million of income tax liabilities.
-
As consideration for the sale of the Biosimilars business activities to
subsidiaries of Fresenius SE & Co. KGaA (Fresenius), Merck received
a payment of EUR 156 million as well as the right to contingent mile-
stone payments and additional royalties based on future product
revenue generated by Fresenius from the Biosimilars business activ-
ities. The gain on the disposal of the Biosimilars business activities
amounted to EUR 319 million.
Opinions
Thereof:
Merck KGaA
TO MERCK Kommanditgesellschaft auf Aktien, Darmstadt
Marcus Kuhnert
ан
Walter Galinat
Merck operates in different jurisdictions with different legal systems.
The application of local regulations on income tax, tax incentives and
transfer pricing rules is complex. The recognition and measurement of
income tax liabilities require Merck to exercise judgment in assessing
tax matters and to make estimates regarding uncertain tax positions.
(%)
Yavne
69.00
7.75
Responsibility Statement
299
Responsibility Statement.
To the best of our knowledge, and in accordance with the applica-
ble reporting principles, the consolidated financial statements of
the Merck Group give a true and fair view of the assets, liabilities,
financial position and profit or loss of the Group, and the combined
Darmstadt, February 14, 2018
management report includes a fair review of the development and
performance of the business and the position of the Group, together
with a description of the material opportunities and risks associated
with the expected development of the Group.
S. Quan
Stefan Oschmann
Udit Batray
Udit Batra
1Behmmm
Kai Beckmann
Belén Garijo
Marus вишива
beukenst
Marcus Kuhnert
он
Walter Galinat
300
Independent Auditor's Report
Note: This is a translation of the German original. Solely the original text in German language is authoritative.
Independent Auditor's Report
Report on the Audit of the Consolidated Financial
Statements and of the Combined Management Report
302
As of December 31, 2017, provisions for legal disputes amount to
EUR 526 million, which among others include provisions for patent
disputes.
The measurement of income tax liabilities as well as the assessment
of unrecognized contingent tax liabilities are subject to judgment
and estimation uncertainty. Among others, this relates to intra-group
business transfers, legal disputes attributable to the determination
of earnings under tax law, and transfer pricing adjustments. Merck
routinely engages external experts to support its own risk assess-
ment with expert opinions from tax specialists.
Our conclusions
The assumptions for the measurement of the provisions for patent
disputes are reasonable. The disclosures in the notes to the con-
solidated financial statements appropriately illustrate the key
assumptions.
Other Information
Management is responsible for the other information. The other infor-
mation comprises the annual report, with the exception of the
audited consolidated financial statements and combined manage-
ment report and our auditor's report.
Our opinions on the consolidated financial statements and on the
combined management report do not cover the other information,
and consequently we do not express an opinion or any other form
of assurance conclusion thereon.
In connection with our audit, our responsibility is to read the other
information and, in so doing, consider whether the other information
⚫is materially inconsistent with the consolidated financial state-
ments, with the combined management report or our knowledge
obtained in the audit, or
• otherwise appears to be materially misstated.
Responsibilities of Management and
the Supervisory Board for the
Consolidated Financial Statements and
the Combined Management Report
Management is responsible for the preparation of the consolidated
financial statements that comply, in all material respects, with IFRSS
as adopted by the EU and the additional requirements of German
commercial law pursuant to Section 315e (1) HGB and that the
consolidated financial statements, in compliance with these require-
ments, give a true and fair view of the assets, liabilities, financial
position, and financial performance of the Group. In addition,
management is responsible for such internal control as they have
determined necessary to enable the preparation of consolidated
financial statements that are free from material misstatement,
whether due to fraud or error.
304
Independent Auditor's Report
In preparing the consolidated financial statements, management is
responsible for assessing the Group's ability to continue as a going
concern. They also have the responsibility for disclosing, as applica-
ble, matters related to going concern. In addition, they are respon-
sible for financial reporting based on the going concern basis of
accounting unless there is an intention to liquidate the Group or to
cease operations, or there is no realistic alternative but to do so.
Furthermore, management is responsible for the preparation of the
combined management report that, as a whole, provides an appro-
priate view of the Group's position and is, in all material respects,
consistent with the consolidated financial statements, complies with
German legal requirements, and appropriately presents the oppor-
tunities and risks of future development. In addition, management
is responsible for such arrangements and measures (systems) as
they have considered necessary to enable the preparation of a com-
bined management report that is in accordance with the applicable
German legal requirements, and to be able to provide sufficient
appropriate evidence for the assertions in the combined management
report.
In addition, we assessed whether the Company's explanations on
the measurement of provisions for patent disputes in the notes to
the consolidated financial statements include appropriate and com-
plete disclosures on the key assumptions.
The supervisory board is responsible for overseeing the Group's
financial reporting process for the preparation of the consolidated
financial statements and of the combined management report.
Our objectives are to obtain reasonable assurance about whether
the consolidated financial statements as a whole are free from mate-
rial misstatement, whether due to fraud or error, and whether the
combined management report as a whole provides an appropriate
view of the Group's position and, in all material respects, is consist-
ent with the consolidated financial statements and the knowledge
obtained in the audit, complies with the German legal requirements
and appropriately presents the opportunities and risks of future
development, as well as to issue an auditor's report that includes our
opinions on the consolidated financial statements and on the com-
bined management report.
Reasonable assurance is a high level of assurance, but is not a guar-
antee that an audit conducted in accordance with Section 317 HGB
and the EU Audit Regulation and in compliance with German Gener-
ally Accepted Standards for Financial Statement Audits promulgated
by the Institut der Wirtschaftsprüfer (IDW) will always detect a mate-
rial misstatement. Misstatements can arise from fraud or error and
are considered material if, individually or in the aggregate, they could
reasonably be expected to influence the economic decisions of users
taken on the basis of these consolidated financial statements and
this combined management report.
We exercise professional judgment and maintain professional skep-
ticism throughout the audit. We also:
•
Identify and assess the risks of material misstatement of the con-
solidated financial statements and of the combined management
report, whether due to fraud or error, design and perform audit
procedures responsive to those risks, and obtain audit evidence
that is sufficient and appropriate to provide a basis for our opin-
ions. The risk of not detecting a material misstatement resulting
from fraud is higher than for one resulting from error, as fraud may
involve collusion, forgery, intentional omissions, misrepresenta-
tions, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit
of the consolidated financial statements and of arrangements and
measures (systems) relevant to the audit of the combined manage-
ment report in order to design audit procedures that are appropri-
ate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of these systems.
• Evaluate the appropriateness of accounting policies used by
management and the reasonableness of estimates made by
management and related disclosures.
• Conclude on the appropriateness of management's use of the
going concern basis of accounting and, based on the audit evidence
obtained, whether a material uncertainty exists related to events
or conditions that may cast significant doubt on the Group's ability
to continue as a going concern. If we conclude that a material
uncertainty exists, we are required to draw attention in the audi-
tor's report to the related disclosures in the consolidated financial
statements and in the combined management report or, if such
disclosures are inadequate, to modify our respective opinions. Our
conclusions are based on the audit evidence obtained up to the
date of our auditor's report. However, future events or conditions
may cause the Group to cease to be able to continue as a going
concern.
•
Obtain sufficient appropriate audit evidence regarding the financial
information of the entities or business activities within the Group
to express opinions on the consolidated financial statements and
on the combined management report. We are responsible for the
direction, supervision and performance of the group audit. We
remain solely responsible for our opinions.
• Evaluate the consistency of the combined management report with
the consolidated financial statements, its conformity with [German]
law, and the view of the Group's position it provides.
• Perform audit procedures on the prospective information presented
by management in the combined management report. On the basis
of sufficient appropriate audit evidence we evaluate, in particular,
lenkunst
Auditor's Responsibilities for the
Audit of the Consolidated Financial
Statements and of the Combined
Management Report
Independent Auditor's Report
To ensure arithmetical accuracy of the valuation model used, we used
a risk-based audit approach to recalculate the Company's calculations
on a sample basis.
Our audit approach
In particular, the US tax reform, which was enacted on December
22, 2017, had a significant impact on the recognition and measure-
ment of income tax liabilities and deferred tax liabilities as of Decem-
ber 31, 2017. The revaluation of deferred tax liabilities resulted in a
tax benefit of EUR 1,020 million. However, the US tax reform also
gave rise to an additional income tax liability in the amount of
EUR 114 million due to the new rules on the taxation of profits of
foreign subsidiaries.
There is a risk for the financial statements that income tax liabilities
and deferred tax liabilities are not fully recognized or not appropriately
measured.
Our audit approach
We involved our own specialists in international, particularly US tax
law into the audit team in order to evaluate Merck's assessment of
tax risks, the related opinions of external experts engaged by Merck
and the impact of the US tax reform.
We obtained an understanding of existing tax risks through inquiry
of management of the affected group companies and employees of
the tax department. We assessed the competence, capabilities and
objectivity of the external experts and evaluated their expert opinions.
In addition, we analyzed correspondence with the relevant tax
authorities and assessed the assumptions underlying the determina-
tion of income tax liabilities based on our knowledge and experience
of how the relevant legal requirements are currently applied by the
tax authorities and courts. We have scrutinized Merck's approach
regarding the recognition and measurement of deferred tax liabilities,
based on laws and regulations enacted as of the reporting date, and
performed recalculations.
Our conclusions
The valuation model and assumptions underlying the recognition and
measurement of income tax liabilities are reasonable. The approach
regarding the recognition and measurement of deferred tax liabilities
(in particular, with respect to the impact of the US tax reform) is
adequate.
IMPAIRMENT TESTING OF GOODWILL
Explanatory notes on the impairment tests can be found in note 6 of
the notes to the consolidated financial statements.
Financial statement risk
Due to the acquisition of Sigma-Aldrich Corporation, USA, in Novem-
ber 2015, goodwill, in particular for the cash-generating unit Life
Science, increased significantly. In aggregate, goodwill amounts to
EUR 13,582 million and thus represents 38% of the Group's total
assets as of December 31, 2017, with EUR 10,519 million of this
attributable to Life Science.
Goodwill is to be tested for impairment at least once a year, and may
need to be tested ad hoc if necessary. In performing the goodwill
impairment test, Merck primarily determines the value in use by
means of a discounted cash flow method. The valuation model used
to determine the value in use is complex and the result of this val-
uation is highly dependent on the projection of future net cash flows
(taking into account future revenue growth, profit margins, exchange
rates and long-term growth rates) and the discount factor used, and
therefore is subject to significant estimation uncertainty.
As supporting evidence for the estimated expenditure required to
settle the patent disputes, we obtained written confirmations from
external legal counsel engaged by Merck to obtain an understanding
of the current status of the pending legal proceedings, reviewed
correspondence with the plaintiffs and relevant courts and other
authorities, and also assessed underlying documents and minutes.
In this context we also interviewed the Company's in-house patent
counsel, employees in Merck's controlling and accounting depart-
ments, and verified the plausibility and consistency of the explana-
tions obtained with the determination of the best estimate of the
expenditure required to settle the disputes.
There is a risk for the financial statements that an existing goodwill
impairment loss was not recognized as of the reporting date. In
addition, there is a risk that the related disclosures in the notes to the
consolidated financial statements are not complete and appropriate.
We applied a risk-based approach to our audit. Using our own sen-
sitivity analyses, we assessed the extent to which the goodwill of
each cash generating unit would still be sufficiently covered by the
respective values in use if assumptions and parameters underlying
the calculations were to change in a manner that is deemed possible.
On the basis of these analyses, our audit particularly focused on the
cash-generating unit Life Science.
We reconciled the expected net cash flows underlying the value in
use calculations with the current medium-term plan approved by
management. To assess the assumptions used in preparing the
medium-term plan, we obtained an understanding of the planning
process through discussions with company representatives, including
corporate management and representatives from the corporate divi-
sions and the research and development department, we assessed
the plausibility and consistency of the explanations received with the
projections, and we compared the assumptions used with the expec-
tations of external analysts and sources.
As part of our audit of the discount factor, we analyzed the peer
group used. With regard to other assumptions and parameters (e.g.
risk-free interest rate, beta factor, market risk premium), we com-
pared those assumptions and parameters with our own assumptions
and publicly available data to assess whether these were appropriate
and whether they were within the range of external recommendations,
to the extent available. In addition, we verified the calculation model
used to determine the discount factor.
Independent Auditor's Report
303
We assessed the appropriateness of the valuation model used. To
ensure arithmetical accuracy, we used a risk-based audit approach
to recalculate the Company's calculations on a sample basis.
In addition, we assessed whether the Company's disclosures regarding
the goodwill impairment test in the notes to the consolidated financial
statements are complete and appropriate.
Our conclusions
The calculation method used for the goodwill impairment test is
appropriate and in line with the applicable valuation principles.
Overall, the assumptions and parameters used by management are
balanced. The disclosures in the notes to the consolidated financial
statements are complete and properly depict the judgment associ-
ated with the subsequent measurement of goodwill.
MEASUREMENT OF PROVISIONS FOR PATENT DISPUTES
Explanatory notes on the provisions for patent disputes can be found
in notes 6 and 27 of the notes to the consolidated financial statements.
Financial statement risk
The amount of the provisions for patent disputes is determined based
on the best estimate of the expenditure required to settle the dis-
pute. Consequently, the measurement of related provisions is based
on estimates and judgment of external lawyers and management.
There is a risk for the financial statements that the provisions for
patent disputes were not measured appropriately as of the balance
sheet date. There is also a risk that the notes to the consolidated
financial statements do not contain the required disclosures on the
key assumptions.
Our audit approach
• Evaluate the overall presentation, structure and content of the
consolidated financial statements, including the disclosures, and
whether the consolidated financial statements present the under-
lying transactions and events in a manner that the consolidated
financial statements give a true and fair view of the assets, liabil-
ities, financial position and financial performance of the Group in
compliance with IFRSS as adopted by the EU and the additional
requirements of German commercial law pursuant to Section
315e (1) HGB.
Belén Garijo
100.00
Mexico
100.00
Santo Domingo
Merck Dominicana, S.R.L.
Dominican Republic
Latin America
100.00
Yongin City
100.00
Bayswater
SAFC Hitech Korea Ltd.
Biochrom Australia Pty. Ltd.
Germany
Germany
Merck 18. Allgemeine Beteiligungs-GmbH
Merck 19. Allgemeine Beteiligungs-GmbH
Merck 23. Allgemeine Beteiligungs-GmbH
Merck 24. Allgemeine Beteiligungs-GmbH
Mexico
Darmstadt
Consumer Health Distribution S. A. de C. V.
Merck Biopharma Distribution S. A. de C. V.
100.00
Casablanca
Merck Maroc S. A.R.L.
Morocco
100.00
Cyber City
Millipore Mauritius Ltd.
Mauritius
90.00
Yavne
PMatX Ltd.
Israel
Africa (MEA)
Middle East and
100.00
Mexico City
Mexico City
100.00
100.00
Darmstadt
100.00
100.00
Germany
Merck 28. Allgemeine Beteiligungs-GmbH
Darmstadt
100.00
100.00
Germany
Merck 29. Allgemeine Beteiligungs-GmbH
Darmstadt
100.00
100.00
Germany
Merck 30. Allgemeine Beteiligungs-GmbH
Darmstadt
Darmstadt
Merck 27. Allgemeine Beteiligungs-GmbH
Germany
100.00
100.00
100.00
Darmstadt
100.00
100.00
Darmstadt
100.00
100.00
100.00
Merck 25. Allgemeine Beteiligungs-GmbH
Darmstadt
100.00
Germany
Merck 26. Allgemeine Beteiligungs-GmbH
Darmstadt
100.00
Germany
100.00
Nigeria
Lagos
Africa (MEA)
Middle East and
50.58
St. Louis
Prolog Healthy Living Fund II, L. P.
United States
38.32
St. Louis
Prolog Healthy Living Fund, L. P.
United States
North America
24.07
Basel
28.36
Plan-les-Ouates
Israel
39.11
Neviah Genomics Ltd.
S.
100.00
Thereof:
Merck KGaA
(%)
Germany
Germany
AB Pensionsverwaltung GmbH
Zossen
100.00
100.00
Germany
Germany
Kai Beckmann
Udit Batra
UditBatry Boh
Stefan Oschmann
Darmstadt, February 14, 2018
Muttenz
CAMAG Chemie-Erzeugnisse und Adsorptionstechnik AG
Prexton Therapeutics SA
Vaximm AG
Switzerland
Representaciones MEPRO S.A.
Venezuela
Merck S.A.
Venezuela
III. Non-controlled companies majority-owned
Company
Country
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
298
100.00
Johannesburg
Serono South Africa Ltd.
South Africa
100.00
IV. Associates not included at equity due to secondary importance
Germany
Germany
Mobile Chamber Experts GmbH
Switzerland
Switzerland
40.26
Lausanne
Asceneuron SA
Switzerland
Countries
Merck Pharmaceutical and Life Sciences Ltd.
Other European
Berlin
100.00
100.00
Caracas
Caracas
(%)
Registered Office
Equity interest
25.00
100.00
Germany
Merck 31. Allgemeine Beteiligungs-GmbH
Merck Ltd.
Feltham
100.00
Merck Pension Trustees Ltd.
Feltham
100.00
Nature's Best Health Products Ltd.
Tunbridge Wells
100.00
United Kingdom
Sigma Chemical Co. Ltd.
Gillingham
100.00
United Kingdom
United Kingdom
United Kingdom
Sigma Entity One Limited
100.00
Gillingham
Feltham
100.00
Moscow
100.00
Moscow
100.00
Bratislava
100.00
Plan-les-Ouates
73.60
Gillingham
100.00
Bristol Organics Ltd.
Gillingham
100.00
Fluka Chemicals Ltd.
Gillingham
Merck Cross Border Trustees Ltd.
100.00
UFC Ltd.
Ultrafine Limited
100.00
United States
Nysa Membranes USA, Inc.
Acton
100.00
United States
United States
Techcare Systems, Inc.
TocopheRx, Inc.
St. Louis
100.00
Groton
62.83
Asia-Pacific (APAC)
Australia
South Korea
St. Louis
Fluka Chemical Corp.
United States
100.00
Gillingham
100.00
Gillingham
100.00
United Kingdom
Webnest Ltd.
Gillingham
100.00
100.00
Wessex Biochemicals Ltd.
Gillingham
100.00
North America
United States
BioControl Systems International, Inc.
Seattle
United Kingdom
Moscow
B-Line Systems Limited
iOnctura SA
Darmstadt
100.00
100.00
Germany
Merck 41. Allgemeine Beteiligungs-GmbH
Darmstadt
100.00
100.00
Germany
Merck Healthcare Holding GmbH
Darmstadt
100.00
100.00
Germany
Merck Life Science Holding GmbH
Merck 40. Allgemeine Beteiligungs-GmbH
Germany
100.00
100.00
Darmstadt
100.00
100.00
Germany
Merck 33. Allgemeine Beteiligungs-GmbH
Darmstadt
100.00
Darmstadt
100.00
Merck 36. Allgemeine Beteiligungs-GmbH
Darmstadt
100.00
100.00
Germany
Merck 38. Allgemeine Beteiligungs-GmbH
Darmstadt
Germany
Dubai
100.00
Country
100.00
Netherlands
Calypso Biotech B. V.
Amsterdam
75.00
Russia
Russia
Russia
Slovakia
Switzerland
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Chemical Trade Limited LLC
MedChem Limited
SAF-LAB LLC
Sigma-Aldrich, spol.s.r.o.
Rome
BioControl Systems S.r.l.
Italy
100.00
Other European
Countries
Company
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
297
Registered Office
100.00
Equity interest
(%)
Greece
Sigma-Aldrich (OM) Ltd.
Athens
100.00
Ireland
SAFC Arklow Ltd.
Arklow
Thereof:
Merck KGaA
(%)
100.00
Latin America
100.00
Merck Ltd.
Tokyo
100.00
Japan
Merck Performance Materials Ltd.
Tokyo
100.00
Japan
Merck Serono Co., Ltd.
Tokyo
100.00
Japan
Sigma-Aldrich Japan G.K.
Tokyo
100.00
Japan
Malaysia
100.00
BioReliance KK
Mumbai
100.00
India
Sigma-Aldrich Chemicals Private Limited
Bangalore
100.00
Indonesia
P.T. Merck Chemicals and Life Sciences
Jakarta
100.00
Indonesia
Tunis
Jakarta
86.65
Japan
Tokyo
Malaysia
New Zealand
New Zealand
Singapore
Merck Performance Materials Pte. Ltd.
Singapore
100.00
Singapore
Singapore
Merck Pte. Ltd.
Sigma-Aldrich Pte. Ltd.
Singapore
100.00
Singapore
100.00
South Korea
Merck Electronic Materials Ltd.
Seoul
100.00
Makati City
Merck Inc.
Philippines
Merck Sdn Bhd
Sigma-Aldrich (M) Sdn Bhd
Merck Ltd.
Sigma-Aldrich New Zealand Co.
Petaling Jaya
100.00
Kuala Lumpur
Merck Specialities Pvt. Ltd.
100.00
100.00
Christchurch
100.00
Philippines
Merck Business Solutions Asia Inc.
Bonifacio Global City
99.99
Palmerston North
India
100.00
Mumbai
100.00
Nantong
100.00
Hong Kong
100.00
China
China
Merck Millipore Lab Equipment (Shanghai) Co., Ltd.
Merck Performance Materials Hong Kong Ltd.
Shanghai
100.00
Hong Kong
100.00
China
China
Merck Performance Materials Hong Kong Services Ltd.
Merck Pharmaceutical (HK) Ltd.
100.00
100.00
Equity interest
(%)
Hong Kong
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
295
Country
China
China
China
Hong Kong
China
Company
Merck Electronic Materials (Suzhou) Ltd.
Merck Holding (China) Co., Ltd.
Merck Life Science Ltd.
Merck Life Science Technologies (Nantong) Co., Ltd.
Merck Ltd.
Registered Office
Suzhou
Shanghai
China
100.00
100.00
100.00
100.00
China
Sigma-Aldrich (Wuxi) Life Science & Technology Co., Ltd.
Wuxi
100.00
India
Merck Life Science Pvt. Ltd.
Mumbai
100.00
India
Merck Ltd.
Mumbai
51.80
India
Merck Performance Materials Pvt. Ltd.
Shanghai
Sigma-Aldrich (Shanghai) Trading Co., Ltd.
China
100.00
China
China
China
Merck Pharmaceutical Manufacturing (Jiangsu) Co., Ltd.
Merck Serono (Beijing) Pharmaceutical Distribution Co., Ltd.
Nantong
100.00
Beijing
100.00
Hong Kong
China
Beijing
100.00
Beijing
100.00
China
SAFC Hitech (Shanghai) Co., Ltd.
Shanghai
Merck Serono (Beijing) Pharmaceutical R&D Co., Ltd.
Merck Serono Co., Ltd.
South Korea
P.T. Merck Tbk.
Seoul
Merck Promotion SARL
Tunisia
Merck SARL
United Arab Emirates
Merck Serono Middle East FZ-LLC
II. Companies not consolidated due to secondary importance
Equity interest
Registered Office
(%)
São Paulo
100.00
Santiago de Chile
100.00
Santiago de Chile
100.00
Tunisia
Bogota
Sigma-Aldrich (Pty) Ltd.
South Africa
Israel
Merck Ltd.
Inter-Lab Ltd.
InterPharm Industries Ltd.
InterPharm Laboratories Ltd.
Merck Serono Ltd.
Israel
QLight Nanotech Ltd.
Israel
Sigma-Aldrich Israel Ltd.
Kenya
Merck Healthcare and Life Science Limited
South Africa
Merck (Pty) Ltd.
South Africa
Merck Pharmaceutical Manufacturing (Pty) Ltd.
100.00
Quito
100.00
Herzliya Pituach
100.00
Merck Ltd.
100.00
Rehovot
100.00
Nairobi
100.00
Halfway House
100.00
Wadeville
100.00
Kempton Park
100.00
Tunis
100.00
Yavne
100.00
Yavne
Guatemala City
100.00
Mexico City
100.00
Toluca
100.00
Panama City
Israel
100.00
100.00
Montevideo
100.00
Cairo
100.00
Yavne
100.00
Lima
Israel
Jerusalem
Egypt
100.00
Thailand
Vietnam
Merck Ltd.
Merck Vietnam Ltd.
Bangkok
45.11
Ho Chi Minh City
100.00
Latin America
Argentina
Merck S.A.
Buenos Aires
100.00
Argentina
Kaohsiung
SAFC Hitech Taiwan Co. Ltd.
Taiwan
100.00
Israel
100.00
South Korea
Merck Performance Materials Ltd.
Pyeongtaek-shi
100.00
South Korea
Sigma-Aldrich de Argentina S.r.l.
Yongin City
Taiwan
Merck Ltd.
Taipei
100.00
Taiwan
Merck Performance Materials Ltd.
Taipei
100.00
Buenos Aires
Sigma-Aldrich Korea Ltd.
Brazil
Merck C. A.
Guatemala
Merck, S.A.
Mexico
Mexico
Panama
Peru
Uruguay
Middle East and
Merck, S. A. de C. V.
Mesofarma Corporation
Merck Peruana S.A.
ARES Trading Uruguay S.A.
100.00
Africa (MEA)
Ecuador
Merck S.A.
Sigma-Aldrich Quimica, S. de R.L. de C. V.
Merck S. A.
Sigma-Aldrich Quimica Ltda.
100.00
Thereof:
Merck KGaA
296
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
Country
(%)
Chile
Sigma-Aldrich Brasil Ltda.
Brazil
Company
Colombia
Rio de Janeiro
Merck S. A.
Chile
1,209
26,010
5.98
20,819
2.56
2.66
2.77
59.9%
2,610
1,633
1,124
1,165
59.5%
3.75
28.8%
2,224
2,154
1,487
1,557
1,389
29.9%
28.3%
29.8%
30.3%
-1.7%
38,081
4,414
4,490
3,630
3.2%
38,258
10,930
-6.9%
7,455
-2.8%
3,388
7,344
10,480
7,385
6.6%
4,512
4,231
4,008
2,990
2,647
- 16.7%
8,317
9,980
5,702
5,284
-9.5%
13,582
15,015
14,492
5,694
4,583
-7.9%
28,166
30,589
30,737
15,530
13,434
35,621
3,253
2016
-132
2017
2015
2014
2013
Business Development 2013 - 2017
6 Proposal on the appropriation of profits for 2017.
5 In fiscal 2014, a 2:1 share split took place.
4 According to the Consolidated Cash Flow Statement.
3 Fiscal 2016 has been adjusted, see Note (4) "Acquisitions and divestments" in the Notes to the Consolidated Financial Statements.
2 Taking into account the share split in 2014; fiscal 2013 has been adjusted accordingly.
1 Not defined by International Financial Reporting Standard (IFRS).
Employees (number as of December 31)
Dividend per share after share split (in €)5
Dividend per share before share split (in €) 5
Research and development costs
Equity ratio (in %)¹
Other key data
Net financial debt¹
Business free cash flow¹
Investments in property, plant and equipment4
Investments in intangible assets4
Liquidity
Current
Non-current
Financial liabilities
Net equity
Cash and cash equivalents
Trade accounts receivable
1,474
Change
in %
75.3%
10,735
12,845
-75
-276
-265
-184
27.9%
29.4%
26.1%
27.5%
28.6%
-3.0%
4,282
4,415
3,354
3,123
3,069
16.5%
16.5%
14.3%
15.5%
15.0%
1.8%
2,525
2,481
1,843
1,762
1,611
2.0%
15,327
15,024
11,363
1,660
7,670
2,609
407
481
514
716
919
28.4%
2,960
2,605
2,766
3,318
3,318
307
559
12,654
11,513
10,144
-11.9%
53.2%
45.4%
33.8%
36.7%
39.5%
1,507
1,704
1,709
1,976
2,140
8.3%
1.90
> 100.0%
1.00
392
179
Inventories³
832
939
589
-37.3%
11,069
11,801
12,855
14,050
14,066
0.1%
3,698
5,637
13,713
12,597
10,823
-14.1%
3,257
3,561
9,616
8,809
8,033
440
2,076
4,097
3,788
2,790
110
143
132
2,610
38,154
1.05
49,613
Annual Press
Conference
August
8/9/2018
Report on the
second quarter
April
4/27/2018
Annual General Meeting
November
11/14/2018
Report on the
third quarter
May
5/15/2018
Report on the
first quarter
ANNUAL REPORT 2017
Online
What does the future
that we're helping to
shape look like? What
topics are relevant,
what projects are being
driven forward and why?
You'll find out more in
our online report.
ar.merckgroup.com/2017
MERRICK
350
The cover of our Annual Report
sparkles thanks to Miraval® 5320
Scenic Gold. We produce this
industrial pigment in Germany.
Based on glass flakes, it is non-
flammable and stable at tem-
peratures of up to 450°C.
MA
2,879
981
1.2%
2,923
2,889
2,738
2,220
2,021
0.9%
2,632
March
3/8/2018
39,639
for 2018
Druckfein
1.20
50,348
1.256
4.2%
52,880
5.0%
307
308
Information and Service
Information and Service
The Annual Report for 2017 was published in German and
English. A fully navigable online version of the report along with
the consolidated financial statements is available on the Web at
ar.merckgroup.com/2017/. It has been optimized for mobile devices.
More information about Merck can be found on the Web at www.
merckgroup.com and in the brochure "Merck - Who we are", which
you may read or order at merckgroup.com/who-we-are.
You can order all publications from Group Communications,
Merck KGaA, 64271 Darmstadt, comms@merckgroup.com.
Published on March 8, 2018 by
Merck KGaA, Group Communications
Frankfurter Strasse 250,
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Telephone: +49 6151 72-0
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Website: www.merckgroup.com
PHOTOS
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Getty (pages 16-17, 27, 34-35)
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CONCEPT AND DESIGN
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Property, plant and equipment³
Wirtschaftsprüfer
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(German Public Auditor)
Wirtschaftsprüfer
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KPMG AG
Frankfurt am Main, February 15, 2018
The German Public Auditor responsible for the engagement is Bodo
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(German Public Auditor)
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2017. We have been the group auditor of MERCK Kommanditgesell-
schaft auf Aktien without interruption since the financial year 1995.
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Independent Auditor's Report
Business Development
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Other intangible assets³
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of which:
Non-current assets³
Total assets³
Assets and liabilities
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Profit after tax
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Margin (% of net sales)¹
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Operating result (EBIT)¹
Net sales
Earnings performance
€ million
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This overview may include historically adjusted values in order to ensure comparability with 2017.
OUR R&D CENTER
AT MERCK
CHERS WORK AT
CLINICAL RESEAR-
19
>1,500
The research spirit of the Merck family of pharmacists was obvious
early on. For instance, in the 19th century Emanuel Merck worked
intensively with plant-based natural substances. He succeeded in
isolating alkaloids such as morphine in pure form. And in 1827,
when he offered these active ingredients for the first time in the
"Cabinet of Pharmaceutical and Chemical Innovations", he achieved
a quantum leap - from a pharmacy to a research-based pharma-
ceutical and chemical company. Soon the portfolio encompassed
hundreds of products, for example as of 1894 the innovative thyroid
medicine Thyreoidinum siccatum. And today, the discovery and
development of innovative medicines to benefit patients is of utmost
importance to Merck, which conducts research and development
around the world. This applies in particular to the four closely linked
R&D hubs located on three continents and operated by the Health-
care business sector.
SCIENTISTS AND
MS MEDICINE MAVENCLAD® APPROVED
More than 1,500 scientists and clinical re-
searchers work at our R&D center at Merck
headquarters in Darmstadt. Bodo Hammes
is one of them. Hammes is a pharmacist but
doesn't work in a laboratory. Instead, he
handles the regulatory strategy for the ap-
proval of medicines developed by Merck. He
is responsible for Immunology and Neurology
and is currently focusing on the MS product
MavencladⓇ (cladribine tablets). In 2017, Merck received approval
in the European Union, Canada and Australia for this new medi-
cine to treat relapsing forms of multiple sclerosis - a major success.
Multiple sclerosis is one of the most common chronic neurological
diseases, affecting around 2.3 million people worldwide. "Obtaining
20
DARMSTADT
"Obtaining approval of a new
medicine in the individual
markets is a long journey."
BODO HAMMES
Director Global Regulatory Lead MavencladⓇ
Around 2.3
MILLION PEOPLE
WORLDWIDE HAVE MS
approval of a new medicine in the in-
dividual markets is a long journey. In-
tensive cooperation with the regula-
tory authorities is therefore extremely
important on the home stretch since
we want patients to benefit from effective new treatments as soon
as possible," says Hammes. Pharmaceutical researchers must first
identify an active ingredient candidate that then undergoes exten-
sive laboratory tests in preclinical development. Only when pre-
clinical testing succeeds can the three phases of clinical development
and testing in humans proceed. The development of a drug from
the first idea until its final approval usually takes about 13 years.
For the marketing authorization of MavencladⓇ, more than 10,000
patient years of data from approximately 2,400 patients enrolled in
the clinical trial program were taken into consideration, including
patients with a follow-up time of up to eight years. The regulatory
authorities review the study data closely and evaluate the benefit-
risk ratio of the drug. The Merck dossier for MavencladⓇ encom-
passes more than 200,000 pages, from the precise manufacturing
information and countless study results, tables and references up
An insatiable passion for research
HEADQUARTERS IN
his training in Stuttgart with the "Pharmacopoea Wirtenbergica", the most modern pharmaceutical formulary of its time.
At Merck, patients are at the forefront. That's why we invest
substantial amounts in new therapies - for example to improve
the treatment of cancer or multiple sclerosis (MS). At our
research and development hubs in Darmstadt, Boston, Beijing,
and Tokyo, around 3,000 employees work in global networks
for the benefit of patients.
350 years of Merck
Magazine
WALTER GALINAT
Member of the Executive Board
"We want to help
shape a future worth
living. Responsible
actions in all areas
are the foundation
for our sustainable
success. We place
high priority on the
efficient use of
resources - in both
our production
operations and our
products."
16
Magazine
AN INSATIABLE
PASSION FOR
RESEARCH
350 years of Merck
1668 Friedrich Jacob Merck purchases a pharmacy in Darmstadt.
An insatiable passion for research
17
Beijing: The Chinese
capital is home to one of
our R&D hubs.
Magazine
The new Merck Innovation
Center, to be opened in 2018
in Darmstadt - our global
headquarters and R&D hub.
1754 Johann Justus Merck works during
D
"We take the raw material
of the starting molecule and
turn it, atom by atom, into
an actual drug. For BavencioⓇ,
we also determined how
the drug acts, attacking the
tumor cell to disable the
tumor's defense system."
Boston: Our U.S.
R&D hub is located
northwest of
this metropolis.
350 years of Merck
1850 In order to ensure the continued existence of his company,
Emanuel Merck establishes the partnership E. Merck together with his sons.
D159
Mission Hill
ELLENZWEIG
At
An insatiable passion for research
Head of Drug Structure, Prediction and Design
甜品
Inside our state-
of-the art R&D hub in
Billerica near Boston.
23
24
Our scientists and researchers
in Tokyo give us a strong pres-
ence in northeast Asia.
Magazine
350 years of Merck
1879 Merck develops internationally, establishing business contacts to Asia (1832),
North America (1845), South America (1851), Africa (1867), and Australia (1879).
H
VANITA SOOD
15
are being studied across more than 15 tumor types. Apart from
metastatic MCC and UC, these include breast, lung, gastric, ovarian,
and head and neck cancer as well as renal cell carcinoma. Vanita
Sood and her team also contributed to the successful development
of BavencioⓇ. Sood, a computational biologist who works both in
Billerica and at global headquarters in Darmstadt focuses on turning
therapeutic ideas into molecules. "We take the raw material of
the starting molecule and turn it, atom by atom, into an actual drug.
For BavencioⓇ, we also determined how the drug acts, attacking
the tumor cell to disable the tumor's defense system," Sood ex-
plains. She is currently working to harness machine learning and
artificial intelligence with the aim of accelerating the ability to pre-
dict which molecules out of trillions have the right properties to
become safe and effective drugs.
350 years of Merck
1827 Emanuel Merck drives the transformation from a pharmacy craft to a research-based
industrial company forward with the presentation of the "Novitäten Cabinet", the cabinet of novelties.
An insatiable passion for research
21
"We are playing a game
of chess against cancer. It's
a tough opponent, but with
the right moves, we can
translate them into patient
benefits."
KIN-MING LO
Head of Redirected Immunotherapy
1777
First immunological
experiments con-
ducted.
Research in the form of self-
experimentation
James Nooth, an English surgeon, implants
patient tumor tissue into his arm, hoping to
achieve cancer prophylaxis. The outcome?
Inflammation and minor pain.
to the package leaflet. "To run a project as big as this one, you
need an extremely knowledgeable and passionate, interdisciplinary
team - we have that and I am proud to be part of it," says
Hammes with a smile.
>500
R&D PROFES-
SIONALS
IN BOSTON
BAVENCIOⓇ: A STEP IN THE FIGHT
AGAINST CANCER
The dedication and expertise required for the
research and development of new medicines is
something Kin-Ming Lo is well-versed in. Origi-
nally from Hong Kong, Lo has been working in
research and development for over 30 years and is a scientist at
our R&D hub in Billerica, Massachusetts, just outside of Boston. At
this highly modern facility, more than 500 scientists work in the
areas of neurology, immunology, immuno-oncology, and oncology.
A major focus of immuno-oncology is on developing breakthrough
immunotherapies for cancer. "We are playing a game of chess against
cancer. It's a tough opponent, but with the right moves, we can
translate them into patient benefits," says Lo. In cooperation with
Pfizer, Merck achieved an important step forward in 2017. The
new oncology medicine Bavencio® (avelumab) was approved in the
United States, the European Union, Japan, Switzerland and Canada
for use in metastatic Merkel cell carcinoma (MCC), a rare and ag-
gressive form of skin cancer. In addition, the U.S. Food and Drug
Administration granted approval of BavencioⓇ for the treatment of
patients with locally advanced or metastatic urothelial carcinoma
(UC). Bavencio® is a human antibody that is directed against the
PD-L1 (programmed cell death ligand 1) protein, a key compo-
nent of an immunosuppressive network that dampens the ability of
T cells to attack tumors. The clinical development program encom-
passes around 30 clinical trials with more than 7,000 patients who
22
Magazine
D
Curious Minds
18
Experts from different disciplines, for example
ethicists, lawyers and physicians, and from
different countries and cultures discuss ethical
aspects of Merck's research activities and
give the company advice, for instance on human
stem cell research. For Merck, as a company
with operations around the world, it is certainly
important to be informed of the global ethical
debates, different moral perceptions and legal
systems, and to align the company strategy
accordingly. Merck implements the recommen-
dation of the MBAP in concrete work processes.
Additionally, the company follows clear princi-
ples and guidelines that distinctly oppose
the potential misuse of gene therapy. After all,
ethical responsibility lies with the scientific
community.
At the turn of the century, Merck expands
its position as a research-based industrial
company. One of the new products in the port-
folio was the thyroid medicine Thyreoidinum
siccatum. To this very day, we are the leader
in this therapeutic area outside the United
States.
A new thyroid medicine.
The pharmacy
becomes a company.
1894
Merck acquires the pharmacy on the Schloss-
graben, which later becomes the Engel-
Apotheke (Angel Pharmacy), the historic core
of the company. On August 26, 1668, he is
issued a license to run a pharmacy, which is
still owned by the Merck family today.
Friedrich Jacob Merck purchases
the second town pharmacy.
The company Merck
is born.
1668
Magazine
The tremendous opportunities offered by gene editing involve a tremendous
responsibility. Merck conducts gene editing research in compliance with statu-
tory regulations and careful consideration of ethical standards. For this pur-
pose, we have established the Merck Bioethics Advisory Panel (MBAP) to pro-
vide advice and guidance on research work that Merck is involved in (see
interview on page 33). The guidelines we have adopted on human stem cell
research as well as fertility research are available on our website.
A GROWING PATENT PORTFOLIO
31
New ways of identifying disease
1987 Immunology research starts at Merck, with a focus on cancer therapy.
350 years of Merck
CRISPR: LEADING-EDGE TECHNOLOGY FOR GENOME EDITING
This applies especially to the new possibilities offered by gene therapy. Since
the human genome was fully decoded around 15 years ago, a lot has hap-
pened in medical research and biotechnology. For instance, CRISPR (Clustered
Regularly Interspaced Short Palindromic Repeats) technology was developed.
With CRISPR, the DNA of all organisms can be edited similarly to a text. Certain
gene sequences of a cell can be separated or cut out and replaced as with a
pair of scissors. This allows scientists to alter the DNA of plants, animals and
humans in a targeted manner, for instance to repair genetic defects and to po-
tentially cure hereditary diseases. "CRISPR can be used to understand the link
between a gene and the function of that gene in a cell. Making these tools
available to scientists helps them to design and carry out experiments to elu-
cidate the cause of diseases. I have the privilege of working on some of the
most exciting technologies in life science," says Martha Rook, Head of Gene
Editing & Novel Modalities in Bedford near Boston. Together with her col-
leagues and team, Rook focuses on new applications and services for drug de-
velopment - from basic research to manufacturing processes. For scientists,
the genome-editing scissors are relatively easy and economical to use. That's
why numerous researchers around the globe are already applying CRISPR, for
instance to cultivate plants that are more resistant or to fight diseases such as
AIDS and cancer.
MARTHA ROOK
Head of Gene Editing &
Novel Modalities
in Bedford, MA (USA)
R&D Manager, Tech-
nology Development,
Molecular Workflow
Tools
We offer a wide selection of products for genome editing. "Our CRISPR tools
can be used for disease modeling, among other things. Cell models deliver
important insights for the development of new medicines and side effect test-
ing," Rook explains. Merck's growing patent portfolio includes genomic inte-
gration. This involves cutting the chromosomal sequence of eukaryotic cells
(such as mammalian and plant cells) and inserting an external or donor DNA
sequence into those cells using CRISPR. Researchers can thus replace disease-
associated mutations with beneficial or functional gene sequences. In addi-
tion, Merck has developed an alternative CRISPR genome-editing method called
proxy-CRISPR that permits access to previously unreachable cell locations,
making CRISPR more efficient, flexible and specific.
ANJA DEDEO
32
1995 Establishment of Merck KGaA. With a volume of DM 2.4 billion, this represents the largest
Germline gene therapy in humans is presently
not justifiable because the techniques are not
precise enough yet. It is currently not possible
to rule out unexpected off-target effects. How-
ever, research work is underway in laboratories
in several countries on embryos. National leg-
islation differs considerably. Many countries per-
mit research on embryos for the first 14 days
of their development. In Germany, however,
this is forbidden. If gene editing becomes
more precise and safer, using gene therapy to
prevent serious hereditary disease is in my
view legitimate - and makes more sense than
eliminating embryos as a result of preimplan-
tation diagnosis.
You are a member of the Merck Bioethics
Advisory Panel (MBAP), which works
for all three business sectors under the
leadership of the Chief Medical Officer.
Could you please summarize the tasks of
this panel?
An insatiable passion for research
PROF. DR. JOCHEN
TAUPITZ
Legal scholar at the
University of Mann-
heim and renowned
ethics expert
34
The magazine
350 years of Merck
350 years of Merck
-
For many years now, genetic research has
been making great progress. What oppor-
tunities do you see in gene therapy?
New gene therapy techniques such as CRISPR
make it possible to intervene in the genome of
plants, animals and humans much more easily,
precisely and cost-efficiently. This is a big ad-
vantage for crop cultivation and animal breed-
33
Interview with Professor Dr. Jochen Taupitz, a renowned ethics expert,
legal scholar at the University of Mannheim, Chairman of the
Central German Ethics Council of the German Federal Medical Council,
and Member of the Merck Bioethics Advisory Panel
lies with the scientific
community."
"Ethical responsibility
New ways of identifying disease
public offering in German history at that time.
2007 The acquisition of Serono succeeds, making Merck a leading biotech company.
What are the risks?
Magazine
For 27 years now, Anja Dedeo has been helping to make
this possible. Based at our Danvers site near Boston,
the experienced scientist works in technology develop-
ment, where she focuses on the further development
of efficient molecular workflow tools. For instance, she
evaluates new technologies in protein and nucleic acid
sample preparation, as well as ways to enhance the effi-
ciency of Western blotting, a standard technique for
transferring proteins to a blotting membrane. "Our goal
is to make laboratory work easier and more efficient
through new technologies. We perform hands-on eval-
uations of these technologies, which can range from
early prototype devices, to various reagents, kits or a
combination of all," says Dedeo. She knows that just
because a technology appears promising based on the
scientific evaluation, commercial viability is not auto-
matically guaranteed. That is why Anja Dedeo highly
values collaboration with many different disciplines,
for instance with internal departments such as Business
Development and Marketing, as well as with academic
institutions and other external partners. "In this age of
personalized medicine, scientists are looking for new
ways to identify disease and treat it with medicines that
have the fewest side effects. To support and provide
scientists with quality products for this challenging task,
we have to precisely understand their needs and pain
points," says Dedeo.
Merck in New York
First commercial
subsidiary in the
United States.
1887
Head of Clinical Pharmacology China
YUE HUANG
"We are working to
enable Chinese patients
to benefit sooner and
more extensively from
our drug pipeline."
骨
Magazine
The successful export business in the United
States led in 1887 to the establishment of a
subsidiary in New York.
26
"It is very stimulating to
get to know different
cultures and people and
to benefit from working
together."
COLLABORATION IN A GLOBAL NETWORK
But for now, everyone involved is pleased
that BavencioⓇ is being approved for the
treatment of Merkel cell carcinoma in a grow-
ing number of markets. This is also the case
in Japan. Ryoko Miyauchi, a pharmacist, has
been working for eleven years at the research and development
hub in Tokyo, which is located in a quiet and picturesque part of the
Japanese capital. Together with her colleagues, she worked on
the regulatory submission of BavencioⓇ, which was the first human
anti-PD-L1 antibody to be approved in Japan - and also the first in
Asia. The fact that this happened in a short period of time is not a
matter of course. Just like every other market, Japan has very
specific requirements for the approval of medicines. "We worked
very closely with our global network to prepare the Japanese dos-
sier for BavencioⓇ. In the process, it was very stimulating to get to
know the different cultures and people. We've not only benefited
from working together, but also made new friends," says Miyauchi.
TRIALS
30 CLINICAL
PATIENTS IN
>7,000
Back to Kin-Ming Lo. While working on BavencioⓇ in its early R&D
days, he already began thinking of strategies to improve its activity.
"Cancer cells employ multiple immunosuppressive pathways to
escape detection by the immune system. If we suppress more than
one of the mechanisms that tumors use to avoid the immune
system, we have a better chance of killing the cancer," says Lo. This
has led to the development of a bifunctional antibody fusion pro-
tein and other candidates in the R&D pipeline.
25
RYOKO MIYAUCHI
CMC Senior Scientist
30
PHARMA STRATEGY FOR CHINA
NEW WAYS
OF IDENTIFYING
DISEASE
TOOLS TO IMPROVE HUMAN HEALTH
-----
The concept of purity has always been firmly embedded
in the biosciences. Emanuel Merck produced basic
materials for medicinal products and very successfully
supplied colleagues in other pharmacies as well as
physicians and chemists. In 1851, he emphasized in a
letter to a customer: "I always guarantee you the
purity of my preparations." To this very day, this strong
commitment to quality characterizes our work. By
providing products for protein research, cell biology, and
chemical-based pharmaceuticals, the Life Science
business covers the bioprocessing value chain. With
more than 300,000 life science products and solutions,
Merck provides scientists with state-of-the-art tools and
services to enable them to successfully meet their
toughest challenges.
29
New ways of identifying disease
is entirely legally and economically independent today. Outside the United States and Canada, the company operates as MSD.
1917 The U.S. subsidiary Merck & Co., Inc., headquartered in New Jersey, USA, is expropriated and
350 years of Merck
Working closely with the global scientific community, our Life Science
business sector is developing numerous innovative products and
solutions for biotech and pharmaceutical research. The new tools and
processes that we offer are helping our customers to capture the
potential of genome medicine.
ing and also for people. That's because so-
matic gene therapy can be used to cure people
suffering from certain hereditary diseases. And
in the distant future, the possibility exists of
influencing the genome of a person so that sub-
sequent generations also benefit. Through in-
tervention in the germ line, meaning the genes
of early embryos or human egg or sperm
cells, it could be possible to spare future human
beings of serious hereditary disorders.
Magazine
28
In Beijing, Merck R&D
experts collaborate
with scientists and
clinical experts from
all over China.
27
An insatiable passion for research
安邦保险
1904 The entire factory is moved to its present-day location on Frankfurter Strasse and is expanded.
350 years of Merck
Merck's vision of giving as many people as possible around the
world access to innovative medicines is thus increasingly becoming
a reality.
This cross-border team spirit is also confirmed by Yue Huang:
"After having lived for nearly 20 years in the United States and
Switzerland, I returned to my homeland of China, and I am very
happy to still be working with people from many different cultures
who are extremely dedicated and committed to the work we're
doing." From the 21st floor of the modern office building that
houses the Chinese research and development hub of Merck, the
Head of Clinical Pharmacology at Merck in China has a good view
of the bustling metropolis of Beijing. Yue Huang is also working in-
tensively on BavencioⓇ and its potential approval in China. Another
advance relates to the oncology drug ErbituxⓇ, following the positive
Phase III trial as a first-line treatment for colorectal cancer in
China. The research and development strategy at the Beijing hub
is mainly focused on bringing innovative and established global
assets to China by leveraging the fast-evolving scientific and regu-
latory environment. "We are working to enable Chinese patients
to benefit sooner and more extensively from our drug pipeline,"
says Yue Huang.
WELCOME
Welcome to space
52
The solar trees at the Darmstadt site (2018).
37
Organic photovoltaic technology (OPV)
was already used in power-generating solar
trees at the 2015 World Expo.
38
THE RISE OF LIQUID CRYSTALS
There is amazing potential not only in the sun, but also in carrots. In
1888, Friedrich Reinitzer, a chemist, investigated cholesterol, which
he extracted from the root vegetable. In doing so, he noticed that
the substance had two melting points and happened to discover
liquid crystals. The scientific community was impressed. And in 1904,
Merck produced liquid crystals at the request of Otto Lehmann, a
physicist. The only problem was that no practical application could
be found at the time for the curious scientific phenomenon. So
research slumbered again until 1968 - exactly 300 years after the
company was founded - when a few young researchers at Merck
devoted themselves to liquid crystals (LCs). They discovered that
the molecules were ideally suited for manufacturing displays. The
first liquid crystal displays were soon being built into wristwatches
and pocket calculators. Display panels, televisions, computers,
tablets and smartphones followed later. Technological development
gathered momentum, demand grew significantly - and Merck is
the global market leader to this day.
NEW LC APPLICATIONS FOR AUTOMOBILES
Yet the exciting career of liquid crystals is continuing, as new fields
of application are increasingly being discovered, for example auto-
mobiles. One focus is on materials for lighting systems. For example,
smart LCD matrix headlights can adapt light distribution with high
resolution as needed in real time. "The core component is the dis-
play with liquid crystals developed by Merck specifically for this
application and featuring high temperature stability,"
says Dieter
Schroth, responsible for new applications of LC technology. Liquid
crystal mixtures from Merck are additionally used in innovative sat-
ellite antennas. In the age of digitalization, car drivers want to be
"always on", also while on the road. Smart antennas steer their beam
electronically through a liquid crystal layer, thus constantly main-
taining contact with the satellite. This makes it possible to receive
huge data volumes at almost any location in the world. Compared
with other antenna solutions, LC antennas are extremely flat and
cost-effectively adaptable. They can thus be easily integrated into
the roof of a car. Another potential application in the automotive
sector is liquid crystal window technology developed by Merck. In-
dividually switchable car windows and sunroofs can be darkened at
the push of a button in the future.
CRYSTAL-CLEAR VIEW
Smart windows based on the technology from Merck are already
being used in architecture. "In smart glass applications, our liquid
crystals regulate the light transmission of window panes and
façades by means of transparent conductive coatings. A switching
process determines the alignment of the liquid crystal molecules
on the glass surface and thus the desired change in light transmis-
sion," explains Johannes Canisius, Head of the Liquid Crystal
Windows business field. LC windows can be used in buildings in many
variants, for example as sun protection and privacy control. As
Magazine
Production of liquid crystal window modules in
Veldhoven, the Netherlands.
350 years of Merck
2015 With the acquisition of the U.S. company Sigma-Aldrich, Merck further expands its
leading position in the life science business. The portfolio now encompasses more than 300,000 products.
MERCK
Welcome to space
off
2010 The acquisition of Millipore in the United States creates a leading global partner
350 years of Merck
TO
SPACE
35
36
Magazine
Chemical processes are driving fast technological change in the
fascinating world of atoms and molecules. Merck offers a broad portfolio
of specialty chemicals that can be encountered almost everywhere:
whether in consumer electronics, architecture, automobiles, or even
the universe.
Our chemical materials are already finding
their way to space today, inside the chips
of diverse electronic instruments and the
solar panels of satellites. It is quite imagin-
able that Merck will have an even stronger
presence in space in the future, however.
Our successful collaboration with the Euro-
pean Space Agency (ESA) provides a solid
foundation for this.
The two partners are united by curiosity,
their passion to explore the unknown. In
joint projects and workshops, the scientists
and engineers share ideas on, for example,
the utilization of virtual reality and Big Data.
"ESA can contribute its expertise in space
travel in fields such as digitalization, mate-
rials science and health. In return, ESA
can also learn a lot from the innovative busi-
ness of a leading science and technology
company," says ESA Director General Prof.
Jan Wörner. In autumn 2017, Merck and
ESA co-hosted a hackathon, an event for
creatively developing new solutions. "The
young scientists and start-ups address,
among other things, the question of how to
analyze the spread of neglected tropical
diseases using data and instruments from
space travel," says Matthias Simnacher,
coordinator of the ESA-Merck partnership at
the Merck Innovation Center. Within the
scope of further joint projects and compe-
titions, Merck is advancing the develop-
ment of materials for use in space
as special coatings and additives.
-
such
SKIN-LIKE SOLAR CELLS
Our materials are already being used to
manufacture high-performance solar cells
for satellites and missions to the planets.
Yet Merck is also working to utilize solar
energy on Earth. Above all, building façades
and roofs offer extensive surfaces for cli-
mate-friendly power generation based on
organic photovoltaics (OPV). Only one ki-
logram of OPV can cover the size of a foot-
ball field. Merck develops and produces
inks based on semiconducting polymers for
OPV modules. These are one hundred
times thinner than a hair and are printed by
means of simple methods similarly to a
newspaper. Therefore, the cost-efficient solar
cells can be used on both rigid and flexible
substrates. The extremely lightweight and
flexible organic solar foils open up future-
oriented applications. OPV elements can be
integrated on all kinds of surfaces - such
as electrical devices, cars or clothing. They
also can be applied on curved surfaces
like a second skin. Or even on "trees". The
components from Merck were part of the
solar trees at the EXPO Milano 2015. These
plant-like objects are twelve meters tall
and generate electricity by means of numer-
ous OPV modules. They were recently in-
stalled at Merck headquarters in Darmstadt.
"We are working intensively to increase
the application possibilities and efficiency
levels of printable organic solar cells,"
says Thomas Kietzke, Head of OPV in the
Advanced Technologies business unit.
1888
The discovery of
liquid crystals.
It started with carrots
In 1888, the Austrian chemist and botanist
Friedrich Reinitzer sees that cholesteryl
benzoate derived from carrots has two differ-
ent melting points. He asks Otto Lehmann,
a German physicist, to support him with his
research. Lehmann realizes that cholesteryl
benzoate and other substances have a further
phase in between the liquid and solid state.
He called these substances "liquid crystals,"
the basis of today's LC displays.
for the life science industry.
Welcome to space
on
Daylight
Welcome to space
Semiconductor materials from Merck are
used in the manufacture of numerous chips.
Quality control in the
liquid crystal window
module facility.
41
TO OUR
SHAREHOLDERS
42-54
ו
TO OUR
SHAREHOLDERS
42-54
45
Letter from Stefan Oschmann
50
The Executive Board
0000
2018 Merck celebrates its anniversary.
350 years of Merck
In 1904, our price lists already contain
materials with liquid crystalline properties.
In 1905, we start cooperating with Otto
Lehmann, the father of liquid crystal research.
We have been conducting our own research
into liquid crystals since 1968.
Dark state
Daylight
Bright state
■Dye molecules
o Liquid crystal molecules
39
40
Merck Shares
Magazine
INNOVATIVE PROCESSES FOR CHIP
MANUFACTURE
The production of semiconductor materials
for chip manufacture is also in full swing
at Merck. These materials are used in a
wide variety of electronic applications. Ever
smaller, faster, more powerful, energy-
efficient and economical is the motto in this
dynamic market. With the growing demand
for electronic devices, the demand for semi-
conductors is increasing, too. And further
miniaturizations call for further improve-
ments in process chemicals. Semicon-
ductors are created in patterned layers that
ultimately form a complete integrated circuit.
Merck offers products such as antireflective
coatings to improve precision of production,
special aids to stabilize the structures, as
well as materials that make it possible to
reduce structural dimensions by means of
a chemical shrinking process. Owing to the
demand for ever smaller structures, Merck
is researching new patterning techniques,
such as directed self-assembly (DSA) and
selective deposition. "Instead of the former
complex and expensive lithographic pro-
cesses, we want to establish smart and cost-
efficient processes in which part of the
structural information is already contained
in the process chemicals," says Ralph
Dammel, Research Fellow and semiconduc-
tor researcher at Merck. Through its € 300
million corporate venture capital arm Merck
Ventures, which invests in innovative start-
ups in three core strategic areas, Merck is
also active in the semiconductor materials
area. For instance by investing in Aveni, a
French start-up working on solutions to
enable the semiconductor industry to further
miniaturize chips.
Whether carrots or chips - with curiosity and
a passion for research, Merck is shaping
progress in innovative high-tech materials,
which are used all around the globe - and
sometimes even beyond.
1968
The official start
of liquid crystal
development
Around 300 years after the
establishment of Merck
sun protection, they could make it possible
to do without exterior blinds, as they can
be darkened to a few percent light transmis-
sion with continuously variable switching
within seconds. By means of optimizing the
amount of light and heat entering, the
technology can significantly increase the
energy efficiency of buildings with glazed
façades. Savings of up to 40% of the build-
ing's energy consumption are possible.
Also when darkened, the windows remain
transparent and provide a color-neutral
view to the outside. The privacy variant
switches immediately from transparent
to opaque. Rooms with glazed walls can also
be easily protected from looks from outside -
from conference rooms and bathrooms to
treatment rooms in hospitals. In November
2017, Merck commissioned the company's
first facility worldwide for the production of
liquid crystal window modules in Veldhoven,
the Netherlands.
18%
GARP (Growth At
Reasonable Price)
Share price development from January 1, 2017 to December 31, 2017
1%
Other
• We made our debut at the International Motor Show in Frankfurt,
where we presented our technologies for future mobility. These
include materials for smart headlights that can adapt light distribution
as needed, thus providing for greater traffic safety. And liquid crystals
for satellite antennas that permit reception of large data volumes
nearly anywhere in the world, an important technology for autono-
mous driving.
These are just a few examples of what we accomplished in 2017 thanks
to the curiosity, the imagination, and the engagement of our more than
52,000 employees. On behalf of the Executive Board, I would like to
cordially thank them.
In business terms, 2017 was a good year. Merck again grew profitably.
For 2017, we will propose to the Annual General Meeting a dividend of
€ 1.25 per share, an increase of € 0.05. Our sales increased to € 15.3 bil-
lion. At the same time, EBITDA pre, the key performance indicator used
to steer our operating business, amounted to € 4.4 billion, which was
at the lower end of our annual forecast, despite unfavorable exchange
rate developments. The impact of higher research and development
costs in our Biopharma business as well as a challenging market envi-
ronment in Liquid Crystals can be seen. We will continue to address both
these issues in 2018.
We are investing further in the development and launch of new medi-
cines. Our earnings in 2018 will also reflect these expenses. Here,
"investing" is the key term because we firmly believe that our financial
commitment will pay off. That's why investing money now is the right
thing to do.
47
48
To Our Shareholders
• The acquisition of BioControl Systems has enabled us to expand our
offerings for customers in the food industry. We now offer them a
comprehensive range of technologies to test for foodborne patho-
gens. In our new Food Safety Studio, our customers can collaborate
with our scientists, for instance to develop rapid tests to check their
products.
Letter from Stefan Oschmann
In the Liquid Crystals business, we have been the market and technol-
ogy leader for many years now. However, the market environment for
well-established liquid crystal technologies has become more difficult,
above all in China. By contrast, sales of innovative technologies, for
instance of energy-saving UB-FFS materials, are growing sharply. This
is why we are driving the launch of new liquid crystal products forward
and capturing new application fields in this core business. These include,
for example, windows with liquid crystal modules, which raise the energy
efficiency of buildings. At the end of November, we opened a new factory
in the Netherlands for this purpose. In addition, the positive develop-
ment of the Semiconductor Solutions and Surface Solutions business
units should mitigate the consequences of more intense competition in
Liquid Crystals.
This shows we are addressing topics that are important to the success
of our company. And we are setting clear business priorities. In our
Biopharma business, we are focusing on the development of innovative
specialty medicines. Additionally, we want to further expand our highly
successful Life Science business in a targeted manner. In our Perfor-
mance Materials business, we will push forward especially with our
rapidly growing businesses, for instance materials for semiconductor
production.
We will continue to maintain a high level of financial discipline in all of
these efforts in 2018. Reducing our acquisition-related net financial debt
remains a priority.
What innovations will be the next to define the industries in which we
operate? We are intensively addressing this question and setting the
course to ensure that Merck prospers tomorrow and beyond as it does
today.
We are using complex digital data analytics in the fight against cancer
and other serious diseases. For instance, to increase the efficacy of
drugs that activate the body's immune system to fight tumors, we have
to have a better understanding of the interactions between the immune
system and the tumor. To do so, we are building up a powerful data
and analysis platform. We want to recognize meaningful patterns and
develop new and effective treatment options.
To Our Shareholders
Letter from Stefan Oschmann
In view of limited resources, making targeted investments always also
means setting priorities. That is why we divested our Biosimilars business
in 2017. And it is why we announced in 2017 that we are analyzing
strategic options for our Consumer Health business.
We received the first approvals for not one, but two important new
medicines - the immuno-oncology drug BavencioⓇ and MavencladⓇ
for relapsing multiple sclerosis in patients with high disease activity.
MavencladⓇ offers patients an innovative dosing regimen. Taken
orally for a maximum of 20 days in the first two years, it can deliver
and sustain four years of disease control.
In 2017, we helped shape technological advances and achieved mile-
stones in our markets.
Letter from Stefan Oschmann
10
15
20
To Our Shareholders
Letter from Stefan Oschmann
45
Dear shareholders, dear friends
of Merch,
The publication of our Annual Report is a good opportunity to reflect for
a moment and to take stock, not only from a financial perspective. In
my letter to you last year, I explained how we at Merck want to help
shape technological advances. Today we can see that we successfully
did so in 2017. More about that later.
Since 2018 is a very special year for our company, let us first take a
look at the present. This year, we are celebrating the 350th anniversary
of Merck. Few companies have roots that date back so far. And in our
industry, we are the only ones who have been successful for so long.
For three and a half centuries, we have repeatedly contributed to
advances in science. In 1668, Friedrich Jacob Merck laid the foundations
with his pharmacy in Darmstadt. In the 19th century, Emanuel Merck
was one of the industrial pioneers of modern pharmacy. Today, more
than 6,000 Merck scientists are working on cutting-edge health solutions
and technologies.
Merck has constantly reinvented itself. But many important things have
remained constant. Scientific curiosity has been, is and always will be
the force that drives our scientists in Europe, Asia and North America
to find new solutions for the most pressing questions facing humanity.
In everything we do, we orient towards a clearly defined and binding
set of values. For instance, this means we run our business as respon-
sible entrepreneurs.
46
To Our Shareholders
Letter from Stefan Oschmann
Stefan Oschmann
Chairman of the Executive Board and CEO
To Our Shareholders
We are creating new opportunities for scientists and biotech companies,
for instance genome editing with CRISPR technology, which enables
researchers to alter the genes of living cells more efficiently than with
previous methods. For example, CRISPR is a key technology that can
help to find new treatment options for serious diseases. We have
received patents for a future-oriented CRISPR technology in the Euro-
pean Union, Australia, Canada, and Singapore. Despite our strong
passion for discovery, we also know that genome editing touches on
fundamental ethical questions. We take these topics very seriously.
That is why we have clear policies in place for our research and busi-
ness operations and an international ethics committee (Merck Bioethics
Advisory Panel). This too is responsible entrepreneurship.
Our high-tech materials are an important basis for many technologies
of the future. For example, organic photovoltaic materials permit entirely
new, clean ways of generating power. They can be used to transform
building façades into energy sources. This is creating entirely new
options for architects - and perhaps soon also for astronauts since we
are cooperating with the European Space Agency (ESA) on future mate-
rials for outer space. You can read more on this in the magazine section
of this Annual Report.
This is no longer science fiction, but rather is increasingly becoming
reality - also with help from Merck. As a vibrant science and technology
company, we are proud to be shaping crucial areas of the world we live
in. Yet rest assured that we at Merck will always keep our feet on the
ground, especially in view of our 350-year history. We will continue to
run your company prudently, conservatively and successfully. And true
to the motto of our anniversary year, we will remain "always curious".
You can count on that.
Sincerely,
More information can be found at www.merckgroup.com →
Company → Who We Are → Management
52
Merck Shares
To Our Shareholders
Merck Shares
At a glance
Overall, the performance of Merck shares was characterized by vol-
atility in 2017. Following an upswing thanks to a favorable market
environment in the first half, the share price visibly came under
pressure in the second half of the year. The Merck share price
decreased nearly 10% over the entire period, finishing the year at
€ 89.75. The performance of Merck shares was significantly weaker
than that of the relevant comparative indices, all of which posted an
increase during the same period. Merck shares were nearly 22 per-
centage points behind the comparative DAX® index, which rose by
13% over the full year. They were around 20 percentage points lower
than the relevant chemical industry index, which increased by over
11% in 2017. The pharmaceutical industry index rose by more than
5% in 2017, thus outperforming Merck shares by 15 percentage
points in the same period.
Since the end of 2016, our shares had seen a positive develop-
ment that continued until early summer 2017. Among other things,
this was driven by the marketing authorization of our immunother-
apy BavencioⓇ (avelumab) for the treatment of patients with meta-
static Merkel cell carcinoma (mMCC) as well as locally advanced or
metastatic urothelial carcinoma by the U.S. Food and Drug Admin-
istration (FDA). The announced divestment of our Biosimilars busi-
ness to Fresenius on April 24, 2017 also resonated positively with
investors and analysts. In addition, equity markets were positively
impacted by encouraging signals for the global economic environ-
ment as well as the sustained optimism of market participants on
the future economic prospects of the United States following the
presidential election in November 2016. Merck shares also benefited
from this, increasing until May 12, 2017 to a new all-time high of
€ 114.40.
However, as of the middle of the second quarter, a visible share
price correction set in for our shares. Various influential factors were
responsible for this. Towards the end of the second quarter, the
environment for equities became more challenging owing to rising
interest rates in important capital markets and the continued strong
development of the euro against the U.S. dollar. The latter also had
considerably negative effects on the Merck share price since the
company has a strong net exposure to the euro due to its geographic
set-up. In Performance Materials, competition for liquid crystal mate-
rials in China increased in the course of the second quarter. These
prolonged adaptation processes are impacting the profit development
of our Performance Materials business in addition to the mentioned
foreign exchange effects. Although in our report on the second quar-
ter of 2017 we maintained our full-year guidance for EBITDA pre
despite the intensification of these burdens compared with early
summer 2017, capital market participants again reduced their earn-
ings expectations for Merck. This led to noticeable profit taking and
selling of shares by institutional investors.
Positive newsflow from the company could do little to counteract this
development and continued uncertainty among investors and ana-
lysts. In June 2017, Merck presented clinical data on key pipeline
products at the American Society of Clinical Oncology (ASCO) Annual
Meeting in Chicago, Illinois (USA) as well as in a conference call. This
was received positively by capital market participants along with
other examples such as the European Commission marketing author-
izations of our immunotherapy Bavencio® (avelumab) in the treat-
ment of metastatic Merkel cell carcinoma (mMCC) and of cladribine
tablets (trade name Mavenclad®) to treat relapsing multiple sclerosis
in patients with high disease activity, and the closing of the divest-
ment of our Biosimilars business. Likewise, the announcement on
September 5, 2017 concerning the review of strategic options for
our Consumer Health business temporarily helped lift our share price
in a generally favorable equity market environment.
As part of our annual analyst and investor meeting, capital market
participants again had the opportunity for intensive and in-depth
discussions with the management of our business sectors on Sep-
tember 28, 2017. Overall, the event resonated well. However, in the
period that followed, analysts and investors began lowering their
earnings expectations, particularly with respect to fiscal 2018.
Although the results of the third quarter were slightly above market
expectations and the guidance for 2017 was confirmed despite cur-
rency headwinds, capital market participants' uncertainty concerning
the future earnings development remained unchanged and adversely
impacted our shares in contrast to the general development of the
stock market.
In 2017, the Merck Executive Board and the Investor Relations
team gave in-depth briefings to more than 780 investors at investor
conferences as well as during roadshows and conference calls. We
thus significantly strengthened our presence further among financial
market participants compared with the previous year.
The average daily trading volume of our shares increased mini-
mally by around 1% from approximately 468,000 in 2016 to over
474,000 in 2017. The North America region continued to dominate,
yet its proportion of the free float decreased to around 28% (2016:
31%) in comparison with the previous year. By investor type, GARP
(growth at reasonable price) and value investors dominated, as in
the previous year. In 2017, growing interest could be seen among
growth-oriented investors, who meanwhile hold approximately 34%
of the free float. At the end of 2017, the top five investors held
around 19% of the free float (2016: 17%).
To Our Shareholders
Merck Shares
53
MERCK SHARES
Short biographies
5
Member of the Executive Board
CEO Performance Materials
51
Stefan Kreman
Stefan Oschmann
Chairman of the Executive Board and CEO
49
50
To Our Shareholders
The Executive Board
The Executive Board
Walter Galinat
Member of the Executive Board
Marcus Kuhnert
Member of the Executive Board
Chief Financial Officer
Stefan Oschmann
Chairman of the Executive
Board & CEO of Merck
To Our Shareholders
Udit Batra
Member of the Executive Board
CEO Life Science
Belén Garijo
Member of the Executive Board
O CEO Healthcare
The Executive Board
Kai Beckmann
in %
0
-10
3 Based on the floor trading systems of all German exchanges and the regulated market on XETRA®.
*Based on the theoretical number of shares (434.8 million).
1 Share-price relevant figures relate to the closing price in XETRAⓇ trading on the Frankfurt Stock Exchange.
2 Subject to approval by the Annual General Meeting.
12,814
11,599
€ million
43,108
39,021
5 Based on the number of shares in free float (129.2 million).
€ million
473,740
number
99.15
89.75
€
71.40
87.90
468,408
Source: Bloomberg, Thomson Reuters.
MERCK SHARES
Identified investors by region as of December 2017
in %
Source: Nasdaq Shareholder Identification.
Source: Nasdaq Shareholder Identification. Total number of shares outstanding: 129.2 million.
25%
Value
28.2%
United States
Europe (excl. Germany/UK)
16.0%
18%
Index
4%
Hedge
14.4%
Germany
Identified investors by type as of December 2017
in %
MERCK SHARES
United Kingdom
16.5%
Rest of World
6.0%
German Retail/Undisclosed
18.9%
€
100.05
114.40
€
Sept.
Aug.
July
June
May
Apr.
March
Febr.
Jan.
Share price low December 7, 2017 → € 87.90 |
Dow Jones European Chemical Index
• DAX®
MSCI European Pharma Index
• Merck
Amp
ww
Share price high May 13, 2017 → € 114.40
-15
Oct.
-5
Nov.
Source: Bloomberg (closing rates).
1.20
1.25
€
Market value of authorized shares 5 (at year-end)
Market capitalization (at year-end)
Daily average number of Merck shares traded³
Year-end share price
Share price low
Share price high
Dividend²
2016
2017
Merck Shares
To Our Shareholders
Key share price data¹
MERCK SHARES
54
Dec.
34%
Growth
The separate, combined non-financial (Group) report of Merck KGaA, which we issue pursuant to sections 289b-289e and 315b-315c HGB, is available as an online version
on our website as of April 27, 2018 at http://reports.merckgroup.com/2017/cr-report/. It is integrated into the 2017 Corporate Responsibility Report in accordance with DRS 20
subsection 252 (b). We have prepared an overview of the information contained in the combined non-financial (Group) declaration at https://www.merckgroup.com/nfr17.
Targeted acquisitions capable of meaningfully complementing or
boosting our strengths remain a growth option. However, we con-
tinue to rule out major acquisitions of more than € 500 million as
long as the debt level expressed as the ratio of net financial debt to
EBITDA pre is greater than 2, unless divestments could be used to
finance them. By the end of 2018, we aim to reduce our debt level
to below 2 again. At Group level, we reduced our net debt by around
€ 1.4 billion in 2017. At the same time, strict financial discipline
supports the rating of the Merck Group. Our dividend policy reflects
a sustainable earnings trend.
We hold the global rights to the Merck name and brand. The only
exceptions are Canada and the United States. In these countries,
we operate as EMD Serono in the biopharmaceutical business, as
MilliporeSigma in the life science business and as EMD Performance
Materials in the high-tech materials business.
Performance Materials develops specialty chemicals and materials
for demanding applications - from liquid crystals and OLED materials
for displays to effect pigments for coatings and cosmetics up to high-
tech materials for the manufacture of integrated circuits.
In Life Science, we conduct research for researchers, providing
scientists with laboratory materials, technologies and services. Our
aim is to make research and biomanufacturing easier, faster and
more successful.
In Healthcare, we discover, develop and manufacture prescription
medicines used to treat cancer, multiple sclerosis, and infertility. Our
products help millions of people around the world.
We are a global science and technology company headquartered in
Darmstadt, Germany. With a history of nearly 350 years, we are the
oldest chemical and pharmaceutical company in the world. In line
with our strategic direction, Merck comprises three business sectors:
Healthcare, Life Science, and Performance Materials.
Merck
Fundamental Information
about the Group
Apart from our three business sectors, our financial reporting
presents the five regions Europe, North America, Asia-Pacific (APAC),
Latin America as well as Middle East and Africa (MEA). As of Decem-
ber 31, 2017, we had 52,941 employees worldwide, which compares
with 50,414 on December 31, 2016.¹
57
Our Group strategy aims to resolutely continue the transforma-
tion of Merck into a science and technology company and to position
the company as a leading player in a changing market environment.
We focus on three areas of key priority, namely "Performance",
"People" and "Technology".
Combined Management Report
This combined management report contains certain financial indicators such as EBITDA pre, operating result (EBIT), business free cash flow, net financial debt and earnings per
share pre, which are not defined by International Financial Reporting Standards (IFRS). These financial indicators should not be taken into account in order to assess the perfor-
mance of Merck in isolation or used as an alternative to the financial indicators presented in the consolidated financial statements and determined in accordance with IFRS.
The figures presented in this combined management report have been rounded. This may lead to individual values not adding up to the totals presented.
*The management report for Merck KGaA has been combined with the Group management report and published in the 2017 Merck Annual Report as well as in the annual
financial statements of Merck KGaA. The annual financial statements and the combined management report of the Merck Group and Merck KGaA for 2017 are being filed with
the electronic German Federal Gazette (elektronischer Bundesanzeiger) and are available on the website of the German company register.
Corporate and Other
139
Performance Materials
Merck
Healthcare
Our Healthcare business sector comprises the three businesses
Biopharma, Consumer Health, and Allergopharma. Since 2015, Belén
Garijo has been the CEO of the Healthcare business sector and
member of the Executive Board. In 2017, Healthcare generated 46%
of Group sales and 41% of EBITDA pre (excluding Corporate and
Other), making it the largest of our three business sectors. The
regions Europe and North America generated 57% of Healthcare's
net sales in 2017. In recent years, we have steadily expanded our
presence in growth markets. In 2017, Asia Pacific and Latin America
accounted for 36% of sales. Our divestment of the Biosimilars
business to Fresenius closed on August 31.
BIOPHARMA
In November, we announced that our Phase III JAVELIN Gastric
300 study did not meet its pre-specified primary endpoint of superior
overall survival. The study set a high bar for success and although
the primary endpoint was not met, we believe that the data will
provide valuable insights. We will therefore further examine the data
in an effort to better understand the results and intend to present
the results at an upcoming medical congress.
the JAVELIN program were presented at major medical congresses
in 2017 to help advance understanding of the field of immuno-
oncology, and this will continue in 2018.
The BavencioⓇ approvals were based on data from our compre-
hensive clinical development program, JAVELIN, which currently
comprises at least 30 clinical programs, including various Phase III
trials, and over 7,000 patients evaluated across more than 15 dif-
ferent tumor types. In addition to MCC and urothelial carcinoma,
these cancers include breast, gastric/gastro-esophageal junction,
head and neck, Hodgkin's lymphoma, melanoma, mesothelioma,
non-small cell lung, ovarian, and renal cell carcinoma. Key data from
Together with Pfizer Inc., USA, we are developing much-needed
new treatment options for patients with hard-to-treat cancers. In
2017, we made key progress in this area. We have obtained a total
of six regulatory approvals for our anti-PD-L1 antibody avelumab
under the brand name BavencioⓇ. The U.S. Food and Drug Adminis-
tration (FDA) granted two accelerated approvals for BavencioⓇ for
the treatment of adults and pediatric patients 12 years and older
with metastatic Merkel cell carcinoma (MCC) and previously treated
patients with locally advanced or metastatic urothelial carcinoma
(UC). These indications were approved under accelerated approval
based on tumor response rate and duration of response. Continued
approval for these indications may be contingent upon verification
and description of clinical benefit in confirmatory trials. The prognosis
for both patient groups is very poor, so for patients around the world
this may represent a welcome new treatment option. Furthermore,
approvals were granted for Merkel cell carcinoma in Switzerland,
Japan, Canada and in the 28 member states of the European Union,
as well as Iceland, Liechtenstein and Norway. Approvals followed in
Australia and Israel in early 2018. In addition, BavencioⓇ was approved
for the treatment of patients with urothelial carcinoma in Israel in
late January 2018.
Erbitux® (cetuximab) remains the second best-selling drug in
the portfolio of our Biopharma business and is our flagship product
in oncology. The product is a standard of care for patients with
epidermal growth factor receptor (EGFR)-expressing, RAS wild-type
metastatic colorectal cancer (mCRC) therapy, as well as both recur-
rent/metastatic and locally advanced squamous cell carcinoma of
the head and neck (SCCHN). We continue to invest in ErbituxⓇ and
are committed to making it available to those patients whom it will
benefit most.
We presented a total of 11 abstracts at ACR/ARHP, highlighting
the momentum of our various clinical programs in immunology. We
presented other data of note on a Phase II post-hoc study analysis
of atacicept for SLE patients with high disease activity. In the analysis
of ADDRESS II, a 24-week, randomized, placebo-controlled Phase IIb
study of 306 people, those who had high disease activity at baseline
had three to five times the odds of attaining low disease activity at
24 weeks when treated with atacicept 150 mg dose (n=51) as com-
pared to those treated with placebo (n=52).
We presented data on sprifermin, our investigational treatment for
knee osteoarthritis, at the ACR/ARHP Annual Meeting held in Novem-
ber. The study of 549 patients met its primary endpoint, demon-
strating statistically significant, dose-dependent increases in MRI
total femorotibial joint cartilage thickness from baseline in the two
sprifermin groups receiving the highest doses as compared with the
placebo group after the two-year treatment period.
Merck
Fundamental Information about the Group
Combined Management Report
58
1 Merck also has employees at sites which are not fully consolidated subsidiaries. These figures refer to all people directly employed by Merck and therefore may deviate from figures in the
financial section of this report.
In August, the European Commission (EC) granted marketing
authorization for MavencladⓇ in the treatment of highly active relapsing
multiple sclerosis. In December, the Therapeutic Goods Administration
(TGA) in Australia updated the registration including the indication,
dosing and safety information of MavencladⓇ for the treatment of
relapsing-remitting (RRMS), and Health Canada approved MavencladⓇ
as monotherapy for the treatment of adult patients with RRMS. In
January 2018, the Israeli Ministry of Health approved MavencladⓇ
for the treatment of adult patients with highly active relapsing MS
as defined by clinical or imaging features.
We view MavencladⓇ as a complementary new oral treatment
option in our MS product portfolio. Our MS treatment Rebif® is and
remains a well-established therapy.
In June, the Committee for Medicinal Products for Human Use
(CHMP) of the European Medicines Agency (EMA) issued a positive
opinion for approval of MavencladⓇ (cladribine tablets). Data from
clinical trials indicate that MavencladⓇ can lead to high and sustained
efficacy through selective modulation of B and T cells, resulting in
lasting resolution of inflammation. We have robust data relating to
the safety and tolerability profile and consider our unique oral short-
course treatment to be an important therapeutic option for patients
with relapsing multiple sclerosis (RMS) with high disease activity.
In 2017, we reinforced our commitment to growing our immu-
nology pipeline to provide new options to better the lives of people
with immunological diseases with the receipt of regulatory approvals
for MavencladⓇ (cladribine tablets) in the 28 member states of the EU
as well as Liechtenstein, Iceland and Norway; Canada and Australia.
We reached important development milestones for atacicept and
sprifermin, reporting our results at key medical meetings around the
world.
Our Biopharma business discovers, develops, manufactures and
markets innovative pharmaceutical and biological prescription drugs
to treat cancer, multiple sclerosis (MS), infertility, growth disorders
as well as certain cardiovascular and metabolic diseases. Biopharma
is the largest of our Healthcare businesses. We operate in four fran-
chises: Oncology, Neurology & Immunology, Fertility, and General
Medicine & Endocrinology. Our streamlined R&D pipeline positions
us with a clear focus on becoming a leading specialty innovator in
oncology, immuno-oncology and immunology, including multiple
sclerosis.
134
Life Science
129
121
Healthcare
152
Macroeconomic and Sector-
Specific Environment
100
Report on Risks
and Opportunities
140
Report on Economic Position
100
Merck
057
Fundamental Information
about the Group
057
55-164
MANAGEMENT
REPORT
COMBINED
55-164
MANAGEMENT
REPORT⭑
COMBINED
Report on Expected
Developments
In addition, as part of our commitment to developing new treat-
ment options for patients with hard-to-treat cancers who would
otherwise have a low chance of survival, we are exploring all potential
options and have entered into four new strategic collaborations to
evaluate avelumab in combination with a range of complementary
oncology medicines (further details can be found under "Research &
Development").
064
070
Additional information on Merck
KGaA in accordance with the
German Commercial Code (HGB)
160
Report in accordance with
section 315 (4) of the German
Commercial Code (HGB)
158
Merck Group
110
Course of Business and
Economic Position
110
Actual Business Developments
Review of Forecast against
103
094
People at Merck
Research and Development
083
Corporate Responsibility
074
Internal Management System
Objectives and Strategies
An important growth driver for our Biopharma business is our
portfolio of fertility products that help couples conceive a child,
ranging from drugs to technologies. Infertility has become a key topic
globally due to the trend towards delaying childbirth. We see steadily
increasing demand in growth markets fueling sales. In addition, we
are facing a rapidly changing environment in the fertility market,
changes in competitive environment trending towards increased price
pressure in the drugs business, more educated patients and an
increasing importance of technologies in Fertility. The innovative
strategic objective of our Fertility business is to develop from the
world market leader in fertility drugs into an integrated fertility treat-
ment partner. We are therefore focusing on turning these trends into
opportunities for Merck to achieve further growth. The first step to
achieve this goal was to complement our existing drug portfolio with
a continuously expanding innovative technologies offering.
Fundamental Information about the Group
Our Fertility Technologies business continues to broaden its
footprint. In December, we announced U.S. FDA 510(K) clearance of
the benchtop embryo incubator Geri TM1. This innovative technology,
designed to improve processes in fertility laboratories, will be
commercially available to IVF clinics in the United States as of the
first half of 2018. In early 2017, we announced the release of two
advanced Fertility Technologies products for improved efficiency in
the assisted reproductive treatment (ART) lab, EevaⓇ Test 3.0 and
GeriTM humidified incubation products.
Fundamental Information about the Group Merck
Combined Management Report
The Pigments & Functional Materials business unit develops and
markets a comprehensive product portfolio of decorative effect pig-
ments and functional materials. Our effect pigments are primarily
used in automotive and industrial coatings, plastics, printing appli-
cations, cosmetics and some foods, in order to give products a unique
luster. Functional materials include laser marking, conductive
additives, applications for counterfeit protection as well as high-
quality cosmetic active ingredients, for example for use in skin care,
as well as sun protection and insect repellants. In 2017, we intro-
duced Xirallic® NXT Cougar Red as a new product for coating appli-
cations. It belongs to the improved product generation of the well-
known high-tech effect pigments and stands out due to an attractive
bluish red and very intense glitter. We developed a special clear coat
for new effect dimensions in automotive coatings in cooperation with
Daimler, the coatings specialist PPG Industries and the Fraunhofer
Institute for Manufacturing Engineering and Automation. This new
development, which was presented at Sucar, the international
conference on automotive body finishing in Cannes, France, can
significantly intensify the effect on existing OEM base coats, making
it possible to create completely new color tones. For its innovative
3D effect printing technology, Merck entered into a strategic part-
nership with Schmid Rhyner of Switzerland. The aim is to further
develop this innovative printing process with effect pigments for
various surfaces and markets. We added TividaⓇ FL 3000 to our
portfolio of fluorosurfactants. Its competitive differentiation is based
on its favorable ecotoxicological profile, and even in very low con-
centrations it significantly improves the flow and wetting behavior
of coating systems.
Integrated Circuit Materials is our second-largest business unit and
supplies products to manufacture integrated circuits and micro-
electronic systems, for antireflection coatings, and for the mini-
aturization of transistor structures. Deposition materials and conductive
pastes for semiconductor packaging round off the portfolio. As an
important partner to leading global electronics manufacturers, the
business unit achieved very strong organic sales growth and gained
relevant market shares in an overall positively developing semicon-
ductor market. Particularly strong growth was generated by materi-
als for dielectric insulating layers and metal layers deposited from
the gas phase used for advanced processors and latest-generation
storage chips. At industry events such as the international trade show
for semiconductor technology Semicon Korea, SPIE Photonics West
in San Francisco, California, USA, and Semicon Taiwan, we presented
our portfolio expanded by the acquisitions of SAFC Hitech and Ormet
Circuits. At the International Conference on Atomic Layer Deposition
(ALD) in Denver, Colorado, USA, we presented our latest advances
in coating technology. In order to support our business expansion in
Asia, we opened a new research and application center at our site in
Kaohsiung, Taiwan. The center houses two laboratories developing
applications for coating materials and semiconductor packaging in
order to provide future-oriented support to our customers.
In 2017, our annual "Displaying Futures" symposium, which took
place in Tokyo, focused on the topic of Digital Transformations. We
host this symposium in order to stimulate an interdisciplinary dia-
logue on the development and potential of technologies and their
future impact on society. Experts in robotics, artificial intelligence
(AI) and design participated, elucidating digital transformation from
the various perspectives. Back in 2016, we launched the Displaying
Futures Award to promote young entrepreneurs and researchers.
The aim of this year's call for proposals was to identify flexible appli-
cations in the field of hybrid electronics. The prize, worth US$ 50,000,
was awarded to three teams from Canada and the United Kingdom.
Global demand for innovative display solutions has continued to
grow in recent years. The demand for high-quality consumer elec-
tronics, such as high-resolution televisions and smartphones, will
rise further in the coming years. This will be accompanied by the
building of new capacities and growth in volume demand, driven
primarily by large-screen televisions. In Display Materials, our largest
business unit, we observed a normalization of our market shares in
the liquid crystals sector in 2017. We want to stabilize this situation
by further strengthening our position as market and technology
leader. Key to this are new, sophisticated liquid crystal technologies,
such as SA-VA (self-aligned vertical alignment) and UB-Plus (ultra
brightness). Both new technologies are being intensively tested by
customers initial quantities to manufacture the corresponding
display panels have already been sold. The innovative, energy-saving
liquid crystal technology UB-FFS (ultra-brightness fringe-field switch-
ing) for small and medium-sized displays recorded double-digit
growth compared with 2016. In addition, we further enhanced our
ability to support customers in solving process technology issues. In
2017, we made further progress in developing new applications for
liquid crystals. For example, we opened the first production facility
for switchable liquid crystal window modules in Veldhoven, the Neth-
erlands. This is an important milestone for capturing a new market
segment for liquid crystals. Frost & Sullivan recognized our liquid
crystal window technology with the Technology Innovation Award
2017. We also made good progress in applying liquid crystal tech-
nologies to smart antennas and automotive headlight systems,
where we expect to generate initial sales in 2018.
-
Our specialty chemicals business is combined in our Performance
Materials business sector. The portfolio includes high-tech chemicals
for applications in fields such as consumer electronics, lighting, coat-
ings, printing technology, paints, plastics, and cosmetics. Perfor-
mance Materials comprises four business units: Display Materials,
Integrated Circuit Materials, Pigments & Functional Materials, and
Advanced Technologies. In September 2017, Kai Beckmann, a mem-
ber of the Executive Board of Merck since April 2011, succeeded
Walter Galinat as CEO Performance Materials. In 2017, the Perfor-
mance Materials business sector's share of Group sales amounted to
16% and its share of EBITDA pre (excluding Corporate and Other)
was 21%. The EBITDA pre margin amounted to 40.1% of sales.
Performance Materials
Merck
Fundamental Information about the Group
Combined Management Report
62
In March, we marked the 50th anniversary of our first lab water
system launch and introduced worldwide the Milli-Q® IQ 7000, the
seventh-generation Milli-QⓇ water purification innovation. There have
been tremendous advancements in the lab, and today's scientists
continue to seek ways to improve reproducibility and reliability of
data. The new lab water system addresses these pain points. Milli-Q®
water has become synonymous with ultrapure lab water and is the
most cited brand in peer-reviewed publications.
Following the acquisition, we opened our first customer food-
safety studio, located in Bellevue, Washington, USA, for manufac-
turers of all types of food. The new center gives customers access
to a complete food-safety workflow, from raw materials testing to
finished-product safety testing, to help find, correct and prevent
hazards within the food supply chain. The investment brings teams
together in a workspace designed to foster open innovation and
collaboration aimed at our becoming the leader in food-safety testing.
The Life Science business sector reinforced its commitment to
food safety with the acquisition of BioControl Systems Inc., offering
customers a complete workflow solution for food pathogen testing.
BioControl's established rapid-detection technology and third-party-
validated testing platforms complement our current portfolio of
instruments and consumables. The acquisition strengthens our ability
to help customers protect the global food supply by providing an
extensive portfolio of state-of-the-art testing technology.
The Applied Solutions business unit supports customers in their
efforts to ensure that drugs, food and beverages are safe for
consumption. We provide trusted products and comprehensive work-
flow solutions that streamline processes, lower costs and deliver
consistent, reliable results. Our 62,000-plus products and services
include analytical separation systems, reference materials, lab water
instruments with consumables and services, and microbiology and
bio-monitoring testing materials.
63
In September, China's first BioReliance® End-to-End Biodevelopment
Center was opened in Shanghai. The center provides a full range of
process development capabilities and services, including cell line
development, upstream and downstream process development and
non-GMP clinical production. The center is designed to meet the
specific needs of customers in the APAC region.
At the Laser World of Photonics 2017 exhibition, we presented a new
pigment for laser marking in a new application field. Iriotec® 8826
is particularly suitable for dark and high-contrast marking of colored
polymers and for the first time enables the laser marking of films.
Besides materials for technical applications, we are working on inno-
vative materials for cosmetics. In 2017, two new raw materials com-
plemented our portfolio: Rona Care® Pristine Bright liquid, a liquid
variant of an active ingredient that makes the skin appear naturally
lighter, and an alcohol-free variant of the anti-aging active ingredient
RonaCare® CP5.
At the International Symposium on Automotive Lighting (ISAL)
in Darmstadt, we presented our functional pigments for lighting
applications. With these pigments from the Iriotec® 8000 series,
circuit layouts can be integrated into injection-molded components
or powder-coated components in laser direct structuring processes.
Laser structuring of the components offers tremendous design
freedom, especially since these pigments also enable light-colored
design in addition to dark modules.
Today, we hold leading positions in the respective markets of our
three business sectors Healthcare, Life Science and Performance
Materials, and are working to bolster and expand these. To this end,
we are pursuing innovation-driven, organic growth. For instance, by
2022 we are targeting sales of around € 4 billion with new products.
New medicines from the pharmaceutical pipeline are to contribute
around € 2 billion, with Life Science and Performance Materials inno-
vations each contributing around € 1 billion in sales.
Over the past decade, Merck has transformed itself from a classic
supplier of chemicals and pharmaceuticals into a global science
and technology company. The main driver was the transformation
of our business portfolio, particularly through the divestment of our
Generics business (2007) and the acquisitions of Serono (2007),
Millipore (2010), AZ Electronic Materials (2014), and Sigma-Aldrich
(2015). In addition, we focused our businesses on innovation-driven
and highly specialized products, extensively revamped our internal
structures and processes, and expanded our presence in global
growth markets. In line with this strategy, we completed the divest-
ment of our Biosimilars business in 2017. In addition, we are pre-
paring strategic options for our Consumer Health business, including
a potential full or partial sale of the business as well as strategic
partnerships.
GROUP STRATEGY
For us, the principle of long-term thinking and actions applies not
only to economic aspects, but also encompasses corporate respon-
sibility. We pursue three strategic spheres of activity: health, envi-
ronment as well as culture and education. The focus is always on the
future viability of society and the competitiveness of our company.
With our current and future product portfolio, we want to help meet
global challenges, from urbanization to aging populations.
Our annual strategic development process follows firmly defined
principles. Our business portfolio is expected to be adequately balanced
at all times so as to reflect an optimum mix between entrepreneurial
opportunities and risks and ensure the long-term success of the com-
pany. We achieve this through our diversification into three comple-
mentary business sectors that make the company as a whole less
dependent on economic cycles, as well as by further expanding our
presence in global growth markets. This exemplifies the long-term
direction of our Group strategy. The company structure of Merck KGaA
also contributes to this. The Merck family holds approximately 70% of
the capital of Merck KGaA via E. Merck KG, the personally liable part-
ner. In addition, the structure requires the Executive Board, whose
members are also personally liable partners, to pay special attention
to the long-term value creation.
Merck is a vibrant science and technology company. Across Health-
care, Life Science and Performance Materials, we bring expert and
high-quality products to the world. Our aim is to achieve technological
progress that will improve life and make our customers and business
associates more successful. This aspiration is embodied by value-
based and economically sustainable corporate governance, and steers
the strategic development of the Group.
GENERAL PRINCIPLES
We are the only company to offer recombinant versions of the
three natural hormones needed to treat infertility as well as a
complete and clinically tested portfolio for every stage of the repro-
ductive cycle. We are continuously supporting patients on their IVF
journey. In November, the FDA approved a new version of the Gonal-fⓇ
(follitropin alfa injection) prefilled pen that is easy-to-learn and easy-
to-use (please refer to the R&D section for details). Earlier in the
year we received regulatory approval for the new PergoverisⓇ pen in
Europe (please refer to the R&D section for details).
Objectives and Strategies
Fundamental Information about the Group _ Objectives and Strategies
Combined Management Report
64
In 2018, we want to focus even more strongly on the needs of our
customers and markets. Therefore, in December 2017, we announced
that we will combine our expertise in three newly created business
units aligned with our target markets: Display Solutions, Semicon-
ductor Solutions and Surface Solutions.
Strategic realignment
In the field of organic photovoltaics, more and more pilot projects
demonstrate the manifold applications of the technology in architecture.
In initial construction projects in Europe and Brazil, printed solar
foils turn glass façades and canopies into active power generators.
In 2017, we received the Innovation Award Architecture + Building
at the BAU 2017 for our organic photovoltaic modules developed in
cooperation with Belectric OPV.
sively to improve materials for televisions, for instance. Brighter
displays and a larger color spectrum were two areas of focus. At our
debut at the International Motor Show (IAA) in Frankfurt, Germany,
we exhibited rear lights with OLED materials, for instance. As OLEDS
are extremely thin and lightweight, the parts require only little space.
This allows rear lights in new forms, giving vehicle designers even
greater possibilities in the future. OLED materials also permit free-
form displays in vehicle interiors, which expands the design possi-
bilities even further. The technology permits particularly vivid con-
trasts, brilliant colors, sharp images, and pleasant readability. We are
continuing to drive OLED technology forward. The capacities at the
application laboratory in Korea were doubled in 2017. High-quality
phosphors are used for the backlighting of liquid crystal displays. We
launched our new full-spectrum phosphors for application in violet
chip-based LEDs. They are very luminous and achieve a high color
rendering index and a spectrum that comes very close to natural
sunlight. Apart from the use of OLED materials in displays, we are
continuing to target the lighting market.
In 2017, the Advanced Technologies business unit invested
further, particularly in future-oriented research and development in
Performance Materials. A very good example of this are our materi-
als for organic light-emitting diodes (OLEDs). The OLED materials
business is one of our fastest-growing businesses. We worked inten-
In 2017, we opened a new application laboratory in Shanghai,
China. It is the first application laboratory for pigments and functional
materials in China, through which we offer our customers compre-
hensive tailored services for our products and at the same time work
with them to develop new products. China is one of the fastest-grow-
ing markets for our pigments and cosmetics businesses. With the
new application laboratory, we are continuing our 20-year commit-
ment in this business in China and Southeast Asia, and are under-
scoring our leading position in pigments and functional materials.
Our single-use chromatography portfolio was boosted in August
with an agreement to acquire Natrix Separations, a provider of hydro-
gel membrane products based in Ontario, Canada. Natrix is known for
its unique technology platform, which delivers high productivity and
impurity removal in a single-use format. The acquisition complements
our efforts to drive next-generation bioprocessing, ultimately enabling
faster and more efficient technology for customers.
General principles and Group strategy
The Process Solutions business unit delivers end-to-end products
and expertise to customers who take what is developed in labs and
manufacture it. We offer a diverse range of products to pharmaceu-
tical and biotechnology companies that enables customers to develop
large- and small-molecule drugs safely, effectively and cost-efficiently.
The 15,000-plus products and services in this business unit include
single-use manufacturing, filtration, chromatography and purification,
virus reduction, pharma and biopharma raw materials, drug delivery
compounds and engineering and validation services.
Combined Management Report
60
On September 5, we announced that we are preparing strategic
options for our Consumer Health business, including a potential full
or partial sale of the business as well as strategic partnerships. This
is consistent with our focus on our innovation-driven Biopharma
pipeline.
Consumer Health currently ranks among the top 15 players in
the global OTC market and already generates more than 50% of its
annual sales in developing growth markets. In particular, markets
such as Mexico, Brazil, Poland, Greece, South Africa, India, Indonesia,
Thailand, and Malaysia are delivering significant growth rates. To
further align the regional strategies with the strategic brand strate-
gies and to even better focus on efficient region-brand combinations,
the business has reorganized its brand structure into a brand-
franchise model leveraging its full expertise and capabilities across
functions.
Global megatrends favor the future growth of our Consumer
Health business. People are becoming more health-conscious and
looking after their own physical well-being. Preventive healthcare
and minimally invasive treatment are growing in importance in both
established and developing markets, the latter characterized by a
growing middle class with specific needs. As people and societies are
growing older than ever before, Consumer Health has established a
movement around its new purpose of actively driving change in the
societies it operates in, all under the independent label and motto
"WE100®."
Our Consumer Health business focuses on consumer-centric inno-
vation under the umbrellas of several strategic brands such as
Neurobion®, Bion3®, Seven Seas®, NasivinⓇ, FemibionⓇ and Dolo-
NeurobionⓇ, as well as ViveraⓇ/Floratil®, Sangobion®, VigantolettenⓇ,
Apaisyl®, and KyttaⓇ. The aim is to emotionalize these over-the-
counter and food supplement brands so that they become irresistible
love brands in the eyes of our consumers and customers alike. Most
of these brands are fully aligned with the newly established purpose
of the Consumer Health business: "We exist to prepare society for a
new era of humans living 100 healthy years."
CONSUMER HEALTH
At the 2017 Pharmaceutical Market Excellence Awards, Merck won
in the category "Excellence in Innovation". We were awarded for our
eHealth ecosystem designed to improve treatment outcomes by
working with patients, carers and healthcare professionals.
Saizen® (somatropin) is our main endocrinology product and is
indicated for the treatment of growth hormone deficiency (GHD) in
children and adults. Saizen® is delivered with the easypod™ electro-
mechanical injection device, the only growth hormone injection device
of its kind. easypod TM is able to wirelessly transfer data such as
injection times, dates and doses to the web-based software system
easypod™ connect, making it easier for healthcare practitioners and
patients to ensure adherence and reach their treatment goals.
We also help to raise awareness and education in the areas we
operate in, such as thyroid diseases and diabetes. For example, we
took part in International Thyroid Awareness Week and announced
a partnership with the International Diabetes Federation (IDF), which
will serve as a basis for joint education and communication activities
to raise awareness of the importance of type 2 diabetes prevention.
Concor®, containing bisoprolol, is the leading beta-blocker for
chronic cardiovascular diseases such as hypertension, coronary
artery disease and chronic heart failure. With a market share above
40% and double-digit sales growth, Euthyrox® (active ingredient
levothyroxine) is the worldwide market leader for treating hypo-
thyroidism, a disease with high prevalence but low diagnosis in most
emerging markets. Glucophage®, containing the active ingredient
metformin, is the drug of choice for first-line treatment of type 2
diabetes. In May, the Medicines and Healthcare products Regulatory
Agency (MHRA) in the United Kingdom authorized Glucophage® SR
(sustained release formulation; metformin) for the reduction in the
risk or delay of the onset of type 2 diabetes in adult, overweight
patients with impaired glucose tolerance (IGT) and/or impaired fast-
ing glucose (IFG), and/or increased glycated hemoglobin (HbA1c),
when intensive lifestyle changes for three to six months have failed.
In addition to the United Kingdom, we have approvals in the indica-
tion of prediabetes in 16 markets and see great potential due to an
increasing prevalence of diabetes.
Every day, more than 60 million patients around the world use our
trusted general medicine and endocrinology (GM&E) medicines.
Today, Concor®, Euthyrox®, GlucophageⓇ and SaizenⓇ are high-value
brands and market leaders in many key markets around the world.
As a result, in terms of sales GM&E is the largest business franchise
of the Healthcare business sector, with strong double-digit growth in
all major therapeutic areas in 2017, contributing significantly to the
overall profitability of Biopharma and Merck. Although no longer
patent-protected, the brand equity built over decades makes our
flagship products cornerstones for the treatment of chronic cardio-
vascular, metabolic and endocrine diseases.
Fundamental Information about the Group Merck
Combined Management Report
1 Geri™ is not yet available in the United States.
As a leader in single-use technology, we launched an industry-
first program that allows more flexibility, better supply predictability
and shorter lead times for safer and more efficient drug manufacture
through the Mobius® MyWAY portfolio. This is critical to customers
ranging from contract manufacturing organizations to large pharma
companies, whose biggest challenge is getting custom assembly with
fast, reliable lead times for quicker turnarounds and more rapid
biomanufacturing.
In January, we opened our first Center of Excellence (COE) for
fertility, an international state-of-the-art facility for high-quality
training of healthcare professionals, such as physicians and embry-
ologists, to improve clinical practices, protocols and clinical outcomes.
Fundamental Information about the Group
Merck
59
Our allergy business Allergopharma is one of the leading companies
in the field of allergy immunotherapy (AIT). The Allergopharma port-
folio includes a diverse spectrum of approved allergen products that
meet high quality standards. AIT (hypo-sensitization, desensitization,
specific immunotherapy) is the only causal therapy for treating allergies
to unavoidable allergens.
In May, we acquired Grzybowski Scientific Inventions (GSI) to
complement our industry-leading e-commerce platform and chemistry
portfolio of more than 400,000 building blocks, catalysts and reagents
for chemical synthesis. GSI developed a revolutionary computer-aided
retro-synthesis tool, used to advance reaction rules and proprietary
algorithms to identify synthesis pathways that meet user-defined
constraints. Virtual synthesis significantly reduces the time between
chemical target conception and route evaluation by using a lab's
preferences to filter millions of data points.
ALLERGOPHARMA
61
Combined Management Report
We continued our journey to spark curiosity in the next genera-
tion of scientists with a year-long Curiosity Cube™ tour across the
United States. The tour was built on the business sector's successful
Curiosity Labs™ program, where employee volunteers brought leading-
edge science, technology and experiments to tens of thousands of
students around the globe - aiming to inspire a future career in
Science, Technology, Engineering and Math (STEM). Through 2017,
the Curiosity CubeTM - a retrofitted shipping container transformed
into a mobile science lab - visited 79 schools, held 54 public events
and reached 38,040 students.
Our e-commerce platform, www.sigmaaldrich.com, allows
customers in nearly every country to easily find the exact products
needed to advance their research. Currently, more than 80% of
legacy Merck Millipore products are available on the platform. In
2016, we implemented a centralized initiative to manage all customer
acquisition channels and scaled search advertising to include more
than two million active keywords to drive increased web traffic to the
content customers are seeking. In 2017, we continued to optimize
our web channel and streamline the customer experience, resulting
in increased user sessions and revenue.
The Life Science business sector generates recurring sales and
stable, attractive cash flows in an industry characterized by stringent
regulatory requirements. A highly diversified and loyal customer base
additionally ensures a low-risk profile. We benefit from a broad and
relevant portfolio, a highly efficient supply chain that includes an
e-commerce platform and global reach.
Fundamental Information about the Group Merck
Another example is the Life Science business sector's MobiusⓇ
single-use bioreactors, which help customers move closer to fully
disposable manufacturing. Single-use technology is becoming
increasingly popular in the industry. With single-use disposable
equipment, customers get improved batch turnaround times, reduced
risk of product cross-contamination, decreased capital costs and
have less equipment to clean.
We manufacture products to diagnose and treat type 1 allergies
such as hay fever or allergic asthma. Our allergy business offers high-
dose, hypoallergenic, standardized products for allergen immuno-
therapy of pollen and mite allergies. These allergoids have a special
focus in Allergopharma's product portfolio and constitute a corner-
stone in its integrated health approach for patients suffering from
these conditions. For effective treatment, reliable diagnosis is key.
Allergopharma offers a broad range of diagnostics in the field of
allergies with more than 100 single allergens, providing physicians
with the specific tools needed to identify the substances causing an
allergy. In addition, Allergopharma provides individual allergen
extracts on a named patient basis, which are needed to treat less
frequent allergies. Personalized medicine has been a reality for
Allergopharma for many years now. Products of Allergopharma are
available in 18 countries worldwide.
Life Science
After successfully orchestrating the largest integration in the his-
tory of Merck, the Life Science business sector redesigned its orga-
nizational structure in the second quarter of 2017 to capture growth
opportunities even more nimbly and to align the entire organization
to optimally contribute to, and capitalize on the strength of the Merck
Group. Strategic Marketing & Innovation units and commercial teams
have been streamlined into three distinct business units - Research
Solutions, Process Solutions and Applied Solutions - with each
designed to increase agility and drive sustained entrepreneurship to
better serve our customers.
In the Life Science business sector, our purpose is to solve the
toughest problems in life science by collaborating with the global
scientific community - and through that, we aim to accelerate access
to health for people everywhere. Udit Batra has been the CEO of our
Life Science business sector since 2014 and a member of the Merck
Executive Board since 2016. In 2017, Life Science generated 38%
of Group sales as well as 38% of EBITDA pre (excluding Corporate
and Other).
The Life Science Research Solutions business unit serves customers
focused on identifying and developing new medicines. We offer a
broad and relevant portfolio of solutions that enables scientific
discovery through collaborative partnerships across the customer
journey. This includes more than 200,000 products and services,
including molecular platforms, protein and pathway technologies,
biochemicals, materials science and cell culture workflow tools.
to shorten bioproduction times in early development, enabling
customers to enhance their speed to market and decrease costs.
Our 300,000 products range from lab water systems to genome-
editing tools, antibodies and cell lines, as well as end-to-end biopro-
cessing systems to support the manufacturing needs of both emerg-
ing biotech and large pharma companies. For example, the Life
Science business sector created the first-ever commercially available
cell line platform for faster, simpler selection and scale-up of high-
producing clones for making recombinant protein drugs. Used to
produce biopharmaceuticals, the CHOZNⓇ cell line has been proven
We serve customers in academia, biotech and pharma - helping
them to deliver the promise of their work better, faster and safer.
As a leading player in the life science industry, we offer innovative
solutions for scientists and engineers at every stage.
> 100.0%
-849
-855
6
-0.7%
1,201
-16
2,680
114
191
-77
-40.4%
1,218
-1.3%
2,600
521
-386
in %
59.7%
€ million
972
1,629
2016
2017
Change
1 Not defined by International Financial Reporting Standards (IFRS).
Earnings per share pre (€)¹
Net income pre¹
Adjustments¹
2,703
Amortization of acquired intangible assets
-907
-24
Corporate Responsibility
6.16
Income taxes on the basis of the underlying tax rate
Merck Human Rights Charter
•
s Charter Merck Code of Conduct
Health
Environment
CR Strategy
Mission Statement and Values ⚫ UN Global Compact
Education and Culture
Entrepreneurial responsibility
Mankind is confronted with global societal challenges such as climate
impact, resource scarcity and insufficient access to health in low- to
middle-income countries. We believe that we can help resolve these
global challenges through our innovative healthcare, life science and
performance materials products, as well as through responsible gov-
ernance. Responsible conduct means looking, listening and doing
better. We respect the interests of our employees, customers, inves-
tors, and society, and work to minimize ethical, economic and social
risks, thereby securing our success. This is an integral part of our
corporate strategy, which in turn underpins our CR strategy, the basis
for the responsible governance we live each and every day. In real-
izing our corporate responsibility, we focus our resources on those
areas where we can have the greatest impact. We pursue three
strategic spheres of activity: namely health, the environment, and
culture & education. The focus here is on securing the future of
society and our competitiveness.
Our corporate responsibility (CR) activities are steered by our CR
Committee, which consists of representatives from our business
sectors and relevant Group functions. Since September 2017, Stefan
Oschmann, Chairman of the Executive Board and CEO, has been
responsible for the committee, which is chaired by the head of the
newly formed Corporate Affairs unit.
Strategy and management
success.
We take responsibility every day - and have been doing so for 350 years.
This commitment is codified in our corporate strategy and values.
Responsible conduct with respect to employees, products, the envi-
ronment, and society is a fundamental prerequisite for our business
Fundamental Information about the Group Corporate Responsibility
Combined Management Report
6.21
-0.05
-0.8%
CREDIT RATING
The rating of our creditworthiness by external agencies is an important
indicator with respect to our ability to raise debt capital at attractive
market conditions. The capital market makes use of the assessments
published by independent rating agencies in order to assist debt
providers in estimating the risks associated with a financial instru-
ment. We are currently assessed by Moody's, Standard & Poor's and
Scope. The most important factor for the credit rating is the ability
to repay debt, which is determined in particular by the ratio of oper-
ating cash flow to (net) financial debt.
DIVIDEND RATIO
-0.9%
With the aim of ensuring an attractive return for our shareholders,
we are pursuing a reliable dividend policy with a target payout ratio
based on EPS pre (see definition above).
Innovations are the foundation of our business and will also be the
prerequisite for future success in changing markets. We are con-
tinuously working to develop new products and service innovations
for patients and customers. Indicators for the degree of innovation
are defined individually depending on the specifics of the respective
businesses.
TALENT RETENTION
Employing a highly qualified and motivated workforce is the basis
for achieving our ambitious business goals. Therefore, we put a
strong focus on establishing the processes and the environment
needed to attract and retain the right talent with the right capabilities
at the right time. To measure the success of the related measures,
we have implemented talent retention as an important non-financial
indicator.
Other relevant/non-financial
performance measures
Apart from the indicators of the financial performance of the busi-
nesses, non-financial measures also play an important role in fur-
thering the success of the company. From a Group perspective, spe-
cifically innovations in the businesses as well as the attraction and
retention of highly qualified employees are of central importance.
74
INNOVATION
Income taxes
2016
€ million
NPV, IRR,
M&A
Projects
ROCE, MEVA
Net sales growth,
EBITDA pre margin
Net sales,
EBITDA pre,
BFCF
Business
MEVA
Net income, EPS,
Dividend ratio,
Credit rating
Net Sales,
EBITDA pre, BFCF
Merck Group
The Value Creation and Financial KPI Pyramid, which summarizes
the important financial performance measures of the Merck Group,
reflects the comprehensive framework of financial KPIs to steer
the businesses and prioritize the allocation of cash resources. It
consists of three managerial dimensions, namely Merck Group,
Business and Projects, each of which require the use of different
indicators.
As a global company with a diverse portfolio of products and services,
we use a comprehensive framework of indicators to manage perfor-
mance. The most important KPI (key performance indicator) to
measure performance is EBITDA pre¹.
Internal Management System
Licensing
Fundamental Information about the Group _ Internal Management System
70
We are pursuing a sustainable dividend policy. Provided that the
economic environment develops in a stable manner, the current div-
idend represents the minimum level for future dividend proposals.
The dividend policy is oriented towards the business development
and earnings increase of the coming years. However, dividend growth
could deviate, for example, within the scope of restructuring or in
the event of significant global economic developments. We aim for
a target corridor of 20% to 25% of EPS pre.
DIVIDEND POLICY
The rating of our creditworthiness by external rating agencies is an
important indicator of the company's financial stability. A strong
investment-grade rating is an important cornerstone of Merck's
financial policy, as it safeguards access to capital markets at attrac-
tive financial conditions. Merck currently has a Baa1 rating from
Moody's, an A rating from Standard & Poor's (S&P) and an A- rating
from Scope, each with a stable outlook. Continuing to reduce our
debt, as in 2017, is of utmost importance to us.
STRONG INVESTMENT GRADE RATING
MAINTAINING SUSTAINABLE AND RELIABLE
BUSINESS RELATIONS WITH A CORE GROUP OF BANKS
We mainly work with a well-diversified, financially stable and reliable
group of banks. Due to Merck's long-term-oriented business approach,
bank relationships typically last for many years and are characterized
by professionalism and trust. The banking group consists of banks
with strong capabilities and expertise in various products and geo-
graphic regions. We regard these banks as strategic partners. Accord-
ingly, we involve them in important financing transactions.
Furthermore, we are using bilateral bank loan agreements with
first-class banks in order to optimize the funding structure and cost.
Additionally, the bond market generally represents a key element.
However, owing to our focus on deleveraging, no bonds were issued
in 2017. The most recent bond issues took place in 2014 and 2015
in connection with the acquisition of Sigma-Aldrich. A hybrid bond,
a U.S. dollar bond and a euro bond were issued. The use of various
instruments provides a broad financing basis and addresses different
investor groups.
We have diversified and profitable businesses as the basis for our
strong and sustainable cash flow generation capacity. Moreover, we
have several funding resources in place. A € 2 billion syndicated loan
facility through to 2020 exists to cover any unexpected cash needs.
The facility is a pure back-up credit facility and has not been drawn
on so far. In addition, we have a commercial paper program with a
volume of € 2 billion at our disposal. Within the scope of this program,
we can issue short-term commercial paper with a maturity of up to
one year.
We ensure that we meet our obligations at all times and adhere to
a conservative and proactive funding strategy that involves the use
of various financial instruments.
A CONSERVATIVE FUNDING STRATEGY
FINANCIAL FLEXIBILITY AND
We are pursuing a conservative financial policy characterized by the
following aspects:
Strategic finance and dividend policy
69
Combined Management Report
eNPV, IRR,
EBITDA pre margin,
EPS, ROCE, MEVA
EBITDA pre margin,
POS, ROCE
€ million
303
2016
15,024
15,327
2017
Change
Net sales
€ million
Net sales
MERCK GROUP
Net sales are defined as the revenues from the sale of goods, services
rendered to external customers, commission income and profit-sharing
from collaborations, net of value added tax and after sales deductions
such as rebates or discounts. Net sales are the main indicator of our
business growth and therefore an important parameter of external as
well as internal performance measurement. In addition, acquisition-
and currency-adjusted sales are used for internal performance man-
agement. Organic sales growth shows the percentage change in net
sales versus a comparative period, adjusted for exchange rate and
portfolio effects. Exchange rate effects may arise as a result of foreign
exchange fluctuation between the functional non-euro currency of a
consolidated company and the reporting currency (euro). By contrast,
portfolio effects reflect sales changes due to acquisitions and divest-
ments of consolidated companies or businesses.
NET SALES
The three key performance indicators net sales, EBITDA pre¹, and
business free cash flow¹ are the most important factors for assessing
operational performance. Therefore, we refer to these KPIs in the
Report on Economic Position, the Report on Risks and Opportunities,
and in the Report on Expected Developments. As the most important
indicators of financial business performance, the KPIs are key ele-
ments of our performance management system.
Key performance indicators of
the Group and its businesses
71
Fundamental Information about the Group — Internal Management System
Combined Management Report
1 Not defined by International Financial Reporting Standards (IFRS).
Capex
NPV, IRR,
Payback period,
EBITDA pre margin, ROCE
Abbreviations
EBITDA pre = Earnings before interest, income tax, depreciation and amortization as well as adjustments
Objectives and Strategies
EPS = Earnings per share
BFCF = Business free cash flow
ROCE = Return on capital employed
NPV = Net present value
IRR = Internal rate of return
eNPV = expected Net present value
POS Probability of success
M&A = Mergers & Acquisitions
MEVA = Merck value added
Fundamental Information about the Group
Combined Management Report
In 2018, we want to focus even more strongly on the needs of our
customers and markets. Therefore, in December 2017, we announced
that we will combine our expertise in three newly created business
units, which are aligned to our target markets: Display Solutions,
Semiconductor Solutions and Surface Solutions.
Global megatrends such as a growing world population and an
increase in average life expectancy are driving the demand for our
healthcare products. To meet these demands and respond appropri-
ately to the dynamics of our healthcare markets, we have signifi-
cantly transformed our Healthcare business sector in recent years.
Following on our successes of the past year, we continue to drive
pipeline projects with the aim of bringing groundbreaking medicines
to patients, maximizing our existing portfolio and continuing our
expansion in growth markets.
Our Healthcare business sector comprises the three businesses Bio-
pharma, Consumer Health and Allergopharma. The diversity and
profound medical expertise we have in these businesses are core
strengths and key differentiators in the market. Within each busi-
ness, we specialize in key therapeutic areas and specific diseases.
HEALTHCARE
Business strategies
Building on our 350-year history, the Darmstadt site is making a
vital contribution to the company's future in research-based specialty
businesses. It serves as a key site for R&D and high-quality production
for all our business sectors in their global markets, as the heart of
Merck, as our global headquarters as well as the base for the family
boards, executive management and our Group functions.
Within the scope of our innovation strategy, we have established Merck
Ventures as the strategic, corporate venture capital fund of Merck with
a total volume of € 300 million to manage funds focused on Health-
care, Life Science, Performance Materials and New Businesses. Merck
Ventures invests globally in transformational ideas driven by strong
entrepreneurs. We take an active role in our portfolio companies and
team up with entrepreneurs and co-investors to translate innovation
into commercial success. We have a significant focus on early-stage
investing and company creation, including the formation of spin-offs
to leverage our science and technology base. Merck Ventures currently
has an active portfolio of 30 companies.
Additionally, the Innovation Center establishes strong connections
to the start-up community, scientific centers of excellence, and
external partners across industries, for example via our Accelerator
program, that supports early-stage start-ups for a period of three
months. The start-ups receive financial support, training and coaching
as well as access to our experts from the businesses. Since the pro-
gram began in September 2015, we have received more than 2,000
applications from over 70 countries and have mentored 30 start-ups.
We seek to establish projects in various strategic innovation fields
of interest that we consider promising. The first such innovation field,
"Biosensing and Interfaces", focuses on the vast opportunities created
by combining new sensor technology with smart algorithms and Big
Data technology. This is expected to lead to new predictive and pre-
scriptive approaches to treat and support patients in the therapeutic
areas that we address. We want to offer innovation projects ideal
conditions in the Innovation Center to grow into viable new businesses
in an environment that provides both entrepreneurial freedom and
dedicated support.
Furthermore, we are working Group-wide to expand the physical
and virtual infrastructure for technology-driven growth. The center-
piece is formed by our Innovation Center in Darmstadt. A modular
Innovation Center was opened in April 2015 in Darmstadt as a proto-
type of the new Innovation Center that will be opened in spring 2018.
The Innovation Center aims to develop entirely new businesses
beyond the current scope, bringing together people, technologies,
and skills from different areas under one roof.
advanced analytics to better forecast drug demand and to optimize
our inventories. Within the scope of this partnership, we want to
leverage Palantir's advanced data analytics capabilities to more rap-
idly develop and deliver medicines and commercialize new products.
This could also play a part in the development of entirely new
therapeutic options for patients in the future. Initially, we will use
Palantir's technology in cancer treatment and patient services. Later
on it can be used in other areas of the company. Our computer-aided
retrosynthesis tool Chematica is also using advanced algorithms to
help customers in medicinal chemistry and drug discovery to identify
synthesis pathways.
Fundamental Information about the Group _ Objectives and Strategies
Combined Management Report
66
In particular, we want to capture the opportunities that digitali-
zation offers in order to create value for patients, customers and
business associates. To us, digitalization means the digital integration
of our entire value chain, the digitalization of our products, services
and communication interfaces to customers as well as the develop-
ment of new digital business models. This is supported by state-of-
the-art methods to collect and analyze vast amounts of data. For
example, we generate additional sales from our e-commerce platform
www.sigmaaldrich.com using algorithmic optimization of ads and
product recommendations. Other examples include a supply chain
project with our partner Palantir Technologies, where we are using
The priority area "Technology" covers the closely interlinked areas
of innovation and digitalization. Developing and marketing innovative
products and services are at the forefront of our Group strategy and
all the business strategies. Our objective is to foster innovations both
within the businesses and between them as well as beyond existing
businesses into areas in which we are not yet active.
Priority area "Technology"
Based on employee feedback and external benchmarking, we are
also continuously further developing our existing programs and pro-
cesses. Our award-winning people analytics approach, which for
example empowers our leaders to make data-driven decisions on
matters relating to their functions and people, has been rolled out
to all people managers globally. Other pilot initiatives focus on,
among other things, strengthening the engagement and innovation
potential of our research and development units, and on flexible ways
of collaborating across national and departmental boundaries.
Combined Management Report
Fundamental Information about the Group
Objectives and Strategies
65
Priority area "Performance"
The priority area "Performance" encompasses all activities that
create sustainable, profitable growth. To this end, we are closely
aligning our businesses with the wishes and needs of customers and
patients, not only through our products, but also best possible prox-
imity. The basis for this is formed by efficient structures and processes
as well as sustainable financial management.
Combined Management Report
In Healthcare, the strategic direction is to become a global spe-
cialty innovator and we aim to maximize growth of existing franchises
and to deliver pipeline with an average of one product launch or
indication per year from 2017. We intend to keep our base business
organically stable until 2022. In 2017, the potential of the pipeline
materialized with six approvals for BavencioⓇ, two in the United
States, and one in the EU, in Switzerland, in Japan, and in Canada,
as well as for MavencladⓇ in the EU, Canada and Australia.
In Performance Materials, we expect that our Semiconductor and
Surface Solutions business units, which are developing well, will
continue to mitigate the consequences of the fiercer competitive
environment in our Liquid Crystals business in 2018. Going forward,
we want to further enhance our degree of diversification. In addition,
new technologies are in the testing phase. Our goal is to achieve
innovation and technology leadership in all businesses and to push
forward with innovative solutions in applications beyond displays.
From a regional perspective, in view of the importance of the
Chinese market and China's ambitious plan to become a global leader
in innovation and technology, we are placing further importance on
bolstering our positioning in this country. China will remain one of
the most strategically important markets for us globally. By focusing
on growth contributions from China and driving innovation and
digitalization across our business sectors, we are fostering the
development and evolution of the Chinese innovation landscape. Our
Healthcare business sector continues to aim for very strong growth
and is improving the lives of millions of patients in China, in particu-
lar with medicines from our General Medicines franchise, for example
to treat cardiovascular diseases, as well as our Fertility franchise.
Our Life Science and Performance Materials business sectors help
Chinese companies and research institutes to become more compet-
itive and efficient. We work with Chinese pharmaceutical companies
on manufacturing and research processes and we make materials
for Chinese electronic and display manufacturers.
Net income
The priority area "People" addresses how we as a science and tech-
nology company can create a working environment that meets our
employees' individual needs and allows curiosity to unfold. Our
growth strategy calls for people with diverse experience and back-
grounds who work together on the basis of shared values to create
innovation and respond flexibly to changing demands.
The basis for this is the ability to identify talented employees
within the company early on and to systematically promote them -
also across business sectors and countries. Moreover, it is crucial to
be perceived as an attractive employer in the market in order to
continue to capture the interest of potential employees. The fact that
we rank among the world's best employers was also confirmed by
the distinction as "Global Top Employer 2017" by the Dutch Top
Employers Institute. In addition, we were ranked fourth among bio-
technology and pharmaceutical companies worldwide by Science
magazine, a leading peer-reviewed international scientific publication.
In the course of our transformation, our leaders play a key role.
They are responsible for driving our strategy forward by building the
right competencies, thereby enabling innovation. We therefore place
great importance on the continuous advanced training and further
development of our leaders. This is essential for them to address the
diverse needs of their team members and the changing requirements
of the businesses and of digitalization.
In Life Science we deliver above-market organic growth by having
a broad portfolio that addresses the needs of the scientific community,
particularly in high-growth areas, for instance bioprocessing. We achieve
solid organic sales growth consistently, even during the integration.
Our profitability is industry-leading, driven by our e-commerce plat-
form and synergies from the rapid integration of Sigma-Aldrich into
our Life Science business sector. By the end of 2018, we expect to
realize € 280 million in planned synergies.
in %
Fundamental Information about the Group
67
Strategic realignment
The LC 2021 strategic initiative is to significantly contribute to our
future growth and continue to generate attractive margins. Under
the umbrella of the LC 2021 strategic initiative, we are combining
future applications of liquid crystals beyond classic displays. In six
fields altogether, we are focusing on improved user experience, on
the one hand, and light and data management, on the other. First
and foremost, this comprises liquid crystal windows. In Veldhoven,
the Netherlands, we opened the first production facility for modules
used in LC windows with sun protection and privacy control.
Strategic initiatives
Our Advanced Technologies business unit aims to develop profitable
future businesses - both for Performance Materials and for our other
business sectors. Besides a broad portfolio for the innovative LED
industry, these also include organic photovoltaics and materials for
flexible display technologies. In accordance with the Performance
Materials strategy, our projects for future business fields are aligned
to megatrends such as miniaturization and the Internet of Things.
In the Pigments & Functional Materials business unit, we are
further expanding our leading position in pearlescent pigments for
automotive coatings. We are continuing to defend our good market
position in plastics, printing and cosmetics applications. Here we are
focusing on high-quality products and innovations. In functional
materials, the focus of our growth strategy continues to be on niche
applications in cosmetics (such as UV filters, insect repellents and
anti-aging substances) as well as technical functional materials. In
the latter, we see great growth potential for laser-marking additives
and for novel coating materials. With these and further innovative
product groups we will drive our growth in segments beyond our
established markets.
The Integrated Circuit Materials business unit supports the entire
semiconductor industry with a portfolio of customized solutions.
Increasingly higher storage capacity, faster process performance and
lower power consumption are being demanded by the semiconductor
industry. In addition, market trends such as mobility, Big Data and
the Internet of Things are leading to higher demand for semiconduc-
tor materials and higher specialization at the same time. By means
of novel materials and innovative technologies, we enable our
customers to meet these requirements, produce more powerful
chips, and counteract rising costs.
The great potential of OLED technology is confirmed by the devel-
opment of the display market. OLED-based smartphone displays
are the standard among all premium suppliers. OLED technology is
also showing dynamic growth in the TV segment, bolstered by high
investments by the leading OLED TV display manufacturer. The
advantages offered by self-luminous OLED displays, such as intense
colors, an especially deep black, thin structure, flexible use and low
energy consumption are of importance here.
The OLED (organic light-emitting diodes) business contributes
significantly to the growth of Performance Materials. It is our declared
goal to strengthen our position as a leading global supplier of OLED
materials. Continuous investments in research and development at
the Darmstadt site as well as application laboratories at the Asian
sites make an essential contribution to this. The opening of a new
application laboratory in Shanghai is planned for 2018.
Global demand for innovative display solutions grew further in
recent years. We assume that increasing demand for high-quality
consumer goods will come from an expanding middle class in growth
markets in the coming years, too. Therefore, we aim to continue to
strengthen our position as the market and technology leader for
liquid crystals. Key to this are new, sophisticated liquid crystal tech-
nologies for further asserting our market and technology leadership,
especially in the highly competitive Chinese market. In 2017, we sold
the first quantity of our eco-friendly, resource-conserving and effi-
cient liquid crystal technology SA-VA (self-aligned vertical alignment)
for manufacture of large-area LC displays. In 2017, we opened the
first production facility for switchable liquid crystal window modules
in Veldhoven, the Netherlands. This is an important milestone for
capturing an entirely new and attractive market segment for liquid
crystals.
In the Performance Materials business sector, we want to sustainably
secure our market and technology leadership in display materials.
In addition, we want to leverage our expertise in liquid crystals
beyond the application field of displays. At the same time, we ben-
efit from the trends in the semiconductor industry, continue to lead
the market in pearlescent pigments, and share in the growth of the
cosmetics industry.
PERFORMANCE MATERIALS
with patents granted in the European Union, Australia, Canada, and
Singapore. The patents provide protection of our CRISPR technology,
while giving scientists the ability to advance treatment options for
the toughest medical challenges. In our BioReliance® End-to-End
initiative we work with emerging biotech companies in process devel-
opment, drug production and facility design services that help bio-
pharmaceutical companies accelerate the progression of molecules
into the clinic and towards commercialization.
Fundamental Information about the Group _ Objectives and Strategies
Combined Management Report
68
Based on a broad assessment of the market, competitive land-
scape and key industry trends, in 2016 we identified several strategic
initiatives in important growth areas. For example, in genome editing
and novel modalities, we have built intellectual property in key areas,
We have tailored our strategy and will continue to manage our
business based on scale and growth to optimize the overall perfor-
mance and portfolio of the Life Science business sector. We have
further streamlined our organizational structure to capture growth
opportunities even more strongly. Strategic Marketing & Innovation
units and commercial teams are now reorganized into three distinct,
vertically integrated business units: Research Solutions, Process
Solutions and Applied Solutions, with each designed to increase
agility and drive sustained entrepreneurship to better serve our
customers. We also announced a number of acquisitions in 2017.
These include BioControl Systems to strengthen our leadership in
biomonitoring, specifically in the food and beverage sector, as well
as Grzybowski Scientific Inventions to boost capability in chemical
synthesis, and Natrix Separations to advance in next-generation bio-
processing.
The ambition of the Healthcare business sector is to become a global
specialty innovator, to operate in therapeutic areas with significant
unmet medical need and to bring high value to patients and consum-
ers. Therefore, we invest heavily in research and development to
discover new treatment options and improve existing ones. Together
with our stakeholders and partners, we want to ensure that people
can access the medicines they need to stay healthy and live longer.
The first pillar of our strategy is to reinforce our global footprint
by developing our tailored portfolio to address unmet medical needs
in all regions worldwide. While developed markets such as the United
States, Japan and Europe are key strategic markets for our specialty
products, sales in growth markets such as China will be driven by
both our biologics and broad general medicine and cardiometabolic
care portfolios. At the same time, it will be essential for us to continue
to focus our efforts on growing in the United States in order to realize
our ambition of becoming a truly global leader.
The second pillar of our strategy is the focus on specialty medi-
cine therapeutic areas. Here, we are concentrating our efforts on
oncology, immuno-oncology, as well as neurology and immunology.
For example, we have made significant investments in R&D, especially
in areas of unmet medical need, and refined our focus on mechanisms
of action and molecules that are expected to lead to transformative
innovations in cancer care and immunological disorders. Our aim is
to turn cancer patients into cancer survivors by being at the forefront
of changing the future of cancer care. Further development programs
for neurology and immunology include evobrutinib as a potential
treatment for multiple sclerosis, systemic lupus erythematosus as
well as rheumatoid arthritis; atacicept as a potential treatment option
for lupus patients with high disease activity; and sprifermin as a
potential therapy for patients with osteoarthritis of the knee.
Our aspiration is to develop high-quality, first-to-market and
best-in-disease assets, and to build a portfolio in each of our thera-
peutic areas. We have streamlined our pipeline and expanded our
innovation capabilities with strong investigational drug candidates.
In order to maximize the impact of our R&D investments and increase
our chances of success in discovering and developing new therapies,
we focus our expertise on specific therapeutic areas and are exploit-
ing synergies in disease mechanisms and biological pathways.
In this context, strategic collaborations are an integral part of
delivering on our commitment to transforming the lives of patients
living with serious unmet medical needs. We recognize the value of
collaboration in the research and development of breakthrough
therapies, as well as in strengthening our current portfolio. Here, we
focus on balancing the right blend of internal capabilities and exter-
nal partnerships, building strong collaborations with other leaders
in industry, including Pfizer, Genea Biomedx and Vertex Pharma-
ceuticals.
We are innovating beyond our pipeline projects with our Medical
Devices and Services unit and our Fertility Technologies. In addition
to innovative therapeutic approaches, the way in which we engage
with patients will be vital to achieving our objective of becoming a
global specialty innovator.
Our divestment of the Biosimilars business to Fresenius closed on
August 31. On September 5, we announced that we are preparing
strategic options for our Consumer Health business, including a
potential full or partial sale of the business as well as strategic part-
nerships. The Biosimilars divestment as well as the decision to exam-
ine strategic options for Consumer Health were both aligned with our
strategy to focus on our pipeline of innovative medicines.
Objectives and Strategies
LIFE SCIENCE STRATEGY
We have a portfolio of more than 300,000 products, in order to
support a broad customer base - including academia, pharma and
biotech labs, pharma manufacturing, biotech manufacturing, clinical
diagnostics, environmental testing, food and beverage and industrial.
We have an industry leading e-commerce platform, www.sigmaaldrich.
com, which offers life science solutions, services and expertise across
the entire biopharma value chain.
To create sustainable value for the future, Life Science has set a
strategy to:
• Deliver the integration to combine the strengths of Merck Millipore
and Sigma-Aldrich
Strengthen the core business by investing in high growth areas,
addressing our customer needs and enhancing capabilities
• Place bold bets in areas with transformative potential in order to
establish new pillars of growth
The Sigma-Aldrich integration has been ahead of plan and we
continue to be on track as we begin year three of the integration.
The synergy estimate was raised from € 260 million to € 280 million.
We will leverage best practices from both organizations, combine our
sales force for one face to the customer, and continue to harmonize
processes for employees and customers.
As a leader in the large and growing life science industry, our purpose
is to solve the toughest problems in life science by collaborating with
the global scientific community.
2.0%
Priority area "People"
EBITDA pre is the main performance indicator measuring ongoing
operational profitability and is used internally and externally. To
provide an alternative understanding of the underlying operational
performance, it excludes from the operating result depreciation and
amortization, impairment losses and reversals of impairment losses
as well as adjustments. These adjustments are restricted to the
following categories: integration costs, IT costs for selected projects,
Elimination first-time consolidation of BioControl Systems²
Business free cash flow¹
- 100.0%
149
-149
Elimination first-time consolidation of Sigma-Aldrich
-86.3%
153
-177
-24
from royalties and licenses according to the consolidated balance sheet
Changes in trade accounts receivable as well as receivables
-2
> 100.0%
1
-23
21.9%
-188
-859
-1,047
Changes in inventories according to the consolidated balance sheet²
software as well as advance payments for intangible assets
-1.7%
in %
€ million
-76
-24
4,490
12
> 100.0%
EBITDA PRE
RECONCILIATION OF NET INCOME TO NET INCOME PRE¹
for selected projects, restructuring costs, gains/losses on the divest-
ment of businesses, acquisition costs and other adjustments. More-
over, amortization of acquired intangible assets as well as impairment
losses on property, plant and equipment and intangible assets are
eliminated. The adjustment excludes impairment losses on intangi-
ble assets for acquired research and development (R&D) projects
below a threshold value of € 50 million. Income tax is calculated on
the basis of the company's underlying tax rate. The following table
presents the reconciliation of net income to net income pre for the
calculation of EPS pre.
Earnings per share are calculated by dividing profit after tax attri-
butable to the shareholders of Merck KGaA (net income) by the
weighted average number of theoretical shares outstanding. The use
of a theoretical number of shares takes into account the fact that the
general partner's capital is not represented by shares. To provide an
alternative view, we also report earnings per share pre, in other
words after the elimination of the effects of integration costs, IT costs
NET INCOME, EARNINGS PER SHARE (EPS) AND
EARNINGS PER SHARE PRE (EPS PRE)¹
Capital market-related parameters
73
Fundamental Information about the Group — Internal Management System
Combined Management Report
MERCK VALUE ADDED (MEVA)
An additional parameter to prioritize investments in property, plant
and equipment as well as intangible assets is the payback period,
which indicates the time in years after which an investment will
generate positive net cash flow.
-14
PAYBACK PERIOD
RETURN ON CAPITAL EMPLOYED (ROCE)
The internal rate of return is a further important criterion for the
assessment of acquisition projects and investments in property, plant
and equipment as well as intangible assets. It is the discount rate that
makes the present value of all future free cash flows equal to the
initial investment or the purchase price of an acquisition. A project
adds value if the internal rate of return is higher than the weighted
cost of capital including mark-ups.
INTERNAL RATE OF RETURN (IRR)
The main criterion for the prioritization of investment opportunities
is net present value. It is based on the discounted cash flow method
and is calculated as the sum of the discounted free cash flows over
the projection period of a project. The weighted average cost of
capital (WACC), representing the weighted average of the cost of
equity and cost of debt, is used as the discount rate. Depending on
the type and location of a project different mark-ups are applied to
the WACC.
NET PRESENT VALUE
Sustainable value creation is essential to secure the long-term
success of the company. To optimize the allocation of financial
resources, we use a defined set of parameters as criteria for the
prioritization of investment opportunities and portfolio decisions.
Investments and value management
2 Previous year's figures have been adjusted, see Note (4) "Acquisitions and divestments"
1 Not defined by International Financial Reporting Standards (IFRS).
3,318
3,318
In addition to NPV and IRR, when looking at individual accounting
periods, ROCE is an important metric for the assessment of invest-
ment projects. It is calculated as the adjusted operating result (EBIT)
pre divided by the sum of property, plant and equipment, intangible
assets, trade accounts receivable and trade accounts payable, as well
as inventories.
4,414
MEVA gives information about the financial value created in a period.
Value is created when the return on capital employed (ROCE) of the
company or the business is higher than the weighted average cost
of capital (WACC). MEVA metrics provide us with a powerful tool to
weigh investment and spending decisions against capital require-
ments and investors' expectations.
Impairment losses/reversals of impairment losses
-133
4,415
-130
1,805
2,481
€ million
Change
2016
1,758
2,525
2017
EBITDA pre¹
Other adjustments
Gains (-)/losses (+) on the divestment of businesses
Acquisition-related adjustments
Integration costs/IT costs
Restructuring costs
EBITDA¹
Depreciation and amortization
Operating result (EBIT)¹
€ million
Reconciliation EBIT to EBITDA pre¹
restructuring costs, gains/losses on the divestment of business,
acquisition costs, and other adjustments. The classification of specific
income and expenses as adjustments follows clear rules and under-
lies strict governance at Group level. Within the scope of internal
performance management, EBITDA pre allows for the necessary
changes or restructuring without penalizing the performance of the
operating business.
MERCK GROUP
1.8%
-2.6%
4,282
-3.0%
Change
Investments in property, plant and equipment,
EBITDA pre¹
€ million
Business free cash flow¹
> 100.0%
in inventories, trade accounts receivable as well as receivables from
royalties and licenses. To manage working capital on a regional and
local level, the businesses use the two indicators days sales out-
standing and days in inventory.
Business free cash flow comprises the major cash-relevant items that
the operating businesses can influence and are under their full control.
It comprises EBITDA pre less investments in property, plant and
equipment, software, advance payments for intangible assets, changes
BUSINESS FREE CASH FLOW (BFCF)
Fundamental Information about the Group _ Internal Management System
Combined Management Report
72
MERCK GROUP
2017
- 310
1 Not defined by International Financial Reporting Standards (IFRS).
1111
4,414
-304
> 100.0%
4,490
2.1%
-59.0%
> 100.0%
-1.7%
-2.2%
23.8%
16.7%
28.7%
3,800
-15.3%
-636
4,164
3,528
11.6%
Margin (% of net sales)²
-696
2,423
1,727
319
14,517
14,836
Margin (% of net sales)²
EBITDA pre²
4,246
-28.7%
2.2%
ANNUAL REPORT 2018
-10.5%
1 Fiscal 2017 has been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes"
in the Notes to the Consolidated Financial Statements.
-685 -21.4%
EBITDA²
3,193
2,508
Business free cash flow²
29.9%
29.5%
-13.9%
-0.82
5.92
5.10
1.77
5.99
7.76
781
2,615
3,396
Earnings per share pre (€)²
Earnings per share (€)
Profit after tax
29.3%
25.6%
-446
Margin (% of net sales)²
CONTACT US
Net sales
ANNUAL REPORT 2018 FINANCES
MERCK
the positive power of science.
the name Merck has stood for
1668
Since
pushing boundaries and making new discoveries.
countries share a passion for
66
SCIENCE
Employees in
Around 52,000
invested in research and development in 2018.
€ 2.2 BILLION
Merck
do.
... is at
the heart
of every-
thing we
Merck
2 Not defined by International Financial Reporting Standard (IFRSS).
science
hearts at Merck beat for science.
MAGAZINE
Online
You can find out what else
makes our research hearts
beat faster at
in %
Change
€ million
2017
2018
€ million
Key figures¹
MERCK GROUP
Key Figures for 2018
Chairman of the Executive Board and CEO
STEFAN OSCHMANN
benefit us all."
logical advantages
possible that
make techno-
entrepreneurship
and responsible
exploration
scientific
"We believe that
annualreport/2018
www.merckgroup.com/en/
Operating result (EBIT)²
MERCK GROUP
12,845
€ million
April 19
Merck sells Consumer Health
We reached an agreement to sell our Con-
sumer Health business to Procter & Gamble
for a cash purchase price of approximately
€3.4 billion. Consumer Health transferred
to P&G on December 1. This is a further
step in our strategic orientation toward
innovation-driven businesses.
May 3
350 years of Merck
This year offered a good reason to celebrate
in Darmstadt together with 900 guests from
politics, business and industry. During this an-
niversary year, we looked to the future as
well as the past. For instance, we opened a
new innovation center in Darmstadt that pro-
vides more space for smart projects outside
of our existing business areas. Throughout
2018, we also held a number of other anniver-
sary events around the world.
350 +
years of Merck
June 20
Partnership to accelerate our CRISPR initiative
We announced a partnership with Tongji
University in Shanghai. As a member of our
CRISPR Core Partnership Program, we will
provide the university exclusive access to our
genome-editing technology and comprehensive
technical support.
June 20
Net sales
June 20
New OLED technology center in Shanghai
We are complementing our OLED positions
in Asia with a new OLED technology center in
Shanghai - in addition to the existing ones in
Korea and Taiwan. Working as a local partner
with our customers, we intend to drive inno-
vations forward for the display industry and
bring them to market faster.
Life Science enhances presence in Asia
In 2018, we invested in a cell culture facility in
South Korea, a manufacturing and distribution
center in India, and a facility to accelerate
MobiusⓇ single-use manufacturing in China. With
these new locations, an investment of €40 mil-
lion, we are responding to growing demand from
the biotech industry in Asia.
HIGHLIGHTS OF 2018
U-
中国
6
HIGHLIGHTS OF 2018
July 3
Transformation program for Performance
Materials
To secure the future prospects of Performance
Materials, we have launched the transfor-
mation program Bright Future with the aim of
further expanding our position as a leading
supplier of solutions for the electronics indus-
try. After 2019, the average annual sales
growth of Performance Materials is expected
to be between 2% and 3% again, with
Semiconductor Solutions as a significant driver
of this growth.
July 17
Research heroes wanted
We are launching the "Future Insight Prize",
with an award of up to €1 million annually
for groundbreaking scientific work. Over the
next 35 years, we'll be awarding it to pro-
mote innovations in the areas of health, nutri-
tion and energy.
FUTURE
INSIGHT
PRIZE
July 30
FDA agrees to review request for approval of
cladribine tablets
The U.S. Food and Drug Administration (FDA)
accepted for filing the New Drug Application for
cladribine tablets as a potential treatment for
patients with relapsing forms of multiple sclerosis.
The FDA is examining whether cladribine tablets,
a short-course oral treatment, can be used to treat
patients in the United States. The proposed
dosing is a maximum of 20 days of treatment over
two years.
5
February 21
Merck forms cooperation with Alibaba Health
To significantly improve the lives of 40 million
patients in China by 2025 is an ambitious goal.
We have teamed up with Internet healthcare
company Alibaba Health to meet this challenge.
The collaboration aims to provide Chinese
patients with improved access to healthcare ser-
vices via a health platform that will start out
by tracking drugs for patients with diabetes, thy-
roid disorders and cardiovascular diseases.
HIGHLIGHTS OF 2018
-
2015
4,490
2016
4,246
2017¹-
3,800
2018¹-
€ million
MERCK GROUP
EBITDA pre²
11,363
2014
2015
15,024
2016
14,517
2017¹ •
Highlights of 2018
2018¹-
3,630
2014 —
14,836
Science
Performance
Materials
4
Merck
Business Sectors
² Not defined by International Financial Reporting Standards (IFRSS).
1 Excluding the Consumer Health business divested in fiscal 2018.
Key figure for fiscal 2017 adjusted.
3,388
Healthcare
Life
These patents expand the foundational CRISPR cutting and integra-
tion IP necessary to correct genetic defects in gene therapy patients
and to fix diseased genes while not affecting healthy ones. Further,
this allows us to license CRISPR-related patents to interested parties
and further supports genome-editing research under ethical and legal
standards. In total, we have achieved foundational CRISPR patents
in seven markets, including Canada and Europe.
To complete an active year advancing the intellectual property
(IP) of our CRISPR technology, in October and December, respec-
tively, we were awarded Australian and European CRISPR patents
for foundational genome-editing technology. The patents covered
paired Cas9 nickase technology to reduce off-target effects, advance
gene therapy and research. A second patent covering CRISPR inser-
tion was also awarded to Merck by the European Patent Office in
December.
In April, we were granted a patent for this CRISPR insertion
technology in China. Shortly thereafter, a paper we co-authored
entitled, "Ethical Considerations in the Manufacture, Sale and Distri-
bution of Genome-Editing Technologies," was published in The American
Journal of Bioethics. The paper highlights the importance of science-
based bioethics in genome editing and novel processes to ensure
products meet the highest standards.
Advancing the global availability of our CRISPR technology
In early 2018, we received two patents for our CRISPR technology:
the first from the Korean Intellectual Property Office and the second
from the Israel Patent Office. These patents address cutting of the
chromosomal sequence of eukaryotic cells (such as mammalian and
plant cells) and insertion of an external or donor DNA sequence into
those cells using CRISPR.
• Meet customer needs
• Partner with the global scientific community
Invest in new and disruptive technologies for the long term
Partnerships and agreements to broaden our reach
91
In March, we signed a Memorandum of Understanding (MoU) with
Schneider Electric, a global specialist in energy management and
automation. The MoU aims to automate biopharmaceutical processes
for China's biopharmaceutical industry and to help our biopharma
customers in their quest for reliable, less expensive and better med-
ical solutions.
In May, we announced a collaboration with Solvias, a Swiss con-
tract research and service provider, to offer our PyroMATTM System,
a new Monocyte Activation Test (MAT) kit for pyrogen detection. The
system offers a high-quality, ready-to-use in vitro method that does
not require live animal testing and detects the broad spectrum of
pyrogens. The new kit also eliminates the laboratory work required
to maintain the cell line.
ATR
The development of high-resolution 4K and 8K TV sets continues
to pose a challenge to the light efficiency of LC displays. We are
therefore actively working to expand UB-FFS technology with our
UB-Plus liquid crystal materials.
In our Display Solutions business unit, our liquid crystal technology
UB-FFS (ultra-brightness fringe-field switching) continues its suc-
cessful growth thanks to new product qualifications and rising
demand in the liquid crystal displays (LCD) sector for mobile devices,
especially mobile phones and tablet PCs.
Display Solutions
The unit develops a technology vision for Performance Materials
and supports the business units in identifying projects with growth
potential and tapping new markets. We evaluate the economic suc-
cess of our projects and expand our activities to encompass neigh-
boring areas in growing markets.
With our Performance Materials business sector, we are the market
and technology leader in most of our businesses. As a science and
technology company we are, in many cases, able to offer innovative
products and solutions, which allow us to stand out from the com-
petition. Successful Research & Development (R&D) is therefore a
material part of the strategy deployed by Performance Materials. In
2018, the part of our R&D activities that is not close to the products
in the business units was combined with a central innovation unit,
Early Research & Business Development. Our goals in taking this
step were to sharpen our focus on our customers' needs as well as
to centrally decide on the assessment of projects and the related use
of resources as part of an integrated approach to research and devel-
opment.
Performance Materials
Fundamental Information about the Group _ Research and Development
Combined Management Report
90
In October, we won two 2018 Convention on Pharmaceutical
Ingredients (CPhI) awards. Our Parteck® MXP Excipient won the
"Excellence in Excipients" category and our modified amino acids
won the "Excellence in Bioprocessing and Manufacturing" category.
In November, our BioRelianceⓇ Viral and Gene Therapy Assay
Portfolio and proxy-CRISPR technology took top honors for innova-
tion at the R&D 100 Awards. These awards honor the 100 most
innovative and significant technologies introduced in the past year.
Over the past six years, we have won nine R&D 100 awards.
Improve and expand our portfolio
As a result of our long-standing efforts in Asia, in March we were
named the "Best Bioprocessing Supplier" and we received the "Best
Bioprocessing Supplier Award for Single-use Systems" at the Asia-
Pacific Bioprocessing Excellence Awards 2018 ceremony in Singapore.
In April, our Millistak+® HC Pro portfolio won an INTERPHEX
Exhibitor Award for Best Technological Innovation. The Millistak+®
HC Pro portfolio is a family of synthetic depth filters providing cleaner,
more consistent depth filtration media than other DE- and cellulose-
based filter offerings.
•
In 2018, we continued to focus on delivering the promise of
accelerating access to health for people everywhere. We launched
nearly 13,000 products, including nearly 6,000 chemicals, while aim-
ing to:
BLYS
BTK
IgA
IL
mAb
MetAP2
PD-L1
PeEF2
PK
TGFB
A disintegrin and metalloproteinase with thrombospondin motifs
Protein kinase B
A proliferation-inducing ligand
Ataxia Telangiectasia Mutated kinase
Ataxia Telangiectasia and Rad3-related kinase
B-lymphocyte stimulator
Bruton's tyrosine kinase
Immunoglobulin A
Across our three Life Science business units of Research Solutions,
Process Solutions and Applied Solutions, our R&D teams are dedi-
cated to finding innovative solutions to our customers' toughest chal-
lenges. In our Life Science business sector, we invest significantly in
R&D, with more than 1,750 employees working in various R&D func-
tions around the world.
Life Science
Allergopharma, our allergy business, is one of the leading manufac-
turers of diagnostics and prescription drugs for allergen immuno-
therapy. As experts, we are determined to fully understand allergies
as well as be able to discover new solutions and therapeutic concepts.
In close cooperation with research institutions and other partners
throughout the world, we gain valuable insights regarding the com-
plex immunological mechanisms responsible for allergy development.
And we pursue new paths in developing innovative treatments. Thus,
we want to create the best conditions today for the next generation of
products for optimally taking care of patients suffering from allergies.
Allergopharma
Fundamental Information about the Group _ Research and Development
Combined Management Report
•
88
Protein kinase
Plasmodium eukaryotic elongation factor 2
Programmed cell death ligand 1
Methionine aminopeptidase 2
Monoclonal antibody
Interleukin
Transforming growth factor ẞ
Recognized for award-winning innovation
Over the course of 2018, we expanded our nanomaterials port-
folio with the launch of more than 250 new products. Our portfolio
includes inorganic and carbon nanomaterials for biomedical applica-
tions, novel 2D inorganics and alternative energy materials for use
in flexible electronics, implantable wearable sensors, batteries and
solar energy generation.
In October, Applied Solutions released the new Milli-Q® IQ 7003/7005
Integrated Ultrapure & Pure Water System. It is a fully integrated
Type 1 and Type 2 water purification solution that is intelligent, easy
to use and environmentally friendly.
2 Merck also has employees at sites which are not fully consolidated subsidiaries. These figures refer to all people directly employed by Merck and therefore may deviate from figures in the
financial section of this report.
1The Consumer Health business was transferred to Procter & Gamble (P&G) on December 1, 2018, and was already classified as a discontinued operation according to IFRS 5 in April 2018.
With the completion of the sale, around 3,300 employees joined P&G.
Apart from initiatives to generate ideas and advance projects,
the Innovation Center offers our employees various training courses
on topics such as innovative methods, creative techniques and devel-
oping business models. In 2018, initial projects in the Innovation
Center reached a milestone by becoming minimum viable products.
This includes a solution where Merck anchors real objects, such as
products, in a blockchain to make supply chains secure and thus
protect companies as well as end consumers.
In order to contribute external ideas and offer the opportunity of
open innovation for our innovation projects, we are building strong
relationships with external partners in all industries and target the
start-up community via our Accelerator.
FOSTERING INNOVATIVE POTENTIAL
Curiosity and a focus on new ideas provide a fruitful basis for inno-
vation and have a positive impact on company performance. In order
to create a place - supplementing classic research and development,
where we can develop ideas into viable businesses beyond the cur-
rent scope we opened the modular Innovation Center in Darmstadt
back in 2015. It serves as the prototype for our Innovation Center
that we opened in March 2018 as part of the 350-year anniversary
festivities. The Innovation Center offers our employees the opportu-
nity to explore new ideas in an inspiring setting and to work on
selected projects. Sufficient scope and adequate support, also in the
form of a suitable working environment, actively promote the inno-
vative strength of our employees. The strategic orientation of our
innovation activities is determined by innovation fields that are
related to our business fields and provide potential for revolutionary
technologies and business ideas. In 2018, in addition to the existing
innovation field of Biosensing and Interfaces, we defined two further
fields: Clean Meat and Liquid Biopsy technologies.
As a science and technology company, we are always looking for
new solutions and working to continuously evolve our approaches.
Engaged, curious employees are key to our ability to innovate - and
therefore also for our success. We need a corporate culture that
broadens the knowledge base of our employees, one that creates
exciting opportunities and motivates them to take a proactive role
in shaping the development of our company.
Driving innovation through
curious people
1,153
2%
Middle East and
Africa (MEA)
Asia-Pacific (APAC)
10,486
20%
Latin America
3,340
92
6%
Europe
25,792
50%
North America
10,978
21%
by region
DISTRIBUTION OF EMPLOYEES
As of December 31, 2018, we had 51,749 employees worldwide¹
(2017: 52,941). In 2018, we were represented by a total of 207 legal
entities with employees in 66 countries.2
OVERVIEW OF OUR HEADCOUNT FIGURES
A career with Merck is enriching both from a professional and
a personal perspective. We offer the necessary framework conditions
that meet the individual needs of our employees, that encompass an
exciting range of tasks and advanced training possibilities, furthering
flexible forms of cooperation and a culture of mutual esteem and
respect. The latter is particularly important as our workforce repre-
sents a broad range of nationalities, cultures, religions and age
groups as well as a variety of personal and professional backgrounds.
We are convinced that this diversity paired with a corporate culture
based on mutual respect strengthens our innovative potential and
contributes to our success.
-
"Bring Your Curiosity to Life" - our promise as an employer describes
how we at Merck collaborate, how we advance our business, how our
employees can develop within the company and who we are. Our
development into a global science and technology company over the
past 350 years would not have been possible without the passion,
creativity and curiosity of our employees. And we are certain that
our current and future employees safeguard our economic success.
They create innovations for patients and customers, and secure our
ability to compete. For this reason, the development of all our employ-
ees is such an important concern to us. In short, we are working to
create an environment where people are able to develop and to reach
their full potential.
People at Merck
0
In November, Process Solutions launched its new BioContinuum™
platform to advance biotherapeutic drug manufacturing through
improved efficiency, simplified plant operations, and greater quality
and consistency. This continuous bioprocessing platform integrates
what are typically batch-based, separate manufacturing steps into
a connected process, enabling continuous flow from the addition of
raw materials through product harvest, purification and testing. Pilot
studies suggest that conversion to continuous manufacturing may
reduce manufacturing costs by up to 50%.
Combined Management Report
People at Merck
In September, Process Solutions announced three new products
to help biomanufacturers navigate the evolving biopharma landscape
with increased speed, greater flexibility and enhanced quality. The
EshmunoⓇ CP-FT resin is a first-of-its kind CEX chromatography resin
for the flow-through removal of aggregates from mAb therapeutics.
Two modified amino acids (Phospho-L-Tyrosine Disodium Salt
EMPROVE® EXPERT, L-Cysteine S-Sulfate Sodium Sesquihydrate
EMPROVEⓇ EXPERT) simplify feeding and reduce total volume in cell
culture.
Nanomaterials possess unique properties that drive the develop-
ment of advanced technology. In biomedical research, nanomaterials
are used to develop probes for high-sensitivity assays and imaging.
In theranostics, innovative nanomaterials enable breakthroughs in
nanomedicines for cancer therapies by improving therapeutic efficacy
and tumor-specific delivery, and minimize side-effects to improve
patient care. In applications beyond life science such as energy and
electronics, the unique properties of nanomaterials enable more
vibrant displays; they will also make enhanced energy storage and
flexible and wearable electronics a reality.
— People at Merck
In May, Applied Solutions also released its new PyroMATTM in vitro
system for Pyrogen Detection, a new robust and sensitive solution
for pyrogen detection. It is the only cell-line based Monocyte Acti-
vation Test (MAT) provided as a ready-to-use kit on the market,
providing an alternative to animal-based testing. In July, we released
Milli-Q® HX 7000 SD, a new series of all-in-one water purification
systems to purify, store, distribute, monitor and control a type 2 pure
water supply entirely from one Milli-Q® HX 7000 SD system.
89
Fundamental Information about the Group _ Research and Development
Combined Management Report
Our Chief Diversity Officer is responsible for the strategic man-
agement of diversity and inclusion. The Diversity Council, a body
consisting of senior leaders from all business sectors and selected
Group functions, is specifically working on the implementation of our
diversity strategy, revised in 2018. Key elements of this are recruit-
ing people representing a breadth of qualifications, skills and expe-
riences as well as developing and retaining these people. In addition,
we support specific employee networks in order to foster exchange
among like-minded individuals. Apart from our women's networks in
various countries, we also support networks that promote the inter-
ests of the LGBTIQ (lesbian, gay, bisexual, trans, intersex, question-
ing) community as well as African-American and international
employees. Our carer network brings together employees from all
over the world who care for a relative.
In April, Applied Solutions launched our new CellStream TM bench-
top flow cytometry system, a compact, customizable flow cytometer
that uses a camera for detection. The system expands the limits of
sensitivity, allowing scientists to tailor their instruments to their
needs in immunology, cancer research and many other areas.
We launched innovations across all segments of our portfolio through-
out 2018. In January, Applied Solutions released Steritest NEO, a new
product that replaces the current Steritest EZ for sterility testing,
which is a flagship for our business. In February, Process Solutions
introduced Viresolve® Barrier capsule filters designed to remove
viruses, mycoplasma and bacteria from cell culture media, protecting
against bioreactor contamination. These filters are a key component
of our Viral Safety Assurance program to mitigate the risk of viral
contamination in upstream bioprocesses and minimize the potential
impact on drug supply and patient safety.
An expanded portfolio to benefit our customers
As we began the second half of 2018, we entered into a global
cooperation agreement with InnoCore Pharmaceuticals to provide its
proprietary SynBiosysⓇ biodegradable polymer platform to develop
sustained release solutions for biologicals in injectable formulations.
This proprietary technology allows the development of injectable
sustained release biological formulations with conserved bioactivity
of these sensitive molecules.
Fundamental Information about the Group
In June, we signed an agreement with HistoCyte Laboratories
Ltd, Tyne and Wear, United Kingdom, to be the exclusive multina-
tional distributor of the company's portfolio of cell lines in the United
States and other select geographies. For our customers, the agree-
ment provides a cost-effective and practical solution to the problem
of tissue heterogeneity.
the premium segment through to TV applications produced in large
numbers, as this technology offers the high contrast and image
quality of the PS-VA technology while also enabling improvements
in display design and panel production, for example through the
reduction of waste and energy consumption in the production of LCDs.
Semiconductor Solutions
The technology area of gas-phase deposition materials (such as
atomic layer deposition, ALD) is an area with high growth rates for
our Semiconductor Solutions business unit. Thanks to increased
research activities in collaboration with original equipment manufac-
turers and chip producers, we are steadily improving our positioning.
Our research projects seek to identify new materials for metallization
processes with low resistance and various dielectric characteristics
for faster and better processors, servers and data storage density.
We have also invested in the development of advanced removers
used in the photolithographic process to provide customers with a
green alternative in compliance with upcoming environmental regu-
lations.
We are currently refocusing our product portfolio to better meet
the requirements of our customers operating in various compound
semiconductor markets such as sensors, radio frequency filters or
integrated circuits. Our conductive paste materials offer value prop-
ositions to our customers as compared with existing interconnect
materials, which are reaching end-of-life status.
To better support our customers, we have expanded our research
capacities in the United States, Germany and Taiwan, and are plan-
ning further research and production capacity expansions in Korea,
Japan and China.
Surface Solutions
In our business with pigments for the automotive industry, we are
currently focusing on the development of achromatic pigments. The
latest example is our IriodinⓇ Icy White Pristine for silky, three-coat
white stylings. Furthermore, we have expanded our regional appli-
cation labs to better support the marketing of our innovative clear-
coat additives, for example those manufactured on a polysilazane
basis. As part of the Smart Effects initiative, we are focusing the
development of cosmetic pigments on matte effects (Allure series)
and luster effects (Lights series). In addition, active ingredients of
natural origin are a focal topic for new cosmetic solutions.
Combined Management Report.
Fundamental Information about the Group
We are a global science and technology company with employees
who represent a varied cross-section of gender identities, national-
ities, cultures, religions, age groups and sexual orientations. They
contribute their professional backgrounds, individual life experience
and perspectives to their work. We believe that a diverse workforce -
paired with a respectful corporate culture - strengthens our ability
to innovate and contributes significantly to our business success.
VALUING CULTURAL DIVERSITY
Our aim is to increase the efficiency of applications for large-
format TV sets and display panels by 10% to 15%. The liquid crystal
technology PS-VA (polymer-stabilized vertical alignment) remains
predominant when it comes to large-format TV sets. Here, our latest
materials provide additional performance benefits and improve the
processing efficiency in the production of TV sets that are based on
PS-VA technology. Moreover, we have successfully demonstrated our
manufacturing expertise with respect to the new liquid crystal tech-
nology SA-VA (self-aligned vertical alignment). We are now focusing
our attention on applications for spezialized display products from
ATM
Global classroom training courses and workshops developed spe-
cifically for teams help our employees develop and build individual
abilities in line with new requirements and perspectives. In 2018,
more than 4,100 employees participated. Digital solutions in the form
of more than 3,735 e-learning and languages courses are available
to our employees. To enable our employees to realize their full poten-
tial, we also provide local business- and function-related offers. All
measures are documented in a globally standardized development
plan.
Akt
Combined Management Report.
We use targeted advanced training to nurture our top talent and
senior executives. The eight-month International Management Pro-
gram strengthens the leadership competencies and global thinking
of top talent at the start of their career. In cooperation with leading
international universities, the Merck University has been offering a
cross-regional, modular advanced training program since 1999. To
date, 397 members of top management have taken part. Further-
more, Merck cooperates globally with academic institutions in order
to support employees who wish to earn an MBA. In 2015, we launched
management programs specifically for people managers in growth
markets, which focus on business management and Merck-specific
topics. These programs are offered in China, the Middle East, Africa
MANAGEMENT PROGRAMS FOR EXECUTIVES
Our goal for the period until 2021 is to maintain the proportion
of women leaders at a stable level of 30%, and we are working to
further increase the representation of women in leadership positions
and business units where they are still underrepresented. To achieve
this objective, during the reporting period we formed special teams
that are responsible for developing goals and measures at depart-
mental level to help us move female candidates into positions in
different areas and hierarchies. At the end of 2018, women occupied
32.3% of leadership roles Group-wide. These figures are steadily
increasing across the company as a whole, but not consistently
across business units, Group functions and hierarchical levels. The
report on stipulations to promote the proportion of women in lead-
ership positions at Merck KGaA pursuant to section 76 (4) and section
111 (5) of the German Stock Corporation Act (AktG) can be found
in the Corporate Governance section of this report.
At Merck, many teams work across sites and internationally. The
diversity of competencies and experiences among the team members
offers tremendous potential that our leaders can make use of. Inter-
nationality and a global mindset characterize our company culture
and are therefore mirrored by our international management team.
In 2018, 63.6% of our executives were not German citizens. Alto-
gether, 70 different nationalities are represented in such positions.
In order to manage our global and diverse organization, we need
managers who can build international teams and promote interna-
tional collaboration so as to contribute to a productive and flexible
working environment. We seek managers whose inclusive leadership
style also reflects different employee and customer traits. This opens
up career opportunities for talented employees from all areas of our
company and ensures a broad experience base as well as differen-
tiated decision-making.
DIVERSITY AND MANAGEMENT
Digitalization also features in our training and advanced training
programs as IT skills are becoming increasingly important. At the
same time, digital media create new ways of learning. For this reason,
we are integrating topics such as 3D printing and artificial intelligence
into our training content with increasing frequency. We are also
increasingly relying on new kinds of learning and innovation methods,
such as scrum or design thinking.
Our manager and employee self-services are another good exam-
ple of modern working methods. Employees can use these services
to manage their own data, retrieve information and perform personnel-
related tasks independently.
Using the big data applications developed by People Analytics
within Human Resources, managers receive quick and targeted
answers to personnel-related questions. In addition to the traditional
master data, the software also holds information on compensation,
performance and potential as well as on commitment or succession
planning and is able to link this data. This means that leaders have
a comprehensive data set at their disposal, which they are able to
use taking into account data protection provisions. The analyses
are based on algorithms and allow the early identification of trends
(predictive analysis) and data-based decisions.
The digital transformation has been leaving its mark on the world
of work for a long time now. New, agile ways of working are thus
increasingly gaining in importance. At Merck, we want to support this
trend actively, which is why we are offering our employees many
opportunities for digital and innovative working.
USING THE OPPORTUNITIES PROVIDED
BY DIGITALIZATION
Fundamental Information about the Group
To assess the performance and potential of every individual and
to establish an effective leadership culture, regular and differentiated
feedback is of utmost importance. In this way, employees and super-
visors can develop a shared vision, execute the business strategy
and further develop a unifying corporate culture.
STRATEGIC COMPETENCY DEVELOPMENT
People at Merck
Fundamental Information about the Group
Combined Management Report
94
One of the major duties of our managers is to motivate and encour-
age employees to show their innovative strength. A dialog in a spirit
of partnership, the development of strategic competencies and the
continuous further development of our leaders help to build trust and
to strengthen our company's success over the long term.
Building empowered leaders
Individual development opportunities are also supported by our
job architecture. It applies globally and enables us to harmonize all
positions and to simplify their classification. This job architecture
defines three fundamental career types: managers, experts and
project managers. They are all equivalent. Employees who wish to
advance in their careers and aim for a top position within the com-
pany can also do so via the expert and project manager career paths.
Furthermore, we have established the "Merck Science Network".
Due to the broad positioning of our company, we do not have a
central research and development organization that unites expertise
across our businesses. Through this project we are promoting the
establishment of a science community within the company to accel-
erate the exchange of innovative ideas and facilitate collaboration
among all our R&D employees. One element of this project is the
"Continuous Performance Dialogues" between 1,300 employees and
their supervisors to align performance and potential appraisals with
research and development needs. Other aspects focus on the
advanced training of experts and their career paths and on the trans-
fer of knowledge within the network.
agreements, as we are convinced that ongoing feedback helps all
employees to grow in terms of their performance and potential.
Regular individual assessments permit us to more readily identify
high-potential employees and to further them accordingly. Clear
objectives, differentiated and open feedback, and individual devel-
opment plans are thus important prerequisites for both the personal
development of every individual and the success of the company.
Employee development at Merck is founded on regular exchanges
and a culture in which employees aspire to high levels of performance
and engagement. As the basis for internal strategic talent manage-
ment, the performance and potential management process is globally
aligned for all employees in accordance with the same principles and
is part of a shared IT system. We systematically combine talent
recognition with performance assessments based on employee target
Our focus on systematic personnel development allows us to sus-
tainably strengthen the performance potential within our company
and to increase the motivation of our people. Only by expanding the
abilities of each individual can we count on innovative and curious
employees and managers in the future and flexibly respond to dif-
ferent requirements.
A transparent competency model is a further pillar of our personnel
development efforts. Managers and employees should show strategic
competence by being purposeful, future-oriented, innovative, results-
driven, collaborative and empowering. By demonstrating these qual-
ities, our managers can build a strong culture of collaboration based
on curiosity, creativity and trust. In addition, our leaders are expected
to set an example by living the Merck values and taking responsibility
for their own decisions. Based on this competency model, we have
defined six leadership behaviors that summarize the conduct we
expect from our leaders.
TARGETED ADVANCED TRAINING AND MAXIMIZING
PERFORMANCE CAPABILITY
— People at Merck
and Latin America, for example. Moreover, in 2018 we ran the
"Managerial Foundation Program" (MFP) for new people managers
in 20 countries with 795 participants. The "Advanced Management
Program" (AMP) for experienced leaders ("managers of managers")
builds on the MFP and was attended by 242 people managers in five
countries. For the top management we also offer a "Global Leader-
ship Program" (GLP). This program addresses issues such as lead-
ership culture and prepares participants for the leadership challenges
of tomorrow. Since 2016, 678 leaders have participated in the GLP.
In 2018, we once again expanded our workforce pool to internally
fill management positions when they become vacant. In 2018 once
again, most management position vacancies were filled by internal
candidates. In addition, we recruited highly qualified external exec-
utives in order to add new perspectives to our long-standing in-house
expertise.
Our aim is to raise awareness for diversity and inclusion among
our employees. We piloted initial training sessions in 2018 to create
awareness of unconscious bias, which will be rolled out globally in
2019. Accordingly, around 380 employees have already been given
the opportunity to identify their own unconscious thought patterns
and stereotypes to help them avoid any unconscious unfair treatment
resulting from such bias. We also introduced the Job Analyzer, an
online tool that allows job advertisements to be checked for critical
wordings prior to their publication, thus fostering gender-neutral
communication with those applying for jobs.
The results are used to identify strategic focus areas and they
feed into the company-wide work on an ongoing basis.
In October 2018, the global employee engagement survey was
again conducted in 22 languages and the status of implementation
reviewed. Around 45,000 employees (86%) took part. Our Group-
wide score, which indicates how attached our employees feel to the
company, was 61%. We are thus on a par with other pharmaceutical
and chemical companies. These surveys are supplemented by smaller
"snapshot surveys", where employees are asked about selected
strategic issues or projects.
We want to create a working environment that empowers our
employees to think outside of the box and find new solutions, open-
ing the door to creative ideas and the discovery of new market
opportunities. In order to promote this and to allow us to carry out
even better comparisons both within the company and with our
competitors, we conduct Group-wide employee engagement surveys
every year. In this way we ensure a regular exchange between
employees, leaders and the top management. The honest feedback
we receive from staff shows us whether the aforementioned mea-
sures and initiatives are successful as well as highlighting areas
where we can improve further.
REGULAR GLOBAL EMPLOYEE SURVEYS
Since 2010, Merck has been presenting the Safety Excellence
Award annually in order to underscore the importance of safety. It is
granted to all production sites with no workplace accidents on record
for the year; in 2018, it was awarded to 62 out of 90 sites.
Since 2010, we have been using the "BeSafe!" program to further
expand our occupational safety activities. Uniform standards as well
as local modules to meet specific safety requirements at individual
sites can help achieve a steady improvement in the current situation.
The program focuses on engaging managers in the safety culture
and building their buy-in; it aims to make safety an intrinsic value
and empower our employees to take responsibility for their own
safety. In 2018, we continued to sensitize our employees to work-
place hazards through numerous awareness campaigns.
A CONSTANT FOCUS ON HEALTH AND SAFETY
Workplace safety and health protection are the highest priority at
Merck. It is especially important to us to do everything in our power
to prevent workplace-related illnesses and accidents. We apply the
lost time injury rate (LTIR) as an indicator to determine the success
of measures aimed at accident prevention as well as occupational
health and safety. This key performance indicator describes the num-
ber of workplace accidents resulting in lost time of one day or more
per one million working hours. After having reached the goal of 2.5
that we had set in 2010, in 2015 we set ourselves a new, ambitious
goal: By 2020 we intend to sustainably lower the LTIR to 1.5. With
an LTIR of 1.3 in 2018, we overachieved this goal.
People at Merck
Fundamental Information about the Group
Combined Management Report
96
95
Specific benefit packages are in place at a national level to meet
the different needs of our employees using well-established man-
agement mechanisms. Focusing more closely on individualized fringe
and social benefits in the future will continue to enable our employ-
ees to individually choose those benefits that best meet their per-
sonal situation and stage of life.
⚫ Health and well-being
At Merck, we reward the performance of every individual through
appropriate and competitive total compensation. For years, we have
been achieving this through global processes and programs that are
supported by digital platforms. We also offer our managers flexible,
market- and needs-oriented compensation tools. These support
well-informed decisions and thus provide comprehensible, perfor-
mance- and position-based compensation. Apart from monetary
compensation components, we also offer our employees attractive
fringe and social benefits. Our fringe benefits feature globally under
the internal "benefits4me" brand. Its offerings comprise three pillars:
Company benefits including a company pension
REWARD SYSTEM
A TRANSPARENT AND FLEXIBLE EMPLOYEE
A healthy work-life balance is a crucial precondition for the
performance ability and motivation of our people. We plan to roll out
a Group-wide guideline on flexible working in 2019. At present, we
offer our employees at many sites around the world various flexible
and innovative working models. The "mywork@merck" working model
allows employees at the German sites in Darmstadt and Gernsheim,
for example, to freely choose their working hours and location in
agreement with their teams and supervisors. In addition, we also
introduced "mywork@merck" for Merck Accounting Solutions &
Services Europe GmbH, Merck Export GmbH, Merck Schuchardt OHG,
As a responsible employer, the physical and mental well-being of our
employees is extremely important to us. To enable employees to plan
their lives independently and to stabilize their long-term satisfaction
at a high level, providing a flexible and health-oriented working
environment is a special focus of our human resources work.
FOSTERING WORK-LIFE BALANCE
As an employer, we take on responsibility for the well-being of our
people and offer a wide range of opportunities to optimize work-life
balance and to protect their health and safety.
By offering information, advice and assistance in finding childcare
and nursing care as well as home and garden services, we help
employees to reconcile the demands of their professional and per-
sonal lives. At various sites, employees benefit from childcare options
that we subsidize. For example, a daycare center has been operating
at the Darmstadt site, looking after children between the ages of one
and twelve, for over 50 years. The adjacent new building houses a
nursery for up to 60 children between the ages of one and three
years. During the orientation phase, our employees can make use
of additional offices for parents at the daycare center. In addition, a
good ratio of staff to children is important to us to reliably supervise
the children.
men.
Merck Selbstmedikation GmbH and Merck Chemicals GmbH. Employ-
ees no longer record their time electronically and must document
their hours only if they exceed their standard working hours within
the agreed working time framework. At the end of December 2018,
a total of 5,698 employees made use of this model. In 2018, 4.8%
of our employees worldwide worked part-time, 12.5% of whom are
Differentiated solutions to support
employee well-being
• Service offers
Since 2016, we have also been working on a specially developed
program to help refugees enter the job market. As part of the "Inte-
grating refugees through training" program, a further group of twelve
young people who were forced to flee their home countries started
language, technical, cultural, and career-related training to prepare
them for vocational training and thus for the labor market.
We promote the professional and social expertise of our employ-
ees in vocational training through numerous regional and global
project activities. This included the support of a foundation for street
children in South Africa in 2018. Furthermore, through our "Start
in die Ausbildung" (Starting vocational training) program, we help
prepare young people who have not been able to find a vocational
training position. The number of interns increased slightly compared
to the previous year with 21 participants aged between 16 and 25
years. Although they have a school leaving qualification, they had
been searching for a vocational training position for at least one year
without success.
VOCATIONAL TRAINING TO RECRUIT YOUNG PEOPLE
In 2018, we again maintained a constant, high vocational training
rate in Darmstadt, our largest site. A total of 562 young people were
enrolled in vocational training in 24 different occupations at our
headquarters in the reporting period. We give unlimited employment
contracts to all employees in vocational training who work in occu-
pations for which we have sustainable demand. On average, the
post-vocational training hiring rate - taking voluntary terminations
into account - was more than 90% over the past five years. We also
offer vocational training at other sites in Germany, in which a total
of 60 young employees participated.
Indication
Status
Osteoarthritis
Phase II
Systemic lupus erythematosus
Phase II
IgA nephropathy
Phase II
Rheumatoid arthritis
Phase II
Systemic lupus erythematosus
Phase II
M5717 (PeEF2 inhibitor)
Psoriasis
Osteoarthritis
Phase I
Immunology
Phase I
Malaria
Phase I
More information on the ongoing clinical trials can be found at www.clinicaltrials.gov. Pipeline products are under clinical investigation and have not been proven to be safe and effective. There is
no guarantee any product will be approved in the sought-after indication.
1 As announced on July 30, 2018, the U.S. Food and Drug Administration (FDA) accepted the resubmission of the New Drug Application (NDA) for cladribine tablets.
2 Avelumab in combination with talazoparib.
3 Avelumab combination studies with talazoparib, axitinib, ALK inhibitors, chemotherapy or novel immunotherapies.
4As announced on May 2, 2018, in an agreement with SFJ Pharmaceuticals Group, abituzumab will be developed by SFJ for colorectal cancer through Phase II/III clinical trials.
5 As announced on March 30, 2017, in an agreement with Avillion, anti-IL-17 A/F nanobody will be developed by Avillion for plaque psoriasis and commercialized by Merck.
ADAMTS-5
Phase II5
General Medicine
M5049 (immune receptor inhibitor)
M6495 (anti-ADAMTS-5 nanobody)
93
— People at Merck
Fundamental Information about the Group
Combined Management Report.
A globally accessible welcome portal is available to new employ-
ees in order to help them prepare for their new job at Merck and to
support their onboarding phase. To further improve the onboarding
process, supervisors, Human Resources and new employees can
exchange information and documents before their first day of work.
In addition, all new employees are assigned an experienced colleague
who can help them to familiarize themselves with the daily working
routine. Our managers are also given detailed information such as
onboarding plans and process descriptions to support them with this
task.
When filling job vacancies, we pursue a holistic recruitment approach
coupled with globally uniform and binding procedures. This starts
with an internal job posting before external channels such as job
portals and recruitment agencies are used. This process enables us
to offer employees better development opportunities. For employees
with leadership responsibility, we offer targeted interview coaching
to support them in selecting candidates and to establish uniform
quality standards.
A HOLISTIC RECRUITMENT APPROACH
We endeavor to identify and develop the abilities of our employees
early on. Our objective is to extensively develop current and future
employees and offer them interesting advanced training opportuni-
ties in order to prepare them for more challenging tasks.
Furthering and asking more of talent
In Germany, we signed the "Charta der Vielfalt" (Diversity Char-
ter) in 2013, the "Charta der Gleichstellung" (Equal Opportunity
Charter) in 2015 and the Inclusion Action Plan of the German Mining,
Chemical and Energy Industrial Union (IG BCE) in 2017. By joining
these initiatives, we underscore our commitment to fairness and
tolerance in the workplace.
Demographic change is posing challenges to the society in Germany
as well as several other EU countries, the United States, China and
Japan. The average age of our employees is slightly above 41. We
assume that this figure will continue to rise in the coming years and
are preparing for this situation. As part of our range of "Health and
Well-being" offers, we specifically promote employee physical and
psychological well-being. These offers vary from country to country
and are adapted to local circumstances. In addition, we offer multi-
faceted continuing education throughout our employees' careers.
Women currently make up 44% of our workforce. However, the
ratio of women to men varies widely across the different regions,
businesses and functions. We are therefore working to raise the
proportion of women wherever they are underrepresented, taking
into account the situation typical for the industry as well as regional
differences.
APRIL
Combined Management Report
87
BIOPHARMA PIPELINE
as of December 31, 2018
Therapeutic area
Compound
Immunology
Sprifermin (fibroblast growth factor 18).
Atacicept (anti-BLYS/anti-APRIL fusion protein)
Atacicept (anti-BLYS/anti-APRIL fusion protein)
Evobrutinib (BTK inhibitor)
Evobrutinib (BTK inhibitor)
M1095 (ALX-0761, anti-IL-17 A/F nanobody)
Fundamental Information about the Group _ Research and Development
As a global employer with intercultural expertise, people from
a total of 136 nations work for Merck; 24.1% of our employees are
German citizens and 73.9% of our employees work outside Germany.
At our headquarters in Darmstadt, 11% of our staff comes from
89 different countries.
Latin America
4,136.5
36.9
With its Liquid Crystals business, Merck is the leading producer
of liquid crystal mixtures for the display industry. The growth rates
of display surfaces totaled on average around 7% in 2017 and 2018,
according to surveys by market researchers at IHS DisplaySearch.
This growth was mainly attributable to increasing average display
size amid slightly declining sales volumes. Liquid crystals will con-
tinue to play a key role in the display industry in the future. OLED
technology, for which Merck also ranks among the leading material
suppliers, is gaining importance in the high-quality display sector.
The semiconductor industry is the most important market for busi-
ness with material for integrated circuits (IC Materials). The growth
rates of the wafer area for semiconductor chips is independent of
cyclical prices, for example for memory, and is a good indicator of
demand for semiconductor materials. According to the global indus-
try association SEMI, the area of delivered wafers rose by just under
8% in 2018, mainly thanks to consistently strong demand from con-
sumers. Sales of semiconductor manufacturers, which have grown
even more sharply, are affected by the price trend of DRAM and NAND
memory chips.
PERFORMANCE MATERIALS
part of the pharmaceutical market. For 2018, annual sales of bio-
similars were estimated at US$ 5.95 billion; this figure is expected
to increase to US$ 23.63 billion by 2023.
According to IQVIA, the market volume of biotechnological phar-
maceuticals grew in 2018 to € 249 billion (equivalent to 27.9% of the
global pharmaceutical market). Around 7,800 biotechnological drug
candidates were in preclinical phase 2 of clinical development. In
2018, monoclonal antibodies accounted for around 25% of these drug
candidates (2017: 23%). Biosimilars are a small, but fast-growing
The demand for Process Solutions products depends heavily on the
sales of biopharmaceutical companies with biologics as well as on the
productivity of their research & development activities.
According to the market research firm Frost & Sullivan, the lab-
oratory product market relevant to Research Solutions and Applied
Solutions achieved growth of 3.6% in 2018 (2017: 3.4%). Strong
growth continued over the course of the year and was driven pri-
marily by customers in the biopharmaceutical industry, specifically
emerging biotech companies. The European market grew by 2.4%
compared with the previous year (2017: 3.5%). The weakening of
growth is attributable to continuing uncertainties, for example result-
ing from Brexit. The market in the United States grew by 4.2%
(2017: 3.1%), driven by increased National Institutes of Health (NIH)
funding and the tax reform. The emerging countries recorded higher
growth rates, particularly in China and India. The Chinese market
grew by 7.0% (2017: 7.8%). Although Chinese GDP growth is slow-
ing down and the tariff and trade relationships have led to uncertain-
ties in procurement, China remains interested in financing scientific
tools and in product investments in the laboratory area, which are
considered key priorities of the 13th Five-Year Plan. India generated
growth of 8.2% (2017: 8.0%) with laboratory products, and is focus-
ing more strongly on supporting academic and government research.
The markets for automotive coatings and cosmetics are crucial
to Merck's Pigments business. As reported by IHS, global automobile
sales in 2018 remained at the 2017 level. Only a few emerging econ-
omies recorded growth while Europe, North America and China
showed a slightly negative trend after high 2017 figures. In the
second half of 2018, in particular, economic relationships between the
United States and China together with political uncertainties in Europe
contributed to a weakening of demand. According to Statista, global
sales of cosmetics and care products rose by approximately 3%.
Our Life Science business sector is a leading supplier of products and
services for both research and applied laboratory applications, as well
as for formulating, purifying, manufacturing and quality-assuring
drug therapies of chemical and biological origin.
103
Macroeconomic and Sector-Specific Environment
Report on Economic Position
Combined Management Report
The developments in the therapeutic areas of relevance to Merck
generally reflect robust growth, albeit with different trends. The market
for the therapeutic area type 2 diabetes excluding the United States
showed a positive trend with a growth rate of 9.7% (2017: 9.2%)
and those for fertility and the treatment of colorectal cancer also saw
positive growth rates of 9.2% (2017: 7.4%) and 5.1% (2017: -0.7%),
respectively, whereas the market for multiple sclerosis patients reg-
istered a weakening of growth to 2.6% (2017: 7.4%).
market is relevant for our business. According to IQVIA, the market
volume of biological pharmaceuticals was approximately € 249 billion
in 2018. In recent years, the share of the global pharmaceutical
market accounted for by these products has grown continuously and
already amounted to 27.9% in 2018 (2017: 25.9%). Globally, the
largest share, or 37.8%, was attributable to the U.S. market.
Not only the growth of the pharmaceutical sector as a whole,
but also in particular the development of the biopharmaceutical
LIFE SCIENCE
In the latest study published in October 2018 by the pharmaceutical
market research firm IQVIA entitled "Market Prognosis 2018-2022",
the growth of the global pharmaceutical market for 2018 is quantified
at 4.8%. By comparison, in 2017, sales growth was only 2.7%. As
was already the case in 2017, the EMEA and Latin America regions
were the main contributors to growth in 2018. North America also
fueled growth. In the United States, growth accelerated substantially
to 5.2% (2017: 1.4%). Latin America continued to see strong growth
of 8.3% (2017: 8.0%). The EMEA region generated growth of 5.0%
(2017 3.6%). The Asia-Pacific region recorded a slight increase in
growth to 3.2% (2017: 2.8%).
104
Report on Economic Position
Combined Management Report
Contrary to our original expectation of a slight to moderate decline
in organic sales, the Performance Materials business sector gener-
ated a slight increase in organic sales of +1.7% in 2018. Since the
third quarter of 2018, various capacity expansion projects by our
Performance Materials
For our Life Science business sector, at the beginning of the year we
had forecast solid organic sales growth, slightly above expected
medium-term market growth of around +4% per year. The business
sector achieved very strong organic growth of +8.8% in 2018. This
means that it exceeded the top end of our forecast of between + 7%
and +8% that we had raised in our report on the third quarter of
2018, thanks to the very positive organic sales development in the
fourth quarter of 2018. As expected, Process Solutions was the most
dynamic business unit, delivering the largest contribution to organic
sales growth within Life Science. As expected, Applied Solutions and
Research Solutions also contributed positively to the organic sales
performance, albeit to a significantly lesser extent than Process
Solutions.
Life Science
In 2018, our Healthcare business sector generated solid organic sales
growth of +5.2% (or € 324 million), thus meeting our forecast of
moderate organic growth. Sales growth in 2018 was supported by
the continuation of good organic sales growth in the General Medicine
& Endocrinology and Fertility business units in our growth markets
(€ 179 million) and the contribution to sales made by our newly
approved products Bavencio® and MavencladⓇ, which slightly
exceeded our expectations. Both products together generated sales
of € 160 million in 2018 and thus contributed € 138 million to organic
sales growth.
Healthcare
Combined Management Report
the growth markets at the start of the year, we anticipated a mod-
erately negative exchange rate effect on our net sales. At the same
time, we assumed that the charges would be greater in the first half
than in the second half of 2018. This assessment was confirmed: the
negative exchange rate effect in 2018 as a whole was -3.9%. From
the middle of 2018 onward a perceptible easing of the exchange rate
between the euro and the U.S. dollar was observed, as expected,
although a number of different currencies in the growth markets,
particularly the Latin American currencies, showed a less favorable
than expected development in the second half of 2018.
For 2018, we had forecast moderate organic net sales growth for the
Merck Group. In the second half of 2018, Merck recorded more
dynamic sales growth in all business sectors than expected at the
start of the year; this means that for 2018 as a whole we realized a
strong organic rise in net sales of +6.1%, thereby slightly exceeding
our forecast.
NET SALES
Due to this portfolio change, the following analysis reflects the new
structure of the Merck Group: it takes the Consumer Health business
into account as "discontinued operation".
On April 19, 2018, Merck announced the signing of an agreement to
divest its global consumer health business to Procter & Gamble (P&G)
for around € 3.4 billion in cash. At the time, the transaction was
expected to be signed at the end of the fourth quarter of 2018. Sign-
ing took place on November 30, 2018. In order to ensure the sys-
tematic continuation of the forecast from the 2017 Annual Report and
assess the further development with respect to the Consumer Health
business, Merck presented its forecast for the expected sales and
earnings of the Merck Group and the Healthcare business sector as
of the first quarter of 2018 both with and without the Consumer
Health business. In its report on the second quarter of 2018, the
Consumer Health business was classified as a "discontinued opera-
tion" in accordance with IFRS 5. Consequently, the prior-year figures
and the figures for the first quarter of 2018 were adjusted accord-
ingly, as was the Merck forecast. At the same time, the key drivers
of the forecast - organic sales and EBITDA pre growth for the Group
and for the business sectors together with their exchange rate effects
in each case remained unchanged.
The forecast of the Merck Group for fiscal 2018 published in the
Annual Report for fiscal 2017 comprised the three business sectors
of Healthcare, Life Science and Performance Materials. On Septem-
ber 5, 2017, Merck had announced that it was examining strategic
options for its Consumer Health business. This analysis had not been
completed by the time the 2017 Annual Report was prepared, and
as of December 31, 2017, the Executive Board concluded that a
divestment of the Consumer Health business within twelve months
was not regarded as highly likely. As a result, the forecast at the time
included the Consumer Health business.
Review of Forecast against Actual Business
Developments
Review of Forecast against Actual Business Developments
Due to the emerging unfavorable development of the exchange
rate between the euro and the U.S. dollar and various currencies in
Report on Economic Position
HEALTHCARE
1 Predicted development. Final development rates for 2018 were not available for all industries when this report was prepared.
2 Growth rates based on market data in local currency, translated at a constant euro exchange rate. The IQVIA market data on the growth of indications are based on current figures, including the
third quarter of 2018. Annual growth based on the values for the past 12 months. The type 2 diabetes market excludes the United States, since this market is insignificant to Merck.
3 Growth rates based on market data stated in U.S. dollars. Market data from EvaluatePharma on the growth of indications are based on published company reports and are subject to exchange
rate fluctuations.
2.6%
2.7%
4.8%
2017
2018¹
Development
Development
7.4%
Global sales of cosmetics and care products
Growth of wafer area for semiconductor chips
Performance Materials
Share of biopharmaceuticals in the global pharmaceutical market²
Market for laboratory products
Life Science
Market for the treatment of colorectal cancer³
Market for fertility treatment²
Growth of LC display surface area
4 Growth of display area is a pure volume indicator, which is counteracted by a negative price momentum.
9.7%
9.2%
2.2%
0.0%
Global automobile sales volumes
3.5%
3.3%
6.0%
8.6%
9.2%
10.0%
25.9%
27.9%
3.4%
3.6%
-0.7%
5.1%
7.4%
7.6%
Market for type 2 diabetes therapies²
Review of Forecast against Actual Business Developments
customers in the display industry have prompted an increase in
demand for our liquid crystal materials in the Display Solutions busi-
ness unit. Prompted by this development and by sales growth of
Semiconductor Solutions in line with our expectations, we raised our
estimate of organic sales growth to between -1% and +1% in our
report on the third quarter of 2018. This temporary upturn continued
in the liquid crystal business in the fourth quarter of 2018, as a result
of which organic sales growth of the Performance Materials business
sector in 2018 slightly exceeded our updated forecast range, at +1.7%.
~ 3,750 to 4,000)
~ 3,750 to 4,000
Organic decline -1% to -3% vs.
2017
2017
~14,100 to 14,600
Organic growth + 3% to +5% vs.
€ 5.00 to € 5.40)
Health business
~ 2,310 to 2,620)
(excluding
Consumer Health
~2,380 to 2,670
~ 2,460 to 2,770 EPS pre € 5.30 to € 5.65
(excluding Consumer
Exchange rate effect -5% to -7%
Organic decline -1% to -3% vs.
2017
~15,000 to 15,500
(excluding Consumer Health
~14,000 to 14,500)
Organic growth + 3% to +5%
Exchange rate effect -4% to -6%
in € million
Results 2018
Q3/2018
~3,950 to 4,150
(excluding Consumer Health
Q2/2018
€ 5.00 to € 5.40
Moderately negative foreign
exchange effect -3% to 5%
-3.9% Currency)
0.0% Portfolio,
0.0% Portfolio,
-1.6% Organic,
5.10
-13.9%
-21.4%
(-10.5%:
Moderately negative foreign Exchange rate effect - 5% to -7%
exchange effect -3% to -5%
~14,400 to 14,800
Organic decline +4% to +6% vs.
2017
2,508
-10%
Exchange rate effect - 8% to
€ 5.00 to € 5.30
~2,340 to 2,630
~3,700 to 3,900
Organic decline -1% to -3% vs.
2017
+6.1% Organic,
14,836
(+2.2%:
3,800
105
Q1/2018
tories due to changes
in the product mix and
volume growth
Report on Economic Position
Combined Management Report
106
For 2018, we expected business free cash flow of the Merck Group
to see a low double-digit percentage decline. We met this forecast
with a decrease of 21.4%. The Healthcare business sector reported
a decline of 22.0% compared with the previous year, which was lower
than the single-digit percentage fall we had forecast at the start of
the year. This development was primarily attributable to the sale of
the Consumer Health business, which had not yet been anticipated
when the forecast was made at the start of the year. The transfer of
the EBITDA pre of the divested business had a particularly significant
impact. The business free cash flow of the Life Science business
sector was more or less stable, declining by 0.7%. This is in line with
the small percentage decrease we had forecast. For the Performance
Materials business sector we anticipated a double-digit decline in
2018. The drop of 35.1% essentially the result of lower EBITDA
pre- thus corresponded to our expectations.
BUSINESS FREE CASH FLOW
EBITDA pre of Corporate and Other, which reached a level of
€ - 381 million in 2018, was within our forecast range of € - 360 mil-
lion to € - 400 million that we specified at mid-year. Compared with
the prior-year figure of € - 292 million this corresponded to a rise in
costs of 30.6%. This development was primarily attributable to losses
from our currency hedging, which were higher in the second half of
2018 than had been expected at the start of the year. We did, how-
ever, reach the forecast we issued at the start of the year, which
provided for an increase in expenses for Corporate and Other
amounting to a low single-digit percentage figure.
Corporate and Other
Review of Forecast against Actual Business Developments
Owing to the expected corrections in the Display Solutions business,
we forecast an organic percentage decline in EBITDA pre for the
Performance Materials business sector totaling a mid-teen percent-
age figure at the start of the year. For the exchange rate effects we
moreover projected a moderately negative charge on EBITDA pre
over 2017. For 2018 as a whole, Performance Materials achieved
EBITDA pre of € 786 million. This corresponded to a drop of -19.8%
over 2017, of which -12.9% was attributable to the organic business
performance and a further -6.9% to exchange rate developments.
Both key financial indicators were thus within the ranges we had
indicated at the start of the year.
organic sales growth and continuing realization of synergies from
the acquisition of Sigma-Aldrich, which remain on schedule. With
€ 1,840 million, the business sector delivered organic growth of
+7.0% and was thus below the forecast range we had given at the
beginning of the year. The exchange rate developments depressed
EBITDA pre by -3.9% and thus corresponded to our forecast of a
moderately negative exchange rate effect.
For Life Science we had expected organic EBITDA pre growth to be
similarly dynamic as in 2017 at around +8% due to the expected
Life Science
For our Healthcare business sector we are forecasting a slight organic
decrease in EBITDA pre over the prior year due to the continuing rise
in research and development expenses to develop our pipeline, par-
ticularly in immuno-oncology, and the disappearance of exceptional
income from the prior year and a slight decline in organic EBITDA
pre over the prior year. In addition, we had expected moderately
negative exchange rate effects. In 2018, EBITDA pre in Healthcare
amounted to € 1,556 million (2017: € 1,773 million). This is equiv-
alent to a decline of -12.2% over 2017; the organic drop of -1.6%
corresponded to the forecast we issued at the start of the year. The
exchange rate effects had a substantially greater negative impact
than expected at the start of the year. As a result, in our reporting
on the third quarter of 2018 we changed our forecast range to
between -9% and -11% and closed out the year 2018 at -10.7%.
Healthcare
For 2018 we expected a slight organic decline in EBITDA pre over
the prior year for the Merck Group. Furthermore, because of the
difficult foreign exchange environment, we expected negative
exchange rate effects to depress EBITDA pre by between -4% and
-6% over the prior year. In 2018, EBITDA pre came to € 3,880 mil-
lion, equivalent to a decrease of -10.5% compared with the prior
year (2017: € 4,246 million). The organic decline of -1.6% entailed
by this figure was in line with our forecast. By contrast, at -8.9%
the foreign exchange effect on EBITDA pre in 2018 as a whole was
substantially more negative than expected at the start of the year,
although it was in line with the range of between -8% and -10%
which we had adjusted in the course of our reporting on the third
quarter of 2018. The expected advantageous development of the
euro against the U.S. dollar in the second half of 2018 was more
than offset by the continuing depreciation of various emerging mar-
ket currencies versus the euro, particularly of the Latin American
currencies. During this period in 2018, the Argentine peso and the
Brazilian real performed significantly worse than we had expected at
the start of the year.
EBITDA PRE
Performance Materials
Forecasts for 2018 in the
interim report:
MERCK GROUP
in € million
plant and equipment,
as well as digitalization
initiatives, higher inven-
Lower EBITDA pre and
investments in property,
Low double-digit
percentage decline
cost management
Moderately negative foreign
exchange effect, particularly
owing to the development of
the U.S. dollar and currencies
of various growth markets
Ongoing adjustment processes
in the Liquid Crystals business
that will not be offset despite
the enhanced diversification of
Performance Materials and active
business sector
Slight organic decline
Moderately negative foreign
exchange effect of -4% to -6%
In Healthcare continued high
investments in research and
development as well as in
marketing and sales; absence of
positive one-time effects from
the previous year
Organic sales growth and
continued realization of planned
synergies from the integration of
Sigma-Aldrich in the Life Science
Actual results 2017
€ 5.92
Business free cash flow
3,193
EBITDA pre
4,246
Slight to moderate organic
decrease in Performance Materials
owing to the ongoing adjustment
processes in the Liquid Crystals
business
Negative foreign exchange effect,
driven primarily by the exchange
rate of the U.S. dollar and curren-
cies of various growth markets
Moderate organic growth
Moderately negative exchange
rate effect
Moderate organic growth
in Healthcare due to strong
dynamics in growth markets
as well as increasing sales of
MavencladⓇ and BavencioⓇ
Solid organic growth in Life
Science, slightly above expected
market growth
Net sales
14,517
Main comments
Forecast for 2018 in the
2017 Annual Report¹
EPS pre
1The 2018 forecast in the 2017 Annual Report included the Consumer Health business.
Market for multiple sclerosis therapies²
Healthcare
Number of nationalities
63.6%5
64.4%³
64.7%³
are not German citizens
Percentage of executives who
6.5%5
703
6.0% 3,4
global, total
30.9%5
29.7%³
28.7%³
in Germany
32.3%5
30.3%³
5.7%³
28.8%³
653
576
12.5%
10.7%
10.6%
Men
4.8%
4.6%
4.7%
705
global, total
5,267
4,507
4.1%
4.4%
5.1%
604
588
5,698
global, total
38.9%
38.6%
215
global, total
global, total
66
66
66
10,959.6
217
10,506.7
North America
1,151.1
1,096.1
1,041.8
Africa (MEA)
Middle East and
3,339.5
10,022.0
39.1%
207
131
44.0%
43.1%
42.8%
10.6%
10.2%
9.7%
73.9%
129
74.9%
24.1%
23.2%
23.1%
95
97
91
136
75.3%
Global pharmaceutical market
14.7%
14.5%
Review of Forecast against Actual Business Developments
104
Macroeconomic and Sector-Specific Environment
101
REPORT ON ECONOMIC POSITION
99-136
REPORT ON ECONOMIC POSITION
111
People at Merck
Combined Management Report
98
5 Not including the Sigma-Aldrich legal entity in Steinheim (Germany) or Allergopharma.
4 Ratio adjusted retrospectively.
3 Not including Sigma-Aldrich legal entities in Germany or Allergopharma.
2The Consumer Health business was transferred to Procter & Gamble (P&G) on December 1, 2018, and was already classified as a discontinued operation according to IFRS 5 in April 2018.
With the completion of the sale, around 3,300 employees joined P&G.
1 Merck also has employees at sites that are not fully consolidated subsidiaries. These figures refer to all people directly employed by Merck and therefore may deviate from figures in the
financial section of this report.
Fundamental Information about the Group
14.5
Course of Business and Economic Position
Healthcare
Macroeconomic and Sector-Specific Environment
Report on Economic Position
Combined Management Report.
102
Organic sales growth of Merck was above the IMF's global growth
expectations in 2018 and came to 6.1%. It was supported by all
regions. Asia-Pacific accounted for the largest share of growth across
the Group at around 42%, followed by Europe at 24.6%, North
America at 20.2%, Latin America at 11.5% and the Middle East and
Africa at 1.8%. Growth was driven primarily by the Healthcare and
Life Science business sectors, while Performance Materials came in
slightly above the 2017 figure. Growth in the Asia-Pacific region was
supported by all business sectors. Healthcare and Life Science made
a positive contribution in Europe as well as in the Latin America
region. Growth in North America was principally the result of oper-
ations in the Life Science business sector.
(2017: 2.4%). The emerging economies of Asia registered stable
growth of 6.5% (2017: 6.5%). As in 2017, India at 7.3% (2017:
6.7%) and China at 6.6% (2017: 6.9%) were the strongest growth
drivers. In the industrialized countries of Asia, the GDP of Japan grew
by 0.9% (2017: 1.7%) and that of Taiwan by 2.7% (2017: 2.9%).
Korea registered growth of 2.8% (2017: 3.1%).
Expressed in figures, according to the latest IMF forecasts global
gross domestic product (GDP) rose by 3.7% in 2018, equivalent to
a slight decline in the growth rate in comparison with 2017 (3.8%).
Strong regional differences and differences between industrial
nations and emerging economies could be seen. Industrial nations
registered a slight weakening of growth to 2.3% (2017: 2.4%). At
4.6% (2017: 4.7%), growth in the emerging economies and devel-
oping countries also declined slightly. The GDP of the United States,
the world's largest economy, grew by 2.9% (2017: 2.2%). By con-
trast, the eurozone recorded a weakening of GDP growth to 1.8%
Merck Group
According to the most recently available figures from the Interna-
tional Monetary Fund (IMF), the global economy faced rising growth
expectations in 2018. Forecast growth in 2019 is expected to be
slightly below the level of the two previous years. Although the global
economy thus continues to expand, growth in the third quarter of
2018 fell short of expectations in a number of economies. Risks to
global growth include, in particular, a further rise in trade barriers
and the outflow of capital from emerging economies.
101
Macroeconomic and Sector-Specific Environment
Report on Economic Position
Combined Management Report
Corporate and Other
Performance Materials
Life Science
Report on Economic Position
Macroeconomic and Sector-Specific Environment
14.5%
14.0
10.0
42.4
Europe
36.9
36.7
Asia-Pacific (APAC)
41.7
41.4
42.5
41.3
23.4%
22.8%
global, total
61.1%
62.1%
62.5%
global, total
24.4%
14.2
42.8
39.9
9.8
9.9
43.3
43.0
42.9
Germany
global, total
44.1
Latin America
44.1
North America
39.2
39.4
39.3
Middle East and Africa (MEA)
40.4
40.3
44.3
-8.9% Currency)
4,046.2
11,272.1
11,294
10,486
Europe
24,438
25,980
25,792
by region
Latin America
4,140
4,050
3,340
Africa (MEA)
1,045
1,097
1,153
North America
10,037
by region
25,126.8
25,302.5
23,727.1
Europe
10,462.9
10,754
10,725.3
51,039.8
52,223.5
49,652.7
global, total
10,978
10,520
Asia-Pacific (APAC)
Asia-Pacific (APAC)
Middle East and
52,941
Percentage of women in leadership positions (= role 4 or higher)
Percentage of women in the workforce
Percentage of employees with German citizenship
Percentage of employees working outside Germany
Percentage of employees with global managers
Number of nationalities working in Germany
Number of nationalities
Number of legal entities
global, total
Number of countries
Number of employees
51,749
97
— People at Merck
Fundamental Information about the Group
Combined Management Report.
Number of employees (FTE - full-time equivalents)
in Germany
global, total
OVERVIEW OF EMPLOYEE FIGURES¹
Number of employees in vocational training in Germany
Vocational training rate
Percentage of executives (= role 4 or higher)
50,414
global, total
Merck (overall)
Dec. 31, 2017
Merck (overall)
Dec. 31, 2016
Average length of service in Germany
Average length of service
Merck (overall)
Dec. 31, 2018²
Percentage of employees aged 50+
Average age globally
Percentage of employees aged 30-49 years
Percentage of employees aged 17-29 years
Percentage of employees working part-time
Average age by region
Number of employees in the "mywork@merck" model (Germany)
4% p.a.
Improved EBITDA pre
Higher inventories reflect the expected
sales growth and changed product mix
Forecasts for 2018 in the
interim report:
Q1/2018
Results 2018
in € million
Q3/2018
Organic growth slightly above the
medium-term market average of
Moderately negative foreign
exchange effect
Slightly below the prior-year level
Q2/2018
Business free cash flow
1,402
Process Solutions is likely to remain the
strongest growth driver, followed by
Applied Solutions
Continuation of the planned realization
of synergies from the
Sigma-Aldrich acquisition
Positive development resulting
from expected sales growth
dynamic as in 2017
Moderately negative foreign
exchange effect
No significant portfolio effect from the
acquisition of Natrix Separations
Negative foreign exchange effect,
particularly owing to the development
of the U.S. dollar
albeit to a smaller extent
Research Solutions will also contribute
positively to organic sales development,
Solid organic growth, slightly above
expected market growth
Moderately negative foreign
exchange effect
Organic earnings growth with a similar
EBITDA pre
1,786
5,882
Net sales
Organic growth of +5% to +6%,
slightly above medium-term average
market growth of 4% p.a.
Negative foreign exchange effect,
particularly owing to the development
of the U.S. dollar
Moderately negative foreign
exchange effect
-3% to -5%
-2.5%
Moderately negative foreign
exchange effect -3% to -5%
Main comments
in € million
Actual results 2017
PERFORMANCE MATERIALS
109
Review of Forecast against Actual Business Developments
Report on Economic Position
Combined Management Report
-3.9% Currency)
0.0% Portfolio,
+7.0% Organic,
-0.7%
Organic growth +7% to +8%,
considerably above medium-term
average market growth of 4% p.a.
1,393
~1,300 to 1,390
~1,310 to 1,400
~1,310 to 1,400
~1,830 to 1,880
Organic growth of around +8%
Exchange rate effect -3% to -5%
Organic growth of around +8%
Exchange rate effect -3% to -5%
~1,830 to 1,880
~1,820 to 1,870
Organic growth at around
the previous year's level of +8%
Exchange rate effect -4% to -6%
1The 2018 forecast in the 2017 Annual Report included the Consumer Health business.
0.0% Portfolio,
-3.6% Currency)
+8.8% Organic,
6,185
(+5.2%:
1,840
(+3.0%:
Forecast for 2018 in the
2017 Annual Report¹
6,246
(+0.9%:
Actual results 2017
0.0% Portfolio,
-4.3% Currency)
+5.2% Organic,
Net sales
2,446
Moderately negative foreign
exchange effect
-4% to -6%
Solid organic growth
+4% to +5%
Moderately negative foreign
exchange effect
-4% to -6%
Moderate organic growth
+3% to +5%
Moderate organic growth
Moderately negative foreign
exchange effect
in € million
Results 2018
Q3/2018
Q2/2018
Q1/2018
interim report:
Forecasts for 2018 in the
Negative foreign exchange effect,
particularly owing to the development
of the U.S. dollar and currencies
of various growth markets
Continued high investments in research
and development as well as in market-
ing and sales; absence of positive one-
time effects from the previous year
Negative foreign exchange effect,
driven primarily by the exchange
rate of the U.S. dollar and currencies
of various growth markets
Continued price pressure in Europe and
also in the Asia-Pacific as well as Middle
East and Africa regions
BavencioⓇ and MavencladⓇ will
contribute visibly to sales growth
Solid organic growth of our Consumer
Health business
Moderately negative
exchange rate effect
Organic sales growth in growth markets
will compensate for the organic decline
in RebifⓇ sales, which is expected to
be in the high single-digit percentage
range
Moderate organic growth
1,314
Business free cash flow
EBITDA pre
1,773
Net sales
6,190
1The 2018 forecast in the 2017 Annual Report included the Consumer Health business.
in € million
Organic decline of -1% to -2%
Exchange rate effect -5% to -7%
(excluding Consumer Health
~1,580 to 1,650)
LIFE SCIENCE
Review of Forecast against Actual Business Developments
Report on Economic Position
Combined Management Report
108
-22.0%
1,025
1,093
~1,060 to 1,140
(excluding Consumer Health
~1,000 to 1,080)
~1,140 to 1,240
Increase in working capital due
to product mix effects
Decline in EBITDA pre
Single-digit percentage
decline
-10.7% Currency)
0.0% Portfolio,
-1.6% Organic,
(-12.2%:
1,556
-9% to -11%
exchange effect
Significantly negative foreign
~1,540 to 1,600
Organic decline of -1% to -2%
Organic decline of -1% to -2%
Exchange rate effect -5% to -7%
~1,580 to 1,650
~1,770 to 1,830
EBITDA pre
980
588
-35.1%
906
Margin (% of net sales)²
EBITDA²
Margin (% of net sales)²
Operating result (EBIT)²
Net sales
€ million
Change
Key figures¹
MERCK GROUP
• Net financial liabilities reduced by -33.9% to € 6.7 billion (Decem-
ber 31, 2017: € 10.1 billion)
• Decrease in business free cash flow to € 2.5 billion (2017: € 3.2 bil-
lion)
Earnings per share pre declined to € 5.10 (2017: € 5.92)
• At 25.6% (2017: 29.3%), EBITDA pre margin of the Group did not
achieve prior-year profitability
•
Group net sales increased to € 14.8 billion; strong organic growth
(6.1%) was reduced by negative exchange rate effects (-3.9%)
All business sectors contributed to the Group's organic sales growth
⚫ EBITDA pre declined by -10.5% and came to € 3.8 billion (2017:
€ 4.2 billion)
•
Overview of 2018
Merck Group
Course of Business and
Economic Position
111
Merck Group
Report on Economic Position
Combined Management Report
-497
15.9%
~ 500 to 450
EBITDA pre²
~ 490 to -440
~-500 to -550
Margin (% of net sales)²
2018
3,396
29.3%
25.6%
-10.5%
-446
4,246
3,800
28.7%
23.8%
-15.3%
-636
4,164
3,528
16.7%
11.6%
-28.7%
-696
2,423
1,727
2.2%
319
14,517
14,836
€ million
2017
Profit after tax
1The 2018 forecast in the 2017 Annual Report included the Consumer Health business.
-381
30.6%
~ 400 to -360
~ 725 to 765
~745 to 785
Organic decline -14% to -16%
Exchange rate effect -6% to -8%
~ 480 to 550
Organic decline -14% to -16% vs.
2017
Exchange rate effect - 8% to -10%
¹The 2018 forecast in the 2017 Annual Report included the Consumer Health business.
0.0% Portfolio,
-3.4% Currency)
+1.7% Organic,
2,406
(-1.7%:
of 2017, i.e. -1% to +1%
Moderately negative foreign
exchange effect -3% to -5%
Slight to moderate organic decline -2%
to -4%
Moderately negative foreign
exchange effect -3% to -5%
Organic sales performance at the level
Slight to moderate organic decline
Moderately negative foreign
exchange effect
in € million
Results 2018
Q3/2018
Q2/2018
Q1/2018
Forecasts for 2018 in the
interim report:
Decline in EBITDA pre, sustained high
investments in property, plant and
equipment and higher inventory levels
due to volume increases
Double-digit percentage decline
Negative foreign exchange effect,
particularly owing to the development
of the U.S. dollar and currencies in key
Asian markets
Organic percentage decline in the mid
teens range
Moderately negative foreign
exchange effect
The decline in market shares and prices
in the Liquid Crystals business cannot
be offset by growth of the other busi-
nesses and active cost management
Volume increase in all businesses;
strong dynamics particularly in
Advanced Technologies and IC Materials
Market share adjustment and price
decline in the Liquid Crystals business
Negative exchange rate effect,
especially due to the forecast
development of the U.S. dollar and
currencies in key Asian markets
Main comments
Organically slightly to moderately below
the year-earlier level
Moderately negative foreign
exchange effect
2017 Annual Report¹
Forecast for 2018 in the
~ 510 to 580
~ 745 to 785
Organic decline -14% to -16%
Exchange rate effect - 6% to -8%
~ 510 to 580
786
(-19.8%:
~ 400 to 360
~ 360 to 320
In contrast, expected currency hedging gains
should have a compensating effect in 2018
The increase in costs is attributable to
investments in innovation and digitalization
initiatives; these costs were previously incurred
in the business sectors and are now recorded
centrally under Corporate and Other
Low double-digit percentage increase
in € million
Results 2018
Q3/2018
Q2/2018
Q1/2018
Forecasts for 2018 in the interim report:
Main comments
Business free cash flow
2017 Annual Report¹
Actual results 2017 in € million
Business free cash flow
-429
EBITDA pre
-292
CORPORATE AND OTHER
Review of Forecast against Actual Business Developments
Report on Economic Position
Combined Management Report
110
Main comments
-6.9% Currency)
0.0% Portfolio,
-12.9% Organic,
Forecast for 2018 in the
Forecast for 2018 in the
2017 Annual Report¹
In 2018, gross profit of the Merck Group came to € 9,454 million and
thus exceeded the 2017 figure of € 9,446 million only slightly. The
positive development of this key indicator for the Life Science busi-
ness sector, which generated an increase of € 169 million, was eaten
up by declining profits in the other two business sectors. The gross
margin of the Group, i.e. gross profit as a percentage of net sales,
amounted to 63.7% (2017: 65.1%).
Actual results 2017
4,512
1,755
183
-1,080
299
85
9,236
25.0%
7,455
20.9%
1,781
23.9%
2,764
2,931
24
1,345
2,170
2,632
133
2,923
8
90
-66
1,221
124
589
8,317
1,582
13,582
Other current liabilities¹
7,237
Property, plant and equipment
4,811
Other non-current assets
1,840
Current assets
of which:
Inventories
Trade accounts receivable
Current financial assets
Other current assets
Cash and cash equivalents
Total assets
Equity
Non-current liabilities
of which:
Provisions for pensions and other post-employment benefits
Other non-current provisions
Non-current financial liabilities
Other non-current liabilities
Current liabilities
of which:
Current provisions¹
Current financial liabilities
Trade accounts payable/Refund liabilities
Total equity and liabilities
Other intangible assets
36,888
35,621
8,635
24.2%
-117
-1.4%
600
2,215
2,238
3,464
36,888
100.0%
457
2,790
2,195
3,191
35,621
100.0%
143
-576
43
273
1,267
3.6%
1 Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes" in the Notes to the Consolidated Financial
Statements.
The total assets of the Merck Group amounted to € 36,888 million
as of December 31, 2018 (December 31, 2017: € 35,621 million),
representing an increase of 3.6% or € 1,267 million. One main reason
for this rise was the cash inflow from the sale of the Consumer Health
business amounting to € 3,052 million. Details of this transaction
and its impact on the consolidated balance sheet are included in
Note (5) "Acquisitions and divestments" in the Notes to the Consol-
idated Financial Statements. Due to exchange rate developments,
total assets rose by around € 0.8 billion. This development was pri-
marily the result of the trend of the exchange rate between the euro
and the U.S. dollar, which had an impact on intangible assets, in
particular.
The rise in net working capital of 2.9% to € 3,486 million (2017:
€ 3,387 million) was mainly attributable to the slight build-up in
inventories.
23.1%
100.0%
8,517
-1,352
100.0%
1,267
3.6%
17,233
46.7%
14,066
39.5%
3,167
22.5%
11,138
30.2%
12,919
36.3%
-1,782
-13.8%
2,336
780
6,681
1,340
2,257
788
8,033
1,842
80
-7
-502
13,764
-1.8%
-513
Report on Economic Position
Merck Group
2,615
Group research and development costs rose by 5.6% to
€ 2,225 million and led to a research spending ratio (research and
development costs as a percentage of net sales) of 15.0% (2017:
14.5%). Accounting for an unchanged 77% of Group R&D spending
(2017: 77%), Healthcare remained the most research-intensive busi-
ness sector of the Merck Group.
MERCK GROUP
Research and development costs
by business sector¹ - 2018
€ million/in %
12%
Life Science
249
11%
Performance Materials
242
77%
Healthcare
1,686
1 Not presented: Research and development costs of € 47 million allocated to Corporate and Other.
Other operating expenses and income showed an expense balance
of € 126 million in 2018, after an income balance of € 332 million in
2017. This strong change was mainly due to developments in the
Healthcare business sector (see explanations under "Healthcare").
In particular, the gain on the divestment of the Biosimilars business
activities amounting to € 319 million had a positive effect in 2017.
Detailed information about the development and composition of
other operating expenses and income can be found in Note (12)
"Other operating income", Note (13) "Other operating expenses"
and Note (38) "Management of financial risks" in the Notes to the
Consolidated Financial Statements.
The increase in provisions for obligations from long-term variable
compensation programs (Merck Long-Term Incentive Plan) negatively
impacted the operating result in 2018; the increase in the intrinsic
value of the Merck Share Units - depending on the fields of activity
of the eligible participants - was reflected in the respective functional
costs (see Note (26) "Other provisions").
The improvement in the negative financial result by € 28 million or
9.6% to € - 266 million (2017: € - 294 million) resulted mainly from
higher interest income. Details with respect to the development of
finance income and finance expenses of the Group are shown in
Note (32) "Financial result/net profit and losses from financial instru-
ments" in the Notes to the Consolidated Financial Statements.
Income tax expense came to € 368 million in 2018 and resulted in
a tax ratio of 25.2%. The income balance of € 428 million in 2017
was due to one-time effects from deferred taxes in connection with
the tax reform in the United States. Further information on income
taxes are included in Note (14) "Income taxes" in the Notes to the
Consolidated Financial Statements.
Profit after tax from discontinued operation of € 2,303 million (2017:
€ 57 million) included the Consumer Health business, which must
be reported separately in the Group income statement pursuant
to IFRS 5. In 2018, this profit figure also includes the gain on the
divestment of the Consumer Health business amounting to € 2,244 mil-
lion. Further information on the divestment of the Consumer Health
business is found in Note (5) "Acquisitions and divestments" in the
Notes to the Consolidated Financial Statements.
Thanks to the gain on the divestment of the Consumer Health
business, in particular, net income rose by € 769 million to € 3,374 mil-
lion (2017: € 2,605 million). In 2017, an exceptional tax income in
connection with the tax reform in the United States of € 906 million
boosted net income. Earnings per share increased accordingly to
€ 7.76 (2017: € 5.99).
EBITDA pre, the key financial indicator used to steer operating busi-
ness, declined by € -446 million or -10.5% to € 3,800 million (2017:
€ 4,246 million). Unfavorable foreign exchange effects lowered
EBITDA pre by -8.9%. Relative to net sales, the EBITDA pre margin
was 25.6% in 2018 (2017: 29.3%). The reconciliation of the oper-
ating result (EBIT) to EBITDA pre is presented in the chapter entitled
"Internal Management System".
Combined Management Report
Report on Economic Position
Merck Group
115
Combined Management Report
The development of EBITDA pre in the individual quarters in com-
parison with 2017 as well as the respective growth rates are pre-
sented in the following overview:
114
1 Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes" in the Notes to the Consolidated Financial
Statements.
HEALTHCARE
107
Review of Forecast against Actual Business Developments
Report on Economic Position
Combined Management Report
7.4%
2,303
3,396
15.5%
22.9%
428
2,557
57
2,615
3.0%
17.6%
0.4%
18.0%
-796
-1,464
2,246
781
> 100.0%
-57.3%
> 100.0%
29.9%
Non-controlling interests
Net income
-22
3,374
-0.2%
22.7%
-10
2,605
-0.1%
17.9%
-12
769
> 100.0%
29.5%
2 Not defined by International Financial Reporting Standards (IFRSS).
MERCK GROUP
EBITDA pre¹ and change by quarter²,3
€ million/change in %
Life Science
1,840
1 Not defined by International Financial Reporting Standards (IFRSS).
37%
Healthcare
1,556
2 Not presented: Decline in Group EBITDA pre by € - 381 million due to Corporate and Other.
116
Combined Management Report
Report on Economic Position
Merck Group
MERCK GROUP
Balance sheet structure
Non-current assets
of which:
Goodwill
Dec. 31, 2018
Dec. 31,2017
Change
€ million
27,652
in %
75.0%
€ million
28,166
in %
79.1%
€ million
in %
44%
786
Performance Materials
19%
Q1
2018
967
2017
1,195
%
-19.1%
Q2
920
Q3
963
Q4
950
in € million
1,066
962
-13.7%
-5.9%
-1.3%
1 Not defined by International Financial Reporting Standards (IFRSS).
2 Quarterly breakdown unaudited.
3 Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes" in the Notes to the Consolidated Financial
Statements.
The decrease in Group EBITDA pre was attributable to the Healthcare
and Performance Materials business sectors. By contrast, in Life
Science the good business development had a positive effect on this
key figure. Consequently, at € 1,840 million (2017: € 1,786 million)
the business sector for the first time generated the highest EBITDA
pre of all the business sectors within the Group. This meant that the
share of Group EBITDA pre accounted for by Life Science (not taking
into account the € -381 million reduction due to Corporate and
Other) rose to 44% (2017: 39%). EBITDA pre of Healthcare declined
by -12.2% to € 1,556 million. The business sector thus contributed
37% (2017: 39%) to EBITDA pre for the Group. With an EBITDA pre
of € 786 million (2017: € 980 million), the share of this Group key
performance indicator attributable to Performance Materials decreased
to 19% (2017: 22%).
MERCK GROUP
EBITDA pre¹ by
business sector² - 2018
€ million/in %
1,023
781
~1,030 to 1,110
Earnings per share (€)
10.2%
-14.8%
-4.6%
996
7%
Middle East and
Africa (MEA)
Merck Group
544
14,836
4%
100%
2.9%
6.1%
-2.9%
-3.9%
2.2%
544
14,517
4%
100%
¹ Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes" in the Notes to the Consolidated Financial
Statements.
2 Not defined by International Financial Reporting Standards (IFRSS).
The consolidated income statement of the Merck Group is as follows:
MERCK GROUP
Consolidated Income Statement¹
€ million
Net sales
29.9%
6%
950
Latin America
33%
Total change
2017
Share
Europe
4,559
31%
4.9%
-1.5%
3.5%
4,406
30%
North America
Cost of sales
3,818
4.7%
-4.5%
0.2%
3,810
26%
Asia-Pacific (APAC)
4,965
33%
7.8%
-3.5%
4.3%
4,761
26%
Acquisitions/
divestments
Gross profit
2018
-6.2%
-95
10.5%
-14.5%
2.3%
-117
5.6%
-458
> 100.0%
16.7%
-696
-28.7%
Financial result
Profit before income tax
-266
-1.8%
1,461
9.8%
-294
2,129
-2.0%
14.7%
28
-668
-9.6%
-31.4%
Income tax
Profit after tax from continuing operations
Profit after tax from discontinued operation
Profit after tax
-368
0.8%
-35
-30.0%
-4,349
-899
-2,108
332
2,423
14,836
-5,382
9,454
in %
100.0%
-36.3%
63.7%
2017
in %
14,517
-5,071
9,446
100.0%
-34.9%
65.1%
€ million
319
in %
2.2%
-311
6.1%
8
Change
0.1%
Administration expenses
-4,384
-993
-29.5%
-6.7%
Research and development costs
-2,225
-15.0%
Remaining operating expenses and income
-126
-0.8%
Operating result (EBIT)²
1,727
11.6%
Marketing and selling expenses
effects
in %
Organic
growth²
3,657
% -
-3.2%
Q2
Q3
Q4
3,714
3,749
3,888
3,695
3,517
3,648
2017
5.2%
7.2%
¹ Not defined by International Financial Reporting Standards (IFRSS).
2 Quarterly breakdown unaudited.
3 Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes" in the Notes to the Consolidated Financial
Statements.
Based on organic sales growth of 5.2%, net sales of the Healthcare
business sector rose by € 56 million, or 0.9%, to € 6,246 million
(2017: € 6,190 million). Healthcare therefore remained the strong-
est business sector in terms of sales with a share of 42% (2017:
43%) of Group sales. In 2018, the share of Group sales accounted
for by Life Science increased by 2 percentage points to 42% (2017:
40%). With organic growth of 8.8% and a total increase in net sales
of 5.2% to € 6,185 million (2017: € 5,882 million), the Life Science
business sector recorded the sharpest rise in sales. Net sales of
the Performance Materials business sector declined by -1.7% to
€ 2,406 million in 2018 (2017: € 2,446 million), as organic growth
of 1.7% was more than offset by negative exchange rate effects of
-3.4%. Performance Materials thus accounted for 16% (2017: 17%)
of Group net sales.
MERCK GROUP
Net sales by business sector - 2018
€ million/% of net sales
16%
Performance Materials
2,406
42%
Life Science
6,185
8.8%
3,486
2018
Q1
7.76
5.99
1.77
29.5%
Earnings per share pre (€)²
Business free cash flow²
5.10
2,508
5.92
-0.82
-13.9%
3,193
-685
-21.4%
1 Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes" in the Notes to the Consolidated Financial
Statements.
2 Not defined by International Financial Reporting Standards (IFRSS).
DEVELOPMENT OF NET SALES AND RESULTS
OF OPERATIONS
The presentation of net sales refers to the continuing business areas
of the Merck Group. Net sales of the Consumer Health business were
no longer reported in Group sales, as this business was to be clas-
sified as a discontinued operation pursuant to IFRS 5. The prior-year
periods were adjusted accordingly (further information on the sale of
the Consumer Health business is included in Note (5) "Acquisitions
and divestments" in the notes to the Note to the Consolidated Finan-
cial Statements.
In 2018, net sales of the Merck Group increased by € 319 million or
2.2% to € 14,836 million (2017: € 14,517 million). This rise was
attributable to organic sales growth of € 882 million, or 6.1%, to
which all business sectors contributed. The stronger euro led to
negative exchange rate effects of € - 563 million or -3.9% in 2018,
which affected all regions. In particular, this affected the regions
North America due to the exchange rate development of the U.S.
dollar, as well as Asia-Pacific as a result of negative exchange rate
effects of the Chinese renminbi, the Korean won and the Taiwan
dollar, and the region of Latin America.
112
Combined Management Report
Report on Economic Position
Merck Group
Exchange rate
MERCK GROUP
Net sales and organic growth¹ by quarter²,3
€ million/organic growth in %
MERCK GROUP
Net sales by business sector¹
The net sales in the individual quarters as well as the respective
organic growth rates in 2018 are presented in the following graph:
-3.6%
8.8%
€ million
5.2%
5,882
40%
2,406
14,836
16%
100%
1.7%
6.1%
-3.4%
-3.9%
-1.7%
2,446
17%
2.2%
14,517
100%
1 Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes" in the Notes to the Consolidated Financial
Statements.
42%
6,185
43%
6,190
Performance Materials
Merck Group
42%
Healthcare
6,246
2018
Share
Organic
growth²
Exchange rate
2 Not defined by International Financial Reporting Standards (IFRSS).
effects
Total change
2017
Share
6,246
42%
5.2%
-4.3%
0.9%
Acquisitions/
divestments
Life Science
Combined Management Report
Merck Group
Report on Economic Position
Share
2018
€ million
Healthcare
MERCK GROUP
performance:
In 2018, the Merck Group recorded the following regional sales
113
Net sales by region¹
5.5%
¹ Not defined by International Financial Reporting Standards (IFRSS).
2 Quarterly breakdown unaudited.
3 Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes" in the Notes to the Consolidated Financial
Statements.
122
Combined Management Report
Healthcare
Net sales of the key product lines and products developed as follows
in 2018:
HEALTHCARE
Net sales by major product lines/products¹
€ million
2018
Report on Economic Position
9.9%
1,630
1,573
Q1
2018
1,435
2017
1,531
€ million/organic growth in %
4.7%
% -
Q2
1,584
1,587
Q3
1,498
Q4
0.9%
1,596
8%
Net sales and organic growth¹ by quarter²,3
23.9%
-26.4%
-536
2,028
1,492
21.6%
32.8%
11.7%
-605
1,337
731
0.9%
56
6,190
-45.3%
Share
1,556
-217
HEALTHCARE
The net sales in the individual quarters as well as the respective
organic growth rates in 2018 are presented in the following graph:
In 2018, the Healthcare business sector generated organic sales
growth of 5.2%. After negative foreign exchange effects of -4.3%,
net sales rose to € 6,246 million (2017: € 6,190 million). The foreign
exchange effect resulted essentially from the development of the
U.S. dollar, the Turkish lira, the Russian ruble and a number of Latin
American currencies.
OF OPERATIONS
DEVELOPMENT OF NET SALES AND RESULTS
² Not defined by International Financial Reporting Standards (IFRSS).
1,773
1 Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes" in the Notes to the Consolidated Financial
Statements.
-289
1,314
1,025
28.6%
24.9%
-12.2%
-22.0%
Organic
growth²
0%
Total change
23%
-6.5%
-4.1%
-10.7%
1,611
26%
of which: MavencladⓇ
90
1%
> 100.0%
-33.3%
> 100.0%
5
0%
Fertility
1,162
19%
General Medicine &
11%
704
0.5%
-4.8%
5.3%
1,438
11%
of which: Gonal-f®
18%
1,094
6.2%
-5.0%
11.1%
708
of which: RebifⓇ
26%
1,616
0.4%
13%
816
15%
946
-0.3%
-4.8%
-4.5%
15%
944
of which: Erbitux®
Oncology
Share
2017
4.2%
Exchange rate
effects
-4.3%
14%
-5.4%
-4.2%
-1.1%
24%
1,529
Neurology & Immunology
853
in %
> 100.0%
-10.8%
> 100.0%
1%
69
of which: BavencioⓇ
21
€ million
2017
2018
6,246
-919
-910
Payments for investments in property, plant and equipment
> 100.0%
62
4
67
Payments from the disposal of intangible assets
-72.9%
9
286
-106
Payments for investments in intangible assets
-17.7%
in %
€ million
-477
2,696
2,219
Cash flow from operating activities according to the cash flow statement
2017
-392
-0.9%
Payments from the disposal of property, plant and equipment
Free cash flow¹
¹ Not defined by International Financial Reporting Standards (IFRSS).
1,006
711
Q3
Q2
514
-3.8%
%
747
2017.
718
2018
Q1
Business free cash flow¹ and change by quarter²
€ million/change in %
MERCK GROUP
The distribution of business free cash flow across the individual quar-
ters and the percentage changes in comparison with 2017 were as
follows:
Business free cash flow of the Merck Group declined to € 2,508 mil-
lion in 2018 (2017: € 3,193 million). This development was primarily
due to the lower EBITDA pre, the increase in inventories and higher
receivables as of the 2018 balance sheet date. The composition of this
financial indicator is presented under "Internal Management System".
-9.2%
- 28.0%
-12
-132
1,433
44
31
1,301
2018
890
€ million
Free cash flow¹
> 100.0%
1,582
589
90
24
2,170
-17.8%
-1,928
10,823
8,896
6,701
11.4%
4
-20.6%
-23
113
90
-1.4%
-1
73
72
4
10,144
-66
-3,443
-72.9%
-33.9%
MERCK GROUP
Statement of Comprehensive Income" and "Consolidated Statement
of Changes in Net Equity" in the Consolidated Financial Statements).
The increase in equity led to an improvement in the equity ratio by
7 percentage points to 46.7% (December 31, 2017: 39.5%).
The composition of free cash flow as well as the development of
the relevant items are presented in the following table:
In 2018, equity of the Merck Group rose by 22.5% or € 3,167 million
to € 17,233 million (December 31, 2017: € 14,066 million). The
increase reflected mainly the strong profit after tax of € 3,396 million
(2017: € 2,615 million). In addition, the currency translation of for-
eign currency assets to the reporting currency (euro) had a positive
effect. Dividend payments and the profit transfer to E. Merck KG
reduced consolidated net equity accordingly (see "Consolidated
Merck Group
Report on Economic Position
Combined Management Report
118
19
10,144
6,701
-167
-1,433
-1,301
93
- 3,129
17
624
768
-429
126
11,513
10,144
2017
2018
Change
Endocrinology
-48.9%
2 Quarterly breakdown unaudited.
37.5%
40.1%
43.3%
Finance structure¹
Current liabilities
Non-current assets
76.0%
41.8%
45.9%
37.2%
49.9%
Asset coverage¹
Equity
Total assets
59.7%
80.7%
80.0%
79.1%
75.0%
Asset ratio¹
62.3%
46.5%
Liabilities (total)
1 Not defined by International Financial Reporting Standards (IFRSS).
Business free cash flow²
Margin (% of net sales)²
Margin (% of net sales)²
EBITDA pre²
Margin (% of net sales)²
EBITDA²
Operating result (EBIT)²
Net sales
€ million
Change
121
Healthcare
Report on Economic Position
Combined Management Report
Key figures¹
HEALTHCARE
Healthcare
The economic position and business development of the Merck
Group can be assessed positively overall. A foundation has been laid
for profitable organic growth going forward. We are seeking to help
shape the important technological developments for our business
sectors and take optimum advantage of the opportunities this creates.
Our key balance sheet figures showed a further improvement in
2018. For instance, the equity ratio rose by 7 percentage points to
46.7% (2017: 39.5%) and has thus reached a very good level. We
will continue to assign high priority to the planned reduction of our
financial liabilities. In 2018, there were no changes to our credit
ratings by the independent rating agencies Standard & Poor's (A with
a stable outlook), Moody's (Baal with a stable outlook) and Scope
(A- with a stable outlook).
Net sales in Life Science showed a very strong performance in 2018.
Following the integration of Sigma-Aldrich, which we completed in
2018, and our growth initiatives we are well-equipped for the future.
Our Performance Materials business sector launched the "Bright
Future" transformation program in 2018 in order to pave the way for
future growth.
Our Healthcare business sector benefited from the approval of
BavencioⓇ and MavencladⓇ in 2017. The steady further development
and optimum use of our promising pipeline remains a high priority.
In 2018, we also pushed ahead with the forming of alliances for
selected active substances, such as the collaboration agreement with
the SFJ Pharmaceuticals Group to develop abituzumab. The disposal
of the Consumer Health business was successfully completed in 2018.
The cash inflow it generated helped reduce net debt substantially and
thereby strengthen our financial flexibility. As a result, despite invest-
ment activity remaining strong, we reduced our net financial debt by
€ -3,443 million to € 6,701 million (2017: € 10,144 million).
2018 was a year of transition for Merck in terms of the operating
business activities of the Merck Group. We generated solid results
amid a challenging market environment. At the same time, important
strategic decisions were made to allow us to generate profitable
growth again in the future. The financial targets that we had set
ourselves for 2018 were achieved. Satisfying organic growth of 6.1%
enabled Group net sales to increase to € 14,836 million (2017:
€ 14,517 million). In 2018, EBITDA pre amounted to € 3,800 million
(2017: € 4,246 million) and recorded an organic decline of -1.6%
over the prior year.
OVERALL ASSESSMENT OF BUSINESS PERFORMANCE AND
ECONOMIC SITUATION
Non-current assets
1 Not defined by International Financial Reporting Standards (IFRSS).
Total assets
33.8%
Healthcare
1,025
34%
1,393
Life Science
46%
588
Performance Materials
20%
€ million/in %
¹ Not defined by International Financial Reporting Standards (IFRSS).
Business free cash flow¹ by business sector² - 2018
119
Merck Group
Report on Economic Position
Combined Management Report
550
2.7%
565
Q4
-20.1%
MERCK GROUP
² Not presented: Decline in Group business free cash flow by € -497 million due to Corporate
and Other.
The contributions of the operating business sectors to business free
cash flow of the Group in 2018 developed as follows: Life Science
generated business free cash flow amounting to € 1,393 million
(2017: € 1,402 million). Consequently, with a 46% share (2017:
39%) of Group business free cash flow (excluding the decline of
€ -497 million due to Corporate and Other), Life Science was the
business sector with the highest cash inflows. In 2018, the Health-
care business sector showed a decline of 22.0% to € 1,025 million
(2017: € 1,314 million), thus contributing a share of 34% to Group
business free cash flow (2017: 36%). With business free cash flow
of € 588 million (2017: € 906 million), Performance Materials con-
tributed 20% (2017: 25%) to this Group key performance indicator.
The investments in property, plant, equipment and software as well
as advance payments for intangible assets included in the calculation
of business free cash flow decreased in 2018 by - 7.9% to € 932 mil-
lion (2017: € 1,012 million). The investments in property, plant and
equipment included therein amounted to € 890 million in 2018
(2017: € 936 million), of which € 480 million (2017: € 438 million)
was attributable to strategic investment projects each with a project
volume of more than € 2 million; the remainder was attributable to
smaller investment projects.
36.7%
39.5%
46.7%
Dec. 31, 2014
Dec. 31, 2015
Dec. 31, 2016
Dec. 31, 2017
Dec. 31, 2018
Equity
Equity ratio¹
in %
Key balance sheet figures
MERCK GROUP
The development of key balance sheet figures was as follows:
Merck Group
Report on Economic Position
Combined Management Report
120
Our credit ratings from the independent rating agencies did not
change in 2018. Merck is currently rated by Standard & Poor's,
Moody's and Scope. Standard & Poor's has issued a long-term credit
rating of A with a stable outlook, Moody's a rating of Baal with a
stable outlook and Scope a rating of A-, likewise with a stable out-
look. An overview of the development of our rating in recent years
is presented in the Report on Risks and Opportunities.
Outside Germany, high levels of strategic investments were made
particularly in China (€ 70 million) and the United States (€ 67 mil-
lion). In China, the Healthcare business sector invested € 15 million
in new production facilities and € 17 million in a new logistics center;
the Life Science business sector invested € 29 million in new produc-
tion facilities in China. In the United States, Life Science invested
€ 51 million, of which € 26 million in the expansion of the Sheboygan
site in Wisconsin.
Strategic investments made in 2018 included € 161 million (2017:
€ 212 million) to expand the Darmstadt site, of which the Healthcare
business sector invested € 68 million, among other things in a new
packaging center (€ 29 million).
45.4%
2,341
-375
5.8%
2.4%
2,152
35%
North America
1,432
23%
0.1%
-4.2%
-4.1%
1,494
24%
Asia-Pacific (APAC)
1,501
24%
8.7%
-3.1%
5.6%
-2.2%
1,421
4.6%
2,203
With the product MavencladⓇ, a medicine for the oral short-course
treatment of highly active relapsing multiple sclerosis, sales of
€ 90 million were generated in 2018 (2017: € 5 million). The product
was approved in Europe in August 2017. Sales of BavencioⓇ, an
immuno-oncology medicine, increased to € 69 million (2017:
€ 21 million).
Gonal-f®, the leading recombinant hormone used in the treat-
ment of infertility, generated organic growth of 5.3%, to which the
trend in the North America region, in particular, contributed with
double-digit organic growth rates. Taking into account currency
headwinds of -4.8%, global sales amounted to € 708 million (2017:
€ 704 million). The other products from the fertility portfolio also
contributed to the increase in net sales with double-digit organic
growth rates across all regions.
The General Medicine & Endocrinology franchise (including
CardioMetabolic Care), which commercializes products to treat
cardiovascular diseases, thyroid disorders, diabetes and growth
disorders, among other things, generated organic growth of 5.8%.
After negative foreign exchange effects of -4.4%, net sales rose to
€ 2,341 million (2017: € 2,308 million). Diabetes drug GlucophageⓇ,
the best-selling product in this area, made a significant contribution
to this development with organic growth of 15.1%. While all regions
reported positive growth, the Asia-Pacific region was the main driver
of higher Glucophage® sales. A negative exchange rate effect of
-4.4% reduced growth and resulted in total sales of € 733 million
(2017: € 662 million). Double-digit organic growth rates (11.2%)
were also achieved with beta-blocker Concor®. Despite adverse
exchange rate effects (-4.5%), net sales of this medicine increased
to € 475 million (2017: € 445 million). All regions contributed to this
gratifying organic development, primarily Europe and Asia-Pacific.
Euthyrox®, a medicine to treat thyroid disorders, recorded organic
growth of 1.9%. However, this was not able to offset the exchange
rate effect (-3.8%). As a result, sales at € 363 million fell slightly
short of the prior-year figure (2017: € 370 million). SaizenⓇ, the
top-selling product in the Endocrinology franchise, generated sales
of € 234 million (2017: € 259 million).
Net sales of the Healthcare business sector by region in 2018 devel-
oped as follows:
HEALTHCARE
Net sales by region¹
€ million
2018
Share
Organic
growth²
effects
Exchange rate Acquisitions/
divestments
Total change
2017
Share
Europe
35%
1 Not defined by International Financial Reporting Standards (IFRSS).
23%
661
124
Combined Management Report
Report on Economic Position
Healthcare
The results of operations developed as follows:
HEALTHCARE
Results of operations¹
€ million
Net sales
Cost of sales
Gross profit
Marketing and selling expenses
Administration expenses
Research and development costs
Remaining operating expenses and income
Operating result (EBIT)²
Depreciation/amortization/impairment losses/reversals
2 Not defined by International Financial Reporting Standards (IFRSS).
Latin America
1 Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes" in the Notes to the Consolidated Financial
Statements.
7%
11%
10.9%
-14.5%
-3.7%
687
11%
Middle East and
Africa (MEA)
Healthcare
448
6,246
7%
100%
5.9%
5.2%
-3.2%
-4.3%
2.8%
0.9%
436
6,190
100%
of impairment losses
0.1%
7%
8.7%
259
4%
270
6,246
4%
100%
226
4%
5.2%
-4.3%
0.9%
6,190
100%
1 Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes" in the Notes to the Consolidated Financial
Statements.
2 Not defined by International Financial Reporting Standards (IFRSS).
Sales of the drug RebifⓇ, which is used to treat relapsing forms of
multiple sclerosis, saw an organic sales decline of -6.5% in 2018.
Including negative exchange rate effects of -4.1%, sales of € 1,438 mil-
lion were recorded (2017: € 1,611 million). Sales in the biggest mar-
ket, North America, declined by -5.0% in organic terms due to the
persistently difficult competitive situation in the interferons market.
A price increase made in February 2018 only partly offset this devel-
opment. Consequently, sales in North America fell to € 920 million
(2017: € 1,012 million). Competitive pressure in Europe was respon-
sible for the organic sales decline of -11.7%. Taking into account
slightly negative exchange rate effects, sales came to € 395 million
(2017: € 456 million). The sales declines in the other regions, which
generated total RebifⓇ sales of € 123 million (2017: € 142 million),
were primarily due to negative exchange rate developments.
Sales of the oncology drug ErbituxⓇ were stable in organic terms,
and after negative exchange rate effects of -4.8%, sales decreased
to € 816 million (2017: € 853 million). The negative organic devel-
opment in Europe of -0.8% was the result of the difficult competitive
setting and some price reductions. ErbituxⓇ sales in the European
market amounted to € 437 million (2017: € 447 million). Net sales of
the oncology drug in the Asia-Pacific region were stable in organic
terms (-0.3%). The drop in sales to € 255 million (2017: € 263 mil-
lion) was attributable to negative exchange rate effects. Organic
growth in Latin America was more than offset by very strong, negative
foreign exchange rate effects, leading to a decline in sales to € 71 mil-
lion (2017: € 87 million). In the Middle East and Africa, organic sales
were at last year's level at € 54 million (2017: € 56 million).
Combined Management Report
Report on Economic Position
-9.4%
Healthcare
-6.3%
4%
11.2%
-4.5%
6.7%
444
7%
of which: Euthyrox®
of which: SaizenⓇ
Other
Healthcare
363
6%
1.9%
- 3.8%
-1.9%
370
6%
234
-3.1%
9%
123
Sales and organic growth¹ of Rebif® and ErbituxⓇ by region - 2018
1%
3%
4%
€ million
816
437
255
71
54
ErbituxⓇ
Organic growth¹ in %
0.4%
-0.8%
% of sales
100%
53%
-0.3%
31%
4.3%
HEALTHCARE
-3.5%
62
Total
€ million
1,438
Europe
395
Rebif®
Organic growth¹ in %
-6.5%
-11.7%
% of sales
100%
28%
North America
920
-5.0%
64%
Asia-Pacific
(APAC)
12
Middle East and
Latin America
Africa (MEA)
48
-10.2%
(of which: adjustments)
EBITDA²
Restructuring expenses
Q3
Q4
381
414
397
339
-3.9%
22.1%
1 Not defined by International Financial Reporting Standards (IFRSS).
2 Quarterly breakdown unaudited.
3 Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes" in the Notes to the Consolidated Financial
Statements.
DEVELOPMENT OF BUSINESS FREE CASH FLOW
15.1%
In 2018, business free cash flow amounted to € 1,025 million (2017:
€ 1,314 million). The decline was primarily attributable to lower
EBITDA pre and a rise in receivables.
HEALTHCARE
Business free cash flow¹,2
-16.0%
€ million
of which: ConcorⓇ
-34.9%
The decrease in marketing and selling expenses was due mainly
to foreign exchange effects. Research and development costs
reflected continued investments in the Biopharma development pipe-
line and amounted to € 1,686 million (2017: € 1,600 million). The
decline in other operating expenses and income was due to multiple
factors in both 2018 and 2017. Thus the 2017 figure included the
gain on the divestment of the Biosimilars business amounting to
€ 319 million, which was adjusted when calculating EBITDA pre. The
previous year's figures also included milestone payments for the
approval of Bavencio® (€ 124 million) as well as income from an
agreement on a one-time payment for future license payments
(€ 116 million). The year 2018 included receipt of a milestone pay-
ment of € 50 million from BioMarin Pharmaceutical Inc., United
States, in connection with the sale of PALYNZIQ® (Peg-Pal) in 2016.
Moreover, income from license agreements and from the transfer of
rights had a positive effect on the fourth quarter of 2018. The fol-
lowing impairments and reversals of impairment losses were also
included in remaining other expenses and income. In 2017, the
reversals of impairment losses on the intangible asset for cladribine
of € 17 million as a result of the marketing authorization of MavencladⓇ
had boosted other operating expenses. In 2018, a reduction in the
fair value of contingent consideration from the sale of the Biosimilars
business led to expenses of € - 27 million.
After eliminating depreciation, amortization, impairments and
reversals of impairment losses as well as adjustments, EBITDA pre
decreased by -12.2% to € 1,556 million (2017: € 1,773 million) in
2018. Negative foreign exchange effects of -10.7% had a material
effect on the development of this key figure. The EBITDA pre margin
relative to sales came to 24.9% (2017: 28.6%).
Combined Management Report
Report on Economic Position
Healthcare
125
The development of EBITDA pre in the individual quarters in com-
parison with 2017 is presented in the following overview:
HEALTHCARE
EBITDA pre¹ and change by quarter²,3
€ million/change in %
Q1
2018
381
2017
586
%
Q2
379
Gross profit of the Healthcare business sector was weighed down by
foreign exchange rate effects in 2018. At € 4,820 million (2017:
€ 4,850 million) it remained flat, resulting in a gross margin of 77.2%
(2017: 78.4%).
EBITDA pre²
2018
Changes in trade accounts receivable as well as receivables from royalties and licenses
Business free cash flow²
-81
-49
-32
64.6%
1,025
1,314
-289
-22.0%
1 Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes" in the Notes to the Consolidated Financial
Statements.
12%
733
of which: GlucophageⓇ
37%
2,308
1.5%
-4.4%
63.1%
Change
-21
-55
2017
11%
662
10.7%
-4.4%
Combined Management Report
1,773
€ million
-217
in %
-12.2%
Investments in property, plant and equipment, software as well as
advance payments for intangible assets
- 395
475
-19
5.2%
Changes in inventories
-34
2 Not defined by International Financial Reporting Standards (IFRSS).
1 Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes" in the Notes to the Consolidated Financial
Statements.
-12.2%
-0.6%
-2,339
- 301
-37.4%
-4.8%
-2,373
-271
-38.3%
34
-1.4%
-4.4%
- 30
11.0%
-1,686
-27.0%
-1,600
- 25.8%
-86
5.4%
237
-30
3.8%
78.4%
6.4%
Integration expenses/IT expenses
Gains (-)/losses (+) on the divestment of businesses
Acquisition-related adjustments
Other adjustments
EBITDA pre²
Change
1,556
2018
6,246
-1,425
4,820
in %
100.0%
-22.8%
77.2%
2017
6,190
-1,340
in %
100.0%
€ million
in %
56
0.9%
- 21.6%
-85
4,850
731
11.8%
-494
8
1,556
24.9%
17
27
-316
16
1,773
28.6%
-5
-31.9%
-9
-34.5%
342
> 100%
-8
-51.0%
-217
26
18
12
10.0%
(>100%)
-26.4%
731
11.7%
1,337
21.6%
-605
-67.6%
-45.3%
761
12.2%
38%
691
(11)
(-51)
69
(63)
1,492
23.9%
2,028
32.8%
-536
11.2%
450
Healthcare
126
Acquisitions²
Payments from the disposal of assets held for sale and from other divestments²
Free cash flow¹
Other
Dec. 31
¹ Not defined by International Financial Reporting Standards (IFRSS).
2 According to the consolidated cash flow statement.
Change
Dec. 31, 2018
2,931
Dec. 31, 2017
2,923
€ million
in %
8
0.3%
29
Dividend payments to shareholders and to E. Merck²
28
1.8%
2,764
2,632
133
5.0%
-2,238
-2,195
-43
1.9%
3,486
3,387
99
2.9%
Change
1
Currency translation
January 1
€ million
Report on Economic Position
MERCK GROUP
Working capital¹
Combined Management Report
Report on Economic Position
Merck Group
117
€ million
Trade accounts receivable
Receivables from royalties and licenses
Inventories
Trade accounts payable/Refund liabilities
Working capital¹
1 Not defined by International Financial Reporting Standards (IFRSS).
The composition and the development of net financial debt were as
follows:
MERCK GROUP
Net financial debt¹
Reconciliation of net financial debt¹
MERCK GROUP
¹ Not defined by International Financial Reporting Standards (IFRSS).
Net financial debt¹
Current financial assets
Cash and cash equivalents
Dec. 31, 2018
less:
Finance lease liabilities
Liabilities from derivatives (financial transactions)
Liabilities to related parties
Bank loans
Bonds and commercial papers
€ million
Financial liabilities
Dec. 31, 2017
Loans from third parties and other financial liabilities
7,286
2 Quarterly breakdown unaudited.
1 Not defined by International Financial Reporting Standards (IFRSS).
195
23.2%
-25.9%
240
254
Q4
Q3
-46.5%
433
3 Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes" in the Notes to the Consolidated Financial
Statements.
Q2
232
%
342
2017
299
2018
Q1
€ million/change in %
Business free cash flow¹ and change by quarter²,3
HEALTHCARE
The development of business free cash flow items in the individual
quarters in comparison with 2017 is presented in the following over-
view:
€ million
-12.8%
2 Not defined by International Financial Reporting Standards (IFRSS).
343
-1,034
620
1,653
-62.5%
824
767
57
7.4%
in %
-11.3%
8,213
-927
212
Corporate and Other
Corporate and Other
PERFORMANCE MATERIALS
Report on Economic Position
Combined Management Report
136
-26.7%
2 Quarterly breakdown unaudited.
Business free cash flow¹ and change by quarter²
€ million/change in %
Q1
Q2
-40.5%
Q3
2018
137
143
152
1 Not defined by International Financial Reporting Standards (IFRSS).
2017
-31.3%
233
239
%
-41.0%
222
Q4
155
-36
786
65
-101
> 100.0%
588
906
-318
-35.1%
¹ Not defined by International Financial Reporting Standards (IFRSS).
Combined Management Report
Report on Economic Position
Performance Materials
135
> 100.0%
Changes in trade accounts receivable and receivables from royalties and licenses
Business free cash flow¹
-30
-44
Changes in inventories
The development of business free cash flow items in the individual
quarters in comparison with 2017 is presented in the following over-
view:
-5.6%
7
Corporate and Other comprises Group administration expenses for
central Group functions that cannot be directly allocated to the busi-
ness sectors, such as Finance, Procurement, Legal, Communications
and Human Resources. Corporate costs additionally encompass
-125
-118
advance payments for intangible assets
Investments in property, plant and equipment, software as well as
in %
-19.8%
€ million
-194
980
-14
expenses for central, non-allocated IT functions, including expenses
related to the expansion and harmonization of IT systems within the
Merck Group as well as research and development costs spanning
business sectors.
-97
Key figures¹
Sales in the Surface Solutions business unit fell short of expectations
and were below the prior year's figure due to factors including the
decline in demand for automobiles in Europe, North America and
China.
The Display Solutions business unit recorded organic sales that
were just positive owing to rising demand and strong growth in the
OLED area and to non-recurring project-related liquid crystal sales,
above all in the third and fourth quarters of 2018.
The net sales in the individual quarters as well as the respective
organic growth rates in 2018 are presented in the following graph:
PERFORMANCE MATERIALS
Net sales and organic growth¹ by quarters²
€ million/organic growth in %
Q1
2018
564
2017 -
645
%
-4.0%
Q2
587
612
Q3
626
611
Q4
629
579
0.4%
3.4%
7.8%
1 Not defined by International Financial Reporting Standards (IFRSS).
2 Quarterly breakdown unaudited.
The Semiconductor Solutions business unit, which pools the busi-
ness for materials to produce integrated circuits, generated strong
organic sales growth in 2018, as expected.
In 2018, net sales of the Performance Materials business sector
decreased by -1.7% to € 2,406 million (2017: € 2,446 million). This
drop was mainly attributable to adverse exchange rate effects of
-3.4% or € 83 million. They resulted primarily from a weaker U.S.
dollar over the previous year and declining Asian currencies such as
the Taiwan dollar and the Japanese yen.
2017
had a positive effect on the operating result. The reversal was made
in connection with contractual refund claims from the sale of the
Generics business in 2007. After eliminating depreciation, amortiza-
tion and adjustments, EBITDA pre amounted to € - 381 million in
2018 (2017: € - 292 million). The increase in negative business free
cash flow to € -497 million (2017: € -429 million) was mainly due
to the development of EBITDA pre.
€ million
Operating result (EBIT)²
EBITDA²
EBITDA pre²
Business free cash flow²
Change
2018
2017
€ million
in %
-548
-437
-111
CORPORATE AND OTHER
25.5%
-391
24.8%
-381
-292
-89
30.6%
-497
-429
-68
15.9%
1 Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes" in the Notes to the Consolidated Financial
Statements.
2 Not defined by International Financial Reporting Standards (IFRSS).
In 2018, administration expenses reported under Corporate and
Other increased to € 320 million (2017: € 295 million). Cross-busi-
ness research and development costs amounting to € 47 million in
2018 (2017: € 42 million), such as expenses for the Innovation
Center, were allocated to Corporate. Other operating expenses (net)
rose to € -197 million (2017: € -101 million), due among other
things to a deterioration in the foreign exchange result. A reversal
of an impairment loss for other receivables amounting to € 37 million
-488
2018
203
EBITDA pre¹
Gross profit
Cost of sales
Net sales
€ million
Results of operations
PERFORMANCE MATERIALS
The development of results of operations is set out below:
1 Not defined by International Financial Reporting Standards (IFRSS).
100%
2,446
Change
-1.7%
1.7%
100%
0%
10
- 20.0%
-1.6%
-18.4%
0%
2,406
8
-3.4%
Performance Materials
2018
2,406
-1,231
1,175
2017
-2.9%
-72
-3.7%
-90
Administration expenses
5.2%
-13
-9.9%
-242
-10.6%
in %
100.0%
-51.2%
48.8%
-255
-9.7%
-127
7.5%
-86
-1.7%
-40
in %
€ million
in %
100.0%
-46.8%
53.2%
2,446
-1,145
1,301
Marketing and selling expenses
-18
Africa (MEA)
2%
-0.3%
-4.8%
9%
220
Europe
Share
2017
Total change
Acquisitions/
divestments
Exchange rate
effects
-5.0%
growth¹
2018
€ million
Organic
Net sales by region
PERFORMANCE MATERIALS
Net sales of the Performance Materials business sector by region
developed as follows:
133
Performance Materials
Report on Economic Position
Combined Management Report
Share
Middle East and
231
North America
37
-12.1%
-8.3%
-3.8%
2%
32
Latin America
80%
1,945
-0.7%
9%
-3.5%
80%
1,932
Asia-Pacific (APAC)
9%
223
-4.3%
-4.6%
0.3%
9%
214
2.9%
Change
25.1%
-242
€ million/change in %
EBITDA pre¹ and change by quarter²
PERFORMANCE MATERIALS
The development of EBITDA pre in the individual quarters in com-
parison with 2017 is presented in the following overview:
EBITDA pre of the business sector declined by -19.8% to € 786 mil-
lion (2017: € 980 million). The negative foreign exchange impact of
-6.9% lowered this key performance indicator. Consequently, at
32.7%, the EBITDA pre margin was below the prior-year figure
(2017: 40.1%).
The operating result (EBIT) decreased to € 508 million in 2018 (2017:
€ 689 million). In addition to the sales and margin-related decline in
gross profit, this was due to higher marketing and selling expenses
as well as additional research and development costs. While the rise
in marketing and selling expenses was primarily attributable to logis-
tics costs, the increase in research costs was chiefly due to the tapping
of new growth areas in materials for the production of integrated
circuits.
Performance Materials
Report on Economic Position
Combined Management Report
134
Q1
(2017: 53.2%). The development of the gross margin is essentially
explained by the price declines observed in the display industry and
by falling sales in the Surface Solutions business unit.
-89.5%
-19.8%
-6
-194
40.1%
980
32.7%
786
7
1
-1
-27.1%
In 2018, gross profit was € 127 million below the previous year's
level and amounted to € 1,175 million (2017: € 1,301 million),
resulting in an expected reduction in the gross margin to 48.8%
-6
2018
2017
€ million
Business free cash flow¹
PERFORMANCE MATERIALS
pre, a rise in receivables as of the 2018 balance sheet date that was
primarily due to one-time project-related sales of liquid crystals in
the fourth quarter of 2018, and higher inventories in the Surface
Solutions business unit.
At € 588 million, the business free cash flow of the Performance
Materials business sector in 2018 fell short of the prior-year figure
(2017: € 906 million). This resulted from the reduction in EBITDA
DEVELOPMENT OF BUSINESS FREE CASH FLOW
-16.4%
-18.3%
228
249
196
Q4
191
Q3
2 Quarterly breakdown unaudited.
1 Not defined by International Financial Reporting Standards (IFRSS).
-18.2%
239
196
Q2
-25.7%
%
263
OF OPERATIONS
Research and development costs
-78.5%
1
261
reversals of impairment losses
Depreciation/amortization/impairment losses/
-26.3%
-181
28.2%
689
21.1%
508
Operating result (EBIT)¹
10.9%
9.8%
-3.0%
-73
-3.3%
-81
Remaining operating expenses and income
7.5%
-17
-9.2%
-225
-10.1%
-7
-4
258
3
20
5
15
1
¹ Not defined by International Financial Reporting Standards (IFRSS).
EBITDA pre¹
Other adjustments
Acquisition-related adjustments
Gains (-)/losses (+) on the divestment of businesses
Integration expenses/IT expenses
10.5%
Restructuring expenses
1.3%
(-19.1%)
(-5)
-178
38.7%
947
32.0%
769
EBITDA¹
(26)
(21)
(of which: adjustments)
-18.8%
in %
100.0%
-44.0%
5,882
-2,588
3,294
-318
1,543
Q4
Q3
Q2
8.8%
%
1,481
2017
1,487
2018
Q1
€ million/organic growth in %
Net sales and organic growth¹ by quarter²
LIFE SCIENCE
The development of sales in the individual quarters in comparison
with 2017 as well as the respective organic growth rates are pre-
sented in the following graph:
to high demand across the portfolio and was thus again the business
sector's main growth driver in 2018. Applied Solutions continued to
perform very well, posting organic growth of 6.3% and the Research
Solutions business unit reported an organic sales increase of 4.1%.
All three business units of the business sector contributed favor-
ably to the organic sales growth of Life Science. Process Solutions
generated double-digit organic sales growth of 14.8%, attributable
In 2018, Life Science posted organic sales growth of 8.8%, partially
offset by negative foreign exchange effects of -3.6%. Net sales rose
overall by 5.2% to € 6,185 million (2017: € 5,882 million).
OF OPERATIONS
DEVELOPMENT OF NET SALES AND RESULTS
-0.7%
9
1,402
1,527
in %
1,628
1,495
2,487
Process Solutions
Share
2017
Total change
Acquisitions/
divestments
Exchange rate
effects
Organic
growth²
Share
2018
€ million
1,393
Net sales by business unit¹
Life Science
Report on Economic Position
Combined Management Report
128
8.8%
2 Quarterly breakdown unaudited.
¹ Not defined by International Financial Reporting Standards (IFRSS).
9.8%
7.7%
1,496
1,408
LIFE SCIENCE
40%
30.4%
3.0%
Margin (% of net sales) 1
EBITDA¹
Margin (% of net sales)¹
Operating result (EBIT)¹
Net sales
€ million
127
Life Science
Report on Economic Position
Combined Management Report
Key figures
LIFE SCIENCE
Life Science
304
5.2%
-135
5.2%
56.0%
169
5.1%
Gross profit
Marketing and selling expenses
-1,775
EBITDA pre¹
Margin (% of net sales)¹
Business free cash flow¹
¹ Not defined by International Financial Reporting Standards (IFRSS).
54
1,786
1,840
26.9%
28.4%
11.1%
175
1,580
1,755
14.2%
16.7%
29.8%
24.2%
834
1,036
5.2%
304
5,882
6,185
in %
€ million
2017
2018
Change
202
-28.7%
14.8%
11.3%
88
Africa (MEA)
Middle East and
5%
273
-6.0%
-16.5%
10.5%
4%
256
Latin America
24%
1,395
9.8%
-3.8%
13.6%
25%
1,532
Asia-Pacific (APAC)
35%
2,093
3.8%
-4.6%
1%
-8.7%
-1.7%
-10.4%
2017
in %
100.0%
-44.0%
56.0%
2018
6,185
-2,723
3,463
Change
Cost of sales
Net sales
€ million
Results of operations
LIFE SCIENCE
The results of operations of the Life Science business sector devel-
oped as follows:
129
8.4%
Life Science
Combined Management Report
¹ Not defined by International Financial Reporting Standards (IFRSS).
€ million
2%
98
5,882
5.2%
-3.6%
8.8%
100%
6,185
Life Science
Report on Economic Position
-3.5%
35%
North America
5.2%
27%
1,609
2.5%
- 3.8%
-3.6%
8.8%
100%
6,185
Life Science
6.3%
27%
1,650
Applied Solutions
35%
2,038
0.5%
-3.6%
4.1%
33%
2,048
Research Solutions
38%
2,234
5,882
100%
1 Previous year's figures have been adjusted due to an internal realignment.
2 Not defined by International Financial Reporting Standards (IFRSS).
The Process Solutions business unit, which markets products and
services for the entire pharmaceutical production value chain, gen-
erated double-digit growth of 14.8% and net sales of € 2,487 million
(2017: € 2,234 million) in 2018. This means that Process Solutions
accounted for 40% (2017: 38%) of Life Science net sales. All busi-
ness areas of Process Solutions contributed to this strong perfor-
mance. The key driver was the BioProcessing business unit, particu-
larly in the Asia-Pacific and North America regions.
34%
2,022
5.6%
-0.8%
6.4%
35%
2,136
Europe
Share
2017
Total change
2,173
Acquisitions/
divestments
Exchange rate
Organic
growth¹
Share
2018
€ million
Net sales by region
LIFE SCIENCE
Net sales of the business sector by region developed as follows:
The Applied Solutions business unit generated strong organic
sales growth of 6.3% with its broad range of products for researchers
as well as scientific and industrial laboratories. Net sales increased to
€ 1,650 million (2017: € 1,609 million). Accordingly, the business
unit contributed 27% (2017: 27%) to net sales of the Life Science
business sector. The sales performance of Applied Solutions was
driven by all business fields, and primarily by the North America and
Asia-Pacific regions.
€ 2,048 million (2017: € 2,038 million), representing 33% (2017:
35%) of the business sector's net sales. In regional terms, Asia-
Pacific was the strongest growth driver for Research Solutions in
2018.
The Research Solutions business unit, which provides products
and services to support life science work in pharmaceutical, biotech-
nology and academic research laboratories, recorded a moderate
organic sales increase of 4.1% in 2018. Strong performance by both
Lab & Specialty Chemicals and Reagents & Kits in particular led to
the growth in net sales of Research Solutions, which increased to
effects
-1,734
-29.5%
-41
receivables from royalties and licenses
Business free cash flow¹
¹ Not defined by International Financial Reporting Standards (IFRSS).
-17
-41
24
1,393
1,402
-9
-59.3%
-0.7%
Combined Management Report
Report on Economic Position
Life Science
131
The development of business free cash flow items in the individual
quarters in comparison with 2017 is presented in the following over-
view:
LIFE SCIENCE
Business free cash flow¹ and change by quarter²
€ million/change in %
Q1
Q2
Q3
2018
375
Changes in trade accounts receivable as well as
> 100.0%
-144
28
¹ Not defined by International Financial Reporting Standards (IFRSS).
2 Quarterly breakdown unaudited.
DEVELOPMENT OF BUSINESS FREE CASH FLOW
In 2018, the business free cash flow of the Life Science business
sector remained stable at the previous year's level at € 1,393 million
(2017: € 1,402 million). Essentially, the inventory build-up to support
sales growth was offset by higher EBITDA pre and lower investments.
LIFE SCIENCE
Business free cash flow¹
2.8%
Change
€ million
2018
EBITDA pre¹
269
1,840
€ million
in %
54
3.0%
Investments in property, plant and equipment, software as well as
advance payments for intangible assets
-315
-371
56
-15.1%
Changes in inventories
-116
2017
1,786
8.1%
411
281
Change
2018
2,406
2017
€ million
in %
2,446
-40
508
689
-181
-1.7%
-26.3%
21.1%
28.2%
769
32.0%
947
-178
-18.8%
38.7%
786
32.7%
588
980
40.1%
-194
-19.8%
906
1 Not defined by International Financial Reporting Standards (IFRSS).
Business free cash flow¹
Margin (% of net sales)¹
Margin (% of net sales)¹
EBITDA pre¹
423
%
33.5%
416
Q4
338
282
-36.6%
-1.3%
20.1%
1 Not defined by International Financial Reporting Standards (IFRSS).
2017
2 Quarterly breakdown unaudited.
Combined Management Report
Report on Economic Position
Performance Materials
Performance Materials
PERFORMANCE MATERIALS
Key figures
€ million
Net sales
Operating result (EBIT)¹
Margin (% of net sales)¹
EBITDA¹
132
-0.6%
2.1%
%
24.2%
Depreciation/amortization/impairment losses/
reversals of impairment losses
(of which: adjustments)
EBITDA¹
Restructuring expenses
Integration expenses/IT expenses
Gains (-)/losses (+) on the divestment of businesses
Acquisition-related adjustments
Other adjustments
EBITDA pre¹
1 Not defined by International Financial Reporting Standards (IFRSS).
719
11.6%
746
12.7%
-27
-3.6%
(23)
(3)
(20)
(>100%)
1,755
202
14.2%
834
16.7%
2.4%
Administration expenses
-282
-4.6%
-261
-4.4%
-22
8.3%
Research and development costs
-249
-4.0%
28.4%
-241
-8
3.4%
Remaining operating expenses and income
-121
-2.0%
-224
-3.8%
104
-46.2%
Operating result (EBIT)¹
1,036
-4.1%
1,580
26.9%
175
-
130
Combined Management Report
Report on Economic Position
Life Science
The development of EBITDA pre in the individual quarters in com-
parison with 2017 is presented in the following overview:
LIFE SCIENCE
EBITDA pre¹ and change by quarter²
€ million/change in %
Q1
this item. In comparison with 2017, the operating result (EBIT) of
Life Science rose by € 202 million to € 1,036 million (2017: € 834 mil-
lion). After eliminating depreciation and amortization as well as
adjustments, EBITDA pre -the key indicator to assess the earning
power increased by 3.0% to € 1,840 million (2017: € 1,786 mil-
lion). EBITDA pre improved by 7.0% over the prior year in organic
terms, whereas negative foreign exchange rate effects depressed
this key indicator by -3.9%.
Q2
Q4
2018
455
452
460
474
2017
445
454
426
461
Q3
-35.1%
Gross profit increased by 5.1% to € 3,463 million (2017: € 3,294 mil-
lion). Despite currency headwinds, the strong increase was driven
by organic growth in sales across all business units. Marketing and
selling expenses increased by 2.4% to € 1,775 million (2017:
€ 1,734 million), while R&D expenses increased by 3.4% to € 249 mil-
lion (2017: € 241 million). The decline in other operating expenses
and income of - 46.2% to € -121 million (2017: € -224 million) was
the result of lower acquisition-related adjustments and a fall in adjust-
ments for integration expenses/IT expenses that were included in
54
11.1%
3
86
-8
2
5
114
1
63
-2
-45.0%
-86.5%
3.0%
-29
-9
> 100%
3
1,840
29.8%
22
1,786
28
-61
-97.2%
-19
30.4%
-25.0%
DEVELOPMENT OF NET SALES AND RESULTS
100%
Low
POLITICAL AND REGULATORY RISKS AND
Business-related risks and
opportunities
The effectiveness of Merck's internal control system with regard
to accounting and the compliance with financial reporting by the
individual companies is confirmed by both the local managing direc-
tor and the local chief financial officer when they sign the single-en-
tity reporting. For the accounting treatment of balance sheet items,
Group Accounting closely cooperates with Group Risk Management
in order to correctly present potential balance sheet risks. All the
structures and processes described are subject to regular review by
Group Internal Auditing based on an annual audit plan set out by the
Executive Board. The results of these audits are dealt with by the
Executive Board, the Supervisory Board and the Finance Committee.
The internal control system at Merck makes it possible to lower the
risk of material misstatements in accounting to a minimum. However,
no internal control system - regardless of its design - can entirely rule
out a residual risk.
For Group financial reporting purposes, most of our subsidiaries
use standard SAP software. Consolidation software from SAP is also
used for the elimination of intragroup transactions. A detailed autho-
rization concept ensures the separation of duties with respect to both
single-entity reporting and the consolidated financial statements. In
principle, the accounting process is designed to ensure that all units
involved adhere to the principle of dual control.
Group Accounting provides support to the local contacts and
ensures a consistently high quality of reporting throughout the entire
reporting process.
applied. Both ensure that accounting complies with IFRSS (Interna-
tional Financial Reporting Standards) and with the Group accounting
guidelines.
The individual companies have a local internal control system.
Where financial processes are handled by a Shared Service Center,
the internal control system of the Shared Service Center is additionally
The internal control system aims to ensure the accuracy of the con-
solidated accounting process through functioning internal controls
with reasonable assurance. The Group Accounting function centrally
steers the preparation of the consolidated financial statements of
Merck KGaA as the parent company of the Merck Group. This Group
function defines the reporting requirements that all Merck subsidiar-
ies must meet. At the same time, this function steers and monitors
the scheduling and process-related requirements of the consolidated
financial statements. Group Accounting centrally manages all changes
to the equity holding structure and correspondingly adapts the
Group's scope of consolidation. The proper elimination of intragroup
transactions within the scope of the consolidation process is ensured.
Group-wide accounting guidelines form the basis for the preparation
of the statutory financial statements of the parent company and of the
subsidiaries, which are reported to Group Accounting; the guidelines
are adapted in a timely manner to reflect changes in the financial
regulatory environment and are updated in accordance with internal
reporting requirements. For special issues, such as the accounting
treatment of intangible assets within the scope of company acquisi-
tions or pension obligations, external experts are additionally involved
where necessary.
KEY TOOLS
The objective of the internal control system for the accounting process
is to implement controls that provide assurance that the financial
statements are prepared in compliance with the relevant accounting
laws and standards. This system covers measures designed to ensure
the complete, correct and timely conveyance and presentation of infor-
mation that is relevant for the preparation of the consolidated financial
statements and the combined management report.
Internal control system for the Group
accounting process
OPPORTUNITIES
Opportunities are assessed in their respective specific business envi-
ronment. General measures of the business functions are quantified
during operational planning, usually in relation to sales, EBITDA pre
and business free cash flow. Net present value, internal rate of return,
the return on capital employed (ROCE) and the amortization period
of the investment are primarily used to assess and prioritize invest-
ment opportunities. Similarly, scenarios are frequently set up to sim-
ulate the influence of possible fluctuations and changes in the respec-
tive factors on results. There is no overarching, systematic classification
of the probability of occurrence and impact of opportunities.
139
Report on Risks and Opportunities
Combined Management Report
> 80%
51-80%
20-50%
Probability of occurrence <20%
Low
Medium
Medium
Low
Low
OPPORTUNITIES
High
As a global company, we face political and regulatory changes in a
large number of countries and markets.
In the Healthcare business sector, the known trend towards increas-
ingly restrictive requirements in terms of drug pricing, reimbursement
and expansion of high-rebate groups is continuing. These require-
ments can negatively influence the profitability of our products, also
through market referencing between countries, and jeopardize the
success of market launches. Foreseeable effects are taken into account
as far as possible in the business sector's plans. Close communication
with health and regulatory authorities serves as a preventive measure
to avert risks.
We are developing new dielectric platforms in cooperation with
our key customers for 3D NAND applications. There has been a
change in 3D NAND device architecture and some of our customers
are moving from floating gate to replacement gate. We are currently
working with those customers on the new device architecture, which
is expected to be introduced and ramped up in 2019 and beyond.
We see huge opportunities with our innovative Directed Self Assembly
(DSA) technique for advanced lithography processing in Semicon-
ductor Solutions. As semiconductor manufacturers continue to advance
their device technologies, the image processing steps are becoming
more complex and significantly more costly to enable device perfor-
mance. Our novel DSA platform and recent material advancements
enable improved device performance and reduce the cost of owner-
ship (COO) to the customer. This has resulted in Merck securing a
leading position as Process of Record (POR) with several key semi-
conductor customers. Adoption of this disruptive lithography platform
is expected to completely change how semiconductor manufacturing
is conducted and could lead to a market leadership position for
advanced lithography over the next few years.
Opportunities in the semiconductor industry
We are pursuing a strategy of leveraging our expertise as the global
market leader in liquid crystals in order to develop new fields of
application for innovative liquid crystal technologies. For instance, we
are pressing ahead to capture the future markets for liquid crystal
windows (LCWs) and mobile antennas. Thanks to licrivision™ tech-
nology, LCWs create new architectural possibilities. Through contin-
uously variable brightness control, they can for example increase a
building's energy efficiency. Moreover, the dynamic solar shading
product eyrise TM s350 launched in the EU and North America allows
solar shading to be managed while the windows remain transparent
and color-neutral. Due to growing demand for dynamic glass, we see
great potential for the new eyriseTM product brand. Antennas that
can receive signals transmitted in the high frequency range can also
be realized with the aid of corresponding liquid crystal mixtures. As
a result, mobile data exchange could improve significantly in a wide
variety of fields of application. Since novel liquid crystal materials for
antennas are currently being developed, the market launch of liquid
crystal antennas could take a few years.
Opportunities due to new application possibilities
for liquid crystals
141
Report on Risks and Opportunities
Combined Management Report
Furthermore, in 2018 Merck opened its new OLED Technology
Center China in Shanghai. The new technology center will make tailored
solutions for the development of innovative OLED applications available
to local customers. It offers state-of-the-art equipment and clean room
installations for the production and characterization of OLED construc-
tion elements. The site will service as venue for the collaboration
between Merck and its customers to enable the joint development
of ideal solutions for OLED display products.
We see opportunities in the medium- to long-term possibilities of
significant market growth of OLED applications in high-quality display
applications. We are building on more than ten years of experience
in manufacturing organic light-emitting diode (OLED) materials as
well as a strong portfolio of worldwide patents in order to develop
ultrapure and extremely stable materials that are precisely tailored
to customer requirements. The development in the OLED market is
being driven by the diversification of applications for OLED displays.
OLED technology is an established alternative to LCDs in small-area
displays, for instance smartphones. However, owing to technological
advances, OLED technology is being used in more and more large-
area displays, such as televisions. In the future, OLED technology
could also transform ceilings or walls in buildings into information
boards. In order to realize such future applications, Merck is devel-
oping highly efficient OLED materials branded Livilux® for vacuum
evaporation technology or printing processes. At the beginning of
the second quarter of 2017, the HyperOLED project started within
the scope of the Horizon 2020 initiative, an EU-funded program. As
part of this project, together with four other partners, we will be
developing high-performance, hyperfluorescence OLEDs for display
and lighting applications over the next three years.
Opportunities due to new technologies in the manufacturing
of displays
Risk of more restrictive regulatory requirements regarding
drug pricing and reimbursement
We compete with numerous companies in the pharmaceutical, chem-
ical and life science sectors. Rising competitive pressure can have
a significant impact on the quantities that can be sold and prices
attainable for our products.
The net risk of negative political and macroeconomic develop-
ments is seen as possible and has critical negative effects on the net
assets, financial position and results of operations. We thus rate this
as a medium risk.
registered via the United Kingdom; changes to supply routes and the
planned build-up of inventories of critical products, which are also
designed to cushion the risk of delays in cross-border traffic, which
is difficult to predict.
The United Kingdom's intended exit from the European Union
("Brexit") gives rise to risks for our existing business in that country
(2018: sales of € 636 million, 1,442 employees and 5 production
sites), including the devaluation of the pound sterling, a weakening
of the United Kingdom's economy, regulatory changes, the creation
of trade barriers such as tariffs as well as, particularly in the event
of a Brexit without a transition phase ("hard Brexit"), operational
risks due to, for example, delays in the supply chain that could have
an impact on our profitability. To analyze these risks and in order to
counteract them early in a targeted manner, we established Group-
internal working groups that considered various scenarios, including
the possibility of a "hard Brexit". Mitigation measures exist for these
scenarios, which shall ensure market access and the stability of the
supply chain in the best possible way. They also include, for example,
a relocation of the marketing authorization holder for drugs currently
Potential negative macroeconomic developments, for example in
Argentina, can also impact our business. To minimize these impacts,
corresponding measures pertaining to the sales strategy have been
initiated in these countries.
Risk of negative political and macroeconomic developments
The destabilization of political systems (as for example in Turkey or
the Middle East), the possible establishment of trade barriers, sanc-
tions and foreign exchange policy changes can lead to declines in
sales in certain countries and regions. These risks are taken into
account as far as possible in the business plans of the affected
countries and regions and mitigated through product, industry and
regional diversification.
Likewise, in our Life Science and Performance Materials business
sectors, we must adhere to a multitude of regulatory specifications
regarding the manufacturing, testing and marketing of many of our
products. Specifically in the European Union, we are subject to the
European chemicals regulation REACH. It demands comprehensive
tests for chemical products. Moreover, the use of chemicals in pro-
duction could be restricted, which would make it impossible to con-
tinue manufacturing certain products. We are constantly pursuing
research and development in substance characterization and the
possible substitution of critical substances so as to reduce the occur-
rence of this risk, and therefore view it as unlikely. Nevertheless, it
is classified as a medium risk given its critical negative impact on the
net assets, financial position and results of operations.
Risk of stricter regulations for the manufacturing, testing and
marketing of products
Remaining risks beyond the current plans resulting from restrictive
regulatory requirements are classified as a medium risk owing to the
possible critical or partly probable and moderate negative impact.
Report on Risks and Opportunities
Combined Management Report
140
MARKET RISKS AND OPPORTUNITIES
Opportunities from new active ingredients for cosmetics
Medium
High
The underlying scales for measuring these factors are shown
below:
The significance of risks is calculated on the basis of their potential
negative impact on the forecast financial targets in conjunction with
the probability of occurrence of the respective risk. In line with these
two factors, risks are classified as "high", "medium" or "low".
RISKS
Risk and opportunity assessment
Report on Risks and Opportunities
Combined Management Report
138
If the occurrence of the identified opportunities is rated as likely,
they are incorporated into the business plans and the short-term
forecasts. Trends going beyond this or events that could lead to a
positive development in the net assets, financial position and results
of operations are presented in the following report as opportunities.
These could have a positive effect on our medium-term prospects.
The risk management system described concentrates on business
risks, and not on opportunities at the same time. The opportunity
management process is integrated into our internal controlling pro-
cesses and carried out in the operating units on the basis of the
Group strategy. The businesses analyze and assess potential market
opportunities as part of strategy and planning processes. In this
context, investment opportunities are examined and prioritized pri-
marily in terms of their potential value proposition in order to ensure
an effective allocation of resources. We selectively invest in growth
markets to leverage the opportunities of dynamic development and
customer proximity at a local level.
OPPORTUNITY MANAGEMENT PROCESS
Within the scope of audits, Group Internal Auditing regularly
reviews the performance of risk management processes within the
units and, at the same time, the communication of relevant risks from
the operating businesses to Group Risk Management.
PROBABILITY OF OCCURRENCE
For reporting risks with a potential negative impact on our EBIT,
a minimum threshold is set at a value of € 5 million in the standard
process and at a value of € 25 million in the ad hoc process. Risks
below these thresholds are steered independently within the business
sectors. The relevant timeframe for internal risk reporting is five
years. The effects of risks described in this report on risks and oppor-
tunities are presented as annual values. The assessment of the risks
presented relates to December 31, 2018. There were no relevant
changes after the balance sheet date that would have necessitated
an amended presentation of the risk situation of the Group.
The residual risk after the implementation of these measures is
presented in the internal risk report as net risk.
Likewise, risk-mitigating measures are reported and assessed.
The effectiveness of these measures and the planned implementation
time frame are monitored by Group Risk Management.
The objective of our risk management activities is to recognize, assess
and manage risks early on and to implement appropriate measures
to minimize them. The responsibilities, objectives and processes of
risk management are described in our internal risk management
guidelines. The business heads, managing directors of Merck sub-
sidiaries and the heads of Group functions are specified as employees
with responsibility for risks. The group of consolidated companies for
risk reporting purposes is the same as the group of consolidated
companies for the consolidated financial statements. Every six months,
the risk owners assess their risk status and report their risk portfolio
to Risk Management. We use special risk management software in the
context of these activities.
RISK MANAGEMENT PROCESS
In our internal risk reporting, risks are defined as potential future
events or developments that could lead to a negative deviation from
our (financial) targets. In parallel, opportunities are defined as poten-
tial events or developments that imply a positive deviation from our
planned (financial) targets. Identified future events and expected
developments are taken into account in internal planning provided
that it can be assumed that their occurrence is likely in the planning
period. The risks and opportunities presented in the following risk
and opportunities report are those potential future events that could
respectively lead to a negative or positive deviation from the topics
covered by planning.
Merck is part of a complex, global business world and is therefore
exposed to a multitude of external and internal influences. Every
business decision is therefore based on the associated risks and
opportunities.
Risk and opportunity management
Risks and opportunities are inherent to entrepreneurial activity. We
have put systems and processes in place to identify risks at an early
stage and to counteract them by taking appropriate action. Within
the company, opportunity management is an integral component of
internal decision-making processes such as short- and medium-term
planning and intra-year business plans.
Report on Risks and Opportunities
137
Report on Risks and Opportunities
Group Controlling & Risk Management forms the organizational
framework for risk management and reports directly to the Group
Chief Financial Officer. Group Risk Management uses the information
reported to determine the current risk portfolio for the Merck Group,
presenting this in a report to the Executive Board, the Supervisory
Board and the Finance Committee with detailed explanations twice
per year. This also encompasses a probability-weighted aggregation
of risks at Group level using a Monte Carlo simulation. Furthermore,
significant changes in the assessment of the risks already known and
new significant risks can be reported at any time and are communi-
cated to the Executive Board on an ad hoc basis.
High
Probability of occurrence
20-50%
Medium
Medium
Medium
Low
Medium
Medium
Critical negative impact on the net assets,
financial position and results of operations
Substantial negative impact on the net assets,
financial position and results of operations
Moderate negative impact on the net assets,
financial position and results of operations
Immaterial negative impact on the net assets,
financial position and results of operations
Explanation
Very likely
Likely
Possible
Unlikely
Explanation
Impact
< 20%
< € 5 million
€ 20-50 million
> € 50 million
RISK MATRIX
The combination of the two factors results in the risk matrix below,
which shows the individual risks and their significance to the Group.
< € 5 million
€5 <20 million
€ 20-50 million
> € 50 million
Degree of impact
DEGREE OF IMPACT
51-80%
> 80%
€ 5-20 million
Combined Management Report
In the current reporting year, Merck has systematically pushed ahead
with the expansion of its research on cosmetic raw materials and
supplies according to the principles of pharmaceutical drug develop-
ment. The synergies from the knowledge and technology transfer
from the Healthcare and Life Science Group areas have substantially
improved the development times and efficiencies of new active ingre-
dients for cosmetics. Taken together with the establishment of
advanced 3D skin models, this results in a range of promising new
cosmetic raw materials that are due to be launched over the coming
quarters.
Another growth driver is the growing demand for sustainably
produced cosmetic raw materials that meet the substantially increased
regulatory requirements on the main markets. Merck occupies a
leading role in this field and is therefore increasingly used as a pre-
ferred supplier.
Product liability risks
Companies in the chemical and pharmaceutical industries are
exposed to product liability risks in particular. Product liability risks
can lead to considerable claims for damages, loss of reputation and
costs to avert damages. We have taken out the liability insurance
that is standard in the industry for such risks. However, it could be
that the insurance coverage available is insufficient for individual
cases. Although the occurrence of product liability claims in excess
of the existing insurance coverage is considered unlikely, individual
cases could still have a critical negative effect on the net assets,
financial position and results of operations. We therefore rate a
potential product liability risk as a medium risk.
Risks due to product-related crime and espionage
Owing to our portfolio, we are exposed to a number of sector-specific
crime risks. This relates primarily to products, including among other
things, counterfeiting, illegal channeling, misuse as well as all types of
property crime, including attempts at these crimes. Crime phenomena
such as cybercrime and espionage could equally affect our innovations
or innovation abilities as such.
To combat product-related crime, an internal coordination network
covering all functions and businesses ("Merck Anti-Counterfeiting
Operational Network") was set up several years ago. In addition,
security measures are in use to protect products against counterfeit-
ing. Innovative technical security solutions and defined preventive
approaches are used to ward off dangers relating to cybercrime and
espionage. Measures to prevent risks and to prosecute identified
offenses are conducted in all the relevant crime areas in close and
trustworthy cooperation with the responsible authorities. The impact
of these risks on business operations depends on the respective
individual case, product-specific factors, the value chain and regional
aspects in particular. Our Corporate Security department is respon-
sible for the overall coordination of all measures in this area. Overall,
the threat resulting from crime in general is seen as being possible
and is classified as a medium risk.
RISKS AND OPPORTUNITIES FROM THE USE
OF SOCIAL MEDIA
The Merck company and its employees are active on numerous social
media channels. The consistent and legally compliant use of the chan-
nels and their content is important in terms of increasing awareness
of our brand, among other things. Merck takes precautions and imple-
ments processes to ensure awareness of the proper handling of social
media, controlling publication and actively managing communication.
Nevertheless, reputational risks could result, for instance through
public dialogs in social media.
Overall, we rate this as a low risk.
Financial risks and opportunities
As a corporate group that operates internationally and due to our
presence in the capital market, we are exposed to various financial
risks and opportunities. Above all, these are liquidity and counterparty
risks, financial market risks and opportunities, risks of fluctuations
in the market values of operational tangible and intangible assets,
as well as risks and opportunities from pension obligations.
RISK AND OPPORTUNITY MANAGEMENT IN RELATION
TO THE USE OF FINANCIAL INSTRUMENTS
In the area of financial risks and opportunities, we use an active
management strategy to reduce the effects of fluctuations in exchange
and interest rates. The management of financial risks and opportuni-
ties by using derivatives in particular is regulated by extensive guide-
lines. Speculation is prohibited. Derivative transactions are subject to
constant risk controls. A strict separation of functions between trading,
settlement and control functions is ensured.
For numerous markets in Asia, the Middle East, Latin America and
Africa, we expect that in the coming years all business sectors will
continue to make above-average contributions to growth. In order to
further expand this potential for our businesses, we have moved for-
ward with several investment projects in recent years. For instance,
in 2018 we invested around € 15 million in China to further expand
the capacity of a pharmaceutical manufacturing facility and a further
€ 29 million in a manufacturing plant for our Life Science business
sector. Moreover, we are continuing our engagement in Africa. The
greater local presence and customer proximity could give us a key
competitive edge and, in the medium to long term, offers the oppor-
tunity for significant growth in sales and EBITDA pre.
Combined Management Report
145
LIQUIDITY RISKS
In order to ensure its continued existence, a company must be able
to fulfill its commitments from operating and financial activities at all
times. Therefore, to reduce potential liquidity risks, we have a central
Group-wide liquidity management system in place and a balanced
maturity profile. The maturities of our financial liabilities are aligned
with our planned free cash flow. Furthermore, we have a multicurrency
revolving credit facility of € 2 billion with a term until 2023, which
ensures continuing solvency if any liquidity bottlenecks occur. As our
loan agreements do not contain any financial covenants, these
agreed lines of credit can be accessed even if Merck's credit rating
should deteriorate. Additionally, we have a commercial paper program
with a maximum volume of € 2 billion.
Overall, the liquidity risk is unlikely and rated as low.
COUNTERPARTY RISKS
Counterparty risks arise from the potential default by a partner in
connection with financial investments, loans and financing commit-
ments on the one hand and receivables in operating business on the
other.
As for counterparty risks from financial transactions, we review
all positions relating to trading partners and their credit ratings on a
daily basis. We manage financial risks of default by diversifying our
financial positions and through the related active management of our
trading partners. Significant financial transactions involving credit
risk are entered into with banks and industrial companies that have
a good credit rating. Moreover, our large banking syndicate the
multi-currency revolving credit facility of € 2 billion was syndicated
by 19 banks - reduces possible losses in the event of default.
-
The solvency and operational development of trading partners is
regularly reviewed as part of the management of operational coun-
terparty risks. Sovereign risks are also analyzed. The volume of
receivables of each customer is capped in line with their credit rat-
ings. Risk-mitigating measures, such as credit insurance, are utilized
as appropriate. Nevertheless, defaults by isolated trading partners,
even those with outstanding credit ratings, cannot be entirely ruled
out, although rated as unlikely (further information can be found in
"Credit risks" in Note (38) "Management of financial risks" in the
Notes to the Consolidated Financial Statements).
Counterparty risk is classified as a medium risk overall owing to
the unlikely probability of occurrence with a potential critical negative
effect.
FINANCIAL MARKET OPPORTUNITIES AND RISKS
As a result of our international business activities and global corporate
structure, we are exposed to risks and opportunities from fluctuations
in exchange rates. These result from financial transactions, operating
receivables and liabilities, as well as forecast future cash flows from
sales and costs in foreign currency. We use derivatives to manage
and reduce the aforementioned risks and opportunities (further infor-
Report on Risks and Opportunities
mation can be found in Note (38) "Management of financial risks" in
the Notes to the Consolidated Financial Statements). Due to their
possible occurrence with a potentially critical negative effect on the
net assets, financial position and results of operations, foreign
exchange rate risks are rated as medium risk.
in high-growth markets
Quality controls along the entire value chain reduce the risks related
to product quality and availability. This starts with the qualification
of our suppliers. Quality controls also include comprehensive quality
requirements for raw materials, purchased semi-finished products
and plants. We are dependent on individual suppliers for a number of
precursor products, packaging materials and finished goods. In the
event that one of these suppliers curtails or discontinues production,
or supply is disrupted, this could potentially have a critical impact on
the business concerned. With long-term strategic alliances for pre-
cursor products critical to supply and price as well as alternative
sourcing strategies, we reduce the probability of occurrence of these
risks and rate them as unlikely. Overall, these are classified as
medium risks.
Other centers are in Martillac (France) and Shanghai (China).
In October 2018, Merck opened another state-of-the-art customer
collaboration center (M LabTM Collaboration Center) in São Paulo,
Brazil. The center includes non-GMP pilot and bench scale labs for
customers to engage in process development support, troubleshoot-
ing and hands-on training. It is one of nine such centers around the
world, each of which allows pharmaceutical manufacturers to explore
new ways to increase productivity, improve processes and mitigate
risks. Other M LabTM Collaboration Center locations include China,
Singapore, Japan, South Korea, India, France and the United States.
RISKS AND OPPORTUNITIES OF RESEARCH
AND DEVELOPMENT
For us, innovation is a major element of the Group strategy. Research
and development projects can experience delays, expected budgets
can be exceeded or targets can remain unmet. Research and devel-
opment activities are of special importance to the Healthcare business
sector. In the course of portfolio management, we regularly evaluate
and, if necessary, refocus research areas and all R&D pipeline projects.
Alliances with external partners and the outlicensing of programs also
form part of the catalog of measures for the efficient allocation of
resources. The conclusion and continuation of these partnerships and
externalizations play an important role. A deviation from the strategic
targets defined in this area could have a critical negative impact on net
assets, financial position and results of operations. The occurrence of
a risk of this magnitude is considered unlikely, which means that this
is a medium risk.
Special mention should be made of the strategic alliance formed
in 2014 between our company and Pfizer Inc. as a research and
development opportunity in the Healthcare business sector. We co-
developed BavencioⓇ with Pfizer. Following its approval for the treat-
ment of patients with metastatic Merkel cell carcinoma and locally
advanced or metastatic urothelial cancer in 2017, it was not approved
for any additional indications this year.
MavencladⓇ was approved in 2017 by the European Commission.
It is the first short-course oral treatment approved in Europe for the
treatment of relapsing multiple sclerosis in patients with high disease
activity. In 2018, approvals were also granted in the Middle East and
Africa (United Arab Emirates) and Latin America (Argentina). Looking
forward, we aim to seek approval for MavencladⓇ in the United States.
Combined Management Report
Report on Risks and Opportunities
143
In addition to marketing already approved medicines, we are pushing
ahead with research projects in other important therapeutic areas.
The portfolio of projects is evaluated on a regular basis. This may
also lead to inlicensing or outlicensing or further strategic alliances.
For example, in 2018 a combination of BAVENCIO® (avelumab)
and INLYTAⓇ (axitinib) was shown to significantly extend the time to
disease progression or death in patients with untreated, advanced
renal cell carcinoma, according to the results of a Phase III trial.
Based on the results, Merck and Pfizer are planning to submit an
application for approval in the United States.
Merck received fast-track designation for Tepotinib in Japan. The
molecule may have the potential to treat patients with advanced
non-small cell lung cancer (NSCLC) harboring MET exon 14 skipping
mutations.
Opportunities due to an expanding local presence
The expenses currently being incurred, especially in our Healthcare
research and development, are already reflected in the current plans.
The same applies to net sales generated by the products BavencioⓇ
and MavencladⓇ for approved indications on the relevant markets,
as well as to the planned approval of Mavenclad in the United States.
Further approvals may result in an increased sales potential.
Furthermore, there is the risk that regulatory authorities either
do not grant or delay approval or grant only restricted approval.
Additionally, there is the risk that undesirable side effects of a phar-
maceutical product could remain undetected until after approval or
registration, which could result in a restriction of approval or with-
drawal from the market. Well-advanced programs in our pipeline and
those of our partners result in potential new approvals; on the other
hand, missing targets in this area may have critical negative effects
on the financial position and operating result, for example due to
lower net sales or the non-occurrence of milestone payments from
collaboration agreements. Overall, these risks are considered to be
medium risks, with probabilities ranging from unlikely to possible.
RISKS AND OPPORTUNITIES RELATED TO THE QUALITY
AND AVAILABILITY OF PRODUCTS
Risk of a temporary ban on products/production facilities or
of non-registration of products due to non-compliance with
quality standards
We are required to comply with the highest standards of quality in
the manufacturing of pharmaceutical products (Good Manufacturing
Practice or official pharmacopoeia). In this regard we are subject to
the supervision of the regulatory authorities. Conditions imposed by
national regulatory authorities could result in a temporary ban on prod-
ucts/production facilities, and possibly affect new registrations with the
respective authority. We make the utmost effort to ensure compliance
with regulations, regularly perform our own internal inspections and
also carry out external audits. Thanks to these quality assurance pro-
cesses, the occurrence of a risk with a critical negative impact is
unlikely, however cannot be entirely ruled out. Depending on the
product concerned and the severity of the objection, such a risk can
have a moderate negative impact on the net assets, financial position
and results of operations. Therefore, we rate this as a medium risk.
Risks of production availability
Further risks include operational failures due to fire or force majeure,
for example natural disasters such as floods or earthquakes, which
could lead to a substantial interruption or restriction of business
activities. Insofar as it is possible and economically viable, the Group
limits its damage risks with insurance coverage, the nature and
extent of which is constantly adapted to current requirements. Like-
wise, we are exposed to risks of production outages and the related
supply bottlenecks that can be triggered by technical problems in
production facilities with very high capacity utilization. Furthermore,
there are risks of supply bottlenecks due to a lack or disappearance
of capacity. We are working to continuously mitigate the risks by
making regular investments, setting up alternative sourcing options
and maintaining inventory levels.
Although the occurrence of these risks is considered unlikely, an
individual event could have a critical negative effect on the net assets,
financial position and results of operations, and they are therefore
classified as a medium risk.
144
Combined Management Report
Report on Risks and Opportunities
Risks of dependency on suppliers
Risks of discontinuing development projects and
regulatory approval of developed medicines
Sometimes development projects are discontinued after high levels
of investment at a late phase of clinical development. Decisions -
such as those relating to the transition to the next clinical phase - are
taken with a view to minimizing risk. We are currently not aware of
any risks beyond general development risks that could significantly
affect the net assets, financial position and results of operations.
Partnerships with leading providers from growth markets beyond
Europe and North America increasingly play an important role when
it comes to commercializing these products, which are offered for
optimized management of the tanning or whitening of the skin, among
other things.
Variable interest and current financial liabilities are exposed to
the risks and opportunities of interest rate fluctuations. These are
also managed and reduced using derivatives. Interest rate risks have
a potentially moderate negative impact, are considered unlikely and
pose low risks overall.
RISKS AND OPPORTUNITIES FROM PENSION
OBLIGATIONS
For instance, we are currently involved in litigation with Merck &
Co. Inc. (outside the United States and Canada: Merck Sharp &
Dohme Corp. (MSD)), against whom we have filed lawsuits in various
countries. This company has also sued us in the United States for
trademark infringement, among other things.
Due to long statutes of limitations or in some cases the absence
thereof, it is not possible to rule out that we will face third-party
claims arising from the same issue despite the conclusion of legal
proceedings. Court or official rulings or settlements can lead to
expenses with a significant impact on our business and earnings.
Despite extensive precautionary measures, non-compliance with
laws and regulations leading to related consequences can never be
completely excluded.
Tax risks are reviewed regularly and systematically by Group Tax.
Corresponding standards and guidelines are used in order to identify
tax risks at an early stage as well as to review, evaluate and corre-
spondingly minimize them. Risk reduction measures are coordinated
by Group Tax together with the subsidiaries abroad.
In our opinion, the lawsuits described below constitute the most
significant legal risks. This should not be seen as an exhaustive list
of all legal disputes currently ongoing.
The manufacture of biopharmaceuticals, or biomanufacturing, is
a growing industry that is increasingly focused on optimized produc-
In June 2018, Merck opened North America's first BioRelianceⓇ End-
to-End Biodevelopment Center for drug manufacturers in Burlington,
Massachusetts. The center provides practical experience and offers
expert advice for each stage of biotechnological development and
manufacture.
Opportunities offered by customer proximity
The CRISPR technologies open up promising new avenues for med-
ical research and the treatment of some of the most difficult diseases
to treat, such as cancer as well as hereditary and rare diseases.
The CRISPR technology is used in genome editing. In 2018, Merck
was awarded several patents for this. Fundamental CRISPR patents
exist in Australia, China, Europe, Israel, Canada, Singapore and
South Korea.
Opportunities provided by the CRISPR technology
Nevertheless, we are still exposed to litigation risks or legal pro-
ceedings. In particular, these include risks in the areas of product
liability, competition and antitrust law, pharmaceutical law, patent
law, trademark law, data protection law, tax law and environmental
protection. As a research-based company, we have a valuable port-
folio of industrial property rights, patents and brands that could
become the target of attacks and infringements. The outcome of
future proceedings or those currently pending is difficult to foresee.
In 2018, we expanded our competencies with a PMatX incubator
for electronics of the next generation in Israel in the Performance
Materials area.
to improve access to healthcare services for patients and their families
in China. The online portal www.fertility.com was launched in June
2018. It comprises a portal for physicians and one for patients. This
platform allows patients and physicians to access information they
require from anywhere at any time. We also introduced two new
technologies to increase efficiency in reproductive laboratories. QBOX
IVF optimizes the data transfer between laboratory instruments and
systems for electronic patient files, while GeriⓇ® Assess 2.0 introduces
the automatic identification of major development steps of embryos
and blastocysts, thereby increasing evaluation efficiency. Merck
entered into a partnership with Medisafe, a start-up based in the
United States. Together the companies aim to help cardiometabolic
patients better manage medication intake and adhere to prescribed
treatment regimens. In the countries of scope, Merck patients will
have access to a customized version of Medisafe's mobile platform
that could combine reminders, motivation and support systems, tar-
geted content, coupons and interventions in their local language.
Report on Risks and Opportunities
Combined Management Report
142
In the Healthcare business sector, in 2018 Merck signed an agree-
ment for a strategic collaboration with Chinese online company Alibaba
Health, which is active in the healthcare sector. The collaboration seeks
Digital technologies are becoming increasingly important for our mar-
kets and our world of work. Therefore, in 2015, we launched strategic
digital initiatives geared to improving the efficiency of our internal
processes and to evaluating the opportunities of digitalization with
regard to our products and customers. In addition to collaborations
with external partners to expand e-health solutions for patients, such
as our MSdialog platform, the Accelerator program, which is being
driven by our Innovation Center, is one component of our innovation
strategy.
Opportunities offered by digitalization and activities
to boost innovative strength
In the Healthcare business sector, both our biopharmaceutical products
and classic pharmaceutical business are exposed to increased compe-
tition from rival products (in the form of biosimilars and generics).
In the Life Science and Performance Materials business sectors, risks
are posed by not only cyclical business fluctuations but also changes
in the technologies used or customer sourcing strategies, particularly
with respect to liquid crystals. We use close customer relationships
and in-house further developments as well as market proximity,
including precise market analyses, as mitigating measures. Overall,
owing to its possible occurrence with a critical negative impact, the
market risk is classified as a medium risk.
Risks due to increased competition and
customer technology changes
With the acquisition of Sigma-Aldrich in 2015, we gained access to the
leading life science e-commerce platform. Our customers are already
benefiting from a portfolio of more than 300,000 products, including
highly respected brands distributed via this e-commerce platform.
We are further expanding this platform in order to continuously
increase the number of products available on it. Making ordering pro-
cesses faster and more convenient for our customers and offering
support through individualized product recommendations could lead
to higher sales volumes and enable us to win new customers. Conse-
quently, this distribution channel could lead to an above-average
development of sales in the medium term.
Opportunities from leveraging the e-commerce
and distribution platform
In November 2018, our Life Science business sector launched its
new BioContinuum™ platform to optimize biotherapeutic drug manu-
facturing through improved efficiency, simplified plant operations,
and greater quality and consistency. This new, adaptive platform of
products, applications and expertise will allow customers to bring
urgently needed therapies to patients, faster and more cost-effec-
tively than ever before, and represents the next development step
in the biopharmaceutical sector.
RISKS OF IMPAIRMENT OF BALANCE SHEET ITEMS
The carrying amounts of individual balance sheet items are subject
to the risk of changing market and business conditions and thus to
changes in fair values as well. Necessary impairments could have a
significant negative non-cash impact on earnings and affect the
accounting ratios. This applies in particular to the high level of intan-
gible assets including goodwill, which mainly derive from the purchase
price allocations made in connection with past acquisitions (further
information can be found in Note (19) "Goodwill" and (20) "Other
intangible assets" in the Notes to the Consolidated Financial State-
ments). All relevant risks were assessed during the preparation of
the consolidated financial statements and taken into account accord-
ingly. We rate risks beyond this as unlikely with a critical negative
impact. Therefore, this is seen as a medium risk.
Generally, we strive to minimize and control our legal risks. To this
end, we have taken the necessary precautions to identify threats and
defend our rights where necessary.
2018
We have commitments in connection with pension obligations. The
present value of defined benefit obligations can be significantly
increased or reduced by changes in the relevant valuation parame-
ters, for example the interest rate or future salary increases. Pension
obligations are regularly assessed as part of annual actuarial reports.
The obligations are covered by the pension provisions reported in the
balance sheet based on the assumptions as of the balance sheet date.
Some of these obligations are funded by plan assets (further infor-
mation can be found in Note (25) "Provisions for pensions and other
post-employment benefits" in the Notes to the Consolidated Financial
Statements). To the extent that pension obligations are covered by
plan assets consisting of interest-bearing securities, shares, real
estate and other financial assets, decreasing or negative returns on
these assets can adversely affect the fair value of plan assets and
thus result in further additions to pension provisions. By contrast,
rising returns increase the value of plan assets, thereby resulting in
excess cover of plan liabilities. We increase the opportunities of fluc-
tuations in the market value of plan assets on the one hand and reduce
the risks on the other by using a diversified investment strategy. The
unlikely risk due to pension obligations could have moderate negative
effects on the net assets, financial position and results of operations,
and is classified as low.
146
Combined Management Report
Report on Risks and Opportunities
ASSESSMENTS BY INDEPENDENT RATING AGENCIES
The capital market uses the assessments published by rating agencies
to help lenders assess the risks of a financial instrument used by
Merck. We are currently rated by Standard & Poor's (S&P), Moody's
and Scope. Standard & Poor's has issued a long-term credit rating of
A with a stable outlook, Moody's a rating of Baal with a stable outlook
and Scope a rating of A-, likewise with a stable outlook. In line with
market procedures, our financing conditions are closely tied to our
rating. The better a rating, the more favorably we can generally raise
funds on the capital market or from banks.
REPORT ON RISKS AND OPPORTUNITIES
Overview of rating development
S&P/Moody's / Scope
A/A2
A-/A3
Legal risks
Rete/Reel
• S&P
• Moody's
Scope
2004 2005 2006 2007
2008
2009
2010
2011 2012
2013 2014
2015
2016 2017
BBB/Baa2
The new center is one of three worldwide supporting Merck's
biotech partners in developing their processes from early clinical
stages to commercialization by providing end-to-end solutions.
tion and high quality. However, the drug development process is long
and complex, and requires biotech companies to make significant
financial investments.
Nevertheless, potentially critical negative impacts of the litigation
on the financial position cannot be ruled out.
For 2019, we forecast organic EBITDA pre of the Healthcare business
sector to record strong growth in the low-to-mid-twenties percentage
range compared with the previous year. Foreign exchange effects
are expected to weigh heavily on EBITDA pre.
EBITDA PRE
For the Healthcare business sector, we expect moderate organic sales
growth in 2019. We project an at least stable sales trend for our base
business. The persistently strong demand for our products in the
General Medicine & Endocrinology business unit on the growth markets
will make a major contribution to this trend, as will our business with
products for the treatment of infertility. These positive effects should
compensate for the expected decline in sales of Rebif® and the con-
tinuing price pressure on major markets in the Europe, Asia-Pacific,
and Middle East and Africa regions. Moreover, we expect our new
products, above all MavencladⓇ, to make a significant contribution
to growth. For 2019, we forecast BavencioⓇ sales totaling a euro
figure in the high double-digit millions and MavencladⓇ sales up to a
figure in the mid-triple-digit millions. These forecasts include the
expected market approval of MavencladⓇ in the United States. In
particular, the unfavorable currency trend on several growth markets
should lead to a moderately negative foreign exchange effect on
Healthcare sales.
NET SALES
- Positive net working capital effects (including positive effects from the sale of the
Consumer Health business)
- Rise in EBITDA pre
- Negative foreign exchange effect due to trend of exchange rates on several
growth markets
- Earnings contributions from the strategic alliance with GlaxoSmithKline plc of
approximately € 100 million and owing to license payments for ErbituxⓇ that
were lower than expected
The negative earnings effects resulting from the projected decline
of RebifⓇ sales should be more than offset by expected, substantial
earnings contributions from our new products, particularly MavencladⓇ.
The disappearance of one-time effects from fiscal 2018 totaling some
€ 180 million should be more than offset by expected earnings con-
tributions from the active management of our pipeline assets and
milestone payments. The conclusion of a global strategic alliance
with GlaxoSmithKline plc (GSK) on February 5, 2019, for the joint
development and marketing of M7824 (Bintrafusp alfa¹) is an initial
major contribution in this respect. For 2019, we expect an income
effect from the upfront cash payment of around € 100 million in other
operating income. License payments for ErbituxⓇ that were lower
than expected had the effect of enhancing earnings. Research and
developments costs to develop our pipeline, especially in immunon-
cology, will continue to rise; based on current forecasts this trend is
likely to weaken. This budgeted cost increase does, however, depend
on the development of clinical data and on prioritization decisions.
We also expect our marketing and selling costs to increase further,
driven primarily by preparations for the launch of MavencladⓇ, par-
ticularly in the United States. However, we expect research and
development costs as well as marketing and selling costs to decline
or at least remain stable in relation to sales.
-
- Moderate increase in research and development expenses due to the develop-
ment of our pipeline, but down in relation to sales
- Expected substantial earnings contributions from our new products, especially
MavencladⓇ, more than offset negative mix effects associated with the projected
decline of RebifⓇ sales
Negative foreign exchange effect due to trend of exchange rates on several
growth markets
-
-
- At least stable sales development of the base business in organic terms
- Substantial growth contribution of our newly approved products, particularly
MavencladⓇ; expected market approval in the United States has been taken into
account
-Increase in the low teens
percentage range
1,025
-
1 Bintrafusp alfa is the proposed International Nonproprietary Name (INN) for bifunctional immunotherapy M7824.
Bintrafusp alfa is currently in clinical trials and not approved for any indication worldwide.
152
Combined Management Report
- Moderately negative foreign
exchange effect
- Organic growth ranging from
strong to a double-digit per-
centage rate
- Slightly negative foreign
exchange effect
- Organic growth slightly above
medium-term market growth
of 4% p.a.
Key assumptions
Forecast for 2019
1,393
1,840
EBITDA pre
Business free
cash flow
6,185
Net sales
2018
€ million
Actual results
FORECAST FOR THE LIFE SCIENCE BUSINESS SECTOR
The main drivers will be the expected rise in EBITDA pre and positive
developments of net working capital (including positive effects from
the sale of the Consumer Health business).
In 2019, we expect business free cash flow of the Healthcare business
sector to show an increase in the low twenties percentage range.
BUSINESS FREE CASH FLOW
Report on Expected Developments
Business free
cash flow
- Pronounced organic growth
rate in the low-to-mid-twen-
ties percentage range
-Strongly negative foreign
exchange effect
exchange effect
- Moderately negative foreign
- Foreign exchange effect primarily resulting from several emerging market
currencies
-
-First-time application of IFRS 16 with a positive contribution of around
€ 130 million
-
- Growth driven by Healthcare and Life Science, which more than offsets the
decline of Performance Materials
Foreign exchange effect primarily resulting from several emerging market
currencies
-
- Growth driven by Life Science and Healthcare, which more than offsets the
decline of Performance Materials
Key assumptions
- Moderate increase
2,508
3,800
EBITDA pre
Business free
cash flow
- Negative foreign exchange
effect of between -3% and
-4%
Pronounced organic percent-
age growth in the low teens
range
- Moderate organic growth
- Slightly negative foreign ex-
change effect of -1% to -2%
14,836
Net sales
Forecast for 2019
Higher EBITDA pre and positive effects in working capital offset higher
investments in property, plant and equipment as well as digitalization initiatives
Moderately below 2018 levels
NET SALES
EBITDA PRE
Moderate organic growth
1,556
EBITDA pre
6,246
Net sales
Key assumptions
Forecast for 2019
Actual results
2018
€ million
FORECAST FOR THE HEALTHCARE BUSINESS SECTOR
the management of working capital. Both effects combined will be
able to more than offset the rising investments in property, plant and
equipment as well as digitalization initiatives.
For business free cash flow of the Merck Group, we expect a moderate
rise in 2019 owing to higher EBITDA pre and positive effects from
BUSINESS FREE CASH FLOW
151
Report on Expected Developments
Combined Management Report
The projected trend of exchange rates will likely reduce EBITDA
pre for the Group by between -3% and -4% compared with the
prior year and will thus have a disproportionate effect compared with
sales, particularly in the Healthcare business sector. While we expect
the development of the euro against the U.S. dollar to be neutral for
the Groups' EBITDA pre, the negative trend of currencies on several
growth markets will weigh on EBITDA pre. In the affected countries,
the cost base is low relative to sales owing to our regional structures.
In addition, due to high hedging costs, these emerging market curren-
cies are not hedged. Therefore, a compensating effect from currency
hedging cannot be expected.
application of the accounting standard IFRS 16, which contains new
provisions on reporting for leases. Based on the current accounting
provisions with respect to leases, EBITDA pre will increase by around
€ 130 million compared with the prior year. Most of the effects will
probably be accounted for by the Life Science and Healthcare business
sectors, while the impact on Performance Materials and Corporate
as well as Other will be less pronounced.
EBITDA pre is our key financial indicator to steer operating business.
On an organic basis, we forecast an increase in EBITDA pre in the
low double-digit percentage range for the Merck Group in 2019 com-
pared with the prior year. This includes effects from the first-time
For the Merck Group, in 2019 we expect moderate organic sales
growth in comparison with the previous year. With regard to foreign
currencies, we continue to expect a volatile environment due to
political and macroeconomic developments. Our forecast for 2019 is
based on an exchange rate of the euro against the U.S. dollar in the
range of 1.15-1.20. This means that the foreign exchange effect
from the development of the exchange rate between the euro and
the U.S. dollar is likely to be neutral when compared with the prior
year. All told, however, due to the unfavorable trend of exchange
rates on several growth markets - Latin America, in particular - we
expect a slightly negative foreign exchange effect of between -1%
and -2% when compared with the previous year.
- Process Solutions is expected to remain the main driver of growth, followed by
Applied Solutions
- Research Solutions will also make a moderately positive contribution to the organic
sales development
- No material portfolio effect as a result of the sale of the flow cytometry business
Negative foreign exchange effect, particularly on account of the development of
emerging market currencies
Lastly, with the approval of the Supervisory Board, the subscription
right of the limited liability shareholders can be excluded in order to
exclude fractional amounts from the subscription right.
Moreover, with the approval of the Supervisory Board, the sub-
scription right of the limited liability shareholders can be excluded if
and to the extent this is necessary to grant the holders or creditors
of conversion or option rights and/or the holders or creditors of
financing instruments carrying conversion or option obligations,
which were or are issued by the company or by a domestic or foreign
company in which the company directly or indirectly holds the major-
ity of the votes and capital, a subscription right to the extent to which
they would be entitled after the exercise of the conversion or option
rights or after the performance of a conversion or option obligation.
It is likewise possible to exclude, with the approval of the Super-
visory Board, the subscription right of the limited liability sharehold-
ers in order to enable E. Merck KG to exercise its right pursuant to
Article 33 of the Articles of Association to convert, in full or in part,
its equity interest into share capital.
to Article 32 (3) of the Articles of Association of the company to
participate in a capital increase by issuing shares or freely transfer-
able share subscription rights.
155
Report in accordance with Section 315a (1) of the German Commercial Code (HGB)
Corporate Governance
The Executive Board is authorized to increase the company's share
capital with the approval of the Supervisory Board and of E. Merck KG
once or repeatedly up to and including April 27, 2022 by up to a total
of € 56,521,124.19 by issuing new no-par value bearer shares
against cash and/or non-cash contributions ("Authorized Capital
2017"). Limited liability shareholders shall be generally granted the
statutory right to subscribe to the new shares. However, the Executive
Board is authorized, with the approval of the Supervisory Board, to
exclude the limited liability shareholders' subscription right in full or in
part in case of a capital increase against cash contributions pursuant
to or by analogous application of section 186 (3) sentence 4 AktG if
the issue price of the new shares is not substantially lower than the
stock exchange price of the company's shares already listed and if
the new shares which are issued under exclusion of the subscription
right do not exceed a proportional amount of 10% of the share capital
either at the time of the Authorized Capital 2017 taking effect or at
the time of the Authorized Capital 2017 being utilized. This restriction
to 10% of the share capital shall include the proportional amount of
the share capital that is attributable to shares which are issued under
exclusion of the subscription right or sold during the term of the
Authorized Capital 2017 based on an authorization to issue new
shares or sell own shares by direct or analogous application of section
186 (3) sentence 4 AktG. Further, this restriction shall also include
the proportional amount of the share capital that is attributable to
shares which may or must be issued in order to service bonds carry-
ing a conversion or option right or a conversion or option obligation,
if the bonds are issued during the term of the Authorized Capital
2017 under exclusion of the limited liability shareholders' subscription
right by analogous application of section 186 (3) sentence 4 AktG.
It is likewise possible to exclude the subscription right of the limited
liability shareholders with the approval of the Supervisory Board in the
case of capital increases through non-cash contributions, particularly
for the purpose of acquiring enterprises, parts of enterprises or inter-
ests in enterprises. In addition, with the approval of the Supervisory
Board, the limited liability shareholders' subscription rights can be
excluded in order to enable E. Merck KG to exercise its right pursuant
of the share capital represented in the vote. The Articles of Association
of the company encompass authorized and contingent capital.
The Articles of Association can be amended by a resolution by the
Annual Meeting that requires the approval of the general partners.
Notwithstanding any statutory provisions to the contrary, the reso-
lutions of the General Meeting are adopted by a simple majority of
the votes cast. Where the law requires a capital majority in addition
to the voting majority, resolutions are adopted by a simple majority
According to the Articles of Association of Merck, the general partners
not holding an equity interest who form the Executive Board are
admitted by E. Merck KG with the consent of a simple majority of
the other general partners. A person may be a general partner not
holding an equity interest only if he or she is also a general partner
of E. Merck KG. In addition, at the proposal of E. Merck KG and with
the approval of all general partners not holding an equity interest,
further persons who are not general partners not holding an equity
interest may be appointed to the Executive Board.
Pursuant to the information on voting rights submitted to us in
accordance with the German Securities Trading Act (WpHG), on
December 31, 2018, no shareholders owned direct or indirect invest-
ments exceeding 10% of the voting rights.
As of the balance sheet date, the company's subscribed capital is
divided into 129,242,251 no-par value bearer shares plus one reg-
istered share. Each share therefore corresponds to € 1.30 of the
share capital. The holder of the registered share is E. Merck Beteili-
gungen KG. It is entitled and obliged to appoint one-third of the
members of the Supervisory Board representing the limited liability
shareholders. If the holder of the registered share is a general partner,
he or she has no such right of appointment. The transfer of the
registered share requires the company's approval. The approval is
granted at the sole discretion of the personally liable general partner
with an equity interest, namely E. Merck KG.
The following information is provided in accordance with section
315a (1) of the German Commercial Code (HGB) and the explanatory
report pursuant to section 176 (1) sentence 1 of the German Stock
Corporation Act (AktG).
Report in accordance with
Section 315a (1) of the German
Commercial Code (HGB)
Report in accordance with Section 315a (1) of the German Commercial Code (HGB)
Corporate Governance
154
The expenses for Corporate and Other will, in our opinion, show an
increase in the low-to-mid-teens range on an organic basis in 2019.
This increase will be based on a further expansion of our innovation
and digitalization initiatives. A greater focus on the costs of the
administrative functions and substantially reduced strain from foreign
exchange effects are likely to partly offset the increase.
The sum of shares issued on the basis of the Authorized Capital 2017
under exclusion of the limited liability shareholders' subscription right
must not exceed a proportional amount of 20% of the share capital,
by taking into account other shares of the company which, during
the term of the Authorized Capital 2017, are sold or issued under
exclusion of the subscription right or are to be issued under bonds
issued after April 28, 2017 under exclusion of the subscription right;
this limitation shall apply both at the time of this authorization taking
effect and at the time of this authorization being exercised.
Corporate and Other
To the extent that the subscription right is not excluded under the
above provisions, it may also be granted to the limited liability share-
holders by way of an indirect subscription right pursuant to sec-
tion 186 (5) AktG or, in part, by way of a direct subscription right,
and otherwise by way of an indirect subscription right pursuant to
section 186 (5) AktG.
The Articles of Association also encompass contingent capital. The
share capital is contingently increased by up to € 66,406,298.40
divided into 51,081,768 shares (Contingent Capital I). The contingent
capital increase serves to grant exchange rights to E. Merck KG in
accordance with Article 33 of the Articles of Association to enable
the conversion of its equity interest. The shares carry dividend rights
from the beginning of the fiscal year following the year in which the
conversion option is exercised.
Since the technical system requirements for the introduction of
the sector-specific ERP systems as regards the OpCos were not in
place at the time of the spin-off, the business activities spun off to
the OpCos have been temporarily leased back by the relevant OpCos
to Merck KGaA until the introduction of the sector-specific ERP sys-
tems. For this purpose, also on March 2, 2018, Merck KGaA entered
into a business leasing contract with the respective OpCo with eco-
nomic effect as of 0:00 hours on January 1, 2018, to lease back all
the operating business previously spun off to the OpCo. Under the
terms of the respective business leasing contract, Merck KGaA leases
the entire operation from the respective OpCo, as well as all fixed
assets in this context; it acquires the current assets as well as certain
liabilities and provisions at their carrying amounts under German
commercial law. The business lease allowed the spin-off measures
to be implemented for all OpCos with economic effect at a uniform
time, 0:00 hours on January 1, 2018, while retaining the flexibility
of transitioning the management of the relevant operating business
Immediately after the spin-off took effect, all shares held by
Merck KGaA in the respective OpCos were transfered to holding com-
panies via a further spin-off (holding company spin-off), as a result
of which the OpCos are each indirectly held by Merck KGaA via an
intermediate holding company. The acquiring legal entities within the
scope of the holding company spin-off were Merck Healthcare Holding
GmbH for the business shares of Healthcare OpCo, Merck Life Science
Holding GmbH for the business shares of Life Science OpCo and
Merck Performance Materials Holding GmbH for the business shares
of Performance Materials OpCo (referred to individually as "HoldCo",
independently of the sector, and jointly as "HoldCos"). To this end,
Merck KGaA and the HoldCos signed a notarized spin-off and takeover
agreement on March 2, 2018. The holding company spin-off took place
with economic effect as of 0:00 hours on January 1, 2018.
Materials business sectors within Merck KGaA together with the rele-
vant assets and liabilities (hereinafter: "operating sectors") were spun
off at their carrying values into three separate companies (hereinafter:
"OpCo" or plural "OpCos") with the legal form of a GmbH or German
limited liability corporation (operating spin-off). This operating spin-off
is based on the spin-off and takeover agreement concluded between
Merck KGaA and the OpCos in notarized form on March 2, 2018.
Following approval by the 2018 Annual General Meeting, the oper-
ating spin-off took place with economic effect as of 0:00 hours on
January 1, 2018.
As part of the strategic development of Merck KGaA, the existing
operating activities of the Healthcare, Life Science and Performance
SPIN-OFF OF OPERATING BUSINESS ACTIVITIES OF THE
BUSINESS SECTORS AND TEMPORARY LEASEBACK OF THE
SPUN-OFF BUSINESS ACTIVITIES
Effects of material company agree-
ments on the net assets, financial
position and results of operations
The Statement of Corporate Governance according to section 289a
of the German Commercial Code (HGB) is contained in the "Corporate
Governance" section of the Annual Group Report.
Statement on Corporate Governance
The financial statements of Merck KGaA have been prepared in
accordance with the provisions of the German Commercial Code
(HGB), as amended by the German Accounting Directive Implemen-
tation Act (BilRUG), and the German Stock Corporation Act (AktG).
The full version of the annual financial statements together with the
unqualified auditor's opinion has been submitted to the operator of
the electronic Federal Gazette (elektronischer Bundesanzeiger),
where they are published and forwarded to the Company Register.
Merck KGaA, headquartered in Darmstadt, is the parent company of
the Merck Group. In addition to its function as a holding company,
Merck KGaA generated sales in the Healthcare, Life Science and
Performance Materials business sectors. Merck KGaA bears a signif-
icant portion of the Group-wide research and development costs, and
employs the majority of the 11,000-plus workforce in Darmstadt.
The management report of Merck KGaA has been combined with the
Group management report. The annual financial statements and the
combined management report of the Merck Group and Merck KGaA
for 2018 are being filed with the electronic German Federal Gazette
(elektronischer Bundesanzeiger) and are available on the website of
the German company register.
Merck KGaA in accordance with the
German Commercial Code (HGB)
Additional Information on
Additional Information on Merck KGaA in accordance with the German Commercial Code (HGB)
Combined Management Report
156
The company has not entered into any material agreements subject
to a change of control pursuant to a takeover offer nor has it entered
into any compensation agreements with the members of the Executive
Board or employees in the event of a takeover offer.
The company is not authorized to acquire its own shares.
Moreover, the share capital is contingently increased by up to
€ 16,801,491.20 composed of up to 12,924,224 no par value bearer
shares (Contingent Capital II). This increase in contingent capital is
only to be implemented insofar as the bearers or creditors of option
or conversion rights or with an obligation to convert or exercise
options on warrant bonds, option participation certificates, option
participation bonds, convertible bonds, convertible participation cer-
tificates or convertible participation bonds issued against contribu-
tions that are issued or guaranteed by the company or a subordinate
Group company on the basis of the authorization resolution of the
Annual General Meeting of April 27, 2018 to April 26, 2023, utilize
their option or conversion rights or, to fulfill their conversion obligation
or obligation to exercise options insofar as they are obliged to fulfill
their conversion or option exercise obligation, or insofar as the com-
pany exercises an option, wholly or in part, of granting shares in the
company instead of paying the sum of money due and to the extent
that in each case a cash settlement is not granted, or own shares or
other forms of fulfillment are used. Each issue of new shares shall
take place at the determined option or conversion price, pursuant to
the aforementioned authorization resolution. The new shares partic-
ipate in the profit from the beginning of the fiscal year in which they
are created; insofar as this is legally permissible, the Executive Board
may, with the approval of the Supervisory Board, and in deviation
from section 60 (2) AktG, stipulate that the new shares also partici-
pate in the profit for a past fiscal year. The Executive Board is author-
ized, with the approval of the Supervisory Board and of E. Merck KG,
to stipulate the further details of the implementation of the increase
in contingent capital.
Furthermore, the Executive Board is authorized, with the approval
of the Supervisory Board, to determine the additional details of the
capital increase and its implementation, including the content of
rights attached to the shares as well as the terms and conditions of
the share issue.
2018
For the Performance Materials business sector we forecast a decline
of business free cash flow in the low teens range, essentially as a
result of the expected negative development of EBITDA pre.
other business areas and strict cost discipline. Consequently, we
expect that organic EBITDA pre will decline in the high single-digit
to low teens percentage range in comparison with 2018. Due to the
development of the euro against the U.S. dollar, we expect a neutral
foreign exchange effect for the Performance Materials business sector.
€ million
FORECAST FOR THE PERFORMANCE MATERIALS BUSINESS SECTOR
153
Report on Expected Developments
Combined Management Report
We expect business free cash flow of our Life Science business sector
to be moderately below the prior-year level. Higher EBITDA pre will
be more than offset by investments in strategic projects.
BUSINESS FREE CASH FLOW
In fiscal 2019, we forecast organic EBITDA pre growth of the Life
Science business sector that will be reduced by a moderately negative
foreign exchange effect, driven by the devaluation of several emerging
market currencies.
rates compared with the previous year. The persistently dynamic
demand trend, a further slight increase in the margin and the IFRS 16
effects will all contribute to the organic growth in income. Cost and
sales synergies from the acquisition of Sigma-Aldrich were realized
as planned in 2018. All told, these synergies came to € 280 million.
No incremental synergies are expected for 2019.
In 2019, the Life Science business sector is expected to show a sharp
increase in organic EBITDA pre totaling nearly double-digit growth
EBITDA PRE
For the Life Science business sector in 2019, we project organic growth
in net sales over the previous year that is slightly above medium-
term market growth, which we put at around 4% per year. We expect
all business units to make a positive contribution to organic growth.
In 2019, the Process Solutions business unit is again likely to remain
the strongest driver of organic growth, followed by Applied Solutions.
The Research Solutions business unit should also make a moderate
contribution to the sales development, albeit to a lesser extent than
the other two business units. We sold the flow cytometry business
at the end of 2018. The divestment will not have a material portfolio
effect. Due to the development of currencies on various growth mar-
kets, we project a slightly negative foreign exchange effect.
NET SALES
- Increase in investments in property, plant and equipment in strategic projects
Improved EBITDA pre
Negative foreign exchange effect, particularly on account of the development
of emerging market currencies
-
- In addition, positive contribution to organic income growth from the switch to
IFRS 16
Organic income growth on account of the expected sales growth and slight
margin expansion
Actual results
2018
BUSINESS FREE CASH FLOW
Forecast for 2019
2,406
Our Performance Materials business sector will probably not be able
to absorb the expected decline in sales of the highly profitable Liquid
Crystals business in 2019, despite a good expected development in
EBITDA PRE
We forecast a moderate organic sales decline in the Performance
Materials business sector in 2019 compared with the prior year. We
also project a drop in sales and prices in the Liquid Crystals business
in fiscal 2019. Despite selected capacity expansion projects by our
customers, which benefited our Liquid Crystals business in recent
months and which are expected to continue providing a benefit in
the first half of 2019, we expect that the price pressure characteristic
of this industry cannot be compensated for by corresponding volume
growth in 2019 as a whole. This development can probably not be
offset by good organic growth in other business areas either, for
example our business with semiconductor materials or OLED. Due to
the development of the euro against the U.S. dollar, we project a
neutral foreign exchange effect for the Performance Materials business
sector in 2019.
NET SALES
- Decline in EBITDA pre
- Neutral foreign exchange effect due to the development of the exchange rate
of the euro against the U.S. dollar
- Drop in liquid crystal prices cannot be offset by growth in other businesses
and active cost management
-
- Strong growth momentum in the Semiconductor Solutions business unit
Continuing price decline in Liquid Crystals business, which is mitigated by a
temporary rise in volume due to capacity expansions of customers in China
- Neutral foreign exchange effect due to the development of the exchange rate
of the euro against the U.S. dollar
Key assumptions
- Decline in the low teens
percentage range
588
786
EBITDA pre
Business free
cash flow
- Foreign exchange effect
roughly neutral
low double-digit percentage
decline
Organic high single-digit to
- Foreign exchange effect
roughly neutral
- Organically moderate decline
from the prior-year level
Net sales
In the Performance Materials business sector, Merck is involved
in a legal dispute with JNC Corporation, Japan, (JNC). JNC claims
that by manufacturing and marketing certain liquid crystals mixtures,
Merck has infringed JNC patents. Merck maintains that JNC's patent
infringement assertion is invalid owing to relevant prior art and has
filed the corresponding nullity actions, which in three cases were
already successful in first-instance proceedings. JNC has filed com-
plaints in each case. In a correction trial, a decision in favor of JNC
was issued in the second instance. Both Merck and the Korean Patent
Office have filed complaints with the Korean Supreme Court. In par-
allel, JNC filed two patent infringement suits. In these cases, a
first-instance and a second-instance decision were taken in Merck's
favor, respectively, against which JNC has appealed or is highly likely
to appeal. We are prepared for this matter and the dispute, and have
taken appropriate accounting measures. Nevertheless, a potentially
critical negative impact of the litigation on the financial position can-
not be ruled out.
€ million
FORECAST FOR THE MERCK GROUP
RISKS DUE TO CYBERCRIME AND THE FAILURE
OF BUSINESS-CRITICAL IT APPLICATIONS
Increasing international networking and the related possibility of IT
system abuse are resulting in cybercrime risks for Merck, such as the
failure of central IT systems, the disclosure or loss of the data integrity
of confidential data from research and business activities, the manip-
ulation of IT systems in process control, or an increased burden or
adverse impact on IT systems as a result of virus attacks.
We use a variety of IT systems and processes in order to optimally
support our globalization. Trends in information technology offer vari-
ous opportunities but also harbor risks.
Information technology risks
Recruiting and retaining specialists and talent is therefore one of
the key priorities for the company and is managed through the tar-
geted use of, for instance, employer branding initiatives, global talent
and succession management processes as well as competitive com-
pensation packages. Nevertheless, employee-related risks that affect
business activities are possible, even though their impact is difficult
to assess. We rate this as a medium risk.
Our future growth is highly dependent on our innovative strength.
Therefore, the expertise and engagement of employees in all sectors
in which we operate are crucial to the success of the company. The
markets relevant to the company are characterized by intensive com-
petition for qualified specialists and by the challenge of being perceived
by the public as an attractive employer. Fluctuation risks specific to
countries and industries have to be identified ahead of time and
specifically addressed in order to keep the skills and expertise critical
to success and business within the company.
Human resources risks
Paroxetine: In connection with the divested generics business, Merck
is subject to antitrust investigations by the British Competition and
Market Authority (CMA) in the United Kingdom. In March 2013, the
authorities informed Merck of the assumption that a settlement
agreement entered into in 2002 between Generics (UK) Ltd. and
several subsidiaries of GlaxoSmithKline plc, United Kingdom in con-
nection with the antidepressant drug paroxetine violates British and
European competition law. Merck, the then-owner of Generics (UK)
Ltd., was allegedly involved in the negotiations for the settlement
agreement and is therefore liable. The investigations into Generics
(UK) Ltd. started in 2011, without this being known to Merck. On
February 11, 2016, the CMA imposed a fine in this matter. Merck has
taken legal action against this fine. Appropriate accounting measures
have been taken. As things stand at present, a decision and outflow
of resources are not expected until 2019 because the Appeals Tribunal
has since submitted the relevant legal questions to the European
Court of Justice (CJEU) for a preliminary ruling. This is currently
classified as a medium risk with a moderate negative impact on the
financial position.
RISKS OWING TO A SETTLEMENT AGREEMENT
OF THE DIVESTED GENERICS GROUP
Report on Risks and Opportunities
The Merck Group operates an information protection management
system based on ISO 27001 comprising security guidelines as well
as organizational and technical measures to prevent and address IT
security incidents. Globally used IT applications form the basis for the
contractual delivery of products and solutions. The failure of busi-
ness-critical IT applications could therefore have a direct influence
on our ability to deliver and the quality of our products. This also applies
to the failure of a data center. To achieve the required service quality,
we use a quality management system certified to ISO 9001 that also
applies to the provision of IT. In addition, to reduce the risk of failure,
we operate several redundantly designed data centers. Furthermore,
insurance solutions for cybercrime offenses are in place at Group level.
Likewise, complications with the changeover of IT systems could
negatively impact the earnings situation. Close monitoring of critical
IT projects serves to mitigate this risk.
Combined Management Report
On July 6, 2017, Merck received notice from the European Com-
mission (EU Commission) in connection with the antitrust review
proceedings for the acquisition of Sigma-Aldrich, in which the EU
Commission informed Merck of its preliminary conclusion that Merck
and Sigma-Aldrich allegedly transmitted incorrect and/or misleading
information within the scope of the acquisition of Sigma-Aldrich. The
EU Commission received registration of the merger on April 21, 2015,
and granted clearance on June 15, 2015, subject to the condition
that Merck and Sigma-Aldrich divest parts of the European solvents
and inorganic chemicals businesses of Sigma-Aldrich in order to
resolve antitrust concerns. According to the preliminary viewpoint of
the EU Commission communicated in a letter dated July 6, 2017,
Merck and Sigma-Aldrich withheld important related information
about an innovation project. According to the EU Commission, the
innovation project should have been included in the remedies pack-
age. At the present time, an EU Commission administrative procedure
is still pending that could lead to a fine being imposed by the EU
Commission. Merck is entitled to legal recourse should a fine be
imposed. The ongoing investigations are limited to the examination
of violations of EU merger control procedures and do not affect the
validity of the EU Commission's decision to approve the merger. As
the risk is considered to have a potential critical negative impact on
the net assets and financial position, a provision has been set up.
RaptivaⓇ: In December 2011, the federal state of São Paulo, Brazil,
sued Merck for damages because of alleged collusion between various
pharmaceutical companies and an association of patients suffering
from psoriasis and vitiligo. This collusion is alleged to have been
intended to increase sales of the medicines from the companies
involved to the detriment of patients and state coffers. Moreover,
patients are also suing for damages in connection with the product
RaptivaⓇ. Merck has taken appropriate accounting measures for these
issues, which relate to various legal cases. Risks in excess of this
with a substantial negative effect on the net assets, financial position
and results of operations cannot be ruled out, but are considered
unlikely. This is rated as a medium risk.
RISKS DUE TO ANTITRUST AND OTHER
GOVERNMENT PROCEEDINGS
measures.
RISKS FROM PRODUCT-RELATED AND PATENT LAW DISPUTES
Merck is involved in a patent dispute with Biogen Inc., Massachusetts
(United States), (Biogen) in the United States. Biogen claims that
the sale of RebifⓇ in the United States infringes on a Biogen patent.
The disputed patent was granted to Biogen in the United States in
2009. Subsequently, Biogen sued Merck and other pharmaceutical
companies for infringement of this patent. Merck defended itself
against all allegations and brought a countersuit claiming that the
patent is invalid and not infringed by our actions. In the first instance,
a jury recognized the invalidity of the patent. This jury verdict was
overturned by a first-instance federal judge. For the time being, the
patent is thus deemed to be legally valid and to have been infringed.
Merck filed a complaint with the United States Court of Appeals of
the Federal Circuit (CAFC - second instance) against the first-instance
ruling in October 2018. We have taken appropriate accounting
147
Report on Risks and Opportunities
Combined Management Report
Actual results
148
Despite the mitigating measures taken and functional continuity
plans, the effects of cybercrime or the failure of business-critical IT
applications and their influence on the net assets, financial position
and results of operations are considered high risks owing to likely
and potentially critical negative impacts.
In July 2017, BMS, E.R. Squibb & Sons L.L.C., Ono Pharmaceutical
Co., Ltd., and Tasuku Honjo filed suit in the United States District
Court of Delaware against Merck KGaA, EMD Serono Inc. and Pfizer
Inc., based on the allegation that BavencioⓇ infringes a U.S. patent.
The lawsuit was settled based on a settlement agreement signed
between Pfizer and the claimants after the balance sheet date. For
this reason, the last year's reported risk is obsolete.
As a company with global production operations, we are exposed to
risks of possible damage to people, goods and our reputation. Audits,
consulting and training on environmental protection and occupational
health and safety minimize these risks to people and the environ-
ment. In order to ensure the continuity of plant and equipment, we
monitor these risks both at our own sites as well as at suppliers and
contract manufacturers. By adhering to high technical standards, our
rules of conduct and all legal requirements in environmental protection
and occupational health and safety, we ensure the preservation of
goods and assets. We have taken sufficient appropriate accounting
measures for the environmental risks known to us. Nevertheless, we
classify these as a high risk since a critical negative impact on the
financial position cannot be ruled out.
Merck defines organic earnings growth as currency-adjusted and
portfolio-adjusted growth. Accordingly, the effects resulting from the
first-time application of the new accounting standard for leases
(IFRS 16) are reflected in organic earnings growth.
Environmental and safety risks
The sale of the Consumer Health business to Procter & Gamble
(P&G) was completed as of December 1, 2018. The 2018 figures
already reflect this sale. For this reason, the sale has not been
recorded as a portfolio effect in the comparison of the forecast with
the figures for fiscal 2018.
The following report provides a forecast for fiscal 2019 of the devel-
opment of the Merck Group and its three business sectors: Healthcare,
Life Science and Performance Materials.
Report on Expected Developments
Combined Management Report
150
We pursue the opportunities that arise and specify their expected
effects in the forecast development of net sales, EBITDA pre and
business free cash flow. Furthermore, we will actively seek new
opportunities, examine their implementation and drive them forward
where appropriate. If opportunities arise in addition to the forecast
developments, or these occur more quickly than anticipated, this
could have correspondingly positive effects on our net assets, financial
position and results of operations.
In our view, business-related opportunities offer the greatest
potential. An important element here is the continuous expansion of
our businesses in Asia, Latin America, Africa and the Middle East. With
the successful focusing and continued intensification of our research
and development activities, we want to be able to continue to offer
our customers innovative products and help shape markets. Moreover,
we also consolidate our expertise in numerous alliances with industrial
partners as well as various universities and international organizations.
We are making targeted investments in future-oriented companies
and start-ups via our Merck Ventures Investment Fund and our Accel-
erator programs. The topic of innovation is at the forefront of all our
activities. Externally, this is becoming particularly apparent through
our new Innovation Center at Group headquarters in Darmstadt,
which is to develop into a nucleus of creativity at Merck. The activities
listed hold significant opportunities for us in the medium to long term,
beyond the underlying forecast period.
The overall risk of the Group, which is derived from the probability-
weighted aggregation of the identified risks, leads to the assessment
that we are not exposed to risks of a nature to threaten the existence
of the Group as a going concern or for which coverage and financing
of the losses is questionable. We are confident that we will continue
to successfully master the challenges arising from the above risks in
the future as well. Our company also benefits from diversification
through our different products and markets.
Report on Expected Developments
With respect to high and medium risks, certain changes have
occurred, as the assessment of the individual risks has of course
shifted over the fiscal year due to changing external and internal
conditions, while the overall risk profile remained stable. Thanks to
the risk reduction measures taken - such as the consistent imple-
mentation of management action (organizational responsibility and
process improvements), existing insurance coverage and accounting
The most significant individual risks in the businesses have been
named in the report above, with business-related risks being the
most significant alongside legal risks.
Overall view of the risk and
opportunity situation and
management assessment
Irrespective of the fact that acquisitions made in the past have been
successfully completed, the risk of conducting the acquisition and
integration exists for future transactions. This includes, among other
things, the inability to meet sales volume targets and higher integra-
tion costs than expected, as well as the failure to meet synergy goals.
The divestment of companies and businesses can lead to liability vis-
à-vis the buyer or additional expenses, for instance through indemnity
clauses and guarantee commitments or long-term supply contracts.
Through strong due diligence processes and closely managed inte-
gration processes, we seek to reduce the probability of occurrence
of this risk. Therefore, we classify this as a low risk with an unlikely
probability of occurrence and potentially moderate negative effects
on the net assets, financial position and results of operations.
businesses
Combined Management Report
Risks of the divestment, acquisition
and integration of companies and
149
precautions - we take counteraction, in particular against significant
individual risks.
Report on Risks and Opportunities
28.5
20,015.3
28.5
19,939.5
1,462.6
1,762.6
891.6
1.4
591.6
181.3
181.3
688.3
168.0
397.2
3,813.7
701.6
1.4
168.0
B. Provisions
3,813.7
701.6
60.3
60.3
187.1
187.1
5,327.9
5,327.9
688.3
Provisions for pensions and other post-employment benefits
200.4
110.7
Other provisions
1,112.1
397.2
18,524.2
General partner's equity
191.8
821.6
17,510.7
Combined Management Report
Additional Information on Merck KGaA in accordance with the German Commercial Code (HGB)
157
in accordance with the sector-specific ERP introduction at an individual
time to the OpCo in question in a targeted manner. On the basis of
the operating lease contract, Merck KGaA will temporarily continue
to operate the spun-off business as a leaseholder in its own name
and for its own account. Once the relevant ERP systems have been
introduced for the respective OpCo, the business lease with this OpCo
will be terminated and the business previously leased out will pass
to the OpCo.
The aforementioned spin-off and business leasing contracts form
part of an overall entrepreneurial concept. They were submitted to
the General Meeting of Merck KGaA for approval on April 27, 2018
(2018 Annual General Meeting) as a coherent restructuring measure
and approved by it. The gradual implementation of the measures is
due to be completed in 2020. In 2018, the Healthcare OpCo changed
its legal form to that of a German corporation with general partners
("Kommanditgesellschaft auf Aktien") and has since been trading
under the name of Merck Healthcare KGaA, Darmstadt.
The table below shows the balance sheet of Merck KGaA after the
operating spin-off, holding company spin-off and temporary lease-
back as of 0:00 hours on January 1, 2018. The impact in fiscal 2018
of the spin-offs was mainly lower depreciation, amortization and
write-downs of fixed assets and lower pension expenses. On the
other hand, business lease expenses and the passing-on of costs for
personnel-related provisions led to an increase in other operating
expenses.
€ million
ASSETS
946.1
Financial assets
B. Current assets
Inventories
18,148.4
Trade accounts receivable
Cash and cash equivalents
C. Prepaid expenses
Total ASSETS
EQUITY AND LIABILITIES
A. Net equity
Subscribed capital
Capital reserves
Retained earnings
Profit carried forward E. Merck KG
Net retained profit: shareholders
Merck KGaA
Dec. 31, 2017
Merck KGaA
Jan. 1, 2018¹
489.7
1,173.0
16,485.7
Other receivables and other assets
A. Fixed assets
Intangible assets
Tangible assets
Additional Information on Merck KGaA in accordance with the German Commercial Code (HGB)
C. Liabilities
The share of sales with other Group companies (Group sales)
amounted to 93.6% in 2018 (2017: 93.6%).
Other sales mainly included intragroup cross-charging for IT services,
rent and other administrative services.
-0.5%
-22
4,807
35.8%
€ million
82
309
4,785
-0.9%
-13
1,399
1,386
0.4%
228
3
Group sales
At 86.7% (2017: 90.3%), the share of exports in 2018 was below
the previous year's level.
0.3%
1
307
4,807
4,785
308
-23
Sales to third parties
Total
4,500
€ million
2017
2018
Change
Outside Germany
Germany
Total
€ million
4,477
1,056.8
777
in %
-3.9%
17.9
19,939.5
17.9
1 After operating spin-off, holding company spin-off and temporary leaseback.
Total LIABILITIES
D. Deferred income
20,015.3
13,612.8
292.1
11,489.1
13,281.3
1,500.0
1,500.0
Other liabilities
Trade accounts payable
Financial liabilities
292.1
11,820.7
780
158
Business development
-94
2,404
2,310
€ million
2017
2018
Combined Management Report
Change
Other sales
Performance Materials
Life Science
Healthcare
€ million
Merck KGaA's net sales decreased slightly in 2018. The decline of
€ 22 million resulted primarily from the Healthcare and Performance
Materials business sectors, offset mainly by an increase in other
sales.
Total
1,312.5
in %
-0.5%
Trade accounts payable
17,532
16,486
1,046
6.3%
2,336
1,763
-23.4%
573
725
688
37
5.3%
315
181
32.5%
-274
1,173
899
The German Corporate Governance Code is geared toward the condi-
tions found in a German stock corporation ("Aktiengesellschaft" or
"AG") and does not take into consideration the special characteristics
of a corporation with general partners ("Kommanditgesellschaft auf
Aktien" or "KGaA") such as Merck KGaA. Given the structural differ-
ences between an AG and a KGaA, several recommendations of the
German Corporate Governance Code are to be applied to a KGaA
only in a modified form. Major differences between the two legal
forms exist in terms of liability and management. While, in the case
of an AG, only the AG is liable as a legal entity, the general partners
of a KGaA also have unlimited personal liability for the company's
obligations (section 278 (1) of the German Stock Corporation Act -
"AktG"). At Merck KGaA, this pertains to both E. Merck KG - which
pursuant to Article 8 (5) of the Articles of Association is excluded
from management and representation - as well as to the managing
general partners, who together make up the Executive Board of
Merck KGaA. The members of the Executive Board of Merck KGaA
are therefore subject to unlimited personal liability. Unlike an AG,
their executive authority is not conferred by the Supervisory Board,
but rather by their status as general partners. Consequently, in addition
to other responsibilities typical of the supervisory board of an AG
(see description of the procedures of the Supervisory Board on pages
186 et seq.), the supervisory board of a KGaA does not have the
authority to appoint the management board, draw up management
board contracts or specify compensation of the management board.
This legal form also involves special features with regard to the
General Meeting. For example, in a KGaA, many of the resolutions
made require the consent of the general partners (section 285 (2)
Joint report of the Executive Board and
the Supervisory Board according to
section 3.10 of the German Corporate
Governance Code including the
Declaration of Conformity
The Statement on Corporate Governance contains the Declaration
of Conformity, relevant information on practices within the com-
pany, a description of the procedures of the corporate bodies, as
well as targets for the percentage of positions held by women as
well as the diversity policy.
Statement on Corporate Governance
Statement on Corporate Governance
Dec. 31, 2018
Dec. 31, 2017
€ million
18,670
239
18,148
490
522
in %
2.9%
-251
-51.2%
134
AktG), including in particular the adoption of the annual financial
statements (section 286 (1) AktG).
73.7%
892
Net equity
Provisions
Provisions for pensions and other post-employment benefits
Other provisions
Liabilities
Financial liabilities
€ million
Corporate Governance
Deferred income
Change
Dec. 31, 2018
Dec. 31, 2017
€ million
5,329
Other liabilities
EQUITY AND LIABILITIES
Additional Information on Merck KGaA in accordance with the German Commercial Code (HGB)
Combined Management Report
401
45.0%
3
1
2
142.9%
34
28
6
21.1%
21,040
19,940
1,100
5.5%
160
1,293
Merck KGaA applies the German Corporate Governance Code
analogously where these regulations are compatible with the legal
form of a KGaA. In order to enable shareholders to compare the
situation at other companies more easily, to a broad extent we base
corporate governance on the conduct recommendations made by the
Government Commission of the German Corporate Governance Code
and forego having our own, equally permissible, code. The recommen-
dations of the Code in the version dated February 7, 2017, the intent
and meaning of which are applied, were complied with in the period
between the last Declaration of Conformity issued on February 28,
2018 with one exception.
For a clearer understanding, the following gives a general expla-
nation of the application of German company law at Merck KGaA
with additional references to the General Meeting and shareholder
rights.
MERCK KGAA
-351
19.5%
Investment income/Write-downs of financial assets
1,234
847
387
-1,801
45.7%
-262
-201
-61
30.3%
Profit before profit transfers and taxes
584
Financial result
-2,152
Other operating expenses
-38.8%
- 18.9%
Cost of materials
-1,776
-1,505
-271
18.0%
Personnel expenses
−1,305
-1,258
-47
3.7%
Depreciation, amortization and write-downs
-112
-183
71
917
-334
-36.4%
Profit transfers
The Financial result deteriorated due to lower fair values of plan
assets.
ASSETS
€ million
Fixed assets
Intangible assets
Tangible assets
Financial assets
Current assets
Inventories
Trade accounts receivable
Other receivables and other assets
Cash and cash equivalents
Prepaid expenses
Change
Based on the provisions of the German Stock Corporation Act,
the Articles of Association of Merck KGaA and the rules of procedure
of the various committees, Merck KGaA has a set of rules for the
Executive Board and its supervision that meet the requirements of
the German Corporate Governance Code. The investors, who bear
the entrepreneurial risk, are protected as provided for by the German
Corporate Governance Code.
The general partner E. Merck KG holds around 70% of the total capital
of Merck KGaA (equity interest); the shareholders hold the remainder,
which is divided into shares (share capital). E. Merck KG is excluded
from the management of business activities. The general partners with
no equity interest (Executive Board) manage the business activities.
Nevertheless, due to its substantial capital investment and unlimited
personal liability, E. Merck KG has a strong interest in the businesses
of Merck KGaA operating efficiently in compliance with procedures.
Merck KGaA's participation in the profit/loss of E. Merck KG in accor-
dance with Articles 26 et seq. of the Articles of Association further
harmonizes the interests of the shareholders and of E. Merck KG.
E. Merck KG appoints and dismisses the Executive Board. In addition,
E. Merck KG has created bodies - complementing the expertise and
activities of the Supervisory Board - to monitor and advise the Exec-
utive Board. This task applies primarily to the Board of Partners of
E. Merck KG.
Investment income rose essentially on account of higher profit
transfers by OpCo companies; see section "Effects of material com-
pany agreements on the net assets, financial position and results of
operations". However, the reduced dividend payment by the Merck
Holding GmbH had an offsetting effect.
5,328
The increase in other operating expenses was due to increased
consulting costs and higher expenses in connection with the business.
lease as well as an increase in the passing-on of costs for personnel-
related provisions; see section "Effects of material company agree-
ments on the net assets, financial position and results of operations".
The rise in personnel expenses was due to higher wages and
salaries as a result of the collectively agreed pay increase and the
higher number of employees.
-454
-553
99
-17.9%
Taxes
32
-193
225
MONITORING
162
171
-9
-116.3%
-5.3%
The decline in other income was mainly the result of lower gains
from the release of provisions.
The increase in cost of materials was due to a higher amount of
intragroup cross-charging and increased sales volume with declining
prices in some cases; the cost of materials in relation to sales amounted
to 37.1% (2017: 31.3%).
Depreciation, amortization and write-downs fell by 38.8% as
a result of the decline in fixed assets following the spin-off.
1
1,119
1,312
574
79
128
10,983
10,473
Risks and opportunities
590
Merck KGaA is largely subject to the same opportunities and risks
as the Merck Group. More information can be found in the Report
on Risks and Opportunities.
DEVIATIONS OF ACTUAL BUSINESS DEVELOPMENT IN
2018 FROM THE PREVIOUSLY REPORTED GUIDANCE:
In the 2017 combined management report, net sales were forecast to
increase slightly in the Life Science and Healthcare business sectors in
fiscal 2018. A slight drop in net sales was forecast for the Performance
Materials business sector.
The sales decline in the Healthcare business sector (-3.9%)
resulted primarily from lower license income. Sales of products were
slightly above the previous year's level. Sales growth was generated
in the Oncology (+2.1%) and Fertility (+11.9%) business units. This
sales growth was offset by declining sales in the other business units
(Neurology & Immunology).
In 2018, sales in the Life Science business sector were flat over-
all. Declining sales in the Research Solutions (-3.0%) and Applied
Solutions (-5.0%) business units were offset by rising sales in Pro-
cess Solutions (+4.4%).
Continued high competitive pressure in the Display Solutions busi-
ness unit (-0.8%) led to a slight fall in Performance Materials net
sales (-0.9%). The Surface Solutions business unit additionally
recorded a slight drop in sales (-2.0%).
Net income was down compared to the previous year (-5.3%).
Higher other operating expenses (19.5%) contrast, in particular, with
improved investment income (45.7%) and a reduction in tax expenses.
Investment income rose primarily due to profit transfers of the newly
established OpCo companies. However, the reduced dividend pay-
ment by the Merck Holding GmbH had an offsetting effect.
Forecast for Merck KGaA
648
671
2,515
Average number of employees during the year
Production
Administration
Research
Logistics
Sales and marketing
Other
Total
2018
2017
3,756
3,536
3,213
3,072
2,674
162
Combined Management Report
Additional Information on Merck KGaA in accordance with the German Commercial Code (HGB)
Forecast 2019
Corporate Bodies of Merck KGaA
Total capital of Merck KGaA
565,211,241.95 €
Executive Board of Merck KGaA
General partners with no equity interest
Shareholders hold
the share capital
168,014,927.60 €
The general partner
E. Merck KG holds
the equity interest
397,196,314.35 €
General Meeting
Supervisory Board
Board of Partners of
E. Merck KG
MONITORING
Further information can be found under "Merck KGaA" on page 166.
Capital Structure and
PERSONNEL
165
Corporate Governance
For fiscal 2019, a decline in net sales is expected overall due to the
planned termination of the business leasing contract with Merck
Healthcare KGaA and the resulting transfer of the Healthcare busi-
ness sector's operating business.
A slight decline in net sales is forecast for the Performance
Materials business sector. In the Life Science business sector, we
expect a slight increase in net sales for fiscal 2019.
As in 2017, the financing costs of the Sigma-Aldrich acquisition con-
tinue to adversely affect net income. Nevertheless, positive invest-
ment income and dividend payments from subsidiaries will lead again
to a slight increase in net income.
The Merck Financial Services GmbH, Darmstadt, will provide the
company with sufficient financial resources and thus ensure liquidity.
Currently no risks can be identified that may jeopardize the con-
tinued existence of the company.
CORPORATE GOVERNANCE
163-196
CORPORATE GOVERNANCE
165
Capital Structure and Corporate Bodies of Merck KGaA
166
Statement on Corporate Governance
193
Report of the Supervisory Board
195
Objectives of the Supervisory Board with respect to Its
Composition and Profile of Skills and Expertise
Capital Structure and Corporate Bodies of Merck KGaA
-40
a dividend of € 1.25 per share.
Dividend
154
1,141
52.7%
9.9%
17
18
21,040
19,940
11,489
-1
1,100
The net assets and financial position of Merck KGaA changed only
slightly in comparison with the previous year. With a 5.5% increase
in total assets, the equity ratio amounted to 25.3% (2017: 26.7%).
The operating spin-off led to a decline in intangible and tangible
assets, while financial assets increased; see section "Effects of material
company agreements on the net assets, financial position and results
of operations".
The increase in current assets (€ + 573 million) was mainly attri-
butable to higher receivables from affiliates for profit transfers and
other group cross-charging.
The drop in other provisions (€ - 280 million) resulted primarily
from the operating spin-off; see section "Effects of material company
agreements on the net assets, financial position and results of oper-
ations".
The rise in other liabilities resulted primarily from the clearing
account with the Merck Financial Services GmbH, Darmstadt.
Research and development
In 2018, research and development spending on projects of
Merck KGaA and other Group companies totaled € 923 million (2017:
€ 685 million). A large portion was also incurred by companies outside
the Merck Group. In Darmstadt, Healthcare mainly focuses on research
in the areas of oncology as well as autoimmune and inflammatory
diseases. The rise of € 196 million in R&D spending by the Healthcare
business sector was reflected in the increase of € 238 million in over-
all R&D spending (34.7%). At the same time, the Healthcare business
sector accounted for 65.4% (2017: 59.6%) and thus the largest
share of research and development spending. The Performance Mate-
rials business sector focuses its research activities on developing new
and improved basic materials and mixtures for LC displays, for inno-
vative OLED applications and for materials for the production of
integrated circuits. To strengthen the Pigments business, new effect
pigments for the automotive, cosmetics and printing ink sectors have
been developed. In the Life Science business sector, research activities
focused in particular on technologies for laboratory and life science
applications, and the promotion of new developments. Improved test
kits, chromatography methods, substrates for separating active sub-
stances, and innovations continue to be in the focus in the fields of
microbiology and hygiene monitoring.
-6.1%
5.5%
12,629
292
1,500
-193
288
200
87
832
1,112
-280
in %
0.0%
-14.7%
43.2%
-25.2%
14,575
13,281
1,295
9.8%
1,500
446
RESEARCH AND DEVELOPMENT COSTS
Change
€ million
2018
13
22
-9
-40.9%
923
685
238
34.7%
Combined Management Report
Additional Information on Merck KGaA in accordance with the German Commercial Code (HGB)
161
The ratio of research and development spending to sales was 19.3%
(2017: 14.3%). Overall, the average number of employees working
in research and development was 2,674. Merck KGaA is one of the
main research sites of the Merck Group, accounting for a share of
41.6% (2017: 32.0%) of total Group research and development
spending.
Personnel
As of December 31, 2018, Merck KGaA had 11,133 employees,
representing an increase over the previous year (2017: 10,677).
Average number of employees by functional area:
Other R&D spending that cannot be allocated to individual business sectors
Total
For 2018, we are proposing to the General Meeting the payment of
18.2%
220
2017
€ million
in %
Healthcare
604
408
196
48.0%
Life Science
46
35
11
31.4%
Performance Materials
260
40
212
Profit after profit transfers and taxes
in %
-0.5%
172
-22
-0.5%
Change
2018
4,148
2017
4,341
€ million
637
4,785
467
4,807
-193
170
-22
in %
-4.4%
36.5%
-0.5%
The decline in net sales of the Healthcare business sector was attri-
butable to a one-time payment for future license payments in the
previous year, which had increased sales. By contrast, net sales of
products rose slightly in 2018. Business with cardiovascular medica-
tions (+5.1%), the oncology drug Erbitux® (+1.0%) and with thyroid
medications (+3.8%) showed a moderate increase. All told, the busi-
ness sector recorded declining sales in particular in the Middle East
and Africa region, while sales rose especially in the Asia-Pacific region.
In the Performance Materials business sector, the previous year's
sales level was not reached by the Display Solutions business unit
(-0.8%). In addition, the Surface Solutions business unit recorded
a slight drop in sales (-2.0%) mainly affecting sales in the Middle
East and Africa region. From a regional perspective, sales in Asia-
Pacific were flat, while Europe recorded moderate losses and North
America generated sales growth.
166
Additional Information on Merck KGaA in accordance with the German Commercial Code (HGB)
-22
Combined Management Report
4,807
4,785
€ million
2018
Other income
2017
€ million
Change
RESULTS OF OPERATIONS
business unit (+4.4%). Sales growth was generated in the North
America and Asia-Pacific regions. By contrast, a slight fall was
recorded in particular in the Europe and Middle East and Africa
regions.
Net sales of the Life Science business sector were slightly above the
previous year's figure. The Research Solutions (-3.0%) and Applied
Solutions (-5.0%) business units showed a slight decline in sales,
which was offset by the increase in net sales in the Process Solutions
159
Sales
Member of the Executive Board
Corporate Governance
Statement on Corporate Governance
The contribution amounts or pensionable compensation and the per-
centage obligation as well as the pension provisions and service costs
are listed in the following tables:
174
Defined-contribution obligation
€ thousand
Udit Batra
Contribution
level
Belén Garijo²
Marcus Kuhnert³
Total
IFRS
Service cost of pension
1 For accounting purposes, this corresponds to a defined-benefit obligation within the meaning of IAS 19.8.
obligations earned in the
current year
Present value of the
defined-contribution pension
obligation as of Dec. 31
2017
Kai Beckmann¹
Moreover, surviving dependents of the two Executive Board
members receive a surviving dependents' pension. For spouses,
this amounts to 60% of the pension entitlement. Dependent children
are entitled to either a half-orphan's or an orphan's pension maximally
until the age of 25.
8,000
Effective January 1, 2017, for the Executive Board members Kai
Beckmann, Belén Garijo and Marcus Kuhnert, the individual contractual
pension agreements were changed from defined-benefit to defined-
contribution pension obligations, maintaining the direct commitment
modality¹. A defined-contribution pension agreement is also in place
with Udit Batra. Within the scope of these defined-contribution pension
obligations, every year an amount of €400,000 is paid into a benefit
account and interest is paid on this at standard market interest rates.
Once the respective Executive Board members reach the contractually
agreed age limit and are no longer employed by E. Merck KG, the
amount in the benefit account is paid out either in ten annual install-
ments or as a one-time payment. The balance in the benefit account
is disbursed as a one-time payment, possibly topped up by additional
contributions (maximally ten contributions, up to the age of 60) in
the event of permanent disability, or in the event of death to surviving
dependents. The vested amount from the former defined-benefit
pension agreement was credited to the benefit account when the
changeover took place.
8,000
1,000
3,120
3,575
8,000
800
2,860
3,300
Walter Galinat received a performance-related pension entitlement
until his departure on September 30, 2018. Stefan Oschmann con-
tinues to receive such a pension provision. The old-age pension is
determined in accordance with a certain percentage of pensionable
compensation. The percentages can be found in the table below. The
individual contractual pension obligations grant Stefan Oschmann
and Walter Galinat entitlement to a lifelong old-age pension or
surviving dependents' pension in the event of reaching the individ-
ual contractually agreed age limit, permanent disability, or death.
As an alternative to an old-age pension, the promised pension may
be paid out as a one-time amount calculated on the basis of actu-
arial principles once the age limit stipulated in the relevant contract
has been reached.
8,000
3,900
4,675
2018
900
2,860
3,300
8,000
PENSION ENTITLEMENTS
1,100
2017
396
400
12,987
¹For 2017, in addition to the current service cost of € 396 thousand for Kai Beckmann occurred a past service revenue of € 2,424 thousand (total service revenue: € 2,028 thousand).
2 For 2017, in addition to the current service cost of € 398 thousand for Belén Garijo occurred a past service cost of € 2,184 thousand (total service cost: € 2,582 thousand).
3 For 2017, in addition to the current service cost of € 426 thousand for Marcus Kuhnert occurred a past service cost of € 1,178 thousand (total service cost: € 1,604 thousand).
Defined-benefit obligations
€ thousand
Member of the Executive Board
IFRS
Pensionable Percentage
compensation entitlement
Service cost of pension
obligations earned in the
current year
2017
11,284
Present value of the
defined-benefit pension
obligation as of Dec. 31
2017
2018
Stefan Oschmann¹
750
64
Walter Galinat (left on: September 30, 2018)
490
65
2018
1,610
1,599
1,600
379
400
633
990
400
4,263
395
3,977
4,402
400
398
394
4,162
4,637
400
426
421
2,512
2,958
2018
3,640
Maximum
9,800
b) EBITDA pre margin, as a proportion of a defined target value
with a weighting of 25%, and
c) the organic sales growth of the Merck Group as a proportion
of a defined target value with a weighting of 25%.
172
Corporate Governance
Statement on Corporate Governance
FY 2017
FY 2018
FY 2019
a) the performance of the Merck share price compared with the
performance of the DAX® with a weighting of 50%,
FY 2020
Reference
Merck share
price at the
beginning
Potential
number of
MSUS for
the grant
Performance cycle
Performance
Grant in €
that are actually allocated to the Executive Board members after the
performance cycle has expired depends on the development of three
weighted key performance indicators over the three-year perfor-
mance cycle:
At the beginning of the performance cycle, for each Executive Board
member the Personnel Committee sets an individual grant in euros.
This grant is then divided by the definitive reference share price at
the beginning of the performance cycle, resulting in the number of
MSUS they could be eligible to receive. The final number of MSUS
The Long-Term Incentive Plan is based on a three-year performance,
future-oriented performance cycle. As part of the Long-Term Incentive
Plan, the members of the Executive Board are eligible to receive a
certain number of virtual shares - Merck Share Units (MSUS). The
number of MSUS is calculated as follows:
Extraordinary contributions to the aspirations and targets of the
Merck Group's stakeholders (for example, employee satisfaction,
customer satisfaction, Corporate Social Responsibility, implemen-
tation of diversity requirements).
Adjustment criteria for lowering profit sharing could include the
following:
• Violations of internal rules and guidelines (for example, the Merck
Code of Conduct), legislation or other binding external requirements
in the area of responsibility;
•
Significant breaches of duty of care within the meaning of sec-
tion 93 AktG or other grossly non-compliant or unethical behavior;
• Behaviors or actions that are contradictory to our company values;
•
Failure to implement particularly important projects or to reach
other exceptionally important targets in the area of responsibility;
• Clear failure to achieve targets for relevant key performance indi-
cators in the area of responsibility.
Merck Long-Term Incentive Plan
MERCK LONG-TERM INCENTIVE PLAN (LTIP)
Key performance indicators
• Share price performance relative to the DAX® (50% weighting)
Cycle
Limit
Reference price (share price
for conversion into numbers
or for payment)
• EBITDA pre margin (25% weighting)
• Organic sales growth (25% weighting)
Three years
Absolute capped amount totaling 250% of the individual grant
Average closing price of Merck shares in XetraⓇ trading during the last 60 trading days prior
to the beginning or the end of the performance cycle
of the Merck
share price
vs. the DAX®
EBITDA
pre margin
Organic
sales
growth
Number
of MSUS
actually
achieved
0%-150%
€ thousand
Member of the Executive Board
Stefan Oschmann
Udit Batra
Kai Beckmann
Walter Galinat (left on: September 30, 2018)
Belén Garijo
Marcus Kuhnert
Maximum limit
Fixed
compensation
Maximum profit
sharing limit
Merck Long-Term
Incentive Plan
Total
limit overall
compensation
1,300
4,810
5,638
Compared with the previous year, one-time payments were abol-
ished as part of the implementation of the revised compensation
system and the maximum cap of the profit sharing was adjusted by
the multiplication factor for individual benefits. The maximum limits
are presented in the following table.
1,000
Compensation is capped with respect to its performance-related com-
pensation elements of profit sharing and Merck Long-Term Incentive
Plan, as well as having an overall cap.
than on expiration of four years after having joined the Executive
Board or after the introduction of the rule. The Share Ownership
Guideline promotes even stronger alignment between the interests
of the Executive Board members and those of our shareholders and it
additionally raises the entrepreneurial responsibility of the Executive
Board members. Moreover, the introduction of the Share Ownership
Guideline takes into account the widespread practice of share own-
ership among management and executive board members in inter-
national peer comparisons.
x
Weighting: 50%
Weighting: 25%
Weighting: 25%
Reference
Merck share
price at
the end
0%-200%
Amount paid
out in € (0%-
250% of the
grant in €)
The Merck Long-Term Incentive Plan thus links two key performance
indicators derived from the strategy with an external, relative key
performance indicator. On the one hand, this creates an incentive to
achieve strategic objectives. On the other hand, the strong share
price orientation takes into account the company's long-term devel-
opment prospects and the expectations of our shareholders. To pre-
vent distortions as a result of exceptional factors as well as to directly
reflect the performance of the Executive Board members, the EBITDA
pre margin is used.
Depending on the performance of the key performance indicators,
after the three-year performance cycle between 0% and 150% of
the provisionally promised MSUs are finally allocated. The value of
these MSUS is paid out to the Executive Board in the year after the
three-year performance cycle has ended. For this, the final allocated
number of MSUS is multiplied by the definitive reference share price
at the end of the performance cycle. The maximum increase in the
share price is limited to 200% of the reference price at the beginning
of the performance cycle, thus limiting participation in external
effects that contribute to share price increases. Apart from setting a
limit on the final number of allocated MSUS and on the applicable
share price increase, the overall Merck Long-Term Incentive Plan
payment is limited to 250% of the individual grant. If targets are
clearly missed, it is also possible that absolutely no payment is made
from the Merck Long-Term Incentive Plan (0%).
Clawback provision
Through their status as personally liable general partners of
Merck KGaA and E. Merck KG, the Executive Board members bear a
very unique entrepreneurial responsibility. This is also reflected by
the penalty criteria set forth in profit sharing and by the German
statutory regulations on liability for damages stipulated in section 93
of the German Stock Corporation Act.
In order to take even greater account of the prominent position of
entrepreneurial responsibility in compensation, a clawback provision
was included in the Long-Term Incentive Plan, effective January 1,
2018, allowing amounts allocated from the Long-Term Incentive Plan
but not yet paid out to be retained. Cases in which the clawback
provision may be applied include violations of internal rules and
regulations (Merck Code of Conduct), legislation, other binding exter-
nal requirements in the area of responsibility, significant breaches of
duty of care within the meaning of section 93 AktG, other grossly
non-compliant or unethical behavior or actions that are contradictory
to our company values.
To further increase the transparency of the Executive Board com-
pensation system, the performance corridor for the key performance
indicators used in the Merck Long-Term Incentive Plan will be subse-
quently disclosed. However, the company will continue to refrain from
publishing this performance corridor in advance as this could permit
market-related and competitively relevant conclusions to be drawn
about strategic objectives.
Corporate Governance
Statement on Corporate Governance
173
Share Ownership Guideline
A Share Ownership Guideline was introduced in 2017. This obligates
the Executive Board members, for the duration of their employment
relationship, to permanently hold Merck shares in an amount equal
to 100% of their annual gross fixed compensation. Owing to his
position as Chairman of the Executive Board, Stefan Oschmann is
obligated to hold a higher amount, or at least 200% of his annual
gross fixed compensation, in Merck shares. The duty to provide
evidence of the complete number of shares must be met no later
OVERALL COMPENSATION LIMIT
1,240
7,025
17,980
1,369
166
PROFIT SHARING
Key perfor-
mance indicator
Period
Limit
Three-year average of the profit after tax of the
E. Merck Group
Three years
Individual absolute capped amount
As part of profit sharing, at the end of a fiscal year the members of
the Executive Board receive an individual per mille rate of the three-
year average of profit after tax of the E. Merck Group. The current
and the two preceding years are included in the calculation. The use
of profit after tax as the key performance indicator, which also serves
Profit sharing
as the basis for dividend payments, ensures very close alignment
with the shareholder interests. The amount of the individual per mille
rate is staggered at intervals. Through staggering, the achievement
of an average profit after tax of more than € 1 billion is more strongly
incentivized than amounts below € 1 billion. However, insofar as the
average profit after tax is more than € 1.5 billion, the amount greater
than € 1.5 billion is not taken into account when determining the
profit-sharing payment. To appropriately take into account the indi-
vidual performance of the Executive Board members, since fiscal
2017 the Personnel Committee has been able to adjust the payment
by applying a factor ranging from 0.7 to 1.3. The performance factor
makes it possible to recognize superb performance of a member of
the Executive Board by multiplying profit sharing by a value greater
than 1.0 up to 1.3. Similarly, multiplying by a value less than 1 down
to 0.7 can lower profit sharing if the case calls for it. The maximum
profit-sharing payment is capped individually.
Adjustment
factor for
Three-year average of the profit after tax
X
X
individual
of the E. Merck Group
Payout 2018
(€)
Individual
rate in %
Statement on Corporate Governance
Corporate Governance
170
• Performance Share Plan based on virtual shares (Merck Share Units)
•
Key performance indicators: share price performance relative to the DAX®
(50%), EBITDA pre margin (25%), organic sales growth (25%)
• Absolute capped amount totaling 250% of the individual grant
Profit sharing
•
Key performance indicator: Three-year average of the profit after tax of the
E. Merck Group
• Consideration of individual performance via the performance factor in a range
from 0.7 to 1.3
• Individual absolute capped amount
Performance-
independent
Fixed compensation
¹Excluding additional benefits and company pension.
PERFORMANCE-INDEPENDENT COMPENSATION AND
ADDITIONAL BENEFITS
Fixed compensation
The fixed compensation received by the members of the Executive
Board comprises fixed and non-performance related amounts that
are paid in the form of 12 equivalent monthly installments.
Additional benefits
In addition, the members of the Executive Board receive non-
performance related additional benefits. These consist mainly of
contributions to insurance policies, personal security expenses and
a company car, which they may use privately.
PERFORMANCE-RELATED COMPENSATION
Performance-related compensation comprises profit sharing as well
as the Merck Long-Term Incentive Plan. Both performance-related
compensation components are based on multi-year steering param-
eters. The regulatory requirements of the German Stock Corporation
Act and the German Corporate Governance Code are taken into
account, and particular recognition is given for sustainable corporate
development.
Profit after tax
Merck Long-Term Incentive Plan
Profit after tax
+
Many important gains in the pharmaceutical pipeline (BavencioⓇ,
Evobrutinib, TGF-ẞ trap).
Approval and market introduction of Cladribin/MavencladⓇ in the
European Union.
Today the Merck pipeline is seen by external experts as having very
high value, and this also significantly eases the task of winning
top-level talent for Merck.
Statement on Corporate Governance
Corporate Governance
Extraordinary performance leading to a clear overachievement of
targets for relevant key performance indicators in the area of
responsibility;
Extraordinary performance in the execution of especially important
projects or the achievement of other exceptionally important
objectives in the area of responsibility;
Extraordinary success in the sustainable strategic, technical, product-
related or structural further development or reorganization of the
Merck Group;
•
Extraordinary success in connection with M&A activities of the
Merck Group;
•
Adjustment criteria for increasing profit sharing could include the
following:
Moreover, the Personnel Committee resolved to define criteria
applicable to the adjustment of profit sharing by applying the factor in
a range of between 0.7 and 1.3. Insofar as the adjustment increases
or decreases the profit sharing of a member of the Executive Board,
this is to be published in the Compensation Report.
Effective fiscal year 2018, the Personnel Committee abolished one-time
payments to members of the Executive Board as part of performance-
related compensation. This adjustment measure serves primarily to
take our international shareholder structure into account.
performance
0.7-1.3
3
FY 2018
FY 2017
•
.
• Success with the multi-year repositioning of the R&D area and
significant productivity increases in pharmaceutical research.
Extraordinary performance in the execution of especially important
projects or the achievement of other exceptionally important
objectives in the area of responsibility; Belén Garijo fulfilled this
positive criterion in 2018 due to the following achievements.
+
FY 2016
Marcus Kuhnert
Average profit-
sharing rate in
per mille in 2018
Performance
factor for
individual perfor-
mance 2018
1.49
1
1.13
1
0.97
1
0.89
1
1.57
1.3
0.89
1
The amount of profit-sharing for Belén Garijo was increased by a
factor of 1.3. The following positive criterion was used to justify the
increase in profit participation:
Profit after tax
compensation
Performance-
related
COMPENSATION ELEMENTS AND COMPENSATION STRUCTURE1
Key performance indicator
(€ million)
Profit after tax of the E. Merck Group
2015
1,066
2016
1,559
2017
2018
2,549
As part of profit sharing, at the end of a fiscal year the members of the
Executive Board receive an individual per mille rate of the three-year
average of profit after tax of the E. Merck Group. The current and the
two preceding years are relevant here.
3,324
1,724
Three-year average profit after tax of the E. Merck Group
(2016-2018)
2,477
The amount of the individual per mille profit-sharing rates is stag-
gered at intervals. This staggering incentivizes the achievement of
an average profit after tax of more than € 1 billion more strongly
than amounts below € 1 billion. However, insofar as the average
profit after tax is more than € 1.5 billion, the amount greater than
€ 1.5 billion is not taken into account when determining the profit-
sharing payment. The average profit-sharing rates in per mille for
the members of the Executive Board in 2018 were as follows:
Member of the Executive Board
Stefan Oschmann
Udit Batra
Three-year average profit after tax of the E. Merck Group
(2015-2017)
Profit sharing
Statement on Corporate Governance
Corporate Governance
9,802
10,955
6,958
1,535
16,760
1The percentage entitlement increases until retirement by two percentage points per year of service up to 70%.
Corporate Governance
Statement on Corporate Governance
175
BENEFITS IN THE EVENT OF TERMINATION OF DUTIES AS
AN EXECUTIVE BOARD MEMBER
In the event of the early termination of the employment relationship,
without notice for good cause, the employment contracts of the
Executive Board members stipulate a cap on severance pay in
accordance with the recommendations of the German Corporate
Governance Code. Pursuant to this, payments in connection with the
termination of an Executive Board member's duties shall not exceed
twice the annual total compensation or constitute compensation for
more than the remaining term of the employment contract (sever-
ance cap). If an Executive Board member's duties prematurely end
due to the termination of the employment contract either by the com-
pany or the Executive Board member before the performance cycle
of an open tranche in the Merck Long-Term Incentive Plan expires,
the obligations resulting from the plan are no longer applicable.
The employment contracts of Stefan Oschmann, Kai Beckmann
and Udit Batra each contain a post-contractual non-competition
clause. During a two-year period, an amount totaling 50% of the
contractual average benefits received by the Executive Board member
in question within the last twelve months prior to their departure is
provided as compensation for each year of the period of the non-com-
petition clause. During the period of the non-competition clause,
other employment income and pension payments will be credited
against this compensation. Within certain time limits, E. Merck KG
has the possibility to dispense with adherence to the non-competition
clause with the consequence that the obligation to make the com-
pensation payments shall no longer exist. The contracts of the Exec-
utive Board members further provide for the continued payment of
fixed compensation to surviving dependents for a limited period of
time in the event of death. Above and beyond existing pension obli-
gations, no further obligations exist in the event of the termination
of the contractual relationships of the Executive Board members.
PAYMENTS TO FORMER EXECUTIVE BOARD MEMBERS AND
THEIR SURVIVING DEPENDENTS
MISCELLANEOUS
The total compensation of the Executive Board of Merck KGaA
includes both the compensation received from E. Merck KG as well
as possibly also from subsidiaries consolidated in the Group financial
statements. Should members of the Executive Board be held liable
for financial losses while executing their duties, under certain circum-
stances this liability risk is covered by a D&O insurance policy from
Merck KGaA. The D&O insurance policy has a deductible in accor-
dance with the legal requirements and the recommendations of the
German Corporate Governance Code.
PERFORMANCE-RELATED COMPENSATION IN 2018
The compensation system for our Executive Board is geared to suit-
ably rewarding the performance of Executive Board members in
terms of sustainable corporate development and the creation of
shareholder value, whereas the failure to meet targets leads to a
noticeable decrease in performance-related compensation. In response
to the suggestions from our shareholders and to further increase the
transparency of the Executive Board compensation system, the follow-
ing tables present the average individual profit-sharing rates and the
performance corridors for the key performance indicators used in the
Merck Long-Term Incentive Plan.
LOANS AND ADVANCES
The members of the Executive Board did not receive any advances
or loans in fiscal 2018.
176
Kai Beckmann
Walter Galinat (left on: September 30, 2018)
Belén Garijo
Corporate Governance
The following principles are followed or taken into account when
it comes to the specific structure of the compensation, the setting of
individual compensation, the selection of the key performance indi-
cators and the structure of payout and allocation terms:
REGULATORY REQUIREMENTS AND PRINCIPLES OF
GOOD CORPORATE GOVERNANCE
The structure of the compensation system and the assessment of
individual compensation are guided by the German Stock Corpo-
ration Act (AktG) and the German Corporate Governance Code.
Within the regulatory framework conditions, the objective is to
offer the Executive Board members a competitive compensation
package in line with market practice.
LONG-TERM GROUP STRATEGY
The execution of the long-term Group strategy is promoted through
the selection of appropriate, ambitious key performance indicators
for performance-related compensation. Against this background, our
performance-related compensation components (profit sharing and
Merck Long-Term Incentive Plan) orient towards the key performance
indicators of the Group.
LONG-TERM INTERESTS OF OUR SHAREHOLDERS
The long-term interests of our shareholders are taken into account
through a significantly high amount of variable, performance-related
compensation as a proportion of total compensation as well as the
compensation system's strong focus on the share price. The per-
formance of the Executive Board members should be properly
recognized, with the failure to meet targets leading to a noticeable
reduction in performance-related compensation.
In our company, unlike publicly listed German stock corporations, it
is not the Supervisory Board, but the Board of Partners of E. Merck KG
that decides on the amount and composition of compensation
received by our Executive Board members. The Board of Partners
has assigned this task to its Personnel Committee. The Personnel
Committee is thus primarily responsible for the followings topics as
they relate to our Executive Board and the compensation thereof:
• Structure and examination of the performance-independent and
performance-related compensation elements
•
•
Contract terms of members of the Executive Board
Assumption of honorary offices, board positions or other sideline
activities
• Distribution of responsibilities among Executive Board members
Granting of loans and salary advances
Taking the suggestions of our shareholders into account, the com-
pensation system was further revised with the help of an independent
compensation consultant with effect from fiscal 2018, while taking
account of the regulatory requirements and the internal corporate
strategy. In April 2018, the compensation system was submitted to
the General Meeting for approval and accepted by 98.9% of the votes
cast.
OVERVIEW OF THE STRUCTURE AND THE COMPONENTS
OF THE COMPENSATION SYSTEM
The compensation system for the Executive Board basically com-
prises the three main components fixed compensation, profit sharing
and the Merck Long-Term Incentive Plan. It is complemented by
contributions to the company pension plan as well as additional ben-
efits. The components of the compensation system are as follows:
Corporate Governance
Statement on Corporate Governance
169
Furthermore, Executive Board compensation orients towards the
external peer environment of Merck KGaA, meaning in a comparison
with other German blue-chip companies as well as international com-
petitors. The relationship between Executive Board compensation
and the compensation of top management and the workforce as a
whole continues to be taken into account, also in a multi-year assess-
ment. The Personnel Committee regularly commissions an independ-
ent compensation consultant to review the appropriateness of the
compensation.
1,401
168
1,569
The compensation paid to the members of the Executive Board
takes into account the responsibilities and duties of the individual
Executive Board members, their status as personally liable partners,
their individual performance, the economic situation, as well as the
performance and future prospects of the company.
COMPENSATION PHILOSOPHY
Statement on Corporate Governance
167
THE GENERAL MEETING OF MERCK KGAA
The twenty-third General Meeting of Merck KGaA was held on April 27,
2018 in Frankfurt am Main, Germany. At 59.25%, the proportion of
share capital represented at the meeting was slightly lower than in the
previous year. In 2017, the proportion of share capital represented
was 64.03%.
In particular, the Annual General Meeting passes resolutions con-
cerning the approval of the annual financial statements, the appro-
priation of net retained profit, the approval of the actions of the
Executive Board members and the Supervisory Board members, as
well as the election of the auditor. Changes to the Articles of Asso-
ciation likewise require the adoption of a resolution by the General
Meeting. The shareholders of Merck KGaA exercise their rights at the
General Meeting. They may exercise their voting rights personally,
through an authorized representative or through a proxy appointed by
the company. The proxy is in attendance throughout the duration of
the General Meeting. All the documents and information concerning
upcoming General Meetings (including a summary explanation of
shareholder rights) are also posted on our website. Moreover, the
General Meeting is webcast live on the Internet from its commence-
ment until the end of the speech by the Chairman of the Executive
Board. The introductory speeches by the Chairman of the Executive
Board and the Chairman of the Supervisory Board are recorded in
order to make them available to interested members of the public
at any time after the meeting. In this way, we are satisfying the high
transparency requirements of the Merck Group.
"Declaration of the Executive Board and the Supervisory Board of
Merck KGaA on the recommendations of the Government Commission
of the German Corporate Governance Code pursuant to section 161
AktG. Since the last Declaration of Conformity on February 28, 2018,
we have complied with the recommendations of the Government
Commission of the German Corporate Governance Code in the version
dated February 7, 2017 published in the official section of the German
Federal Gazette with the following exception: Contrary to section
5.3.2 of the German Corporate Governance Code, the Supervisory
Board has not established an audit committee. However, an audit
committee does exist in the form of the Finance Committee of the
Board of Partners of E. Merck KG, which to a large extent exercises
the duties described in section 5.3.2 of the Code. Due to the relatively
limited authority of the supervisory board of a KGaA in comparison
with that of an AG, this therefore satisfies the requirements of the
German Corporate Governance Code.
In view of future compliance with the current recommendations
of the Government Commission of the German Corporate Governance
Code, the Executive Board and the Supervisory Board declare the
following: With the exception of the aforementioned deviation from
section 5.3.2 (audit committee), the company will comply with the
recommendations of the Code in the version dated February 7, 2017."
Darmstadt, February 26, 2019
DECLARATION OF CONFORMITY
In accordance with section 161 AktG, applying the provisions of the
German Corporate Governance Code correspondingly, the Executive
Board and the Supervisory Board issued the following Declaration of
Conformity with the recommendations of the Government Commission
of the German Corporate Governance Code:
For the Executive Board
For the Supervisory Board
s. Stefan Oschmann
s. Wolfgang Büchele
168
Corporate Governance
Statement on Corporate Governance
Compensation report
(The compensation report is part of the notes to the audited consol-
idated financial statements).
As the world's oldest pharmaceutical and chemical company, Merck
attaches great importance to responsible governance and entrepre-
neurship. This is also reflected by the compensation of the members
of the Executive Board of Merck KGaA. Unlike management board
members of stock corporations, they are not merely employed mem-
bers of a corporate board. Rather, they are personally liable general
partners of both Merck KGaA and the general partner E. Merck KG,
and in this capacity they receive profit sharing from E. Merck KG.
Owing to the legal form as a KGaA (corporation with general partners),
the stipulations of the German Corporate Governance Code concerning
the compensation of management board members of publicly listed
German stock corporations as well as the individual disclosure thereof
do not apply to the Executive Board members of Merck KGaA. Never-
theless, we have decided to comply with the requirements of the
German Corporate Governance Code.
Payments to former members of the Executive Board or their surviv-
ing dependents are made for a limited period of time and represent
continued payment of fixed compensation in the event of death as
well as pension payments. In fiscal 2018, these amounted to
€ 13,763 thousand (2017: € 12,786 thousand). Pension provisions
for 2018 come to € 155,950 thousand (2017: € 152,973 thousand).
171
•
2017
81
2,400
1,430
15,590
904
4,385
2,387
Kai Beckmann
2017
1,000
36
2,400
1,430
14,954
3,000
1,870
19,555
1,779
1,000
5,928
2018
5,435
7,310
-375
2018
1,000
38
2,800
1,705
18,588
1,078
4,916
2,791
Udit Batra
2017
1,000
12
2,800
1,705
17,830
1,623
-335
-376
2018
900
107,930
103,528
6,261
9,421
29,784
15,937
32,035
-1,768
1 Number of potential MSUS subject to target achievement. For details see pages 171 and 172. The actual number of MSUS to be granted after the expiration of the three-year performance cycle
may deviate from this.
2Time value on the date of the grant (date of the legally binding entitlement). The amount of a payment is thus not predefined. Payment is subject to target achievement and is made on a
specified date after the expiration of the three-year performance cycle. The time value of the obligations was calculated using a Monte Carlo simulation based on the previously described KPIs.
The expected volatilities are based on the implicit volatility of Merck shares and the DAX® in accordance with the remaining term of the LTIP tranche. The dividend payments incorporated into
the valuation model orient towards medium-term dividend expectations.
3 In accordance with IFRS, the expense recorded for 2018 includes the values for the 2016, 2017 and 2018 LTIP tranches. In accordance with IFRS, the expense recorded for 2017 includes the
values for the 2015, 2016 and 2017 LTIP tranches.
Corporate Governance
Statement on Corporate Governance
179
INFORMATION IN ACCORDANCE WITH THE REQUIRE-
MENTS OF THE GERMAN CORPORATE GOVERNANCE CODE
In accordance with the requirements of the German Corporate
Governance Code, the following tables present the compensation
granted for 2018, including additional benefits, contributions to the
company pension plan and the achievable minimum and maximum
values of the variable compensation components, as well as the allo-
cation of the respective compensation components for the fiscal year.
BENEFITS GRANTED FOR THE FISCAL YEAR
Stefan Oschmann
Chairman of the Executive Board
Udit Batra
Member of the Executive Board
9,900
9,900
17,200
16,300
314
423
26
2,200
1,320
14,391
835
3,961
2,203
Marcus Kuhnert
2017
2,146
800
2,200
1,320
13,804
1,256
4,277
-385
Total
2018
2017
5,900
6,000
21
23,581
2,255
3,700
1The key performance indicator organic sales growth became a component of the Merck Long-Term Incentive Plan in 2017 and is therefore not relevant for target achievement of the tranche in
fiscal 2014.
Actually achieved
Target achieve-
Lower target
corridor limit
Target
Upper target
corridor limit
value Merck LTIP
tranche 2015
ment Merck LTIP
tranche 2015
Key performance indicator¹
Share price performance relative to the DAX®
(external key performance indicator)
-20%
0%
50%
-16.1%
19.5%
EBITDA pre margin
(internal key performance indicator)
25%
126.7%
29.6%
31%
28%
177
Merck Long-Term Incentive Plan
Until the beginning of fiscal 2017, payment from the Merck Long-
Term Incentive Plan was based on the achievement of specific targets
with respect to the development of the Merck share price compared
with the DAX® as well as the development of the EBITDA pre margin
during the three-year performance cycle. Since fiscal year 2017,
organic sales growth of the Merck Group has been included as an
additional key performance indicator. The tables below show the
target values that lead to 100% target achievement relative to the
respective key performance indicator. Below the lower target corridor
limit, target achievement for the respective key performance indicator
is 0%. Above the upper target corridor limit, target achievement no
longer increases.
Key performance indicator¹
Share price development relative to the DAX®
(external key performance indicator)
Lower target
corridor limit
Target
28%
Upper target
corridor limit
0%
50%
Actually achieved
value Merck LTIP
tranche 2014
Target achieve-
ment Merck LTIP
tranche 2014
36.3%
136.3%
EBITDA pre margin
(internal key performance indicator)
25%
-20%
Benefits granted (€ thousand)
31%
116.7%
MSUS
49
Time value²
(€ thousand)
(€ thousand)
(€ thousand)
Member of the Executive Board
2018
1,300
186
3,700
2,255
24,584
1,426
6,612
3,536
Stefan Oschmann
2017
1,300
164
Number of
Grant value
(€ thousand) (€ thousand)
(€ thousand) (€ thousand)
Merck Long-Term Incentive Plan
(with a long-term incentive effect)
1The key performance indicator organic sales growth became a component of the Merck Long-Term Incentive Plan in 2017 and is therefore not relevant for target achievement of the tranche in
fiscal 2015.
178
Corporate Governance
Statement on Corporate Governance
TOTAL COMPENSATION
According to the German Commercial Code (HGB), the total com-
pensation of the members of the Executive Board of Merck KGaA,
broken down by performance-related and performance-independent
compensation components, is as follows.
Performance-independent
components
Expense
(+)/income
(-) recorded
in the period
29%
for share-
Performance-related components
Total
pensation³
Profit sharing
(without a
long-term
Fixed com- Additional
pensation
benefits
incentive
effect)
based com-
2017
2018
Fixed compensation
36
81
1,000
81
1,000
800
600
600
600
81
32
26
26
26
Total
1,036
1,081
1,081
1,081
832
Additional benefits
626
2018 (min.) 2018 (max.)
2017
400
8,711
7,981
2,855
13,303
5,814
5,316
1,438
9,341
Kai Beckmann
Member of the Executive Board
Walter Galinat
Member of the Executive Board
(left on: September 30, 2018)
Benefits granted (€ thousand)
2017
Fixed compensation
1,000
2018
1,000
2018 (min.) 2018 (max.)
2018
626
626
Profit sharing
4,288
3,661
626
6,786
395
1,476
395
8,171
168
166
166
166
4,456
3,827
792
6,952
Belén Garijo
Member of the Executive Board
Marcus Kuhnert
Member of the Executive Board
Benefits granted (€ thousand)
7,776
1,081
4,385
395
4,780
2,769
2,400
2,400
3,120
2,200
2,200
2,860
Multi-year variable compensation
LTI 2017 (2017 to 2019)
1,361
400
1,256
904
3,575
835
3,300
Total
4,797
Service cost
-2,028
Total compensation¹
LTI 2018 (2018 to 2020)
Corporate Governance
400
1,369
1,038
1,038
1,038
Profit sharing
3,700
3,700
4,810
2,800
2,800
3,640
Multi-year variable compensation
LTI 2017 (2017 to 2019)
2,146
1,623
LTI 2018 (2018 to 2020)
1,426
5,638
1,078
4,263
1,012
Total
1,486
1,486
1,300
1,300
2018 (min.) 2018 (max.)
1,300
1,300
2017
1,000
2018
1,000
1,000
2018 (min.) 2018 (max.)
1,000
Additional benefits
164
186
186
186
12
38
38
38
Total
1,464
1,486
7,310
1,361
4,797
3,900
1,870
20,386
1,183
6,249
2,969
Belén Garijo
6,612
1,486
11,934
5,435
4,916
1,038
8,941
Service cost
Total compensation
1,401
1,369
1,369
66
1,100
2018
91
-388
Walter Galinat
2018
600
26
2,200
1,320
14,391
835
379
3,661
(left on: September 30, 2018)
2017
800
32
2,200
1,320
13,804
1,256
4,288
2,051
Statement on Corporate Governance
1,100
2018
395
4,475
Walter Galinat
Belén Garijo
Member of the Executive Board
Member of the Executive Board
Marcus Kuhnert
Member of the Executive Board
Allocation (€ thousand)
Fixed compensation
(left on: September 30, 2018)
2017
2018
2017
2018
2017
2018
800
600
1,100
1,100
800
900
-2,028
3,485
Additional benefits
400
4,564
7,154
2,400
Multi-year variable compensation
LTI 2014 (2014 to 2016)
2,077
402
2,077
LTI 2015 (2015 to 2017)
Total
Service cost
Total compensation¹
599
326
599
7,241
5,785
4,214
4,164
5,513
4,080
1,401
1,369
379
8,642
4,593
2,400
32
49
599
599
3,172
2,931
5,343
5,665
3,887
3,725
168
3,340
166
3,097
2,582
394
1,604
421
7,925
6,059
5,491
4,146
Karl-Ludwig Kley
Bernd Reckmann
Member of the Executive Board
(left on: April 29, 2016)
105
26
866
140
66
21
26
Total
832
626
1,149
1,166
821
926
Profit sharing
2,200
2,200
3,000
3,900
2,200
2,200
Multi-year variable compensation
LTI 2014 (2014 to 2016)
LTI 2015 (2015 to 2017)
Total
Service cost
Total compensation², 3
1,194
2,800
2,800
3,700
3,900
3,900
2,200
2,200
2,860
Multi-year variable compensation
LTI 2017 (2017 to 2019)
1,779
1,256
LTI 2018 (2018 to 2020)
1,183
4,675
835
3,300
Total
5,928
6,249
1,166
9,741
4,277
3,961
926
7,086
3,000
Service cost
Profit sharing
926
49
66
2018 2018 (min.) 2018 (max.)
1,100
1,100
66
2017
2018
2018 (min.) 2018 (max.)
1,100
800
900
900
900
66
21
26
26
26
Total
1,149
1,166
1,166
1,166
821
926
926
2,582
Total compensation²,3
8,510
2018
1,300
1,300
1,000
1,000
1,000
1,000
Additional benefits
164
186
12
38
36
81
Total
1,464
1,486
1,012
1,038
1,036
1,081
Profit sharing
3,700
2017
2018
2017
2018
394
6,643
394
1,560
394
10,135
1,604
421
421
421
5,881
4,382
1,347
7,507
Fixed compensation
¹ Kai Beckmann's total compensation in 2017 comprised current service costs of € 396 thousand and past service revenues of € 2,424 thousand (total: € 2,028 thousand).
2 Belén Garijo's total compensation in 2017 comprised current service costs of € 398 thousand and past service costs of € 2,184 thousand (total: € 2,582 thousand).
3 Marcus Kuhnert's total compensation in 2017 comprised current service costs of € 426 thousand and past service costs of € 1,178 thousand (total: € 1,604 thousand).
Corporate Governance
Statement on Corporate Governance
ALLOCATION FOR THE FISCAL YEAR
Stefan Oschmann
Udit Batra
Allocation (€ thousand)
Fixed compensation
Chairman of the Executive Board
2017
Member of the Executive Board
Kai Beckmann
Member of the Executive Board
180
Additional benefits
2017
Allocation (€ thousand)
Fixed compensation
Königstein, Chief Financial Officer
no board positions
(b) EMD Millipore Corporation, Billerica, Massachusetts, United States
(President)
(a) - Bundesdruckerei GmbH, Berlin
no board positions
(b) - Banco Bilbao Vizcaya Argentaria S.A., Bilbao, Spain
- L'Oréal S.A., Clichy, France
no board positions
The general partners with no equity interest (Executive Board) manage
the business activities in accordance with the laws, the Articles of
Association and the rules of procedure. They are appointed by
E. Merck KG in accordance with the consent of a simple majority of
the other general partners. The members of the Executive Board are
jointly responsible for the entire management of the company. Certain
tasks are assigned to individual Executive Board members based on
a responsibility distribution plan. Each Executive Board member
promptly informs the other members of any important actions or
operations in his respective business area. The Executive Board is
responsible for preparing the annual financial statements of
Merck KGaA and of the Merck Group as well as for approving the
quarterly and half-year financial statements of the Merck Group. In
addition, the Executive Board ensures that all legal provisions, official
regulations and the company's internal policies are abided by, and
works to achieve compliance with them by all the companies of the
Merck Group. A Group-wide guideline defines in detail which trans-
actions require prior Executive Board approval.
The Executive Board provides the Supervisory Board with regular,
up-to-date and comprehensive reports about all company-relevant
issues concerning strategy, planning, business developments, the risk
situation, risk management and compliance. The rules of procedure
of the Executive Board and of the Supervisory Board as well as a
Supervisory Board resolution regulate further details on the informa-
tion and reporting duties of the Executive Board vis-à-vis the Super-
visory Board.
The Executive Board informs the Board of Partners and the
Supervisory Board at least quarterly of the progress of business and
the situation of the company. In addition, the Executive Board informs
the aforementioned boards at least annually of the company's annual
plans and strategic considerations.
The Executive Board passes its resolutions in meetings that are
normally held once a month.
186
SUPERVISORY BOARD
Corporate Governance
Statement on Corporate Governance
Member
Wolfgang Büchele
Munich, Chairman of Exyte AG, Stuttgart
Michael Fletterich
Gernsheim, Chairman of the Merck Joint Works Council
Crocifissa Attardo
Darmstadt, Full-time member of the Merck Joint Works Council
Mechthild Auge
Marcus Kuhnert
Wehrheim, Full-time member of the Merck Joint Works Council
Frankfurt am Main, CEO Healthcare
Eppertshausen, Member of the Executive Board until September 30, 2018
Within the framework of their work, all Executive Board and Super-
visory Board members of Merck KGaA are exclusively committed to
the interests of the company and neither pursue personal interests
nor grant unjustified advantages to third parties.
Before an Executive Board member takes on honorary offices, board
positions or other sideline activities, this must be approved by the
Personnel Committee of the Board of Partners of E. Merck KG. The
Chairman of the Executive Board, Stefan Oschmann, and the Chief
Financial Officer, Marcus Kuhnert, are both members of the Executive
Board of E. Merck KG. This does not, however, create conflicts of
interest.
In its report to the General Meeting, the Supervisory Board dis-
closes any conflicts of interest involving its members and how they
were dealt with. Consultancy agreements as well as other service
and work contracts of a Supervisory Board member with Merck
require the approval of the Supervisory Board. In fiscal 2018, there
were neither conflicts of interest nor consultancy agreements or other
service or work contracts with Merck KGaA involving Supervisory
Board members.
ADHERENCE TO ENVIRONMENTAL AND
SAFETY STANDARDS
At Merck, closed-loop thinking guides the way in which we address
environmental protection issues. To this end, we integrate precaution-
ary measures into our process, procedural and product development
planning. Our Environment, Health and Safety Policy, with its prin-
ciples and strategies, implements the guidelines formulated by the
national and international associations of the chemical industry in
the Responsible Care guidelines. The Responsible Care Global Charter,
developed by the International Council of Chemical Associations
(ICCA) in 2014, puts even more emphasis than before on overall
responsibility for products, supply chains and the community. Merck
signed this expanded version of Responsible Care Global Charter for
the entire Group in the same year. It is currently being implemented
by Merck at an international level. We report our ecological, economic
and social performance transparently in accordance with the interna-
tionally recognized principles of the Global Reporting Initiative (GRI),
taking into account the requirements of the German Sustainability
Code and the principles of the UN Global Compact. One of our major
climate protection objectives is to achieve a 20% reduction in our
greenhouse gas emissions by 2020, measured against the 2006
baseline.
Many guidelines specify how the sites and employees of the
Merck Group are to observe the principles in their daily work. The
Group function Environment, Health, Safety, Security, Quality steers
these global activities and ensures compliance with statutory require-
ments, internal standards and business needs throughout the entire
Group. In this way, Group-wide risks are minimized and continuous
improvement is promoted in the areas of Environment, Health,
Safety, Security and Quality. Corporate Responsibility reports are
also published at regular intervals.
Corporate Governance
Statement on Corporate Governance
185
Procedures of the Executive Board,
Supervisory Board, Board of Partners
and its Committees
MEMBERS OF THE EXECUTIVE BOARD OF MERCK KGAA
Information on memberships of statutory supervisory boards and
comparable German and foreign supervisory bodies (section 285
No. 10 HGB in conjunction with section 125 (1) sentence 5 AktG).
Memberships of
(a) statutory supervisory boards and
(b) comparable German and foreign supervisory bodies of corporations
Member
2017
Stefan Oschmann
Munich, Chairman
Udit Batra
Wellesley (Massachusetts, United States), CEO Life Science
Kai Beckmann
Darmstadt, CEO Performance Materials
Walter Galinat
Belén Garijo
AVOIDANCE OF CONFLICTS OF INTEREST
Gabriele Eismann
Edeltraud Glänzer
(b) comparable German and foreign supervisory bodies of corporations
(a) - Gelita AG, Eberbach (Vice Chairman)
(b) E. Merck KG, Darmstadt¹
- Kemira Oyj, Helsinki, Finland
no board positions
b) - Merck BKK (rotating chairperson)
no board positions
no board positions
(a) B. Braun Melsungen AG, Melsungen
- Evonik Industries AG, Essen (Vice Chairperson)
no board positions
(b) - E. Merck KG, Darmstadt¹
(b) - E. Merck KG, Darmstadt¹
no board positions
no board positions
(a) 4SC AG, Martinsried
- Supervisory Board of Bonn University Hospital
(b) - E. Merck KG, Darmstadt¹
(b) - E. Merck KG, Darmstadt¹
(a) - Henkel AG & Co. KGaA, Düsseldorf
(b) E. Merck KG, Darmstadt¹
- DKSH Holding Ltd., Zurich, Switzerland
(b) E. Merck KG, Darmstadt¹
no board positions
(a) statutory supervisory boards and
Seeheim-Jugenheim, Senior Product Manager
Memberships of
1 Internal board position.
Hanover, Vice Chairperson of IG Bergbau, Chemie, Energie
(IG BCE), Hanover
Michaela Freifrau von Glenck
Zurich, Retired teacher
Siegfried Karjetta²
Darmstadt, Physician
Albrecht Merck
Schriesheim, Commercial Director of the Castel Peter Winery,
Bad Dürkheim
Dietmar Oeter
Seeheim-Jugenheim, Vice President Corporate Quality Assurance
Alexander Putz
Michelstadt, Full-time member of the Merck Joint Works Council
Helga Rübsamen-Schaeff
Langenburg, Chairperson of the Advisory Board of AiCuris Antiinfective
Cures GmbH, Wuppertal
Gregor Schulz
Umkirch, Pediatrician
Theo Siegert
Düsseldorf, Managing Partner of de Haen Carstanjen & Söhne KG,
Düsseldorf
Tobias Thelen²
Munich, Managing Partner of
Altmann Analytik GmbH & Co. KG, Munich
Veit Ulshöfer
Sachsenheim, Merck Global Head of Research and Bioinformatics
2 Members appointed according to Article 6 (5) of the Articles of Association.
The Executive Board, the Supervisory Board and the Finance Com-
mittee are regularly informed about the current risk portfolio of the
Group and the individual companies. More detailed information can be
found in the Report on Risks and Opportunities on pages 137 et seq.
RISK AND OPPORTUNITY MANAGEMENT
The Executive Board informs the supervisory bodies at least once
a year about the key compliance issues.
Wolfgang Büchele
(Chairman)
Michael Fletterich
(Vice Chairman)
Crocifissa Attardo
Mechthild Auge
Gabriele Eismann
Edeltraud Glänzer
Michaela Freifrau von Glenck
Siegfried Karjetta
Albrecht Merck
Dietmar Oeter
Alexander Putz
Helga Rübsamen-Schaeff
Gregor Schulz
Theo Siegert
Tobias Thelen
Veit Ulshöfer
Total
Fixed compensation
2018
Compensation for
meeting attendance
Total compensation
2017
in €
2018
year. The Chairman receives double and the Vice Chairman receives
one and a half times this amount. Moreover, the members receive
additional compensation of € 750 per meeting. The individual values
are presented in the following table:
COMPENSATION FOR THE SUPERVISORY BOARD
MEMBERS OF MERCK KGAA
Additional benefits
Total
Profit sharing
Multi-year variable compensation
LTI 2014 (2014 to 2016)
Member of the Executive Board
(left on: August 31, 2016).
2017
LTI 2015 (2015 to 2017)
Total
Service cost
Total compensation
2,769
2,077
499
265
2,769
499
2,077
265
¹Kai Beckmann's total compensation in 2017 comprised current service costs of € 396 thousand and past service revenues of € 2,424 thousand (total: € 2,028 thousand).
2 Belén Garijo's total compensation in 2017 comprised current service costs of € 398 thousand and past service costs of € 2,184 thousand (total: € 2,582 thousand).
3 Marcus Kuhnert's total compensation in 2017 comprised current service costs of € 426 thousand and past service costs of € 1,178 thousand (total: € 1,604 thousand).
Corporate Governance
Statement on Corporate Governance
181
The compensation of the Supervisory Board members is defined by
Article 20 of the Articles of Association of Merck KGaA. The members
of the Supervisory Board receive fixed compensation of € 47,000 per
2017
2018
2017
Corporate Governance
Statement on Corporate Governance
183
FURTHER REPORTS
The combined management report of Merck KGaA and the Merck
Group does not contain a non-financial declaration. Instead, we issue
a separate combined non-financial (Group) report in accordance with
sections 289b-289e and 315b-315c HGB. This is available effective
April 15, 2019, as an online version on our website at https://www.
merckgroup.com/en/cr-report/2018/. It is integrated into the 2018
Corporate Responsibility Report in accordance with DRS 20 subsection
252 (b). We have compiled an overview of the information contained
in the combined non-financial (Group) report, which can be viewed
at https://www.merckgroup.com/nfr18. The report on gender and
salary equality pursuant to section 21 in conjunction with sections
25 and 22 of the German Transparency of Pay Act for fiscal 2017 is
included as an appendix to the combined management report of
Merck KGaA.
VALUES AND COMPLIANCE
-
Based on a corporate culture that places the fundamental company
values - courage, achievement, responsibility, respect, integrity and
transparency at the center of our entrepreneurial actions, the
Code of Conduct (www.merckgroup.com/en/company/who-we-are/
strategy-and-values.html) helps those involved in the business pro-
cess to implement the values when dealing with one another on a
daily basis.
With its Code of Conduct, a revised version of which was issued
in mid-2017, Merck has established a set of rules and regulations
intended to help our employees to act responsibly and to make the
right decisions in their daily work.
The Code of Conduct explains the company principles for dealings
with business associates, shareholders, colleagues and employees,
and within the scope of our responsibility for society. Thus, it supports
all employees in acting ethically - not only in their dealings with one
another, but also outside the company. The Code of Conduct is thus
the main set of rules of our compliance program. In the newly pub-
lished version, Merck has aligned its Code of Conduct even more
closely with the Merck values. Additionally, it has expanded the Code
of Conduct to include further important topics such as data privacy,
healthcare compliance and bioethics. To Merck, compliance means
observing legal and company-internal regulations and the basic eth-
ical principles anchored in the company values. With the Code of
Conduct and the various unit-specific ethical compliance rules, the
values are integrated into daily work and business practice. The Code
of Conduct is binding on all employees, both at headquarters and in
the subsidiaries. We also expect our business associates worldwide
to accept these principles or to have their own comparable principles.
While supplier management ensures compliant behavior of suppliers,
global business partner risk management encompasses the relations
with sales-related business associates such as distributors and
wholesalers.
The Compliance Office monitors observance of the Code of Con-
duct with support from corresponding monitoring and training pro-
grams throughout the Group. All employees are called upon to report
potential compliance violations to their supervisor, Legal, HR or other
relevant departments. Merck created the position of Group Compliance
Officer in 2002. This employee is responsible for setting up, main-
taining and further developing our global compliance program. By
taking appropriate measures, the Group Compliance Officer and his
team, including regional compliance officers, help to lower the risk
of serious legal violations of, for instance, anti-trust law, anticorruption
rules, or legal regulations and requirements of industry codes in the
healthcare sector. Money laundering prevention was added in 2018,
with Compliance coordinating the necessary organizational measures,
including training.
In 2014, we began appointing compliance officers for the various
business sectors. In particular, they are responsible for business-spe-
cific compliance input and they evaluate sector-specific risks that are
incorporated in the design of the Compliance program.
A further focal area of the Compliance program is ensuring legally
and ethically correct dealings with medical professionals and adher-
ing to the transparency requirements. Since October 2013, the Group
Compliance Officer has agreed extensive measures with the affected
areas of the company in order to establish an internal framework of
rules as well as the corresponding processes for approving and doc-
umenting interactions with experts that ensure correct publication.
We of course also ensure compliance with the respectively valid data
protection regulations.
The role of the Group Compliance Officer is reflected in the sub-
sidiaries, which ensure via country representatives that compliance
measures are implemented in the countries. Since 2013, Compliance
tasks in the countries and on a regional basis have largely been
performed by full-time compliance officers. As a result, a higher level
of compliance expertise is based locally and the increasing tasks in
all business sectors are taken into account. At the same time, the
management structure was streamlined and the reporting lines for
the countries were consolidated regionally. Since the end of 2016,
the compliance officers in the countries have been reporting to the
dedicated compliance officers for the respective business sectors
(Healthcare, Life Science and Performance Materials). A separate
responsibility was also created for Group functions. Regular regional
compliance meetings are held to promote the exchange of information
within the Compliance organization.
Newcomer training seminars were introduced in 2010 for newly
appointed compliance officers. These seminars serve to build up
compliance expertise and strengthen cooperation within the Compli-
ance organization. This Group-wide network is used to steer the
global compliance program. Within the Group Compliance function
in Darmstadt, a team is occupied with continuously further develop-
ing the compliance program and shaping company-internal compli-
ance projects. The Compliance organization is also involved in the
relevant due diligence processes for the incorporation of new business
units as well as possible divestments and acquisitions, and the sub-
sequent integration of companies. Within the scope of the global
compliance program, a high degree of importance is attached to
regular compliance seminars of the Merck Compliance Training Plan,
which are conducted as Web-based training courses and classroom
sessions. By presenting various training topics, particularly on the
Code of Conduct, corruption, antitrust and competition law as well
as healthcare compliance and data privacy, they serve to sensitize
184
Corporate Governance
Statement on Corporate Governance
employees and management to the consequences of compliance
violations and to show ways of avoiding them. Since Merck set up a
central SpeakUp line, employees and certain business partners have
been able to report compliance violations by telephone or via a Web-
based application in their respective national language. The SpeakUp
line is available 24 hours a day, free of charge. Case numbers enable
anonymous, two-way communication. The reports received are indi-
vidually reviewed. If a compliance violation exists, corresponding
corrective action is taken based on concrete action plans. If necessary,
disciplinary measures are taken. These can range from a simple warn-
ing up to the dismissal of the employee who violated a compliance
rule. In 2010, Merck set up a Compliance Case Committee to guide
these processes. The Compliance Case Committee consists of senior
members from various Group governance functions; they are involved
in reviewing compliance violations and introducing countermeasures.
The joint work in the Compliance Case Committee enables processes
between the various Group functions to be optimally coordinated and
designed efficiently.
Further significant elements of the Compliance program include
requirements on locally identifying and assessing risks as well as
reporting these, both within the subsidiary abroad and to the Group
functions. The Compliance Office regularly reviews and assesses the
implementation status of the Compliance program at the subsidiaries
abroad. In cooperation with Group Internal Auditing, the Compliance
Office regularly reviews the implementation of Group-wide compliance
measures at the subsidiaries abroad. The audits regularly focus on
the local compliance structure, the compliance measures taken, and
the existence of corresponding compliance guidelines and processes.
The Compliance Office reports regularly to the Executive Board
and the Supervisory Board, informing them of the status of compli-
ance activities (including training status), compliance risks and serious
compliance violations.
Since 1995, KPMG AG Wirtschaftsprüfungsgesellschaft, Berlin,
has been the audit firm for the statutory audit of the annual financial
statements and consolidated financial statements of Merck KGaA.
The auditor responsible for auditing the consolidated financial state-
ments changes regularly in accordance with the statutory require-
ments. Bodo Rackwitz is currently leading the audit engagement and
has been the auditor in charge of the engagement since fiscal 2015.
The Supervisory Board had KPMG AG Wirtschaftsprüfungsgesellschaft,
Berlin, provide a statement regarding the scope of the business,
financial, personal, and other relationships between KPMG AG
Wirtschaftsprüfungsgesellschaft, Berlin, its bodies and head auditors,
and Merck KGaA, its Group companies and the members of their
bodies (independence declaration). The statement also covers the
scope of the services provided by KPMG AG Wirtschaftsprüfungs-
gesellschaft, Berlin, in the previous fiscal year as well as the services
(other than auditing services) that are contracted for the upcoming
year (especially consultancy services) for Merck KGaA and its sub-
sidiaries. Having examined the declaration, the Supervisory Board
has found no grounds to doubt the independence of KPMG AG
Wirtschaftsprüfungsgesellschaft, Berlin. Neither party identified any
conflicts of interest.
ACCOUNTING AND AUDITS OF FINANCIAL STATEMENTS
Merck KGaA prepares its consolidated financial statements and com-
bined management report in accordance with International Financial
Reporting Standards (IFRSS), as applicable in the EU, as well as the
supplementary rules applicable under section 315e (1) of the German
Commercial Code (HGB) and as stipulated by our Articles of Associ-
ation. The consolidated financial statements and the combined man-
agement report are prepared by the Executive Board and examined
by an auditor, taking into account the generally accepted standards
for the audit of financial statements promulgated by the Institute of
Public Auditors in Germany (Institut der Wirtschaftsprüfer – IDW).
The Supervisory Board commissioned KPMG AG Wirtschaftsprü-
fungsgesellschaft, Berlin, to audit the consolidated financial statements
and the combined management report for 2018. Moreover, the Super-
visory Board agreed with KPMG AG Wirtschaftsprüfungsgesellschaft,
Berlin, that the auditor shall inform the Supervisory Board without
delay of any grounds for disqualification or bias occurring during the
audit if these cannot be immediately rectified. Additionally, the auditor
shall immediately report to the Supervisory Board any findings and
issues which emerge during the audit that have a direct bearing upon
the tasks of the Supervisory Board. The auditor shall inform the
Supervisory Board or note in the audit report any circumstances
determined during the audit that would render inaccurate the Decla-
ration of Conformity made by the Executive Board and the Supervisory
Board. It has also been agreed with the auditor that in order to assess
whether the Executive Board has fulfilled its obligations in accordance
with section 91 (2) AktG, the audit will also cover the company's
early warning risk identification system. Moreover, the auditor is
required to examine and evaluate the accounting-relevant internal
control system insofar as this is necessary and appropriate for
assessing the accuracy of financial reporting.
In order to ensure a high level of protection for insider information,
in 2011 the Executive Board issued internal insider guidelines appli-
cable throughout the Merck Group worldwide. The guidelines inform
employees about their responsibilities under insider trading laws and
give clear instructions for compliant behavior. In addition, they describe
the function of the insider committee in detail. Moreover, our Code of
Conduct, which is binding on all employees, also contains an explicit,
detailed reference to the ban on using insider information. Within the
scope of obligatory training courses on the Code of Conduct as well as
specific training courses on insider law, all employees are instructed
on the stipulations of insider trading.
Dealing properly with insider information is very important to us. Our
insider committee examines the existence of insider information,
ensures compliance with legal obligations and prepares any neces-
sary measures. The members of the insider committee are appointed
by the Executive Board; at least two members work in Group Legal
& Compliance. The insider committee meets at regular intervals, yet
also meets when circumstances require. The Chief Financial Officer
is vested with the authority to make the final decision on handling
potential insider information.
94,000.00 94,000.00
3,000.00 3,000.00
97,000.00 97,000.00
70,500.00 70,500.00 2,250.00
72,750.00 73,500.00
47,000.00 47,000.00 3,000.00 3,000.00 50,000.00 50,000.00
47,000.00 47,000.00 3,000.00 3,000.00 50,000.00 50,000.00
47,000.00 47,000.00 3,000.00
47,000.00 47,000.00 3,000.00
47,000.00 47,000.00 3,000.00 3,000.00
47,000.00 47,000.00 3,000.00 3,000.00 50,000.00 50,000.00
47,000.00 47,000.00 3,000.00 3,000.00 50,000.00 50,000.00
47,000.00 47,000.00 3,000.00 3,000.00 50,000.00 50,000.00
47,000.00 47,000.00 3,000.00 2,250.00 50,000.00 49,250.00
47,000.00 47,000.00 3,000.00 2,250.00 50,000.00 49,250.00
47,000.00 47,000.00 3,000.00 3,000.00 50,000.00 50,000.00
47,000.00 47,000.00 2,250.00 3,000.00 49,250.00 50,000.00
47,000.00 47,000.00 3,000.00 3,000.00 50,000.00 50,000.00
47,000.00 47,000.00 3,000.00 3,000.00 50,000.00 50,000.00
822,500.00 822,500.00 46,500.00 45,750.00 869,000.00 868,250.00
3,000.00
3,000.00
2,250.00
50,000.00 50,000.00
50,000.00 49,250.00
50,000.00 50,000.00
As a member of corporate bodies of E. Merck KG, Supervisory Board member Wolfgang Büchele received an additional payment of € 140,000 for performing this function in 2018 (2017: € 140,000).
As a member of corporate bodies of E. Merck KG, Supervisory Board member Michaela Freifrau von Glenck received an additional payment of € 80,000 for performing this function in 2018
(2017: € 80,000).
As a member of corporate bodies of E. Merck KG, Supervisory Board member Siegfried Karjetta received an additional payment of € 140,000 for performing this function in 2018 (2017: € 140,000).
As a member of corporate bodies of E. Merck KG, Supervisory Board member Albrecht Merck received an additional payment of € 120,000 for performing this function in 2018 (2017: € 120,000).
As a member of corporate bodies of E. Merck KG, Supervisory Board member Helga Rübsamen-Schaeff received an additional payment of € 150,000 for performing this function in 2018
(2017: € 150,000).
2018
As a member of corporate bodies of E. Merck KG, Supervisory Board member Gregor Schulz received an additional payment of € 140,000 for performing this function in 2018 (2017: € 140,000).
As a member of corporate bodies of E. Merck KG, Supervisory Board member Theo Siegert received an additional payment of € 150,000 for performing this function in 2018 (2017: € 150,000).
As a member of corporate bodies of E. Merck KG, Supervisory Board member Tobias Thelen received an additional payment of € 140,000 for performing this function in 2018 (2017: € 140,000).
COMPANY BY MEMBERS OF THE EXECUTIVE BOARD AND
OF THE SUPERVISORY BOARD
As of December 31, 2018, the members of the Executive Board and
of the Supervisory Board held less than 1% of the issued shares of
Merck KGaA. Transactions executed by members of the Executive
Board and of the Supervisory Board are disclosed on the Merck
website at www.merckgroup.com/en/investors/corporate-governance/
directors-dealings.html.
182
Corporate Governance
Statement on Corporate Governance
Information on corporate
governance practices
REPORTING
It is Merck KGaA's objective to provide the latest information to all
shareholders, media, financial analysts and interested members of
the public, while creating the greatest possible transparency. For this
reason, Merck uses a wide range of communication platforms to
engage in a timely dialog with all interested parties about the situation
of the company and business changes. Merck's principles include
providing factually correct, comprehensive and fair information.
Information subject to disclosure requirements, as well as infor-
mation that is not, can be accessed worldwide on the Merck KGaA
website (www.merckgroup.com), which is the company's most impor-
tant publication platform. Apart from a detailed financial calendar,
quarterly statements and/or quarterly and half-year financial reports
covering the past three years are available here in German and Eng-
lish. In addition, in line with the legal requirements, ad hoc announce-
ments are published on the website. These contain information on
circumstances and facts that could impact the Merck share price.
Regular press conferences, investor meetings on the occasion of
investor conferences as well as road shows offer another platform
for dialog. The company presentations prepared for this purpose are
also available on the Merck KGaA website. In addition, the Investor
Relations team is always available to private and institutional inves-
tors who wish to receive further information. To ensure the greatest
possible transparency, all documents concerning the General Meeting
are available on the company website. Additionally, some parts of
the General Meeting are webcast live on the Internet.
DEALING WITH INSIDER INFORMATION
OWNERSHIP, PURCHASE OR SALE OF SHARES IN THE
1,100
Sales Expert, Life Science,
São Paulo, Brazil
November 12
From Darmstadt to 90 countries
ANA LUISA
Research
drives us all
Sales Expert, Life Science,
São Paulo, Brazil
SHINJI OKITSU
Group Leader Immunology,
Healthcare, Billerica, United States
Get to know our Merck team from
around the world at
https://www.merckgroup.com/en/
annualreport/2018/magazine/heartbeats
MARC FEIGLIN
Head of Alliance
CADORE
Management & Partnership,
Yavne, Israel
SUNNY CHOI
Talent and Development
Manager,
Seoul, Korea
Research drives us all
HEARTBEATS
13
"It's my job to give
people the courage
to explore new
things that did not
exist before. If they
succeed at that,
it makes my heart
beat faster."
SUNNY CHOI
Talent and Development Manager,
Seoul, Korea
14
Research drives us all
"My mother suffered from cancer
during the same time I was research-
ing the cellular mechanism respon-
sible for her illness. My research could
conceivably help to better understand
the disease. That was an enlightening
moment for me."
SHINJI OKITSU
FRANZISKA HÖLY
Deputy Foreman,
Performance Materials,
Darmstadt, Germany
Group Leader Immunology, Healthcare,
BavencioⓇ in combination with INLYTAⓇ
The phase III JAVELIN Renal 101 study evaluat-
ing BavencioⓇ and Pfizer's InlytaⓇ compared
with SutentⓇ as initial therapy for patients with
advanced renal cell carcinoma yielded posi-
tive top-line results. In February 2019 the FDA
granted priority review to this therapy based
on these interim results.
Semiconductors as a new driver of growth 26-27
New partner 24-25
The health platform for everyone 22-23
Big plans for China 20-22
China is on the way to becoming a leading
high-tech nation. We intend to take an
active role in shaping this transformation
with our China strategy.
2. Vibrant China
Research drives us all 12-17
the passion.
Why science? What fascinates us about it?
We wanted to find out - so we followed
1. Heartbeats
Magazine
Table of Contents
9
to combat kidney cancer
TABLE OF CONTENTS MAGAZINE
November 28
Fourth place in the Access to Medicine Index
This result means that we have maintained our
ranking since the index was last published in
2016. We are proud of our efforts to improve
access to medicine and thus the health of
underserved populations.
November 20
Collaborate against cancer with Syntropy
We want to advance cancer research. To that
end, we intend to form a joint venture under the
name Syntropy with software company Palantir
Technologies. Syntropy will enable research cen-
ters to have access to a collaborative technol-
ogy platform to drive forward cancer research,
speed up scientific progress and improve peo-
ple's lives.
November 19
HIGHLIGHTS OF 2018
80
7
راق
HIGHLIGHTS OF 2018
New innovation hub in Southern China
We announced the plans to establish a new
competence center for innovation in
Guangzhou in Southern China scheduled to
open September 2019. It will be located in
the heart of a large biotechnology park where
startups will conduct research in all three
of our business sectors. To coincide with this,
we will also start our three-month China
Accelerator Program in 2019.
Since October 17, 2018, eight fully automated
packaging lines and robotized logistics are
up and running in the new packaging center,
which covers a total area of 15,000 square
meters. Here, medications from our current
product portfolio are packaged and shipped
to more than 90 countries. The new capacities
help address rising patient demand for our
primary products Glucophage®, Concor® and
EuthyroxⓇ in the therapeutic areas diabetes,
cardiovascular diseases and thyroid disorders.
Some €63 million were invested in the con-
struction of the new packaging center between
2015 and 2018.
October 17
Recognized compensation system
The European investors federation Better
Finance recognized us as the company with
the most shareholder-friendly board com-
pensation system in the German DAX 30 stock
index. We revised this system in the run-up
to the 2018 Annual General Meeting. The estab-
lishment of objective compensation criteria
resulted in improved comprehensibility - now
even with a seal of quality.
Billerica, United States
HEARTBEATS
Research drives us all
UVEX
September 11
3. Beyond tomorrow
Can pandemics be predicted? How does smartphone
glucose monitoring work? Where will our meat come
from in the future? How can we better connect
researchers with each other? Whoever wants to
actively shape the future, needs to ask the
right questions.
The needle-free sensor 30-31
A platform for the fight against cancer 32-33
New heroes wanted 36-37
10
HEARTBEATS
1
11
HEARTBEATS
Hearts
beats
Why science? What fascinates us about it?
Each of us has an answer to that. We wanted
to find out what they were - so we followed
the passion.
12 HEARTBEATS
Real meat without the side effects 34-35
ANA LUISA CADORE
HEARTBEATS
15
Research drives us all
"Even as a child, I
shape the world. My
passion for science
was more deeply
engaged after I
came to Israel and
immersed myself
in this ecosystem
of entrepreneurship
and technology."
MARC FEIGLIN
dreamed of helping
Yavne, Israel
16
HEARTBEATS
Research drives us all
"I am passionate about science,
because sometimes it only takes
a small finding for the big
breakthrough that improves the
lives of many people."
Head of Alliance Management & Partnership,
- 4SC AG, Martinsried
Supervisory Board of Bonn University Hospital
No board positions
(a) innogy SE, Essen
-
No board positions
(b) AVW Versicherungsmakler GmbH, Hamburg
- Vonovia Finance B.V., Amsterdam, Netherlands
No board positions
The Board of Partners supervises the Executive Board in its manage-
ment of the company. It informs itself about the business matters of
Merck KGaA, and may inspect and examine the company's accounts,
other business documents and assets for this purpose. According to
Article 13 (4) of the Articles of Association of Merck KGaA, the Exec-
utive Board requires the approval of E. Merck KG for transactions
that are beyond the scope of the Group's ordinary business activities.
For such transactions, approval must first be obtained from the Board
of Partners of E. Merck KG. The Board of Partners convenes as and
when necessary; however, it normally meets four times a year. The
members of the Executive Board of Merck KGaA are invited to all
meetings of the Board of Partners, unless the Board of Partners
resolves otherwise in individual cases. The members of the Board of
Partners may convene a joint meeting with the Supervisory Board
of Merck KGaA if so agreed by the chairmen of the two boards.
Wolfgang Büchele
The Board of Partners may delegate the performance of individual
duties to committees. Currently, the Board of Partners has three
committees in place: the Personnel Committee, the Finance Com-
mittee, and the Research and Development Committee.
PERSONNEL COMMITTEE
Munich, Chairman of Exyte AG, Stuttgart
General Partner of E. Merck KG, Vice Chairman
Darmstadt, Chairman of the Executive Board and
Frank Stangenberg-Haverkamp
Vienna, Austria, Vice Chairman of the Executive Board and
General Partner of E. Merck KG, Chairman
Johannes Baillou
Merck KGaA, Darmstadt
Helga Rübsamen-Schaeff
(a)
Köln, Head of Infrastructure Development at DB Netz AG, Frankfurt am
Main
- Gelita AG, Eberbach (Vice Chairman)
Member
Heidelberg, Member of the Executive Board of SAP SE, Walldorf
Katharina Kraft
Michael Kleinemeier
Cures GmbH, Wuppertal
Mannheim, Senior Management Consultant at BASF SE, Ludwigshafen
Helene von Roeder
Frankfurt am Main, Member of the Executive Board of Vonovia SE, Bochum
Daniel Thelen
Langenburg, Chairperson of the Advisory Board of AiCuris Antiinfective
(b) - Kemira Oyj, Helsinki, Finland
Simon Thelen
Memberships of
(a) statutory supervisory boards and
(b) comparable German and foreign supervisory bodies of corporations
no board positions
(b) - Fortas GmbH, Rösrath (Chairman)
-
Oras Invest Ltd, Helsinki, Finland
- Travel Asset Group Ltd., London, United Kingdom (Chairman)
(a) Merck KGaA, Darmstadt
Köln, Senior Physician at the Clinic for Trauma and Hand Surgery,
University Hospital Düsseldorf
On January 27, 2019, a new election of the Board of Partners was
held. The Board of Partners now consists of the following members:
OF CONFORMITY
Statement on Corporate Governance
Bad Dürkheim
Schriesheim, Commercial Director of the Castel Peter Winery,
Albrecht Merck
Darmstadt, Physician
Siegfried Karjetta
Munich, Chairman of Exyte AG, Stuttgart
Wolfgang Büchele
General Partner of E. Merck KG, Vice Chairman
Darmstadt, Chairman of the Executive Board and
Frank Stangenberg-Haverkamp
Vienna, Austria, Vice Chairman of the Executive Board and
General Partner of E. Merck KG, Chairman
Johannes Baillou
Member
The Board of Partners has nine members. During fiscal 2018 and up
until January 27, 2019, the Board of Partners was composed as
follows:
Statement on Corporate Governance
Corporate Governance
188
Some of the responsibilities that lie with the supervisory board of a
German stock corporation are fulfilled at Merck by E. Merck KG. This
applies primarily to the Board of Partners of E. Merck KG. Therefore,
the Board of Partners as well as the composition and procedures of
its committees are described in the following.
BOARD OF PARTNERS OF E. MERCK KG
The German Stock Corporation Act prescribes that the Supervisory
Board of a publicly listed company must have at least one member
who has professional expertise in accounting or auditing. Theo Siegert
satisfies these requirements and is furthermore the Chairman of the
Finance Committee of the Board of Partners of E. Merck KG.
The rules of procedure prescribe that the Supervisory Board may
form committees. The Supervisory Board has formed a Nomination
Committee comprising three shareholder representatives. Its mem-
bers are Albrecht Merck, Wolfgang Büchele and Theo Siegert. The
Nomination Committee is responsible for proposing to the Supervi-
sory Board suitable candidates for its proposal to the Annual General
Meeting. Apart from legal requirements and the recommendations
of the German Corporate Governance Code, the "Objectives of the
Supervisory Board with respect to its composition", "Profile of skills
and expertise" and the "Diversity Policy" are to be taken into con-
sideration as well. Owing to the aforementioned limited authority,
and since a corresponding need has not yet arisen, the Supervisory
Board currently has no further committees.
The members of the Board of Partners of E. Merck KG and of the
Supervisory Board may be convened to a joint meeting if so agreed
by the chairmen of the two boards.
of the Group. The adoption of the annual financial statements is not
the responsibility of the Supervisory Board, but of the General Meeting.
The Supervisory Board normally meets four times a year. Further
meetings may be convened if requested by a member of either the
Supervisory Board or the Executive Board. As a rule, resolutions of
the Supervisory Board are passed at meetings. At the instruction of
the chairman, in exceptional cases a resolution may be passed by
other means, details of which are given in the rules of procedure.
The Supervisory Board examines the annual financial statements
as well as the consolidated financial statements and the combined
management report, taking into account in each case the reports of
the auditor. Moreover, the Supervisory Board discusses the quarterly
releases and the half-year financial report, taking into account in the
latter case the report of the auditor on the audit review of the
abridged financial statements and the interim management report
However, the fact that the Supervisory Board has no possibilities
to directly influence the Executive Board restricts neither its infor-
mation rights nor audit duties. The Supervisory Board must monitor
the Executive Board in terms of legality, regularity, usefulness and
economic efficiency. In particular, the Supervisory Board has the duty
to examine the reports provided by the Executive Board. This includes
regular reports on the intended business policy, as well as other
fundamental issues pertaining to corporate planning, especially
financial, investment and HR planning; the profitability of the Merck
Group; the progress of business; the risk situation; risk management
(including compliance); and the internal auditing system. In addition,
by means of consultation with the Executive Board, it creates the
basis for supervision of the management of the company by the
Supervisory Board according to section 111 (1) AktG.
The Supervisory Board performs a monitoring function. It supervises
the management of the company by the Executive Board. In com-
parison with the supervisory board of a German stock corporation,
the role of the supervisory board of a corporation with general partners
(KGaA) is limited. This is due to the fact that the members of the
Executive Board are personally liable partners and therefore are
themselves responsible for the management of the company. In
particular, the Supervisory Board is not responsible for appointing
and dismissing general partners or for regulating the terms and
conditions of their contracts. This is the responsibility of E. Merck KG.
Nor does the Supervisory Board have the authority to issue rules
of procedure for the Executive Board or a catalog of business trans-
actions requiring approval. This authority likewise belongs to
E. Merck KG (Article 13 (3) sentence 1 and (4) sentence 1 of the
Articles of Association).
187
Statement on Corporate Governance
Corporate Governance
Helga Rübsamen-Schaeff
189
Langenburg, Chairperson of the Advisory Board of AiCuris Antiinfective
Gregor Schulz
Corporate Governance
(a) Merck KGaA, Darmstadt
(b) DKSH Holding Ltd., Zurich, Switzerland
- Henkel AG & Co. KGaA, Düsseldorf
(a) - Merck KGaA, Darmstadt
(a) - Merck KGaA, Darmstadt
· Supervisory Board of Bonn University Hospital
- 4SC AG, Martinsried
CORPORATE GOVERNANCE AND DECLARATION
The Personnel Committee has four members. During fiscal 2018 and
up until January 27, 2019, these were: Johannes Baillou (Chairman),
Wolfgang Büchele, Theo Siegert and Frank Stangenberg-Haverkamp.
As of January 27, 2019, the Personnel Committee comprises Johannes
Baillou, Wolfgang Büchele, Michael Kleinemeier and Frank Stangenberg-
Haverkamp. The Personnel Committee meets at least twice a year.
Further meetings are convened as and when necessary. Meetings of
the Personnel Committee are attended by the Chairman of the Exec-
utive Board of Merck KGaA unless the Committee decides otherwise.
(a) - Merck KGaA, Darmstadt
(a) - Merck KGaA, Darmstadt
(a) Merck KGaA, Darmstadt
(b) Kemira Oyj, Helsinki, Finland
- Gelita AG, Eberbach (Vice Chairman)
(a) Merck KGaA, Darmstadt
- Travel Asset Group Ltd., London, United Kingdom (Chairman)
- Oras Invest Ltd, Helsinki, Finland
(b) - Fortas GmbH, Rösrath (Chairman)
no board positions
(b) comparable German and foreign supervisory bodies of corporations
(a) statutory supervisory boards and
Memberships of
Munich, Managing Partner of Altmann Analytik GmbH & Co. KG, Munich
Tobias Thelen
Carstanjen & Söhne KG, Düsseldorf
Düsseldorf, Managing Partner of de Haen
Theo Siegert
Umkirch, Pediatrician
Cures GmbH, Wuppertal
190
We foster diversity within the company, which also includes ensuring
a balance of genders in management. To this end, we pursue both
voluntary and statutory objectives, and we work continuously and
sustainably on achieving them. On December 15, 2016, the Execu-
tive Board of Merck KGaA set the new targets for the percentage of
positions held by women on the two management levels of Merck KGaA
below the Executive Board as follows:
Statement on Corporate Governance
In-depth knowledge of the fields relevant to the company
The Supervisory Board shall have at least four members with in-depth
knowledge of and experience in fields that are important to the
company, including at least one expert for the Healthcare and Life
Science/Performance Materials sectors, respectively. This require-
ment is met at the present time. At present, the Supervisory Board
has more than four members who have in-depth knowledge of and
experience in the Healthcare and Life Science/Performance Materials
sectors. More than four Supervisory Board members also have exec-
utive experience in companies that also or specifically operate in the
Healthcare and Life Science/Performance Materials sectors.
Management experience
The Supervisory Board shall have at least three members who have
experience in managing or supervising a medium- or large-sized
company. The Supervisory Board has more than three members who
have the corresponding experience. They include supervisory board
members who were or still are members of the management or
executive board at relevant companies as well as supervisory board
members who have gained experience in supervisory bodies of German
or foreign companies of this size.
Knowledge of business administration
The Supervisory Board shall have at least four members who have
in-depth knowledge of business administration. This requirement is
met at the present time.
Experience on other supervisory or control boards
Lastly, the Supervisory Board shall have at least four members who
have experience as members of other supervisory or control boards
(whereby possible membership of the Board of Partners of E. Merck KG
is not taken into account). This requirement is also met at the present
time.
In accordance with Article 14 (2) of the Articles of Association,
the Supervisory Board also examined the annual financial statements
of Merck KGaA, the proposal for the appropriation of net retained
profit and the auditor's report presented in accordance with Article 27
(2) of the Articles of Association. It also examined the consolidated
financial statements of the Merck Group as well as the combined
management report for Merck KGaA and the Merck Group, and took
note of the auditor's report of KPMG AG Wirtschaftsprüfungs-
gesellschaft, Berlin. It focused particularly on the aforementioned
key audit matters of particular importance in the audit opinion, on
the resulting risks for the financial statements, the approach adopted
during the audit as described and the conclusions drawn by the
auditor. Furthermore, the Supervisory Board also examined the sep-
arate combined non-financial (Group) report and the memorandum
on a limited assurance engagement prepared by the auditor on behalf
of the Supervisory Board. The discussion of the relevant agenda item
at the Supervisory Board's meeting on February 26, 2019, to approve
the financial statements was also attended by the auditors who sign
the audit opinion on the annual financial statements of Merck KGaA
and the consolidated financial statements of the Merck Group as well
as the separate combined non-financial (Group) report. These auditors
furthermore reported on their audit at this meeting. The Supervisory
Board took note of and approved the results of the audit. On com-
pletion of its examination, the Supervisory Board raised no objections
and thus approved the annual financial statements for Merck KGaA,
the consolidated financial statements of the Merck Group, the com-
bined management report of Merck KGaA and the Merck Group pre-
pared by the Executive Board, the report presented by the auditor in
accordance with Article 27 (2) of the Articles of Association and the
separate non-financial (Group) report. The Supervisory Board gave
its consent to the proposal of the Executive Board for the appropri-
ation of net retained profit.
In addition, the auditor audited the calculation of Merck KGaA's par-
ticipation in the profit of E. Merck KG in accordance with Article 27
(2) of the Articles of Association as well as the separate combined
non-financial (Group) report. The annual financial statements of
Merck KGaA, the consolidated financial statements of the Merck
Group, the combined management report for Merck KGaA and the
Merck Group, the proposal of the Executive Board for the appropri-
ation of net retained profit and the separate combined non-financial
(Group) report were submitted to the Supervisory Board together
with the auditor's report.
• Measurement of disposal gains/losses from the divestment of the
Consumer Health business
• Measurement of provisions for patent disputes
Corporate Governance
•
• Goodwill impairment tests
For the consolidated financial statements prepared in accordance with
International Financial Reporting Standards and for the combined
management report, the auditors issued the unqualified auditor's
report reproduced in the Annual Report of the Merck Group. The audit
opinion for the consolidated financial statements contained the follow-
ing audit topics of special importance:
Additionally, in accordance with section 5.4.1 (2) of the German
Corporate Governance Code, the Supervisory Board has prepared a
profile of skills and expertise, and reports on the status of implemen-
tation below.
Report of the Supervisory Board
194
Spin-off of the Healthcare, Life Science and Performance Materials
business sectors to three subsidiaries and leaseback of business
sectors as part of business leases
Recognition and measurement of provisions for tax liabilities
•
• Impairment testing of interests in associates
The auditors issued an unqualified audit opinion on the annual
financial statements of Merck KGaA in accordance with German
Auditing Standards. The audit opinion for the annual financial state-
ments contained the following key audit matters, i.e. those matters
that, in the professional judgment of the auditor, were of most sig-
nificance in the audit of the annual financial statements:
The annual financial statements of Merck KGaA, the consolidated
financial statements of the Merck Group and the combined manage-
ment report for Merck KGaA and the Merck Group, including the
accounts, were audited by KPMG AG Wirtschaftsprüfungsgesellschaft,
Berlin.
ANNUAL FINANCIAL STATEMENTS
At its fourth meeting on November 9, 2018, the Supervisory
Board dealt with the report of the Executive Board on the third quarter
of 2018. Additional topics of focus were the 2018 status reports of
Group Internal Auditing, status reports on compliance and data pro-
tection, and the report of the Research and Development Committee
Healthcare. Furthermore, the Group Executive Conference and the
strategy of Merck Business Services were reported on and discussed.
In addition, a revision of the Articles of Association due to the depar-
ture of Walter Galinat was discussed.
At its meeting on July 31, 2018, the Supervisory Board focused
intensively on the report of the Executive Board on business perfor-
mance in the second quarter of 2018. In addition, the auditor
explained the half-year financial report. Risk management within the
company was a further topic. The Head of Risk Management pre-
sented the status report for the first half of 2018. No risks that
threaten the continued existence of the company were identified. In
addition, the list of permitted non-audit services was updated, an
external audit of the non-financial declaration was resolved upon and
various developments in the Corporate Governance area were dis-
cussed. Finally, the Supervisory Board elected the new members of
the Nomination Committee as regularly scheduled.
The meeting held on May 9, 2018, focused on current business
developments in the first quarter of 2018. The report of the Research
and Development Committee Life Science/Performance Materials of
the Board of Partners of E. Merck KG was a further focus of the
meeting. The Supervisory Board also dealt with the Compliance and
Data Protection Report for 2017.
The Supervisory Board also took note of the written risk report as
well as the report from Group Internal Auditing for 2017.
At the meeting held on February 28, 2018, the Executive Board
first intensively addressed the annual financial statements and con-
solidated financial statements for 2017, the combined management
report, the audit report of the auditor on the separate non-financial
report (of the Merck Group) for fiscal 2017 and the proposal for the
appropriation of the net retained profit. The auditor explained the
audit reports including the focus areas of the audit. The Executive
Board and the Head of Accounting reported on the financial state-
ments. The Supervisory Board took note of the information on the
"Operational Infrastructure" project, the restructuring of Merck KGaA.
Furthermore, the Supervisory Board resolved upon the report and
the objectives of the Supervisory Board with respect to its composi-
tion and the profile of skills and expertise, the Declaration of Con-
formity with the German Corporate Governance Code and the State-
ment on Corporate Governance, which simultaneously includes the
joint report on Corporate Governance of the Executive Board and
Supervisory Board. The Supervisory Board also approved the pro-
posals to be made to the General Meeting. The Executive Board
reported on business performance in 2017 and presented the plans
for fiscal 2018. The "Roda" project, the divestment of the global
Consumer Health business, was the subject of intense deliberations.
KEY TOPICS OF THE SUPERVISORY BOARD MEETINGS
Four Supervisory Board meetings were held in fiscal 2018. At these
meetings, the Supervisory Board intensely discussed the reports of
the Executive Board as well as company developments and strategic
issues together with the Executive Board.
Corporate Governance
PROFILE OF SKILLS AND EXPERTISE
Regular limit on the length of Supervisory Board membership
The objective of the Supervisory Board regarding its composition is
that, as a rule, all members belong to the board for an uninterrupted
period of no more than 15 years (corresponds to three regular terms
of office). With one exception, this objective is also met at the present
time.
As a rule, the members of the Supervisory Board shall not exceed
the age of 75. This objective is met at the present time.
Corporate governance is a topic of high priority for the Supervisory
Board.
In its own estimation, the Supervisory Board has an adequate
number of independent members. There were no conflicts of interest,
as defined by the German Corporate Governance Code, involving
Supervisory Board members during the year under review. In fiscal
2018, the Chairman of the Supervisory Board was prepared to hold
talks with investors on topics pertaining to the Supervisory Board as
appropriate and remains willing to do so. The next efficiency review
of the Supervisory Board will be held in the coming fiscal year,
following the last efficiency audit in fiscal 2017.
After discussing corporate governance issues in detail, the Exec-
utive Board and the Supervisory Board on February 14, 2019 (Executive
Board), and February 26, 2019 (Supervisory Board), respectively,
adopted the updated Declaration of Conformity and issued it jointly
on February 26, 2019 in accordance with section 161 AktG. The
statement is permanently available on the website of Merck KGaA
(www.merckgroup.com/en/investors/corporate-governance.html).
More information about corporate governance at Merck KGaA, includ-
ing the compensation of the Executive Board and Supervisory Board,
is given in the Statement on Corporate Governance on pages 166 et
seq. of the Annual Report.
COMMITTEES
Apart from the Nomination Committee, the Supervisory Board of
Merck KGaA currently has no further committees on account of the
special features that apply to the Supervisory Board of a corporation
with general partners (KGaA) under German company law and
because a corresponding need for this has not emerged to date. The
members of the Nomination Committee convened on November 9,
2018, in order to recommend suitable candidates to the Supervisory
Board for the Supervisory Board elections in 2019. At its meeting, the
committee discussed potential candidates. The discussion took into
account the statutory requirements as well as the candidate's fit into
the full Supervisory Board, the objectives of the Supervisory Board
regarding its composition, its profile of skills and expertise and the
diversity policy. No report is given on the work of further committees.
PERSONNEL MATTERS
With the exception of Michael Fletterich, who was excused and absent
from the meeting on November 9, 2018, all the Supervisory Board
members attended all the Supervisory Board meetings.
Darmstadt, February 26, 2019
The Supervisory Board of Merck KGaA
Wolfgang Büchele
Chairman
Corporate Governance
Objectives of the Supervisory Board with respect to Its Composition and Profile of Skills and Expertise 195
Objectives of the Supervisory Board
with respect to Its Composition and
Profile of Skills and Expertise
INITIAL SITUATION
According to section 5.4.1 of the German Corporate Governance
Code, the Supervisory Board shall specify concrete objectives regard-
ing its composition as well as prepare a profile of skills and expertise
for the entire board. Within the scope of the company-specific situa-
tion, the composition of the Supervisory Board shall appropriately
reflect the international activities of the enterprise, potential conflicts
of interest, the number of independent Supervisory Board members,
an age limit to be specified for the members of the Supervisory
Board, a regular limit to be specified for the length of Supervisory
Board membership and diversity.
GENERAL NOTES ON THE COMPOSITION OF THE
SUPERVISORY BOARD
Age limit
The Supervisory Board shall have an appropriate number of inde-
pendent members. Assuming that the status of being an employee
representative per se does not justify doubts with respect to the
independence criteria within the meaning of section 5.4.2 of the
German Corporate Governance Code, as a rule all employee repre-
sentatives shall be independent within the meaning of the Code. In
any case, at least four of the shareholder representatives on the
Supervisory Board shall be independent. According to the Articles of
Association of Merck KGaA, six members representing the sharehold-
ers are to be elected by the General Meeting and two members are
to be delegated. Taking this and the special ownership structure of
Merck into account, the Supervisory Board considers four share-
holder representatives to be an appropriate number of independent
members. In the Supervisory Board's estimation, the objectives con-
cerning independent members are met at the present time. The
Supervisory Board considers the following members to be independ-
ent: Crocifissa Attardo, Mechthild Auge, Wolfgang Büchele, Gabriele
Eismann, Michael Fletterich, Edeltraud Glänzer, Michaela Freifrau von
Glenck, Siegfried Karjetta, Albrecht Merck, Dietmar Oeter, Alexander
Putz, Helga Rübsamen-Schaeff, Gregor Schulz, Theo Siegert, Tobias
Thelen and Veit Ulshöfer. In particular, the Supervisory Board does
not believe that membership of the Board of Partners of E. Merck KG
conflicts with independence. The Board of Partners exists comple-
mentary to the competencies and the activities of the Supervisory
Board. It is not to be expected that this will lead to material and not
merely temporary conflicts of interest. It should also be taken into
account that due to its substantial capital investment and unlimited
personal liability, E. Merck KG has a strong interest in the businesses
of Merck KGaA operating efficiently and in compliance with proce-
dures, counteracting from the outset conflicts of interest between
E. Merck KG and Merck KGaA and thus also corresponding conflicts
of interest between the members of the respective corporate boards.
Moreover, no one shall be proposed for election to the Supervisory
Board who simultaneously serves on a board of or advises a major
competitor of the company, or owing to another function, such as
advisor to major contract partners of the company, who could poten-
tially become involved in a conflict of interest. No Supervisory Board
member serves on a board of or advises a major competitor. No
Supervisory Board member performs a function that could lead to a
lasting conflict of interest.
Number of independent members, no material conflicts of
interest
Six women are currently members of the Supervisory Board of
Merck KGaA. Accordingly, women make up 37.5% of the Supervisory
Board. When nominating candidates for election to the Supervisory
Board or making proposals for delegations, the Supervisory Board
shall examine whether the percentage of women can be increased
by suitable candidates. The Supervisory Board considers the 37.5%
share of women members to be satisfactory at the present time. This
applies both owing to the percentage of women in leadership positions
at Merck as well as the fact that the supervisory boards of other
companies have a comparable percentage of women.
Women on the Supervisory Board
Objectives of the Supervisory Board with respect to Its Composition and Profile of Skills and Expertise
The cooperation with the Executive Board was characterized by inten-
sive, trustworthy exchange. During fiscal 2018, the Executive Board
provided the Supervisory Board with regular written and verbal
reports on the business development of Merck KGaA and the Merck
Group. In particular, the Supervisory Board was informed about the
market and sales situation of the company against the background
of macroeconomic development, the financial position of the com-
pany and its subsidiaries, along with their earnings development and
corporate planning. Within the scope of quarterly reporting, the sales
and operating results were presented for the Merck Group as a whole,
and broken down by business sector. Aside from the Supervisory
Board meetings, the Chairman of the Supervisory Board also main-
tained and continues to maintain a regular exchange of information
with the Chairman of the Executive Board.
Corporate Governance
The Supervisory Board shall have at least three members with busi-
ness experience in the main sales markets of Merck KGaA. Currently,
the main sales markets of Merck KGaA are Europe, North and Latin
America, and Asia-Pacific. The present composition of the Supervi-
sory Board satisfies this objective. More than three Supervisory
Board members have entrepreneurial experience in a wide range of
European countries. More than three Supervisory Board members
have experience in management positions in companies that operate
globally.
Internationality
In accordance with section 5.4.1 (2) of the German Corporate
Governance Code, the Supervisory Board has specified the following
objectives regarding its composition and reports on the status of
implementation below:
OBJECTIVES OF THE SUPERVISORY BOARD WITH
RESPECT TO ITS COMPOSITION
For the Supervisory Board of Merck KGaA, professional qualifications
and personal expertise are the two most important prerequisites for
appointments to seats on the Supervisory Board. When proposing
Supervisory Board candidates for election or delegation, the Super-
visory Board will always give top priority to these prerequisites, which
are essential for fulfilling its legal duties. Overall, the Supervisory
Board's policy is to optimally meet its monitoring and advisory duties
by having diversity among its members. Diversity includes, in par-
ticular, internationality as well as different experience backgrounds
and career paths. The proportion of women on the Supervisory Board
is also considered to be an aspect of diversity. When preparing pro-
posals for election or delegation to the Supervisory Board, the Super-
visory Board shall consider in each case to what extent different,
complementary specialist skills, professional and life experience, and
an appropriate representation of both genders benefits the work of
the Supervisory Board. Additionally, the Supervisory Board shall sup-
port the Executive Board in its efforts to increase diversity within the
company.
The Supervisory Board of Merck KGaA currently comprises 16 mem-
bers, eight of whom represent the shareholders and a further eight
who represent the employees. The eight employee representative
members are elected by employee delegates pursuant to the provi-
sions of the German Codetermination Act (Mitbestimmungsgesetz
- "MitbestG"). These consist of six company employees, including a
senior executive, as well as two union representatives. The Supervi-
sory Board has no statutory proposal right with respect to electing
the delegates or employee representatives. Owing to a delegation
right of E. Merck Beteiligungen KG, two of the eight shareholder
representatives are specified. The Supervisory Board likewise has no
statutory proposal right with respect to exercising this delegation
right. The other six shareholder representatives are elected by the
General Meeting. In accordance with section 124 (3) sentence 1
AktG, the Supervisory Board shall propose to the General Meeting
Supervisory Board members for election. These proposals require a
majority of the votes of the shareholder representative members of
the Supervisory Board. The next scheduled election to the Supervi-
sory Board shall take place at the 2019 General Meeting. The General
Meeting is not required to follow the election proposals. The appoint-
ment objectives and competency requirements that the Supervisory
Board sets forth below therefore do not represent requirements to
be met by those eligible to elect or to delegate members. Instead,
they are intended to express the objectives pursued by the Super-
visory Board in office with regard to its advisory and monitoring
functions.
196
COOPERATION WITH THE EXECUTIVE BOARD
Recognisition and measurement of income tax liabilities and
deferred tax liabilities
193
(see also pages 186 et seq. for the description of Supervisory Board
procedures).
that are listed or subject to co-determination stipulates binding targets Diversity policy pursuant to section
for the percentage of positions on the Supervisory Board and on the
Management Board held by women. However, for Merck KGaA, stip-
ulations pursuant to section 111 (5) AktG need not be set for the
following reasons:
The statutory target of 30% pursuant to section 96 (2) AktG is
already applied to the Supervisory Board of Merck KGaA. This elim-
inates the obligation to stipulate a further target for the percentage
of positions held by women on the Supervisory Board (see section
111 (5) sentence 5 AktG).
The obligation to stipulate a target for the percentage of positions
held by women on the Management Board pursuant to section 111
(5) AktG is not applicable to the legal form of a corporation with
general partners (Kommanditgesellschaft auf Aktien), as a corpo-
ration with general partners neither has a management board com-
parable to that of a stock corporation nor does the Supervisory
Board have personnel authority over the Executive Board. Instead,
the Executive Board consists of personally liable general partners
289f (2) No. 6 of the German
Commercial Code (HGB)
Pursuant to section 111 (5) AktG, the Supervisory Board of companies
Merck is pursuing a Group-wide, global diversity program. At Merck,
diversity stands for a culture of inclusion, mutual esteem and respect.
To demonstrate this open and dynamic company culture, we promote
diversity throughout the Group and do so at all levels, including
We believe that our innovative strength is driven by a diverse
workforce and that an inclusive working environment sustainably
contributes to entrepreneurial success. That is why we are furthering
a culture of diversity independent of age, gender, disability, ethnic
or cultural background, religion, industry experience and educational
background. The diversity policy to strategically steer the topics of
diversity and inclusion at Merck thus focuses on the following key
criteria:
Management
experience
Gender
Internationality,
global mindset
Age
the Executive Board and Supervisory Board.
STIPULATIONS PURSUANT TO SECTION 111 (5) AKTG
(TARGET FOR THE PERCENTAGE OF POSITIONS ON THE
SUPERVISORY BOARD HELD BY WOMEN)
191
The Supervisory Board again properly executed its duties in 2018 in
accordance with the law as well as the company's Articles of Asso-
ciation and rules of procedure. In particular, the Supervisory Board
monitored the work of the Executive Board diligently and regularly.
The Personnel Committee is responsible for, among other things, the
following decisions concerning members and former members of
the Executive Board: contents of and entry into employment con-
tracts and pension contracts; granting of loans and advance pay-
ments; changes to the compensation structure and adaptation of
compensation; approval for taking on honorary offices, board posi-
tions and other sideline activities; and division of responsibilities
within the Executive Board of Merck KGaA. The Personnel Committee
passes its resolutions by a simple majority; in matters concerning
the Chairman of the Executive Board, unanimity is required. The
Chairman of the Committee regularly informs the Board of Partners
of its activities.
FINANCE COMMITTEE
The Finance Committe has four members. During fiscal 2018 and up
until January 27, 2019 these were: Theo Siegert (Chairman), Johannes
Baillou, Wolfgang Büchele and Tobias Thelen. As of January 27, 2019,
the Finance Committee comprises Johannes Baillou, Wolfgang
Büchele, Helene von Roeder and Daniel Thelen. The Finance Com-
mittee holds at least four meetings a year, at least one of which is a
joint meeting with the auditor of Merck KGaA. Further meetings are
convened as and when necessary. Meetings of the Finance Committee
are attended by the Chief Financial Officer of Merck KGaA. Other
members of the Executive Board of Merck KGaA may attend the
meetings upon request of the Finance Committee. These meetings
regularly include the Chairman of the Executive Board. The Finance
Committee is responsible for, among other things, analyzing and
discussing the annual financial statements, the consolidated financial
statements and the respective reports of the auditor, as well as the
half-year financial report (including the report of the auditors for the
audit review of the abridged financial statements and interim man-
agement report contained in the half-year report) and the quarterly
statements. Moreover, the Finance Committee recommends to the
Chairman of the Supervisory Board annual audit focuses for the
auditors of the annual financial statements. It also recommends to
the Supervisory Board an auditor for the annual financial statements
as well as auditors for the audit review of the abridged financial
statements and interim management report contained in the half-
year financial report for the Supervisory Board's corresponding sug-
gestion to the General Meeting. In addition, the Finance Committee
is concerned with the net assets, financial position, results of oper-
ations and liquidity of Merck, as well as accounting, internal auditing,
risk management and compliance issues. Upon request of the Board
of Partners, the Finance Committee examines investment projects
that must be approved by the Board of Partners and provides recom-
mendations pertaining thereto. It passes its resolutions with a simple
majority. The Committee Chairman regularly informs the Board of
Partners of the activities of the Finance Committee.
RESEARCH AND DEVELOPMENT COMMITTEE
The Research and Development Committee has four members. During
fiscal 2018 and up until January 27, 2019, these were: Helga
Rübsamen-Schaeff (Chairperson), Johannes Baillou, Siegfrid Karjetta
and Gregor Schulz. Since January 27, 2019, the Research and Devel-
opment Committee comprises Helga Rübsamen-Schaeff, Johannes
Baillou, Katharina Kraft und Simon Thelen. The Research and Devel-
opment Committee is convened as and when necessary, but holds at
least two meetings a year. Meetings of the Research and Develop-
ment Committee are attended by members of the Executive Board
of Merck KGaA upon request of the Committee. These meetings
regularly include the Chairman of the Executive Board as well as the
CEO Healthcare, the CEO Life Science and the CEO Performance
Materials. The Research and Development Committee is responsible,
among other things, for reviewing and discussing the research activ-
ities of the Healthcare and Life Science/Performance Materials busi-
ness sectors. It passes its resolutions with a simple majority. The
Chairperson of the Committee reports to the Board of Partners on
the insights gained from the meetings held.
Stipulations to promote the
percentage of management positions
held by women pursuant to section 76
(4) and section 111 (5) of the German
Stock Corporation Act (AktG)
STIPULATIONS PURSUANT TO SECTION 76 (4) AKTG
(TARGET FOR THE PERCENTAGE OF POSITIONS HELD BY
WOMEN ON THE TWO UPPER MANAGEMENT LEVELS
BELOW THE EXECUTIVE BOARD)
• First management level of Merck KGaA below the Executive Board:
21% of positions held by women
•
Second management level of Merck KGaA below the Executive
Board: 26% of positions held by women
The deadline set for reaching the new targets is December 31, 2021.
The first management level comprises all managers of Merck KGaA
with a direct reporting line to the Executive Board of Merck KGaA or
who belong to the global executive group. The second management
level comprises all managers of Merck KGaA who report to managers
with a direct reporting line to the Executive Board of Merck KGaA or
the global executive group. In addition, as a global company with
correspondingly aligned global (leadership) structures, Merck con-
tinues to pursue a (voluntary) global target of maintaining the pro-
portion of leadership positions held by women (managers, experts and
project managers in roles 4 and above) ¹ at a stable level of 30% in
the period until 2021.
1The relevant group represents approximately 6% of the entire workforce; see the section entitled "Diversity and Management" (on page 94).
Corporate Governance
Industry
knowledge
Educational
background
Statement on Corporate Governance
In addition to the aspects presented in the following, reference is
made to the objectives of the Supervisory Board with respect to its
composition and the profile of skills and expertise of the Supervisory
Board (see the information on the "Objectives of the Supervisory
Board with respect to its composition and profile of skills and expertise"
on pages 195 et seq.). The statements made there are part of the
diversity policy for the Supervisory Board presented here.
Currently, the Executive Board has the full breadth of the sector-
specific experience required.
INTERNATIONALITY AND GLOBAL MINDSET
As a science and technology company with global operations and
major markets on five continents with around 50,000 employees at
locations in 66 countries², internationality and the associated global
mindset is one of our key success factors. According to our diversity
policy, the Executive Board's internationality derives from leadership
experience or national origin, relative to our key sales markets or those
locations that are organizationally and culturally relevant to our employee
development efforts. For both criteria, Europe, North America and Asia-
Pacific are currently the key regions. The Executive Board meets this
objective with management experience in the named regions, for
instance in the following countries: France, Spain, Switzerland, the
United States, Singapore, India, Taiwan, Malaysia and Australia. One-
third of the Executive Board members are not German citizens.
MANAGEMENT EXPERIENCE
The key prerequisites for high-performance leadership teams are
both the diversity of the individual competency profiles and a balance
In order to translate the tremendous innovative potential of a science
and technology company into sustainable business success, interdis-
ciplinary educational backgrounds are a key element of our diversity
policy both for the Executive Board and for the Supervisory Board.
The current composition of both boards illustrates this interdiscipli-
nary aspect to a very high degree.
The members of the Executive Board contribute knowledge of
various fields including veterinary medicine, economic sciences,
medicine (pharmacology), chemistry and information technology. In
addition, all members of the Executive Board hold a university degree
and a doctorate from a German or foreign university.
Moreover, the members of the Supervisory Board have a back-
ground in one or more of the following fields of specialization: chem-
istry, biochemistry, nutrition, human medicine, business administration
and economics, education and physics, among others.
More than one-half of our Supervisory Board members are uni-
versity graduates and hold doctorates.
1 Merck also has employees at sites that are not fully consolidated subsidiaries. These figures refer to all people directly employed by Merck and therefore may deviate from figures in the financial
section of this report.
2Each country with at least one active employee is considered one country.
Corporate Governance
Report of the Supervisory Board
Report of the Supervisory Board
Our Group-wide diversity policy encompasses both voluntary as well
as legally defined objectives that we continuously and sustainably
work on to achieve. In this context, it should be noted that with
respect to the Executive Board of Merck KGaA, many rules can only
be applied correspondingly. This is because the Executive Board com-
prises personally liable general partners of Merck KGaA and is not a
management board with employed members of a corporate body
(for details, please also see the "Joint Report of the Executive Board
and the Supervisory Board" on pages 166 et seq.).
To efficiently lead and manage the Group, the Executive Board must
have in-depth knowledge of the key industries and business sectors
that the company operates in. In accordance with the diversity policy,
there should be at least one member of the Executive Board with
in-depth expertise of Healthcare, Life Science or Performance Mate-
rials, respectively.
INDUSTRY EXPERIENCE
EDUCATIONAL BACKGROUND
between a Group-internal and external management perspective.
Therefore, as a whole the Executive Board must have in-depth knowl-
edge and experience in the following key areas of importance to the
company: Strategy & Planning, Finance & Accounting, Sales & Oper-
ations, Human Resources, Legal & Compliance and Information Tech-
nology. In addition, for the composition of the Executive Board it is
important to ensure a good balance of members from within and
outside the company. Our diversity policy seeks to derive inspiration
and innovation from outside the company and to identify the latest
trends of relevance to the core businesses of the company, while
ensuring sustainability and continuity in line with our corporate culture.
We have therefore set ourselves the global objective of filling
two-thirds of our leadership positions with candidates from within
the company.
192
The current Executive Board fulfills both of the aforementioned
objectives: All required aspects of the competency profile are covered
by at least one member of the Executive Board. Likewise, three
members of the Executive Board possess multiple years of experience
working within the Merck Group prior to their appointment to the
Executive Board.
Statement on Corporate Governance
AGE
Corporate Governance
In their current composition, both boards meet this objective.
The age range of the Executive Board is 15 years; that of the Super-
visory Board is 30 years. In addition, maximum age limits apply to
both boards (for the Supervisory Board please see the information
regarding the "Objectives of the Supervisory Board with respect to
its composition, and profile of skills and expertise" on pages 195 et
seq.). For Executive Board members, a maximum age of 70 applies.
GENDER
Gender diversity also plays a crucial role since it enables us to benefit
from a larger talent pool, and allows us as a company to develop a
better understanding of important customer groups. We have set
ourselves the (global) strategic objective of maintaining the proportion
of women in leadership positions (managers, experts and project
managers in role 4 and higher¹) at a stable level of 30% by 2021
(please also refer to the description on page 94 under "Diversity and
Management").
Additionally, Merck continues to pursue representation of both
genders as an objective for the Executive Board. With Ms. Belén Garijo
as CEO Healthcare, at Merck a woman is currently responsible for our
largest business sector in terms of sales. The statutory target of 30%
pursuant to section 96 (2) AktG is already applied to the Supervisory
Board of Merck KGaA. We consider further targets to be dispensable
here.
Our boards are to have a balanced age structure. This permits future-
oriented and consistent succession planning and is a key element of
sustainable company management and monitoring. Our diversity
policy aims for an age range of at least ten years between the young-
est and the oldest member of the respective board.
-13
-155
-162
-42
3,042
-1,147
2,191
→ 31
156
3,129
- 320
185
Changes in cash and cash equivalents due to currency translation
→ 33
Cash and cash equivalents as of December 31 (consolidated balance sheet)
939
589
Cash and cash equivalents as of January 1
-30
-5
11
4
-323
-466
-1,847
-4
-1,843
-2,057
69
7
2,170
-314
-932
-593
32
→ 41
-1,821
-2,825
-496
5
-1,870
182
1,586
-319
349
375
147
589
Profit transfer to/from E. Merck KG
204
2,615
10
2,605
14,050
61
13,989
-346
3,229
-191
24
3
14,050
61
13,989
3
3,229
11
→ 18
55
-17
44
-219
-75
31
-919
-7
-910
67
-392
-106
103
2,696
2,219
24
4
3,374
Total equity
to Merck KGaA
3,814
168
397
December 31, 2018
-16
59
12,525
-46
Transactions with no change of control
-515
including changes in reserves
-162
29
-41
Changes in scope of consolidation/Other
interests
-1,340
1 See Note (49) "Effects from new accounting standards and other presentation and measurement changes".
2 Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes".
Non-controlling
translation Equity attributable
difference
Cost of hedging
reserve¹
Cash flow
hedge reserve
-191
24
instruments¹
7
financial assets¹
Fair value
reserve for debt
Available-for-sale
Gains/losses recognized in equity
205
Consolidated Statement of Changes in Net Equity
Consolidated Financial Statements
Currency
1 Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes".
29
Dividend payments
Retained earnings
General
397
partner's equity Subscribed capital
Merck KGaA
Merck KGaA
168
Capital reserves
(share premium)
Merck KGaA
Remeasurement Fair value reserve
Equity capital
3,814
of defined
benefit plans
for equity
instruments
-1,501
-3
397
168
Retained earnings/
net retained profit
8,049
3,814
December 31, 2017²
Transactions with no change of control
Consolidated Financial Statements
Consolidated Statement of Changes in Net Equity
Consolidated Statement of Changes in Net Equity
For details see Note (36) "Equity".
€ million
January 1, 2017 (as reported)
Changes in scope of consolidation/Other
Adjustment due to mandatory
retrospective adoption of IFRS 9¹
Profit after tax²
Other comprehensive income²
Comprehensive income
Dividend payments
Profit transfer to/from E. Merck KG
including changes in reserves
January 1, 2017 (restated)
-41
8,046
2,605
-
Adjustment on application of IAS 29¹
January 1, 2018 (restated)
4
397
168
-1,358
3,814
-1,358
.6
3,374
Profit after tax
Other comprehensive income
Comprehensive income
9,930
-1,501
9,903
23
3,814
142
2,605
142
-155
-593
1
Adjustment on initial application of IFRS 91
Adjustment on initial application of IFRS 15¹
397
3,814
9,903
-1,358
January 1, 2018
397
168
168
-55
Net sales
-2,733
2018
2017
→8
14,836
14,517
→ 9
-5,382
-5,071
9,454
9,446
Marketing and selling expenses
→ 10
-4,384
-4,349
Administration expenses
-993
-899
-780
→ 13
Other operating expenses
1,212
627
→ 12
Note
Other operating income
→ 38
Impairment losses and reversals of impairment losses on financial assets (net)2
-2,108
-2,225
→ 11
Research and development costs
27
Gross profit
Cost of sales
7
(55) Research and development costs 305
(56) Goodwill 305
(54) Collaboration agreements, in-licensing and out-licensing in
the Healthcare business sector 304
(53) Recognition of net sales and other income 303
(50) Measurement policies 301
(51) Consolidation methods 302
(52) Currency translation 302
(49) Effects from new accounting standards and other presentation
and measurement changes 288
Accounting and Measurement
Policies 288-311
(57) Other intangible assets 305
(47) Information on preparation and approval 287
(48) Subsequent events 288
(46) Companies opting for exemption under section
(45) Corporate governance 287
(43) Executive Board and Supervisory Board compensation 286
(44) Auditor's fees 287
(42) Related-party disclosures 286
Other Disclosures 286-288
(41) Net cash flows from financing activities 285
264 (3) HGB or section 264b HGB 287
-880
(58) Property, plant and equipment 306
(59) Leasing 306
(61) Financial liabilities 308
€ million
Consolidated Income Statement¹
Consolidated Income Statement
Consolidated Financial Statements
200
(70) List of shareholdings 312
(60) Financial assets 306
List of Shareholdings 312-321
(68) Other provisions and contingent liabilities 310
(67) Provisions for pensions and other post-employment
benefits 310
(66) Inventories 310
(64) Other non-financial assets and liabilities 309
(65) Deferred taxes 309
(63) Contingent consideration 309
(62) Derivatives and hedge accounting 308
(69) Share-based compensation programs 311
(39) Information on fair value measurement 274
(40) Other financial obligations 283
Operating result (EBIT)³
2,423
thereof: from discontinued operation
diluted
→ 17
7.76
5.99
2.51
5.87
5.25
0.12
7.76
5.99
2.51
5.87
5.25
0.12
thereof: from continuing operations
thereof: from discontinued operation
1 Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes".
Changes recognized in equity
Tax effect
Changes in remeasurement
Net defined benefit liability
to profit or loss in subsequent periods
Items of other comprehensive income that will not be reclassified
thereof: from continuing operations
Profit after tax¹
Consolidated Statement of Comprehensive Income
201
Statement of Comprehensive Income
Consolidated Financial Statements
3 Not defined by International Financial Reporting Standard (IFRSS).
2 Relevant for the first time as of January 1, 2018, given the first-time application of IFRS 9, see Note (49) "Effects from new accounting standards and other presentation and measurement
changes".
€ million
basic
Earnings per share (in €)
10
→ 14
Income tax
2,129
1,461
-345
-343
-368
→ 32
77
32
-
Profit before income tax
Finance costs
Finance income
51
1,727
428
1,093
22
→ 36
thereof: attributable to non-controlling interests
2,605
3,374
thereof: attributable to Merck KGaA shareholders (net income)
Profit after tax from continuing operations
2,615
Profit after tax
57
2,303
→ 5
Profit after tax from discontinued operation
2,557
3,396
(37) Derivative financial instruments 264
(38) Management of financial risks 267
(35) Financial liabilities/capital management 258
(36) Equity 260
(33) Cash and cash equivalents 257
(34) Financial assets 257
-3
55
-4
-515
-515
-175
-13
-162
3,964
22
3,943
619
-32
-7
568
-1
569
4
-1
-121
-1
1,171
13,992
-93
63
3,374
22
3,396
-7
-32
619
14,055
-96
-1
-128
• IFRS 9 "Financial Instruments"
• IFRS 15 "Revenue from Contracts with Customers"
• IFRIC 22 "Foreign Currency Transactions and Advance Consideration"
Amendment to IAS 40 "Investment Property"
•
• Amendment to IFRS 2 "Share-based payment"
Amendment to IFRS 4 "Insurance Contracts"
The following regulations take effect as of fiscal 2018:
• Amendments to IFRS 15 "Revenue from Contracts with Customers"
• Annual Improvements to IFRS 2014-2016 Cycle: Amendments to
IFRS 1 "First-time Adoption of International Financial Reporting
Standards" and to IAS 28 "Investments in Associates and Joint
Ventures"
The other new regulations applicable for the first time in fiscal
2018 did not have a material impact on the consolidated financial
statements.
Regulations applicable as of fiscal 2019
The following standards will take effect as of fiscal 2019:
• IFRS 16 "Leases"
• IFRIC 23 "Uncertainty over Income Tax Treatments"
Amendment to IAS 28 "Investments in Associates and Joint Ventures"
• Amendment to IFRS 9 "Financial Instruments"
We did not opt for early application of any of these standards. With
the exception of IFRS 16, none of these rules is expected to have a
significant effect on the consolidated financial statements.
IFRS 16 "Leases" replaces IAS 17 "Leases" and the corresponding
interpretations. Merck applies the modified retrospective method to
implement IFRS 16. The cumulative transition effects will be recog-
nized as at the date of first-time application (January 1, 2019).
Previous-year figures will not be restated.
Please refer to Note (49) "Effects from new accounting standards
and other presentation and measurement changes" for further details
on first-time application effects of IFRS 9 and IFRS 15. Note (49)
also comprises details on the following effects: adjustments of the
consolidated balance sheet as of January 1, 2018, resulting from the
application of IAS 29 "Financial Reporting in Hyperinflationary Econ-
omies" regarding Argentina, disclosure adjustments for interest and
penalties related to income taxes, and adjustments of the consolidated
income statement according to IFRS 5, effective for 2017, in connec-
tion with the disposal of the Consumer Health business.
4
Regulations applicable as of fiscal 2018 and other presentation
and measurement changes
These consolidated financial statements have been prepared in
accordance with the International Financial Reporting Standards in
force on the reporting date as issued by the International Accounting
Standards Board (IFRS and IAS) and the IFRS Interpretations Com-
mittee (IFRIC and SIC) and as adopted by the European Union as
well as the additionally applicable provisions of section 315e of the
German Commercial Code (HGB). The fiscal year corresponds to the
calendar year. These financial statements have been prepared in
euros, the reporting currency. The figures reported in the consoli-
dated financial statements have been rounded, which may lead to
individual values not adding up to the totals presented.
-33
1,790
17,200
33
17,233
206
The accounting and measurement policies used in the consolidated
financial statements are presented in Notes (50) "Measurement pol-
icies" to (69) "Share-based compensation programs".
Consolidated Financial Statements
Notes to the
Consolidated Financial Statements
General Disclosures
(1) Company information
The accompanying consolidated financial statements as of Decem-
ber 31, 2018, have been prepared with MERCK Kommanditgesellschaft
auf Aktien (Merck KGaA), Frankfurter Strasse 250, 64293 Darmstadt
as parent company. Merck KGaA is registered under HRB 6164 with
the Commercial Register of Darmstadt. In accordance with the pro-
visions of the German financial reporting disclosure law (Publizitäts-
gesetz), consolidated financial statements are also prepared for
E. Merck Kommanditgesellschaft (E. Merck KG), the ultimate parent
company and general partner of Merck KGaA with an equity interest
of 70.274% as of December 31, 2018 (December 31, 2017: 70.274%).
These consolidated financial statements include Merck KGaA and its
subsidiaries. The authoritative German versions of these financial
statements are filed with the German Federal Gazette (Bundesan-
zeiger) and can be accessed at www.bundesanzeiger.de.
(2) Reporting principles
Notes to the Consolidated Financial Statements
1
-15
-15
(2) Reporting principles 206
(1) Company information 206
General disclosures 206-209
Operating Assets, Liabilities and
Contingent Liabilities 231-254
Consolidated Statement of Changes
in Net Equity 204
(18) Net cash flows from operating activities 230
(3) Management judgments and
(17) Earnings per share 230
(15) Cost of materials 229
(14) Income tax 226
(10) Marketing and selling expenses 223
(11) Research and development costs 223
(12) Other operating income 224
(13) Other operating expenses 225
(9) Cost of sales 223
(8) Net sales 221
(7) Segment reporting 216
(16) Personnel expenses/headcount 229
Consolidated Cash Flow Statement 203
sources of estimation uncertainty 208
(4) Changes in the scope of consolidation 210
(5) Acquisitions and divestments 210
(32) Financial result/net gains or losses from financial
instruments 255
Capital Structure, Investments and
Financing Activities 255-285
(31) Net cash flows from investing activities 254
(30) Refund liabilities 254
(29) Trade accounts payable 254
(26) Other provisions 247
(27) Contingent liabilities 252
(28) Other liabilities 253
Group structure 210-215
(25) Provisions for pensions and other
post-employment benefits 241
(23) Inventories 240
(22) Other assets 239
(21) Property, plant and equipment 237
(20) Other intangible assets 234
(19) Goodwill 231
(6) Collaborations of material significance 213
(24) Trade accounts receivable 240
Equity instruments²
Consolidated Balance Sheet 202
Result from Operating Activities
and Income Taxes 216-230
-121
-1
1,171
14,003
63
14,066
31
31
-121
-1
1,171
14,003
63
14,066
-31
Consolidated Statement of
Comprehensive Income 201
1
-593
Consolidated Income Statement 200
FINANCIAL STATEMENTS
CONSOLIDATED
197-321
FINANCIAL STATEMENTS
CONSOLIDATED
1
-2,057
6
767
-155
4
-159
-593
761
Fair value adjustments
-55
Changes recognized in equity
Other non-current provisions
→ 26
2,336
780
2,257
788
Non-current financial liabilities
→ 35
6,681
8,033
Other non-current liabilities
→ 28
52
354
Deferred tax liabilities
→ 14
1,288
11,138
1,489
12,919
1,766
29
2,790
2,215
→ 35
457
→ 25
600
Income tax liabilities¹
Refund liabilities²
Trade accounts payable²
Current financial liabilities
Current provisions¹
Current liabilities
→ 26
Provisions for pensions and other post-employment benefits
Non-current liabilities
14,066
2,170
→ 33
490
460
→ 14
731
589
886
-
90
24
34
2,923
2,931
22
2,195
→ 5
7,455
63
14,003
1,081
12,358
565
565
15,006
1,629
17,200
33
17,233
9,236
36,888
Non-controlling interests
Gains/losses recognized in equity¹
Reserves¹
Equity capital
→ 36
Total equity
35,621
Equity attributable to Merck KGaA shareholders
→ 30
472
→ 14
Changes in cash and cash equivalents
thereof: from discontinued operation
Net cash flows from financing activities
Repayment of other current and non-current financial liabilities
Payments from new borrowings of other current and non-current financial liabilities
Repayment of bonds
Note
Repayment of financial liabilities to E. Merck KG
Dividend payments to E. Merck KG
Dividend payments to non-controlling interests
Dividend payments to Merck KGaA shareholders
thereof: from discontinued operation
Payments from the disposal of assets held for sale less transferred cash and cash equivalents
Net cash flows from investing activities
Payments from other divestments less transferred cash and cash equivalents
Payments from new borrowings of financial liabilities from E. Merck KG
Payments from the disposal of other financial assets
2018
3,396
Tax effect
-1,256
-288
103
199
234
2017
104
-109
-184
-172
1,758
1,812
2,615
-221
→ 24
Payments for acquisitions less acquired cash and cash equivalents
Payments from the disposal of property, plant and equipment
1 Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes".
2 As of January 1, 2018, refund liabilities were reclassified from trade accounts payable into a separate item in the consolidated balance sheet, given the first-time application of IFRS 15, see
Note (49) "Effects from new accounting standards and other presentation and measurement changes".
35,621
36,888
Total equity and liabilities
8,635
8,517
Consolidated Financial Statements
→ 5
2,288
→ 28
Liabilities directly related to assets held for sale
Other current liabilities
1,016
1,176
2,175
Payments for investments in financial assets
Consolidated Cash Flow Statement
Consolidated Cash Flow Statement
Payments for investments in property, plant and equipment
Payments from the disposal of intangible assets
Payments for investments in intangible assets
Net cash flows from operating activities
thereof: from discontinued operation
Other non-cash income and expenses¹
Neutralization of gains/losses on disposal of assets
203
Changes in other assets and liabilities
Changes in trade accounts payable/refund liabilities
Changes in trade accounts receivable
Changes in inventories
Depreciation/amortization/impairment losses/reversals of impairments
Profit after tax¹
€ million
Changes in provisions
2,632
69
23
-1
29
-13
142
1
8
-1
7
→ 37
-71
88
52
12
12
-31
-7
69
-7
-2,011
626
Other comprehensive income¹
Changes recognized in equity
Reclassification to profit or loss
29
Changes taken directly to equity
-32
10
5
-5
-47
→ 37
4
142
-41
2
Fair value adjustments
Cash flow hedge reserve
Changes recognized in equity
Tax effect
Fair value adjustments
Available-for-sale financial assets³
Reclassification to profit or loss
Changes recognized in equity
Reclassification to profit or loss
Fair value adjustments
Debt instruments²
to profit or loss in subsequent periods
2,764
Items of other comprehensive income that may be reclassified
Tax effect
-51
Reclassification to assets
Changes recognized in equity
141
-34
-7
→ 25
2,615
3,396
2017
Tax effect
2018
Exchange differences on translating foreign operations
Changes recognized in equity
Tax effect
Reclassification to profit or loss
Fair value adjustments
Cost of cash flow hedge reserve¹
Note
619
Reclassification to profit or loss
581
13,582
13,764
→ 19
Dec. 31, 2017
Dec. 31, 2018
Note
- 20
Total assets
Cash and cash equivalents
Income tax receivables
Other current assets
Current financial assets
Trade accounts receivable
Inventories
Assets held for sale
Current assets
7,237
→ 21
28,166
-2,062
->
27,652
1,106
1,091
8,317
→ 14
→ 22
444
610
→ 34
4,512
4,811
138
Deferred tax assets
205
Non-current financial assets
Comprehensive income
6
22
→ 36
thereof: attributable to non-controlling interests
761
3,964
3,943
3,964
Comprehensive income
-1,989
Other non-current assets
-1,847
568
767
767
thereof: attributable to Merck KGaA shareholders
1,634
thereof: from continuing operations
Non-current assets
Other intangible assets
Consolidated Balance Sheet
Consolidated Balance Sheet
Consolidated Financial Statements
€ million
1 Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes".
2 Relevant for the first time as of January 1, 2018, given the first-time application of IFRS 9, see Note (49) "Effects from new accounting standards and other presentation and measurement changes".
3 Relevant until December 31, 2017, see Note (49) "Effects from new accounting standards and other presentation and measurement changes".
700
202
2,330
thereof: from discontinued operation
67
Property, plant and equipment
Goodwill
high
IFRS 5
210
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
Group Structure
no
(4) Changes in the scope of consolidation
The scope of consolidation changed as follows in the reporting period:
Consolidated subsidiaries as of December 31, 2017
Date on which assets and liabilities are classified as "held for sale"
Liquidations/mergers
Retirements
Establishment
Acquisitions
Materiality
Divestments
Immateriality
Loss of control
Consolidated subsidiaries as of December 31, 2018
Non-consolidated subsidiaries as of December 31, 2017
Non-consolidated subsidiaries as of December 31, 2018
314
5
→ 5
1
10
Additions
Assets held for sale
Measurement of sales deductions, and refund liabilities
33
Recognition and measurement of contingent liabilities
-16
high
IAS 37
Recognition and measurement of other provisions
high
IAS 37
Determination of fair values of share-based compensation programs
medium
IFRS 2
Revenue recognition
→ 6,8,30
yes
Determination of type and timing of revenue recognition
(including upfront and milestone payments received)
medium
medium
IFRS 15
IFRS 15
Income tax
→ 14
no
Recognition and measurement of income tax liabilities
high
-1,176
IAS 12
Recognition and measurement of deferred taxes from temporary differences
Recognition of deferred tax assets from loss carryforwards
medium
medium
IAS 12
IAS 12
-13
-370
59
2,303
57
2,281
53
22
4
Neither net gains nor losses on fair value measurement less costs
to sell were recognized for fiscal 2018 or the previous year.
The following table provides the reconciliation from the disposal
proceeds to the preliminary net gain from the disposal of discon-
tinued operation before tax:
€ million
Disposal proceeds
less: net assets divested
Subtotal
Transaction costs related to the disposal
Realized currency translation effects on equity
Disposal gain before tax
2018
3,364
-606
2,758
-103
-41
2,614
212
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
Net assets divested comprised the following items:
€ million
no
-43
301
-8
2,682
44
Overall, the impact of subsidiaries not consolidated due to immate-
riality on net sales, profit after tax, assets and equity was less than
1% relative to the entire Merck Group. Investments held in non-con-
solidated subsidiaries were disclosed under non-current financial
assets (see Note (34) "Financial assets"). The list of non-consolidated
subsidiaries mainly comprises non-operating shelf companies as well
as entities subject to liquidation procedures, which are measured at
fair value through other comprehensive income.
The list of shareholdings presents all of the companies included in the
consolidated financial statements as well as all of the shareholdings
of Merck KGaA (see Note (70) "List of shareholdings").
(5) Acquisitions and
divestments
DIVESTMENT OF CONSUMER HEALTH BUSINESS
On April 19, 2018, Merck signed an agreement on the divestment of
its global Consumer Health business to The Procter & Gamble Com-
pany, United States, (P&G). The transaction was completed on
December 1, 2018. The selling price was € 3.4 billion in cash before
defined purchase price adjustments for transferred operating assets
and borrowed capital, among other things. The purchase price
adjustments will be made in the first half of 2019. The transaction
was executed through the sale of shareholdings in multiple Merck
subsidiaries as well as by way of various asset sales. Apart from the
commercial operations in 44 countries, the Consumer Health business
also comprised two production facilities in Austria and India. Moreover,
with respect to the transfer of the shareholdings in Merck Ltd., India,
the commercial operations of other business sectors were transferred
as well, and immediately repurchased. About 3,300 employees trans-
ferred to P&G as part of the Consumer Health business divestment.
In addition to the divestment agreement, Merck and P&G signed a
number of manufacturing, supply and service agreements.
With the signing of the agreement to divest the Consumer Health
business, in the opinion of the Executive Board the preconditions for
classification as a discontinued operation pursuant to IFRS 5 were
given. Until transaction closing, the parts of the Consumer Health
business being transferred to P&G were disclosed in the consolidated
balance sheet as assets held for sale and as liabilities directly related
to assets held for sale.
In accordance with IFRS 5, the financial figures disclosed in these
consolidated financial statements relate exclusively to continuing
operations unless expressly stated otherwise. Supplies and services
provided by Merck after the conclusion of the sale transaction accord-
ing to contractual agreements were taken into account for the pres-
entation of the reporting period and the prior-year period. The
amounts of earnings contributions allocated to Merck's continuing
operations are based on the anticipated transactions that will be made
with the disposed business after the divestment. In accordance with
IFRS 5, the prior-year consolidated balance sheet was not adjusted.
The cash flows from the discontinued operation are shown under
separate items in the consolidated cash flow statement. A detailed
reconciliation of the reporting components published in previous
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
211
periods to the reporting components adjusted in accordance with
IFRS 5 can be found in Note (49) "Effects from new accounting
standards and other presentation and measurement changes". The
financial figures of discontinued operations are presented below:
€ million
Net sales
Expenses
Gain on the disposal of discontinued operation
Profit/loss of discontinued operation before income tax
Income tax on ordinary activities
Income tax on the gain on the disposal of discontinued operation
Proift/loss of discontinued operation after income tax
thereof: attributable to Merck KGaA shareholders
thereof: attributable to non-controlling interests
2018
2017
748
809
-680
-709
2,614
101
→ 26,27
ary scope/
estimation
uncertainty
Other provisions and contingent liabilities
regarding all right-of-use assets except land, land rights and
buildings, including buildings on third-party land - Merck will not
separate non-lease components from lease components;
⚫ leases that were previously subject to IAS 17 and the corresponding
interpretations, will be treated as leases under IFRS 16 as well;
⚫ at first-time application, no impairment tests for right-of-use
assets will be carried out - instead, Merck will charge provisions
for onerous contracts against the respective right-of-use assets;
• at first-time application, directly attributable costs incurred at con-
tract inception will not be taken into consideration.
Merck will not apply the practical expedient regarding leases with a
term of less than 12 months.
• Amendment to IFRS 3 "Business Combinations"
• Annual Improvements to IFRSS 2015-2017 Cycle
• Amendments to References to the Conceptual Framework in IFRS
Standards
From today's perspective, the new rules are not expected to have
any material effects on the consolidated financial statements.
The European Union announced on October 30, 2015, that it would
not endorse the interim standard "IFRS 14 Regulatory Deferral
Accounts" published by the International Accounting Standards Board
on January 30, 2014. On December 17, 2015, the International
Accounting Standards Board decided to defer the date of the manda-
tory first-time application of the amendments to the IAS 28 "Invest-
ments in Associates and Joint Ventures" and IFRS 10 "Consolidated
Financial Statements" standards published on September 11, 2014,
indefinitely.
Published accounting standards not yet endorsed by the
European Union
As of the balance sheet date, the following standards were published
by the International Accounting Standards Board, but not yet endorsed
by the European Union:
• IFRS 17 "Insurance Contracts"
• Amendment to IAS 1 "Presentation of Financial Statements"
• Amendment to IAS 8 "Accounting Policies, Changes in Accounting
Estimates and Errors"
• Amendment to IAS 19 "Employee Benefits"
leases of intangible assets within the scope of IAS 38 will not be
recognized in accordance with IFRS 16;
(3) Management judgments and
The preparation of the consolidated financial statements required
Merck to make discretionary decisions and assumptions as well as
estimates to a certain extent. The discretionary decisions, assumptions
relating to the future and sources of estimation uncertainty described
below are associated with the greatest potential effects on these
consolidated financial statements.
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
209
Discretion-
Items
Goodwill
Non-current assets
Carrying
amount Dec.
31, 2018
(€ million)
See Note for
details
Sensitivity
analysis
IFRSS
sources of estimation uncertainty
•
Merck will make use of the following practical expedients of IFRS 16:
• as before, right-of-use assets, including the corresponding liabilities,
from leases of low-value assets will not be recognized in the con-
solidated balance sheet;
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
207
IFRS 16 introduces a uniform lessee accounting model that requires
lessees to recognize all leases in the consolidated balance sheet. This
model mandates that right-of-use assets be recognized for identified
assets and lease liabilities recognized for entered payment obliga-
tions. The new lease accounting regulations affect Merck as a lessee,
in particular regarding leased real estate and vehicles. The lessor
accounting regulations remain largely unchanged; this business has
no material relevance for Merck.
Furthermore, Merck's consolidated financial statements will not be
affected by the new sale-and-lease-back regulations introduced per
IFRS 16.
Lease liabilities - recognized for leases with Merck as a lessee -
are measured at the present value of the future lease payments,
discounted using the interest rate implicit in the lease, or the relevant
incremental borrowing rate. The resulting amount is also used to
recognize the right-of-use asset, adjusted by directly attributable
costs,
if applicable. Furthermore, prepayments as well as liabilities
relating to fiscal 2018 are taken into account. When remaining lease
terms are determined at first-time application, the probability that
purchase, extension, or termination options will be exercised is
assessed based on the latest insights. These assessments were dis-
cretionary.
According to IFRS 16, right-of-use assets are recognized within
property, plant and equipment, using the same line item that would
have been used if the underlying asset had been purchased by Merck.
Going forward, interest expenses from the unwinding of the discount
on lease liabilities are recognized in the financial result; this differs
from the previous accounting method, according to which operating
lease expenses were recognized in full in the respective functional
costs.
At the time these consolidated financial statements were pre-
pared, and based on the knowledge and contractual status at that
time, Merck expected the following impact on financial position and
performance from the application of IFRS 16:
Consolidated Balance Sheet
Merck carried out a Group-wide analysis to establish the projected impact from the first-time application
of IFRS 16. As of January 1, 2019, an increase in lease liabilities and corresponding right-of-use assets
in the amount of € 470 million will be recognized. Financial liabilities will increase by 5.3% accordingly.
As a result, Merck's equity ratio will decline by about one percentage point (0.6%) according to our
projections.
The right-of-use assets to be recognized as of first-time application of IFRS 16 affect the following items
within property, plant and equipment:
Consolidated Income Statement
Consolidated Cash Flow Statement
€ million
Non-current assets
Land, land rights and buildings, including buildings
on third-party land
Plant and machinery
Other facilities, operating and office equipment
January 1, 2019
€ ~ 385 million
€ ~15 million
€ ~ 70 million
Based on the leasing portfolio held at first-time application (January 1, 2019) and the latest contractual
status, we expect for fiscal 2019 depreciation of about € 120 million, and corresponding interest expenses
of about € 10 million. To date, expenses from operating lease agreements were recognized over the
lease term, on a straight-line basis, in operating expenses. These changes in accounting principles will
translate into improved KPIs. Based on the current contractual status, the operating result (EBIT) will
improve by about € 10 million, and the EBITDA pre by about € 130 million. However, the first-time
application of IFRS 16 will have no material impact on the business free cash flow (BFCF).
The repayment components of about € 115 million included in the lease payments represent repayments
of financial liabilities and are therefore recognized as cash flows from financing activities. To date, such
repayment components were recognized within payments from operating lease agreements in cash
flows from operating activities.
208
Consolidated Financial Statements
13,764
→ 19
yes
Determination of recoverable amount
IAS 2
Trade accounts receivable
2,931
→ 24, 38
yes
Determination of impairment amount
medium
IFRS 9
Other financial assets
→34, 39
yes
Determination of fair values of contingent considerations
high
259
IFRS 13
IFRS 9,
Determination of fair values of equity instruments
medium
274
IFRS 13
Provisions for pensions and other post-employment benefits
→ 25
yes
Determination of present value of defined-benefit obligations
medium
-4,719
IAS 19
medium
-1,381
Identification of impairments (or reversal of impairments)
→ 23
high
IAS 36
Other intangible assets
7,237
-20
yes
In-licensing of intangible assets
medium
IAS 38
Identification of impairments (or reversal of impairments)
medium
IAS 36
Determination of amortization
medium
IAS 38
Property, plant and equipment
4,811
→ 21
no
Identification of impairments (or reversal of impairments)
medium
IAS 36
Determination of depreciation
medium
IAS 16
Inventories
2,764
no
Goodwill
If so, Merck had to determine whether Merck's contractually
promised goods or services contained in the collaboration agreement
could be separated or not.
Deferred tax assets
-1,254
379
59
359
313
327
310
19
55
1,159
1,629
1,621
1,516
-1,333
1,314
1,402
Business free cash flow³
1,025
1 Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes".
2 Excluding intersegment sales.
3 Not defined by International Financial Reporting Standard (IFRSS).
4 According to the consolidated cash flow statement.
INFORMATION BY COUNTRY AND REGION¹
Europe
€ million
2018
2017
thereof: Germany
2018
1,393
-2,985
-2,893
20,422
834
747
726
696
743
13
53
23
3
-87
1,492
2,028
1,755
63
-256
1,580
206
1,556
1,773
1,840
1,786
24.9%
28.6%
29.8%
30.4%
7,568
8,184
20,860
thereof: Switzerland
1,036
North America
2018
3,031
2,895
1,503
1,385
Research and development costs
-1,938
-1,840
-920
-681
647
-902
623
-1,050
Property, plant and equipment
1,024
-186
-166
Number of employees
25,791
25,979
13,513
13,302
2,234
2,151
10,978
10,520
1 Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes".
2 Excluding intersegment sales.
927
14,694
14,868
2,839
2017
2018
2017
Net sales by customer location²
4,559
4,406
1,002
945
211
223
3,818
3,810
Net sales by company location²
5,012
4,828
1,407
1,416
390
360
3,871
3,835
Goodwill and other intangible assets
5,562
6,537
575
614
2,124
2017
Property, plant and equipment
1,337
57
60
14
75
128
699
93
606
SIGNIFICANT MANAGEMENT JUDGMENTS AND SOURCES
OF ESTIMATION UNCERTAINTY - ASSETS HELD FOR SALE,
DISPOSAL GROUPS AND DISCONTINUED OPERATIONS
The assessment as to when a non-current asset, disposal group or
discontinued operation meets the prerequisites of IFRS 5 for classi-
fication as "held for sale" is subject to significant discretionary judg-
ment. Even in the case of an existing management decision to review
a disposal, an assessment subject to uncertainties has to be made
as to the probability that a corresponding disposal will occur during
the year or not.
Regarding the divestment of the Consumer Health business, material
information was made available to potential buyers first in fiscal
2018, using electronic data rooms. It was only on the basis of this
information that potential buyers were able to submit binding offers
that were analyzed by Merck based on its price expectations. During
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
213
54
the subsequent negotiations with potential buyers, the negotiating
parties were able to define the transaction in more specific terms,
i.e. material changes to the disposal plan were not unlikely at the
balance sheet date (December 31, 2017). Against this background
DIVESTMENT OF FLOW CYTOMETRY BUSINESS
On October 18, 2018, Merck signed an agreement with Luminex
Corporation, United States, concerning the divestment of the flow
cytometry business. These business activities comprised the flow
cytrometry platforms Amnis® and GuavaⓇ as well as the associated
reagents under these brands. The disposal proceeds amounted to
€ 66 million (US$ 75 million), of which € 61 million (US$ 70 million)
was paid in fiscal 2018. The remaining € 5 million will be paid in
fiscal 2019. The transaction was completed on December 31, 2018.
The business activities assigned to the Life Science business sector
primarily consisted of the allocated goodwill as well as intangible
assets and inventories. This divestment generated a disposal gain of
€ 9 million which was recognized in other operating income.
On September 15, 2017, Merck acquired a 100% interest in Natrix
Separations, Inc. (Natrix). The company, which is headquartered in
Burlington, Canada, supplies hydrogel membrane products for single-
use chromatography. Natrix was integrated into the Life Science
business sector. The purchase price comprised fixed compensation
of around US$ 14 million (€ 12 million) as well as milestone payments
of up to US$ 8 million (€ 7 million).
The purchase price allocations for GSI and Natrix remained
unchanged compared to December 31, 2017. The most significant
impact from the purchase price allocations resulted, in both cases,
from the remeasurement of technology-related intangible assets.
(6) Collaborations of
material significance
DIVESTMENT OF BIOSIMILARS BUSINESS
IN PREVIOUS YEAR
On August 31, 2017, Merck completed the divestment of the Biosim-
ilars business to subsidiaries of Fresenius SE & Co. KGaA. In addition
to the divestment of the business activities, the contract parties
entered into supply and services agreements, which include drug
development support and manufacturing services. As compensation
for the sale of the business activities, Merck received an upfront
payment of € 156 million. According to the agreed terms of the trans-
action, Merck was entitled to future milestone payments of up to
€ 497 million, which were partly covered by services to be performed,
as well as tiered royalties on product sales. The disposal gain
amounted to € 319 million and was recorded under other operating
income. Further information regarding the fair values determined in
2017 by an external expert for the contingent consideration compo-
nents and the sensitivity analysis can be found in Note (39) "Infor-
mation on fair value measurement".
In addition to the aforementioned consideration components,
Merck received an advance payment of € 45 million for services to
be performed at short notice which was recognized in the period in
which the services were provided. Proceeds from the provision of
services were mainly recognized as part of net sales.
ACQUISITIONS IN THE PREVIOUS YEAR
On May 8, 2017, Merck acquired all of the shares in Grzybowski
Scientific Inventions Ltd. (GSI) headquartered in Evanston, United
States. GSI developed Chematica, a computer-aided retro-synthesis
tool. The software uses advanced reaction rules and proprietary algo-
rithms to identify synthesis pathways that meet user-defined require-
ments. GSI was integrated into the Life Science business sector. The
purchase price comprised fixed compensation of US$ 7 million (€ 7 mil-
lion) as well as milestone payments of up to US$ 1 million (€ 1 million).
at December 31, 2017, the Executive Board did not consider the
divestment of the Consumer Health business within the next twelve
months as highly probable.
7
46
827
Other non-current assets
Current assets
Cash and cash equivalents
Inventories
Receivables
Other current assets
Total assets
Non-current liabilities
Provisions for pensions and other post-employment benefits
Other non-current liabilities and provisions
Current liabilities
Trade accounts payable
Other current liabilities and provisions
Total liabilities
Net assets divested (including non-controlling interests)
thereof: non-controlling interests
Net assets divested
Carrying
amounts on the
disposal date
251
84
48
8
391
241
43
115
38
436
STRATEGIC ALLIANCE WITH PFIZER INC., UNITED
STATES, TO CO-DEVELOP AND CO-COMMERCIALIZE
ACTIVE INGREDIENTS IN IMMUNO-ONCOLOGY
On November 17, 2014, Merck formed a global strategic alliance with
Pfizer Inc., United States, (Pfizer) to co-develop and co-commercialize
the anti-PD-L1 antibody avelumab and an anti-PD-1 antibody con-
tributed by Pfizer. In 2017, avelumab was approved for the first time
under the trade name BavencioⓇ for the treatment of patients with
metastatic Merkel cell carcinoma as well as patients with locally
advanced or metastatic urothelial cancer. This antibody is also being
studied in multiple broad-based clinical trials as a potential treatment
for further tumor types. The active ingredient is to be developed as a
single agent as well as in various combinations with a broad portfolio
of approved and investigational active ingredients. The overriding
objective of the strategic alliance is sharing the development risks
and to accelerate the two companies' presence in immuno-oncology.
According to the collaboration agreement, during the development
period each company bears one-half of the development expenses.
In the commercialization phase, Merck realizes the vast majority of
sales from the commercialization of BavencioⓇ while Merck and Pfizer
evenly split the net amount of sales less defined expense compo-
nents. The execution of the collaboration agreement is not being
structured through a separate vehicle.
731
Upon entry into the agreement in 2014, Pfizer made an upfront
cash payment of US$ 850 million (€ 678 million) to Merck. Pfizer also
committed to make further payments of up to US$ 2 billion to Merck
subject to the achievement of defined regulatory and commercial mile-
stones. Based on the collaboration agreement, Merck additionally
received the right to co-promote for multiple years Xalkori® (crizotinib),
Consolidated Financial Statements
€ million
Net sales²
Intersegment sales
Operating result (EBIT)³
Depreciation and amortization
Impairment losses
Reversals of impairment losses
EBITDA³
Adjustments³
EBITDA pre (Segment result)³
EBITDA pre margin (in % of net sales)³
Assets by business sector
Liabilities by business sector
Investments in property, plant and equipment4
Investments in intangible assets 4
Net cash flows from operating activities
Healthcare
Life Science
2018
2017
2018
2017
6,246
6,190
6,185
5,882
51
INFORMATION BY BUSINESS SECTOR¹
214
(7) Segment reporting
Notes to the Consolidated Financial Statements
Notes to the Consolidated Financial Statements
a kinase inhibitor indicated for the treatment of patients with metastatic
non-small cell lung cancer (NSCLC) whose tumors are anaplastic
lymphoma kinase (ALK)-positive or whose tumors are metastatic
ROS1-positive. During co-promotion of XalkoriⓇ, Merck receives from
Pfizer a profit share, which is reported in net sales. In 2018, this
profit share income amounted to € 58 million (2017: € 72 million). At
initial recognition, the right was measured at fair value by an inde-
pendent external expert using the multi-period excess earnings
method. The right was capitalized when it was granted and is being
amortized over the term of the agreement. The residual book value
of this intangible asset as of December 31, 2018, was € 68 million
(December 31, 2017: € 93 million). An impairment loss of € 33 million
was recognized for rights to XalkoriⓇ in 2017.
On the date the collaboration agreement was entered into, both the
upfront payment received and the value of the right to co-promote
XalkoriⓇ were recognized in the balance sheet as deferred income
under other liabilities. Both amounts are being recognized as income
on a pro rata basis over the expected period during which Merck is to
meet certain obligations and will be presented under other operating
income (2018: € 191 million/2017: € 191 million). In fiscal 2018,
Merck generated sales of € 69 million with Bavencio® (2017:
€ 21 million) and recorded research and development expenses of
€ 313 million (2017: € 264 million). In addition, Merck recognized
income in a mid double-digit million euro amount in return for waiving
rights to Pfizer's anti-PD-1 antibody, which had previously been
included in the collaboration agreement; this income was reported
under other operating income (2017: income of € 124 million for mile-
stone payments for regulatory approvals received).
SIGNIFICANT MANAGEMENT JUDGMENTS AND
SOURCES OF ESTIMATION UNCERTAINTY -
COLLABORATION AGREEMENTS
In the past, Merck occasionally recognized income for upfront and
milestone payments as well as license fees received under collabora-
tion agreements.
In this context, Merck had to assess the extent to which the
requirements of IFRS 15 had to be applied directly or indirectly.
For the immuno-oncology collaboration agreement entered into
with Pfizer Inc., United States, in November 2014, the various promises
to transfer goods or services could not be separated, meaning that
the promises had to be accounted for in their entirety as a single
performance obligation - as is customary for collaboration agreements
in the pharmaceutical industry.
Furthermore, for identified performance obligations, Merck had to
determine whether income had to be recognized over time or at a point
in time. If income is recognized over time, management judgments
are required as to the appropriate revenue recognition method and
the period over which income is to be recognized.
In the case of the collaboration agreement with Pfizer, income
had to be recognized over time, i.e. the upfront payment received
had to be allocated over the period in which the main development
activities were conducted. If the consideration received in this context
and deferred as a liability had been recognized in the income statement
over a shorter period reduced by six months, in fiscal 2018 this would
have increased other operating income, and profit before income tax
would therefore have increased by € 64 million (2017: € 38 million).
Recognition over a period extended by six months would have low-
ered other operating income and profit before income tax by
€ 38 million (2017: € 27 million).
AGREEMENT WITH BRISTOL-MYERS SQUIBB COMPANY,
UNITED STATES, FOR THE CO-COMMERCIALIZATION OF
GLUCOPHAGE® IN CHINA
In December 2012, Merck established an agreement with Bristol-Myers
Squibb Company, United States, (BMS) for the co-commercialization
of the antidiabetic agent GlucophageⓇ (active ingredient: metformin
hydrochloride) for the treatment of type 2 diabetes in China. Based
Result from Operating Activities and Income Taxes
on this agreement, as of fiscal 2017 Merck took over the exclusive
distribution of GlucophageⓇ in China. Since then, Merck has recorded
sales of GlucophageⓇ in China and pays license fees to BMS. In fiscal
2018, sales generated with GlucophageⓇ in China amounted to
€ 329 million (2017: € 279 million) and license payments to BMS
were € 53 million (2017: € 44 million).
Notes to the Consolidated Financial Statements
215
AGREEMENT WITH INTREXON CORPORATION,
UNITED STATES, ON THE JOINT DEVELOPMENT AND
COMMERCIALIZATION OF CAR-T CANCER THERAPIES
In March 2015, Merck and Intrexon Corporation, United States,
(Intrexon) entered into a strategic collaboration and license agree-
ment to develop and commercialize chimeric antigen receptor T-cell
(CAR-T) cancer therapies. The agreement provided Merck exclusive
access to Intrexon's proprietary and complementary suite of tech-
nologies to engineer T-cells with optimized and inducible gene
expression. Based on this agreement, Intrexon was responsible for
all platform and product developments until the investigational new
drug application was submitted for regulatory approval. In 2015,
Merck made an upfront cash payment of US$ 115 million to Intrexon,
which was recognized as part of intangible assets not yet available
for use (carrying amount as of December 31, 2017: € 104 million).
Effective December 28, 2018, Merck transferred the above-men-
tioned exclusive rights back to Intrexon on the basis of a contractual
agreement. At the time the contract was signed, Merck was entitled
to receive Intrexon common stock worth US$ 150 million in return
for the assignment of rights. Due to the intention to hold the shares
for the long term, the shares were classified as equity instruments
subsequently measured at fair value through other comprehensive
income. Furthermore, the agreement contained another investment
by Merck, amounting to US$ 25 million, in Intrexon's subsidiary Pre-
cigen, Inc., United States, (Precigen) which is involved in the devel-
opment of T-cell cancer therapies. In return, Merck received a con-
vertible note in an amount of US$ 25 million, with the option, under
certain conditions, to acquire shares in either Intrexon or Precigen.
The convertible note was classified as a debt instrument measured
at fair value through profit or loss.
The closing conditions for the transaction to take effect, including
the waiting period pursuant to the Hart-Scott-Rodino Antitrust
Improvements Act (U.S. antitrust law) were met in fiscal 2018. The
transaction led to the disposal of the intangible asset in an amount
of € 104 million and to the recognition of a disposal gain, which was
reported under other operating income.
DEVELOPMENT AGREEMENT WITH AVILLION LLP,
UNITED KINGDOM, TO DEVELOP MERCK'S ANTI-IL-17-A/F
NANOBODY®
On March 30, 2017, Merck announced an agreement with a subsidiary
of Avillion LLP, United Kingdom, (Avillion) to develop the anti-IL-17-A/F
NanobodyⓇ M1095. Merck acquired full, exclusive rights to anti-IL-17-
A/F NanobodyⓇ through a global development and commercialization
license from Ablynx nv, Belgium, in 2013. This Nanobody® is an
investigational therapy which has completed Phase I development.
As part of the cooperation, Avillion will be responsible for developing
this anti-IL-17-A/F NanobodyⓇ from Phase II through Phase III in
plaque psoriasis. Avillion will also finance the clinical program through
to regulatory submission. The drug candidate is currently in a
Phase IIb trial that started on schedule in August 2018. During the
development phase, Merck recognizes a financial liability for poten-
tial repayment obligations to Avillion and records a corresponding
expense as research and development costs. Research and develop-
ment costs in the low single-digit million euro range were incurred
in fiscal 2018.
IMMUNO-ONCOLOGY COLLABORATION WITH F-STAR
DELTA LTD., UNITED KINGDOM
On June 4, 2017, Merck announced a strategic collaboration with
F-star Delta Ltd, United Kingdom, (F-star) for the development and
commercialization of bispecific immuno-oncology antibodies. Merck
has the option, upon delivery of pre-defined data packages by F-star,
to fully acquire the company that owns five bispecific development
programs, including F-star's lead asset FS118. In return, Merck made
upfront payments to F-star and its shareholders totaling € 60 million,
which were capitalized in 2017. Until the option can be exercised,
Merck finances F-star's research and development activities and
reports the corresponding expenses under research and development
costs. In addition, since the collaboration began, Merck has made
performance-related milestone payments of € 14 million, which have
been capitalized. If the option is exercised and defined milestones
are reached, Merck will incur further payment obligations.
DEVELOPMENT AGREEMENT WITH THE SFJ
PHARMACEUTICALS GROUP, UNITED STATES,
TO DEVELOP ABITUZUMAB
On May 2, 2018, Merck announced that it had signed an agreement
with the SFJ Pharmaceuticals Group, United States, (SFJ) to develop
abituzumab. Abituzumab is an investigational monoclonal antibody
with potential for treating solid tumors such as colorectal cancer
(mCRC). In a Phase II study of a patient population with KRAS
wild-type mCRC, a subgroup of patients was identified as potentially
benefiting from treatment with abituzumab in combination with
ErbituxⓇ and chemotherapy. SFJ will be responsible for Phase II
and III development of abituzumab. During the development stages,
Merck recognizes a financial liability for potential repayment obli-
gations to SFJ and records a corresponding expense as research and
development costs. No significant clinical development expenses
were incurred in the 2018 reporting period.
216
Consolidated Financial Statements
Consolidated Financial Statements
85
80%
4,965
Consolidated Financial Statements
€ million
Expenses for company's
350-year anniversary
Impairment losses
The restructuring expenses and impairment losses contained in other
operating expenses as well as the expenses for company's 350-year
anniversary anniversary were allocated to the functional costs as
follows:
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
226
Remaining other operating expenses included, among others,
special environmental protection costs as well as personnel expenses
not allocable to the functional areas. This item also included the
expense for the donation of Cesol® 600 tablets containing the active
ingredient praziquantel to the World Health Organization (WHO) and
expenses for insurance services.
The expenses for the revaluation of contingent considerations
in the amount of € 31 million (2017: € 2 million) were mainly attri-
butable to value changes (recognized through profit or loss) of the
variable consideration resulting from the divestment of the Biosimilars
business in the previous year.
incurred further expenses from the relocation of the shared service
organization. In the previous year, restructuring expenses also arose
in connection with the planned closure of German sites of the Life
Science business sector.
Restructuring expenses in the amount of € 45 million (2017:
€ 64 million) resulted, among other things, from the adjustment of
corporate structures in Darmstadt and Gernsheim. In addition, Merck
Impairments of non-financial assets amounted to € 58 million
(2017: € 86 million), € 20 million of which were attributable to a
technology in the Performance Materials business sector and
€ 19 million of which were attributable to software modules in the
Life Science business sector which are not further developed and no
longer used (see Note (20) "Other intangible assets").
Litigation expenses amounting to € 74 million (2017: € 108 million)
arose primarily from additions to provisions for legal disputes (see
Note (26) "Other provisions").
Integration and IT expenses amounting to € 104 million (2017:
€ 156 million) were incurred for the global harmonization of the IT
landscape and in connection with the integration of acquired and
existing businesses.
1 Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes".
2 Given the first-time application of IFRS 9, effective January 1, 2018, impairment losses on financial assets are offset against reversals of impairment losses on financial assets, and disclosed
separately in the consolidated income statement.
-880
-780
-218
-185
-36
-6
Cost of sales
Marketing and selling expenses
Administration expenses
Restructuring expenses
2018
-33
Research and development costs
-21
-30
-19
-45
- 39
-12
-1
-33
-2
-15
-6
-6
-23
20171
2018
20171
2018
20171
(including employee bonus)
on non-financial assets
-17
- 5
-23
-13
Remaining other operating expenses
Impairment losses on financial assets²
Acquisition expenses
Losses on disposal of businesses and non-current assets
Expenses for miscellaneous services
Project expenses
Expenses for the company's 350-year anniversary (including employee bonus)
Expenses for the revaluation of contingent considerations
Premiums, fees and contributions
Restructuring expenses
Profit share expenses
Non-income related taxes
Impairment losses on non-financial assets
Exchange rate differences from operating activities (net)
Litigation
Integration expenses/IT expenses
€ million
The breakdown of other operating expenses was as follows:
(13) Other operating expenses
225
Notes to the Consolidated Financial Statements
Other operating expenses
2018
2017¹
-104
-23
-7
-25
-40
-31
-2
-31
-38
-36
-64
-6
-45
-46
-54
-53
-86
-58
-3
-62
-108
-74
-156
-27
Consolidated Financial Statements
Other operating expenses
-14
Services
License income
Commission income
14
Income from co-commercialisation
agreements
Total
Net sales by region
(customer location)
Europe
North America
Asia-Pacific (APAC)
Latin America
Total
58
1%
58
6,246
100%
6,185
100%
15
1
4
4
Healthcare
6,085
98%
Life Science
5,413
87%
Performance Materials
2,404
Group
100%
13,902
94%
2,406
4
6%
347
2%
84
1%
424
7%
2
510
4%
343
-3
100%
100%
-79
20171
-694
-579
2018
The following table presents the tax reconciliation from theoretical
income tax expense to income tax expense according to the consol-
idated income statement. The theoretical income tax expense is
determined by applying the statutory tax rate of a corporation head-
quartered in Darmstadt.
TAX RECONCILIATION
1 Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes".
Deferred taxes in the period
Income taxes
Income taxes for previous periods
Current income taxes in the period
€ million
(14) Income tax
1 Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes".
-40
-31
-86
-58
-64
-45
Total
-1
-14
290
1,137
-368
2,203
35%
2,136
35%
220
9%
4,559
31%
1,432
23%
14,836
2,173
214
9%
3,818
26%
1,501
24%
1,532
25%
1,932
428
35%
2018
Remaining other operating income in a mid double-digit million
euro amount was generated from payment claims resulting from the
waiver of rights to an anti PD-1 antibody previously included in the
strategic alliance with Pfizer Inc., United States, (see Note (6) "Col-
laborations of material significance") and from the reversal of a pro-
vision for insurance obligations.
The gains on disposal of businesses and non-current assets of
€ 83 million in 2018 (2017: € 350 million) were related to the out-li-
censing of two DNA-dependent protein kinase (DNA-PK) inhibitors
4%
270
Total
Other
4%
234
thereof: SaizenⓇ
6%
363
thereof: Euthyrox®
8%
475
thereof: ConcorⓇ®
12%
733
thereof: GlucophageⓇ
38%
2,341
General Medicine & Endocrinology
11%
708
6,246
100%
222
Consolidated Financial Statements
6,185
27%
1,650
33%
2,048
40%
2,487
2018
Total
Other
19%
Semiconductor Solutions
Display Solutions
€ million/in %
PERFORMANCE MATERIALS
Total
Applied Solutions
Research Solutions
Process Solutions
€ million/in %
LIFE SCIENCE
Notes to the Consolidated Financial Statements
Surface Solutions
100%
1,162
90
2,406
100%
6,185
100%
6,246
4%
544
8
1%
88
7%
448
6%
950
2%
32
4%
256
11%
661
33%
100%
14,836
100%
The following tables present a breakdown of net sales by key product
23%
1,438
24%
1,529
1%
69
13%
816
15%
944
1%
2018
Fertility
thereof: MavencladⓇ
thereof: Rebif®
Neurology & Immunology
thereof: BavencioⓇ
thereof: ErbituxⓇ
Oncology
€ million/in %
HEALTHCARE
lines/products:
thereof: Gonal-f®
and another preclinical compound used in gene editing for six defined
genetic diseases to Vertex Pharmaceuticals Incorporated, United
States. Furthermore, Merck recognized gains from the transfer of
exclusive rights regarding the development of T cell-based therapies
using chimeric antigen receptors (CAR-T) to the Intrexon Corporation,
United States, and from the termination of a license agreement in
China. The gains recognized in the previous year were mainly attri-
butable to the divestment of the Biosimilars business (€ 319 million).
2018
55%
2018
€ million
Other operating income was as follows:
(12) Other operating income
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
224
Subsidies received and reimbursements made resulted in net
expenses of € 1 million in 2018 (2017: net income of € 29 million)
recognized in research and development costs. These expenses com-
prised reimbursements from governmental institutions as well as
repayments of previously recognized governmental subsidies with a
total net amount of € 4 million (2017: net income of € 6 million). The
reimbursements recognized in the previous year mainly referred to
the strategic alliance with Pfizer Inc., United States, in the field of
immuno-oncology.
(11) Research and development costs
€ 84 million (2017: € 90 million) of royalty and license expenses
related to the commercialization of Erbitux®, and € 53 million (2017:
€ 44 million) to the license expenses for Glucophage® in China with
the distribution partner Bristol-Myers Squibb.
Amortization of intangible assets was mainly attributable to customer
relationships, marketing authorizations, licenses and similar rights,
brands and trademarks, which could be functionally allocated to
Marketing and Selling.
-4,349
-4,384
-245
-263
-224
-213
-1,014
-975
-649
-702
2017¹
Income from upfront payments, milestone payments, rights and royalties
368
564
Income from upfront payments, milestone payments, rights and roy-
alties of € 368 million (2017: € 564 million) primarily resulted from
the collaboration agreement entered into with Pfizer Inc., United
States, in the field of immuno-oncology in 2014. This related to the
pro rata recognition of deferred income in the amount of € 191 million
(2017: € 191 million) (see Note (6) "Collaborations of material sig-
nificance"). Furthermore, Merck recognized a milestone payment of
€ 50 million for the submission of an application; the corresponding
drug candidate was sold to BioMarin Pharmaceutical Inc., United
States, in 2016. License income was mainly due to the licenses
granted for interferon beta products (Biogen Inc., United States),
which amounted to € 79 million in the year under review (2017:
€ 87 million).
1,212
100
138
627
87
91
1
10
15
1 Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes".
2 Given the first-time application of IFRS 9, effective January 1, 2018, reversals of impairment losses on financial assets are offset against impairment losses on financial assets, and disclosed
separately in the consolidated income statement.
-504
Other operating income
Reversal of impairment losses on non-financial asset
Reversal of impairment losses on financial assets²
Income from the revaluation of contingent considerations
Income from miscellaneous services
10
21
Gains from the release of provisions for litigation
350
83
Gains on disposal of businesses and non-current assets
Remaining other operating income
1,332
-509
-808
into consideration.
The measurement of sales deductions and refund liabilities resulting
from expected rebates and discounts took
Merck granted its customers various kinds of rebates and discounts.
In addition, expected customer refund claims, state compulsory
charges as well as rebates from health plans and programs are also
deducted from sales. The most significant portion of these deductions
from sales was attributable to the Healthcare business sector. The
most substantial sales deductions in this business sector were attri-
butable to health plans and programs in the United States. The mea-
surement of sales deductions and the corresponding refund liabilities
required extensive estimates.
Sales deductions
expected product growth rates
pricing information as well as
•
historical experience,
•
SIGNIFICANT MANAGEMENT JUDGMENTS AND SOURCES
OF ESTIMATION UNCERTAINTY - REVENUE RECOGNITION
As of December 31, 2018, future income from concluded con-
tracts with an originally expected contract term of more than one
year amounted to € 294 million, of which € 191 million will be recog-
nized in other operating income. Merck expects to generate the
majority of income from these contracts in 2019 and 2020.
from customer-specific equipment/hardware in the Life Science busi-
ness sector.
Group net sales stood at € 14,836 million in fiscal 2018, out of which
an amount of € 557 million was recognized over time. Over-time
revenue recognition related mainly to net sales from services and
Further income was reported within other operating income. This
relates in particular to income from upfront and milestone payments
as well as royalty and license income not generated in the course of
ordinary activities.
100%
2,406
1
25%
596
20%
476
The measurement of sales deductions and refund liabilities resulting
from rights of return took
•
historical return rates of individual product groups,
information from distributors on inventory levels as well as
publicly available information on product sales from sector-specific
service providers (Healthcare business sector)
into consideration.
-918
-913
2017¹
2018
1 Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes".
2 Excluding amortization of internally generated or separately acquired software.
Marketing and selling expenses
Other marketing and selling expenses
Royalty and license expenses
Amortization of intangible assets²
Logistics
-795
Sales promotion
Sales force
€ million
Marketing and selling expenses comprised the following items:
(10) Marketing and selling expenses
Cost of sales primarily included the cost of manufactured products
sold as well as merchandise sold. Cost comprises the following items:
directly attributable costs, such as cost of materials, or personnel and
energy costs; depreciation and amortization; overheads attributable
to the production process; inventory impairments and impairment
reversals. Cost of sales included amortization of intangible assets
(excluding amortization of internally generated or separately acquired
software) in the amount of € 175 million (2017: € 179 million).
(9) Cost of sales
223
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
Changes in estimates of the parameters listed above have an impact
on the net sales recognized in the respective adjustment period.
Further information can be found in Note (30) "Refund liabilities".
Internal sales services
Equipment/hardware
Middle East and Africa (MEA)
Net sales by nature of the products
14,836
14,517
14,857
14,675
570
665
32
39
2
2
21,001
21,899
1,020
-185
10,800
923
585
531
266
214
127
114
43
364
357
959
879
2018
2017
2018
2017
3,627
3,623
4,965
4,761
1,869
1,583
45
950
544
544
14,836
14,517
3,704
3,672
4,718
4,532
1,659
1,416
996
2017
4,811
-165
10,339
the reportable segments presented. This related mainly to central
Group functions. Moreover, the column served the reconciliation to the
Group numbers. As these are steered at Group level, the expenses
and income as well as cash flows attributable to the financial result
and income taxes were also disclosed under Corporate and Other.
Apart from sales, the success of a segment is mainly determined
by EBITDA pre (segment result) and business free cash flow. EBITDA
pre and business free cash flow are performance indicators not
defined by International Financial Reporting Standards. However,
they represent important variables used to steer the Merck Group.
To permit a better understanding of operational performance, EBITDA
pre excludes depreciation and amortization, impairment losses, and
reversals of impairment losses as well as the adjustments presented
in the following. Among other things, business free cash flow is also
used for internal target agreements.
Neither in 2018 nor in 2017 did any single customer account for
more than 10% of Group sales. Transfer prices for intragroup net
sales were determined on an arm's-length basis.
The following table presents the reconciliation of EBITDA pre of all
operating businesses to the profit before income tax of the Merck
Group:
€ million
EBITDA pre of the operating businesses²
2018
4,181
20171
4,538
Corporate and Other
EBITDA pre of the Merck Group²
- 381
-292
3,800
4,246
Depreciation/amortization/impairment losses/reversals of impairment losses
-1,801
-1,741
Adjustments²
-272
-82
Corporate and Other included income and expenses, assets and
liabilities as well as cash flows that could not be directly allocated to
The Healthcare business sector comprises the businesses with
prescription pharmaceuticals, allergy products and medical devices.
The customers of this business sector mainly comprise wholesalers,
hospitals and pharmacies. The Life Science business sector offers
solutions to research and analytical laboratories in the pharmaceu-
tical/biotechnology industry or in academic institutions, and custom-
ers manufacturing large- and small-molecule drugs. In accordance
with the field of activity, the customers of this business sector largely
include companies of the pharmaceuticals and biotech sector as well
as retailers and universities. The Performance Materials business
sector consists of the entire specialty chemicals business and pri-
marily services industrial companies. The fields of activity of the
individual segments are described in detail in the sections about the
business sectors in the combined management report.
Segmentation was performed in accordance with the organizational
and reporting structure of the Merck Group that applied during 2018.
The combination into segments is based on the business models of
the business sectors and led to homogeneous risk structures within
the segments. Resource allocation and the assessment of the earning
power of the business sectors was performed by the Executive Board
of Merck KGaA as the main decision-maker.
Notes to the Consolidated Financial Statements
-69
-73
-30
-26
-17
-17
-14
Goods
-2,225
-2,108
4,512
10,486
3,550
3,324
3,337
4,027
1,121
1,060
51,713
52,880
218
Consolidated Financial Statements
11,294
2018
2017
2018
41
1,743
1,742
21
26
4
58
86
-87
769
947
-488
-391
3,528
4,164
17
33
107
99
272
82
60
232
240
2,423
Notes to the Consolidated Financial Statements
217
Performance Materials
Corporate and Other
Merck Group
2018
2017
2018
2017
2018
786
2017
2,446
14,836
14,517
-51
-57
508
689
-548
-437
1,727
2,406
980
-381
-292
392
742
969
-1,303
-1,418
2,219
588
906
-497
-429
106
2,508
thereof: United States
Asia-Pacific
thereof: China
Latin America
Middle East and Africa
Merck Group
2018
2017
2018
2017
2,696
3,193
Operating result (EBIT)²
13
910
3,800
4,246
32.7%
40.1%
25.6%
29.3%
4,046
3,942
-489
-484
919
4,414
-14,940
36,888
35,621
-19,655
-21,554
119
116
13
14
100
15
116
3,073
-16,832
1,727
-12
Financial result
-21
-131
-3
-188
Integration expenses/IT expenses
Gains (+)/losses (-) on the divestment
of businesses
310
310
Acquisition-related adjustments
-1
-5
-56
2,423
Other adjustments
-13
-10
-42
-5
-11
-81
-31
-61
-3
-41
-327
¹Not defined by International Financial Reporting Standards (IFRSS).
220
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
€ million
2017
Restructuring expenses
thereof:
marketing
thereof:
cost of sales¹
Adjustments before impairment losses/
and selling
thereof:
research and
development
thereof: other
operating income
expenses¹
expenses¹
costs¹
and expenses¹
Total¹
-5
-12
thereof:
administration
-26
reversals of impairment losses²
-43
2018
3,800
20171
4,246
-932
-1,012
Changes in inventories
-214
-18
Changes in trade accounts receivable as well as receivables from royalties and licenses
Elimination first-time consolidation of BioControl Systems
-145
-22
-2
Business free cash flow²
2,508
3,193
1 Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes".
2 Not defined by International Financial Reporting Standard (IFRSS).
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
221
(8) Net sales
The following tables present a more detailed breakdown of net sales
from contracts with customers by business sector.
€ million/in %
software as well as advance payments for intangible assets
Investments in property, plant and equipment,
EBITDA pre²
€ million
-219
-5
235
-82
Impairment losses
-6
-33
-16
-14
-68
-50
Reversals of impairment losses
87
Adjustments (total)²
31
-76
-219
-21
222
-64
1 Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes".
2 Not defined by International Financial Reporting Standards (IFRSS).
Business free cash flow was determined as follows:
87
-2
-63
-27
-188
-25
310
-2
-63
-58
-81
-272
-82
-55
-68
87
-327
-64
The adjustments recognized under integration and IT expenses in
the amount of € 142 million (2017: € 188 million) mainly result from
expenses for ERP systems (2018: € 50 million/2017: € 64 million)
and the integration of the Sigma-Aldrich Corporation, United States
(2018: € 66 million/2017: € 95 million). These amounts were
recorded under other operating expenses.
Losses on the divestment of businesses in the amount of € 25 mil-
lion (2017: gains on the divestment of businesses of € 310 million)
were mainly attributable to the subsequent measurement of contin-
gent considerations received in connection with the divestment of
the Biosimilars business in the previous year, and were included in
other operating expenses.
The majority of other adjustments in the amount of € 58 million
(2017: € 81 million) was related to the activities on the occasion of the
company's 350th anniversary (2018: € 31 million/2017: € 62 million).
The adjustments were included in the consolidated income statement
under cost of sales as well as under other operating expenses and
income, and were allocable to functional costs as follows:
€ million
2018
-142
-61
-46
20171
-266
-294
Profit before income tax
1,461
2,129
1 Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes".
2 Not defined by International Financial Reporting Standard (IFRSS).
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
-209
The adjustments comprised the following:
Restructuring expenses
€ million
Integration expenses/IT expenses
Gains (+)/losses (-) on the divestment of businesses
Acquisition-related adjustments
Other adjustments
Adjustments before impairment losses/reversals of impairment losses²
Impairment losses
Reversals of impairment losses
Adjustments (total)²
1 Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes".
2 Not defined by International Financial Reporting Standard (IFRSS).
2018
Restructuring expenses
Integration expenses/IT expenses
219
cost of sales
-25
-25
-2
2
-58
Adjustments before impairment losses/
reversals of impairment losses¹
-45
-13
-190
-50
-2
-272
Impairment losses
- 18
-14
-19
-55
Reversals of impairment losses
Adjustments (total)¹
-63
thereof:
-23
-3
-3
-2
-6
-39
thereof:
marketing
and selling
-1
thereof:
research and
development
expenses
expenses
costs
thereof: other
operating income
and expenses
Total
thereof:
administration
-39
-6
Acquisition-related adjustments
Gains (+)/losses (-) on the
-142
divestment of businesses
-99
-3
-46
-1
Other adjustments
Changes in scope of consolidation/currency translation/other
135
Changes from reclassification into assets held for sale
15
-2
Deferred taxes credited/debited to equity
-41
-30
2017¹
201
93
-15
2018
Change in deferred tax assets (consolidated balance sheet)
Change in deferred tax liabilities (consolidated balance sheet)
€ million
DEFERRED TAXES (CONSOLIDATED INCOME STATEMENT)
The reconciliation between deferred taxes in the consolidated balance
sheet and deferred taxes in the consolidated income statement is
presented in the following table:
and led to an increase in the current tax expense of the previous
year by € 114 million. Please refer to the tax reconciliation of the
previous year for further information on material effects from the US
tax reform.
1,235
-164
€ million
290
Total
IMPACT OF TAX REFORM IN THE UNITED STATES IN 2017
The Tax Cuts and Jobs Act became effective in the US on Decem-
ber 22, 2017, and introduced new rules on the taxation of profits of
foreign subsidiaries. This resulted in additional taxation of past profits
Abroad
Germany
Total
Abroad
Germany
Dec. 31, 2017
Deferred taxes (consolidated income statement)
Dec. 31, 2018
Tax loss carryforwards were structured as follows:
CHANGES IN TAX LOSS CARRYFORWARDS
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
228
As in the previous year, changes in scope of consolidation/currency
translation/other mainly resulted from exchange rate fluctuations
between the euro and the U.S. dollar.
1 Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes".
1,137
Tax loss carryforwards
Income taxes consisted of corporation and trade taxes for the com-
panies domiciled in Germany as well as comparable income taxes for
foreign companies. Income taxes for previous periods recognized in
fiscal 2018 resulted mainly from completed tax audits and mutual
agreement procedures, and from additions to provisions for tax audits.
263
25.2%
Tax rate differences
-675
-463
Theoretical income tax expense
31.7%
31.7%
Tax rate
2,129
1,461
20171
2018
Profit before income tax
€ million
227
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
118
150
Tax effect of companies with a negative contribution to consolidated profit
Income tax for previous periods
-37
-71
1 Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes".
Tax ratio according to consolidated income statement
428
-368
-114
401
619
732
-20.1%
34
52
-14
2232
-25
Tax effect of non-deductible expenses/tax-free income/other tax effects
thereof: from the US tax reform (deferred taxes on temporary differences)
thereof: from the US tax reform (deferred taxes on oustide basis differences)
thereof: from the US tax reform (one-time transition tax on foreign earnings)
Income tax expense according to consolidated income statement
Tax effect on tax loss carryforwards
Tax credits
-79
193
1,069
Supply Chain
5.8%
⚫ Cost of equity
Discount rate after taxes (weighted average cost of capital - WACC)
Based on long-term inflation expectations and expected long-term sector growth
Long-term growth rate after the detailed planning period
Based on past experiences, adjusted for expected changes
• Profit margins
Based on internal planning, taking into consideration internal and external market information and
market estimations, i.e. regarding market shares, excluding possible approvals of new compounds
from the development pipeline and other expansion investments
⚫ Sales growth
Net cash flows
Discount rate after tax (weighted average cost of capital - WACC)
Long-term growth rate after the detailed planning period
Net cash flows
Most recent financial medium-term planning approved by the Executive Board and used for internal purposes
4 years
Performance Materials
Life Science
Consumer Health¹ (previous year)
Healthcare (excluding Consumer Health)
Value in use
Determination of the value
of the key assumptions
Detailed planning period
Key assumptions
Planning basis
Measurement basis
Impairment test level
When conducting the impairment tests the following parameters
were used:
The determination of the recoverable amount is subject to manage-
ment judgements and estimation uncertainties.
GOODWILL
Risk-free interest rate: Derived from the returns of long-term government bonds
Beta factor:
Market risk premium:
Derived from the respective peer group
Range as recommended by the Technical Committee for Business Valuation
and Commerce of the Institute of Public Auditors in Germany (Institut der
Wirtschaftsprüfer e. V. - IDW)
6.4%
0.00%
0.00%
1,534
1,534
Healthcare (excluding Consumer Health)
2017
2018
2017
2018
2017
2018
-
2017
€ million/in%
Cost of capital before tax
Cost of capital after tax
Long-term growth rate
Goodwill
The long-term growth rates and weighted average costs of capital
(WACC) used to conduct the goodwill impairment tests were as fol-
lows:
233
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
¹At the date of the impairment test in the previous year, Consumer Health was not classified as a discontinued operation pursuant to IFRS 5.
Derived from market data and the respective peer group
• Cost of debt and capital structure
2018
6.7%
OF ESTIMATION UNCERTAINTY
As in 2017, goodwill was not subject to impairment in fiscal 2018.
955
Potential deferred tax assets for
tax loss carry forwards
27
254
281
19
269
288
Recognized deferred tax assets on
tax loss carryforwards
9
24
33
7
25
32
Not recognized deferred tax assets
on tax loss carryforwards
18
230
248
12
244
256
894
61
976
917
In the Healthcare business sector, the reclassifications to assets held
for sale were attributable to the divestment of the Consumer Health
business to The Procter & Gamble Company, United States, and in
the Life Science business sector to the divestment of the flow cytom-
etry business AmnisⓇ and GuavaⓇ to the Luminex Corporation, United
States (see Note (5) "Acquisitions and divestments").
Goodwill was incurred mainly in connection with the acquisitions of the
Sigma-Aldrich Corporation, AZ Electronic Materials S.A., the Millipore
Corporation and Serono SA. The changes in goodwill caused by for-
eign exchange rates resulted almost exclusively from translating the
goodwill from the acquisitions of the Sigma-Aldrich Corporation, AZ
Electronic Materials S.A. and the Millipore Corporation, which were
partially denominated in U.S. dollars, into the reporting currency.
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
232
1 Values effective January 1, 2018, have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes".
13,764
1,334
10,896
1,534
Net carrying amount as of December 31, 2018
1,187
SIGNIFICANT MANAGEMENT JUDGMENTS AND SOURCES
117
1,171
Tax loss carry forwards for which a
deferred tax asset is recognized
59
152
211
56
160
216
Tax loss carry forwards for which no
deferred tax asset is recognized
59
1,054
The vast majority of the tax loss carryforwards either has no expiry
date or can be utilized for up to 20 years. In 2018, the income tax
expense was reduced by € 34 million (2017: €0 million) due to the
utilization of tax loss carryforwards from prior years for which no
deferred tax asset had been recognized in prior periods.
8.5%
251
ment
rights and other
in develop-
patents, licenses, similar
Marketing authorizations, and software
Software
Customer
relation-
ships,
brands and
trademarks
December 31, 2017
Currency translation
Classification as held for sale or transfer to a disposal group
Transfers
Disposals
Additions
Changes in scope of consolidation
Cost at January 1, 2017
€ million
(20) Other intangible assets
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
234
the higher beta factor of individual entities in the peer group. The
resulting effects more than offset the increase in net cash flows
during the detailed planning period compared to the previous period.
The lower sensitivity of the impairment test for the cash-generating
unit Life Science regarding changes in the long-term growth rate and
the capital costs declined compared to 2017. This was due to an
increase in weighted average costs of capital (WACC) on account of
1 At the date of the impairment test in the previous year, Consumer Health was not classified as a discontinued operation pursuant to IFRS 5.
> 5
> 5
Advance
payments
Total
Not yet
Finite
useful life
-838
2
2
4
8
-8
6
-2
-32
-27
-5
-1
> 2
398
263
24
20
21
-1
20,239
639
766
10,824
8,011
for use
available
110
Consumer Health¹
>2
> 2
growth rate
Decrease in long-term
externally available forecasts and the recoverable amounts deter-
mined were validated using valuation multiples based on peer group
information. In addition, sensitivity analyses of the key assumptions
were performed as part of the impairment tests. As a result, no change
of a significant assumption deemed possible by management would
have resulted in an impairment. The following table presents the
amount by which key assumptions would have to change before an
impairment would need to be recognized as a result of the impair-
ment tests:
In all the impairment tests performed, the recoverable amount was
more than 10% higher than the carrying amount of the respective
cash-generating unit or group of cash-generating units. Irrespective
of this, the planning data used were checked for plausibility against
Net cash flows were discounted using cost of capital after tax. The
aforementioned cost of capital before tax was subsequently derived
iteratively. All of the aforementioned assumptions are considered a
source of estimation uncertainty due to their inherent uncertainty.
¹At the date of the impairment test in the previous year, Consumer Health was not classified as a discontinued operation pursuant to IFRS 5.
7.5%
7.4%
5.9%
0.50%
0.50%
1,278
8.4%
8.8%
6.8%
7.2%
1.75%
1.75%
10,519
10,896
1,334
Performance Materials
Life Science
8.2%
6.6%
2.00%
Increase in cost of capital
after tax
Decrease in net
cash flows
2018
2017
Performance Materials
> 5
> 5
1.8
0.9
> 2
1.2
> 5
> 2
> 2
Life Science
Consumer Health¹
> 2
> 5
> 2
> 2
> 2
> 2
Healthcare (excluding Consumer Health)
in %
in percentage points
in percentage points
2017
2018
2017
2018
> 5
DEFERRED TAXES (CONSOLIDATED BALANCE SHEET)
Deferred tax assets and liabilities correspond to the following balance
sheet items:
Dec. 31, 2018
€ million
Average number of employees
965
53,760
1The average number of employees of the Consumer-Health-business during the time of affiliation to the group from January to November 2018 was 3,358.
(17) Earnings per share
Basic earnings per share are calculated by dividing the profit after
tax (net income of the Group) attributable to the shareholders of
Merck KGaA by the weighted average number of theoretical shares
outstanding. The calculation of the theoretical number of shares is
based on the fact that the general partner's capital is not represented
by shares. The share capital of € 168 million was divided into
129,242,252 shares. Accordingly, the general partner's capital of
€ 397 million was divided into 305,535,626 theoretical shares. Over-
all, equity capital thus amounted to € 565 million or 434,777,878
theoretical shares outstanding. The weighted average (basic) number
of shares in 2018 was likewise 434,777,878.
The calculation of diluted earnings per share had to take into
account a potential dilution effect that arose from the free grant of
Merck shares to eligible employees on the occasion of the 350th
anniversary of the company. The shares required for this were pur-
chased on the market. Pursuant to IAS 33, this led to an increase of
17,924 in the weighted average (diluted) number of shares to
434,795,802 shares. However, this did not lead to an arithmetical
dilution effect on the indicator so that diluted earnings per share
corresponded to basic earnings per share.
(18) Net cash flows from operating
activities
In 2018, tax payments totaled € 900 million (2017: € 702 million).
Tax refunds totaled € 65 million (2017: € 73 million). Interest paid
totaled € 286 million (2017: € 297 million). Interest received amounted
to € 34 million (2017: € 28 million).
In the previous year, the changes of other assets and liabilities
included the adjustment of deferred taxes as a result of the U.S. tax
reform.
In the period under review, the neutralization of the profits/losses
from the disposal of assets and other disposals mainly comprised the
gain from the divestment of the Consumer Health business; in the
previous year, this item mainly comprised the gain from the divest-
ment of the Biosimilars business.
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
231
Operating Assets, Liabilities and Contingent Liabilities
(19) Goodwill
€ million
Cost as at January 1, 2017
Changes in scope of consolidation
Additions
Disposals
Transfers
Classification as held for sale or transfer to a disposal group
Currency translation
December 31, 2017
Accumulated amortization and impairment losses, January 1, 2017
Changes in scope of consolidation
3,456
51,990
3,100
11
thereof:
Total Consumer Health¹
Total
thereof:
Consumer Health
16,239
623
15,570
680
9,856
160
9,272
197
Impairment losses
7,243
6,786
143
4,012
191
3,726
172
15,445
1,973
15,073
2,253
7
1,563
146
2017
Disposals
Reversals of impairment losses
-25
-1
1,785
-1,250
10,519
-174
1,278
-25
-1,425
13,582
1,785
10,519
1,278
13,582
1,785
10,519
1,278
13,582
-251
-1
-31
-282
408
57
464
1,534
10,896
1,334
13,764
17
Total
15,015
1,452
11,752
17
Classification as held for sale or transfer to a disposal group
Currency translation
December 31, 2017
Net carrying amount as of December 31, 2017
Cost as at January 1, 2018¹
Changes in scope of consolidation
Additions
Disposals
Transfers
Classification as held for sale or transfer to a disposal group
Currency translation
December 31, 2018
Transfers
Accumulated amortization and impairment losses, January 1, 2018
Impairment losses
Disposals
Transfers
Reversals of impairment losses
Classification as held for sale or transfer to a disposal group
Currency translation
December 31, 2018
Goodwill
Healthcare
Life Science
Performance
Materials
1,811
Changes in scope of consolidation
2018
Other
Marketing and Sales
454
37
485
92
236
66
190
35
Liabilities
67
12
69
9
Tax loss carryforwards
33
32
Tax refund claims/other
60
98
58
86
Deferred taxes (before offsetting)
1,606
1,803
1,548
Provisions for pensions and other post-employment benefits
Other provisions
2
21
5
Intangible assets
Property, plant and equipment
Assets
Liabilities
Dec. 31, 2017
Assets
Liabilities
119
1,479
111
1,555
34
84
1,931
23
Current and non-current financial assets
12
3
5
41
Inventories
564
18
554
14
Current and non-current receivables/other assets
25
98
Offset deferred tax assets and liabilities
Deferred taxes (consolidated balance sheet)
-515
1,091
4,111
3,953
Compulsory social security contributions and special financial assistance
619
586
Pension expenses
295
304
Personnel expenses (including Consumer Health)
5,024
4,843
Consumer Health
Wages and salaries
204
Personnel expenses (as reported in the functional costs)
4,820
4,632
230
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
Personnel expenses comprised expenses of € 91 million (2017:
€ 86 million) for defined contribution plans which are funded exclu-
sively using external funds and therefore do not represent any obli-
gation for Merck other than making contribution payments. In 2017,
this included an amount of € 1 million attributable to the Consumer
Health business. In addition, employer contributions amounting to
€ 81 million (2017: € 76 million) were transferred to the German stat-
utory pension insurance system and € 44 million (2017: € 46 million)
to statutory pension insurance systems abroad. Each of these total
transfer amounts included an amount of € 1 million attributable to
the Consumer Health business (2017: € 2 million).
Effective December 31, 2018, the number of employees at Merck
Group stood at 51,713 (December 31, 2017: 52,880 employees).
The previous year's figure included all employees at the Consumer
Health business.
The following table provides the number of employees by function
(annual average):
Production
Administration
Research and Development
211
-190
2017
€ million
-515
-442
-442
1,288
1,106
1,489
Deferred tax liabilities from outside basis differences for planned
dividend payouts were recorded in the amount of € 30 million
(December 31, 2017: € 17 million). Temporary differences relating
to the retained earnings of subsidiaries, for which no deferred taxes
are recognized, amounted to € 9,934 million (December 31, 2017:
€ 2,856 million).
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
229
INCOME TAX RECEIVABLES AND INCOME TAX LIABILITIES
Income tax receivables amounted to € 460 million (December 31,
2017: € 490 million). Tax receivables resulted primarily from tax
prepayments that exceeded the actual amount of tax payable for
2018 and prior fiscal years, and from refund claims for prior years.
2018
As of December 31, 2018, income tax liabilities, including provisions
for uncertain tax obligations, amounted to € 1,176 million (Decem-
ber 31, 2017: € 1,016 million).
SIGNIFICANT MANAGEMENT JUDGMENTS AND SOURCES
OF ESTIMATION UNCERTAINTY - INCOME TAXES
The calculation of the reported assets and liabilities from current and
deferred income taxes required extensive discretionary judgments,
assumptions and estimates.
The recognized income tax liabilities and provisions were partially
based on estimates and interpretations of tax laws and ordinances
in different jurisdictions.
With regard to deferred tax items, there were degrees of uncer-
tainty concerning the date on which an asset is realized or a liability
settled and concerning the tax rate applicable on this date. This par-
ticularly related to deferred taxes recognized in the context of the
acquisitions of the Sigma-Aldrich Corporation, the Millipore Corpo-
ration, Serono SA, and AZ Electronic Materials S.A.
The recognition of deferred tax assets from loss carryforwards
required an estimate of the probability of the future realizability of
loss carryforwards. The following influencing factors were taken into
account as part of this assessment:
⚫ results history,
⚫ results planning and
⚫the existing tax planning of the respective Group company.
(15) Cost of materials
Material costs in 2018 amounted to € 2,598 million (2017: € 2,322 mil-
lion) and were largely reported under cost of sales.
(16) Personnel expenses/headcount
Personnel expenses comprised the following:
The disclosure of interest and penalties related to income taxes was
adjusted with retrospective effect as of January 1, 2017, see Note
(49) "Effects from new accounting standards and other presentation
and measurement changes".
-1
8.9%
-1,053
5
-21
-747
-427
Transfers
Disposals
Impairment losses
Amortization
-11,260
-357
-596
-8,438
-1,868
Accumulated amortization and impairment losses, January 1, 2018
Changes in scope of consolidation
19,780
755
885
10,739
7,402
December 31, 2018
342
6
71
14
-1
-57
-1,231
329
289
1,543
5,076
Net carrying amounts as of December 31, 2018
-104
-12,544
-426
-596
-9,195
-2,326
December 31, 2018
265
-3
-61
Currency translation
65
2
38
24
Classification as held for sale or transfer to a disposal group
Reversals of impairment losses
-40
26
7
-19
-40
7,237
Currency translation
-7
348
421
2,246
5,303
Net carrying amounts as of December 31, 2017
258
-11,260
15
-357
-596
1
100
-8,438
-1,868
142
December 31, 2017
Currency translation
Classification as held for sale or transfer to a disposal group
17
17
1
-2
2
33
27
5
8,317
7,171
10,685
1,017
-51
-29
Classification as held for sale or transfer to a disposal group
4
4
-56
57
Transfers
-162
-8
-111
-87
-37
Disposals
106
55
35
14
1
Additions
Changes in scope of consolidation
Cost at January 1, 2018
19,577
705
-6
1
Consolidated Financial Statements
235
616
616
1,156
966
643
323
0.5-14.3
2.3 14.3
thereof: acquisition of AZ Electronic Materials S.A.
Others
Patents, licenses and similar rights
49
32
32
95
62
31
93
68
737
369
31
1.0
68
3.0
741
61
6
10
In fiscal 2018, a reduction of the useful life of the intangible asset
reported in connection with the drug RebifⓇ by one year would have
lowered profit before income tax by € 369 million (2017: € 184 mil-
lion). An extension of the useful life by one year would have increased
profit before income tax by € 123 million (2017: € 92 million).
If the amortization of intangible assets from customer relation-
ships, brands, trademarks, marketing authorizations, patents,
licenses and similar rights and other had been 10% higher, for exam-
ple due to shortened remaining useful lives, profit before income tax
would have been € 117 million lower in fiscal 2018 (2017: € 120 mil-
lion).
Substantial assumptions and estimates were required to determine
the appropriate level of amortization of other intangible assets. This
related in particular to the determination of the underlying remaining
useful life, which Merck reviews regularly and adjusts if necessary.
Merck considered factors including the typical product life cycles for
each asset and publicly available information about the estimated
useful lives of similar assets.
Determination of impairment amount
Identification of impairment or reversals of impairment
Discretionary decisions were required in the identification of objective
evidence of impairment as well as in the identification of a reversal
of impairment of other intangible assets. External and internal infor-
mation was used to identify indications of impairment and reversals
of impairment. For example, the closure of a site or the approval of
a competing product in the Healthcare business sector can be an
indicator of impairment.
Merck is regularly a partner of research and development collabora-
tions with research institutions, biotechnology companies or other
contract parties. These collaborations are aimed at developing mar-
ketable products. Merck also enters into in-licensing agreements
regarding intellectual property of contract partners. Such agreements
typically involve making upfront payments and payments for the
achievement of certain milestones related to development and com-
mercialization. In this context, Merck has to judge to what extent
upfront or milestone payments represent remuneration for services
received (research and development costs) or whether such pay-
ments result in an in-licensing of an intangible asset that has to be
capitalized. This assessment is regularly subject to judgment.
In-licensing of intangible assets
SIGNIFICANT MANAGEMENT JUDGMENTS AND
SOURCES OF ESTIMATION UNCERTAINTY - OTHER
INTANGIBLE ASSETS
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
236
369
The reclassifications to assets held for sale were made in con-
nection with the divestment of the Consumer Health business and
of the flow cytrometry platforms AmnisⓇ and GuavaⓇ (see Note (5)
"Acquisitions and divestments").
The additions to software and software in development in the
amount of € 55 million (2017: € 110 million) were mainly attributable
to new ERP developments.
in fiscal 2018 (2017: € 263 million) and were attributable almost
entirely to the Healthcare business sector. The disposals of marketing
authorizations, patents, licenses, similar rights and other that were
not yet available for use mainly referred to the transfer of rights to
develop and commercialize T-cell cancer therapies (CAR-T)
(€ 104 million) to the collaboration partner Intrexon Corporation,
United States (see Note (6) "Collaborations of material significance").
The additions to marketing authorizations, patents, licenses, sim-
ilar rights and other not yet available for use amounted to € 35 million
The net carrying amount of capitalized customer relationships, dis-
closed under customer relationships, brands and trademarks,
amounting to € 5,076 million (December 31, 2017: € 5,303 million),
mainly included the identified and capitalized intangible assets in
connection with the acquisition of the Sigma-Aldrich Corporation, AZ
Electronic Materials S.A., the Millipore Corporation, and Serono SA.
These acquisitions account for the majority of marketing authoriza-
tions, patents, licenses, similar rights and other with finite useful
lives (€ 1,543 million; December 31, 2017: € 2,246 million). The
impairment losses on market authorizations, patents, licenses, similar
rights and other with finite useful lives in the amount of € 21 million
(2017: € 50 million) in 2018 was essentially related to a technology in
the Performance Materials business sector. In 2017, an impairment loss
was recognized for the co-promotion right XalkoriⓇ in the Healthcare
business sector (€ 33 million) and for technologies no longer used in
the Performance Materials business sector (€ 17 million). These impair-
ments were recognized in the consolidated income statement in impair-
ment losses on non-financial assets under other operating expenses.
421
289
4
285
Not yet available for use
54
77
The impairment losses recognized for software and software in
development in the amount of € 19 million (2017: €0 million) were
attributable to software modules not further developed and used in
the Life Science business sector. The impairment was recognized
in the consolidated income statement in impairment losses on non-
financial assets under other operating expenses.
Notes to the Consolidated Financial Statements
1.0
Gonal-fⓇ
3,495
17.9-18.9
thereof: acquisition of Sigma-Aldrich Corporation
thereof: acquisition of Millipore Corporation
Brands and trademarks
4,422
4,263
155
4,108
0.5-18.9
5,303
5,076
162
4,914
Materials Dec. 31, 2018 Dec. 31, 2017
Life Science
Healthcare
years
Customer relationships, brands and trademarks
Customer relationships
€ million
Total
Total
Performance
Remaining
useful life in
The carrying amounts of customer relationships, brands and trade-
marks as well as marketing authorizations, patents, licenses, similar
rights and other were attributable to the business sectors as follows:
1
3,496
3,693
0.5-8.5
SaizenⓇ
Xalkori®
2,246
1,543
653
329
561
Rebif®
Marketing authorizations
Finite useful life
Marketing authorizations, patents, licenses,
similar rights and other
Other marketing authorizations
695
655
8.9
thereof: acquisition of Sigma-Aldrich Corporation
881
813
7
806
4.5-8.9
681
-25
569
655
-67
569
-10,259
-751
-451
Reversals of impairment losses
Transfers
Disposals
Impairment losses
Amortization
-50
-356
-585
-7,759
-1,560
Accumulated amortization and impairment losses, January 1, 2017
Changes in scope of consolidation
19,577
-41
705
10,685
7,171
-17
1,017
-1,243
1
2,256
7
1
2,336
2,257
Germany
2018
2017
1.97% 1.90%
2.51% 2.51%
1.75% 1.75%
Switzerland
2018
2017
1.00% 0.70%
1.74% 1.80%
United Kingdom
2018 2017
2.95% 2.56%
2.00% 2.00%
2.94% 3.04%
Other countries
Plan administration costs recognized in income
2,329
1
2,255
-2,452
-2,391
2,328
4,707
4,719
Dec. 31, 2017
Dec. 31, 2018
Future pension increases
Future salary increases
Discount rate
2018
2017
3.16% 2.99%
3.21% 3.66%
1.77% 1.94%
Installments
The defined benefit obligations were based on the following types of
benefits provided by the respective plan:
93
84
Total
450
1
2,602
Other countries
Dec 31, 2018
United Kingdom
Switzerland
Germany
Fair value of the plan assets
Present value of defined benefit obligations
Medical plan
Other
The calculation of the defined benefit obligations was based on the
following actuarial parameters:
Lump sum
Annuity
Benefit not based on final salary
Installments
Lump sum
Annuity
Benefit based on final salary
€ million
These were average values weighted by the present value of the
respective benefit obligation.
Provisions for pensions and other post-employment benefits
242
Net defined benefit liability recognized in the balance sheet
Customer payments/defaults
thereof: attributable to performance obligations satisfied in prior periods
Additions
January 1, 2018
Adjustment on initial application of IFRS 15
Adjustment on initial application of IFRS 9
December 31, 2017
€ million
The following table provides details on the development of trade
accounts receivable before loss allowances during the period under
review:
In the period from January 1 to December 31, 2018, trade accounts
receivable in Italy with a nominal value of € 28 million (2017:
€ 25 million) were sold for € 28 million (2017: € 24 million). The sold
receivables did not involve any further rights of recovery against
Merck.
2,923
2,931
-367
-73
3,290
3,004
21
Dec. 31, 2017
3,290
Dec. 31, 2018
2,983
Allowances on receivables subsequently measured at fair value through other comprehensive income
Net trade accounts receivable
Allowances on receivables subsequently measured at amortized cost
Gross trade accounts receivable
Subsequently measured at fair value through other comprehensive income
Currency effects
Classification as held for sale or transfer to disposal group
Change in scope of consolidation/other
December 31, 2018
Gross trade ac-
Effects of asset ceilings
Funded status
Fair value of the plan assets
Present value of all defined benefit obligations
€ million
and other post-employment benefits was derived as follows:
The value recognized in the consolidated balance sheet for pensions
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
3,137
93
In order to limit the risks of changing capital market conditions
and other developments, for many years now newly hired employees
have been offered plans that are not based on final salary.
Assets from defined benefit plans
Depending on the legal, economic and fiscal circumstances prevailing
in each country, different retirement benefit systems are provided
for the employees. Generally, these systems are based on the years
of service and salaries of the employees. Pension obligations com-
prise both obligations from current pensions and accrued benefits
for pensions payable in the future.
For further information on loss allowances as well as credit and
market risks affecting trade accounts receivable, please refer to Note
(38) "Management of financial risks", section "Credit risks". Please
refer to Note (49) "Effects from new accounting standards and other
presentation and measurement changes" for further details on the
first-time application effects of IFRS 9 regarding the classification
and measurement of financial assets.
3
3,004
-86
6
-16,590
1
16,395
3,277
-4
-9
counts receivable
3,290
(25) Provisions for pensions and other
post-employment benefits
1
10
777
-7
thereof: attributable to the divested Consumer Health business
-202
54
-256
Items recognized in income
3
3
Other effects recognized in income
-3
14
-17
Currency translation differences recognized in income
4
4
-2
-2
42
42
-85
-85
-161
-161
2
-2,256
-5
Actuarial gains (+)/losses (-)
-115
-115
-18
139
-40
-18
139
-40
Payment transactions
Employee contributions
Employer contributions
Pension payments
Actuarial gains (+)/losses (-)
Actuarial gains (+)/losses (-)
Changes in the effects of the asset ceilings
arising from experience adjustments
Actuarial gains (+)/losses (-)
Remeasurements of plan assets
arising from experience adjustments
Actuarial gains (+)/losses (-)
arising from changes in financial assumptions
Actuarial gains (+)/losses (-)
arising from changes in demographic assumptions
Remeasurements of defined benefit obligations
Net defined
benefit liability
Effects of the
asset ceilings
Fair value of the
plan assets
2,452
140
dependent upon years of service and final salary from which newly
hired employees have been excluded. On the other hand, the benefit
rules applicable to employees newly hired since January 1, 2005,
comprised a direct commitment that is not based on the final salary.
The vast majority of defined benefit obligations of German entities
were attributable to plans that encompass old-age, disability and
surviving dependent pensions. On the one hand, these obligations
were based on benefit rules comprising benefit commitments
2,391
148
450
656
4,719
313
456
778
3,172
1,137
26
26
Subsequently measured at amortized cost
10
6
6
39
33
6
1,407
67
237
319
Transfers
-152
-4,707
Present value
of the defined
benefit obligations
Gains (+) or losses (-) on settlement
Past service cost
Plan administration costs recognized in income
Interest income
Interest expense
Current service cost
January 1, 2018
€ million
Pension obligations in the United Kingdom resulted primarily from
benefit plans which are based on years of service and final salary and
were closed to newly hired employees in 2006. The agreed benefits
comprised old-age, disability and surviving dependent benefits. The
employer and the employees made contributions to the plans. Merck
had to observe the existing statutory minimum funding obligations.
The following table shows the development of the net defined
benefit liability recognized in the balance sheet:
563
Pension obligations in Switzerland comprised old-age, disability
and surviving dependent benefits regulated by law. The employer
and the employees made contributions to the plans. Merck had to
observe the existing statutory minimum funding obligations.
243
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
47
786
890
Disposals
-14
-64
-46
-28
The benefit entitlement resulted from the cumulative total of annually
determined pension components that were calculated on the basis
of a defined benefit expense and an age-dependent annuity table.
Statutory minimum funding obligations did not exist.
€ million
(24) Trade accounts receivable
241
9
1
1
5
8
Dec. 31, 2017
Dec. 31, 2018
Net carrying amount of assets classified as finance lease
Other property, plant and equipment
Land and buildings
€ million
The carrying amounts of assets classified as finance leases were as
follows:
5
The reclassifications to assets held for sale were made in con-
nection with the divestment of the Consumer Health business (see
Note (5) "Acquisitions and divestments").
In 2018, impairment losses amounted to € 18 million (2017:
€ 5 million). These were attributable primarily to assets allocated to
the Healthcare business sector, and mainly referred to buildings and
Reclassifications from construction in progress were mainly attri-
butable to the completion of the expansion of Merck's global head-
quarters at the Darmstadt site, and to the completion of the pharma
packaging center.
In fiscal 2018, material additions to construction in progress were
attributable to the construction of a pharma packaging center, invest-
ments into the administrative buildings at the Darmstadt site as well
as the expansion of US and Chinese production capacities in the Life
Science business sector. Furthermore, Merck invested in its pharma-
ceutical production facilities and logistic hub in China. Additional
investments were made into our laboratory, production and logistic
facilities in China, Italy and Germany.
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
238
1 Values effective January 1, 2018, have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes".
4,811
1,092
328
1,163
2,228
production facilities. Reversals of impairment losses were insignifi-
cant overall. In 2017 impairment losses for the biopharmaceutical
production facility in Corsier-sur-Vevey (Switzerland) were reversed
in the amount of € 69 million to depreciated cost. The decision to
reverse the impairment loss was due to improved expectations for
the capacity utilization of the production facility, particularly owing
to the approvals of the immune-oncology medicine BavencioⓇ, which
is to be produced in this facility. An impairment loss of € 165 million
was originally recognized for the facility in 2011.
Net carrying amounts as of December 31, 2018
SIGNIFICANT MANAGEMENT JUDGMENTS AND SOURCES
OF ESTIMATION UNCERTAINTY - PROPERTY, PLANT AND
Identification of impairment or reversals of impairment
Discretionary decisions were required in the identification of objective
evidence of impairment as well as in the identification of a reversal
of impairment of property, plant and equipment. External and internal
information was used in this context. For example, the closure of a
site can be an indicator of impairment.
247
312
17
Current
Total
Non-current
Dec. 31, 2018
Financial items
(operational)
Derivatives with a hedging relationship
(operational)
Derivatives without a hedging relationship
EQUIPMENT
through profit or loss
295
Other receivables
Subsequent measurement at amortized cost
Current
€ million
239
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
Other assets comprised:
(22) Other assets
Substantial assumptions and estimates were required to determine
the appropriate level of amortization of property, plant and equipment.
The underlying remaining useful life of property, plant and equipment
was reviewed regularly by Merck and adjusted if necessary. Merck
considered factors including the typical product life cycles for each
asset and publicly available information about the estimated useful
lives of similar assets.
Determination of impairment amount
Subsequent measurement at fair value
45
-5,740
-3,150
Impairment losses
Depreciation
Changes in the scope of consolidation
-5,343
-887
-2,978
-1,474
January 1, 2018¹
Accumulated depreciation and impairment losses
10,551
1,096
1,305
Disposals
4,313
December 31, 2018
90
10
6
31
43
Currency translation
-134
-2
-20
-69
-43
3,837
-977
Transfers
-246
-1,609
66
-44
-5
-23
-16
13
40
13
December 31, 2018
Currency translation
Classification as held for sale or transfer to a disposal group
Reversals of impairment losses
-156
-24
116
2
42
59
11
-18
-2
-1
-3
-12
-517
-115
24
45
Dec. 31, 2017
Non-current
Total
Contract assets
Non-current
Current
Finished goods/goods for resale
Inventories
Work in progress
Raw materials and supplies
€ million
This item comprises the following items:
(23) Inventories
December 31, 2018
Changes in scope of consolidation/other
Currency effects
35
Classification as held for sale or transfer to disposal group
Reclassification to receivables
Additions
January 1, 2018
€ million
The following table provides details on contract assets representing
completed performances not yet invoiced:
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
240
For further information on impairment losses and credit risks from
financial items associated with other assets, please refer to Note (38)
"Management of financial risks". Please refer to Note (49) "Effects
from new accounting standards and other presentation and mea-
surement changes" for further details on the first-time application
effects of IFRS 9 regarding the classification and measurement of
financial assets.
Other receivables also comprised license receivables in the amount
of € 29 million (December 31, 2017: € 28 million).
Other receivables were subsequently measured at amortized cost
and mainly contained claims from service agreements in connection
with the divested Consumer Health business, which Merck continues
to fulfill for the acquiring party. In the previous year, other receivables
mainly comprised current receivables from related parties resulting
from refund claims to companies from taxes paid for the account of
such companies.
1 Due to the first-time application of IFRS 15 as of January 1, 2018, contract assets included in other assets in 2017 were reported separately as of January 1, 2018; see Note (49) "Effects from
new accounting standards and other presentation and measurement changes".
Reclassification from non-current to current
936
35
95
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
inventories. There were estimation uncertainties with respect to the
calculation of the net realizable value. It was determined, in particular,
on the basis of information on changes in selling and procurement
prices and on the expected cost of completion.
Identification of impairments or reversal of impairments
Discretionary decisions were required in the identification of impair-
ment as well as in the identification of a reversal of impairment of
SIGNIFICANT MANAGEMENT JUDGMENTS AND SOURCES
OF ESTIMATION UNCERTAINTY - INVENTORIES
As of the balance sheet date, no inventories were pledged as security
for liabilities.
The increase in impairment losses was attributable in particular to
the realignment of the Performance Materials business sector. In
addition, quality-related write-downs increased in the Healthcare
business sector.
Impairments of inventories in 2018 amounted to € 183 million
(2017: € 144 million); reversals amounted to € 77 million (2017:
€ 110 million).
The increase in inventories in 2018 was due to the overall acceler-
ating business volume in all three business sectors.
2,632
2,764
1,355
94
1,420
834
481
Dec. 31, 2017
Dec. 31, 2018
510
52
1
-1
-1
52
1
1
-78
-78
795
205
731
1,024
117
Prepaid expenses
277
38
239
326
8
318
Receivables from non-income related taxes
367
91
277
5
361
299
45
15
30
4
1
4
46
46
276
29
Total
63
121
99
8
138
886
Other assets
568
114
454
663
76
587
Non-financial items
184
69
115
156
62
94
Remaining other assets¹
1
1
7
7
Assets from defined benefit plans
52
1
52
Contract assets¹
107
81
Past service cost
-696
41
21
-13
1
-12
74
-59
15
-4,707
2,452
-2,256
With the exception of the net balance of interest expense on the
defined benefit obligations and interest income from the plan assets,
which is recorded under the financial result, the expenses for defined
benefit pension systems were allocated to the individual functional
areas in the consolidated income statement.
The actual loss on plan assets amounted to € 73 million in 2018 (2017:
return of € 164 million).
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
245
The development of cumulative actuarial gains (+) and losses (-)
I was as follows:
€ million
Both the benefit obligations as well as the plan assets are subject
to fluctuations over time. This could lead to (an increase in) under-
funding. Depending on the statutory regulations, it could become
necessary in some countries to reduce underfunding through addi-
tions of liquid assets. The reasons for such fluctuations could include
changes in market interest rates and thus the discount rate as well
as adjustments to other actuarial assumptions (e.g. life expectancy,
inflation rates).
-46
In order to minimize fluctuations of the net defined benefit lia-
bility recognized in the balance sheet, in managing its plan assets,
Merck also pays attention to potential fluctuations in liabilities. The
portfolio is structured in such a way that, in the ideal case, assets
and defined benefit obligations develop in opposite directions when
exposed to exogenous factors - in particular interest rate fluctua-
tions thus creating a natural defense against these factors.
67
Additions
Net carrying amounts as of December 31, 2017
69
-40
122
-5,340
2,042
1,158
291
1,022
4,512
21
-886
Cost at January 1, 2018¹
3,517
4,136
1,178
1,026
9,857
Changes in the scope of consolidation
16
246
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
814
Debt instruments
993
993
957
Direct investments in real estate
105
105
94
94
Investment funds
458
458
420
1
421
Insurance contracts
Other
77
814
592
592
Equity instruments
The fair value of the plan assets can be allocated to the following
categories:
Dec. 31, 2018
Dec. 31, 2017
Quoted market
€ million
price in an
active market
No quoted
market price in
Quoted market
price in an
-2,978
No quoted
market price in
Total
active market
an active market
Total
Cash and cash equivalents
147
147
77
77
an active market
77
-1,472
63
-2
Items recognized in income
-217
6
thereof: attributable to the divested Consumer Health business
-8
3
Remeasurements of defined benefit obligations
Actuarial gains (+)/losses (-)
arising from changes in demographic assumptions
Actuarial gains (+)/losses (-)
arising from changes in financial assumptions
Actuarial gains (+)/losses (-)
arising from experience adjustments
Remeasurements of plan assets
Actuarial gains (+)/losses (-)
arising from experience adjustments
Changes in the effects of the asset ceilings
Actuarial gains (+)/losses (-)
-3
Actuarial gains (+)/losses (-)
Other effects recognized in income
40
Gains (+) or losses (-) on settlement
Present value
of the defined
benefit obligations
-4,698
Fair value of the
plan assets
2,386
Effects of the
asset ceilings
Net defined
benefit liability
-2,313
-160
Classification as held for sale or transfer to a disposal group
-160
-86
-86
43
43
-2
-2
-8
-8
Currency translation differences recognized in income
-33
Pension payments
Employer contributions
Employee contributions
76
36
36
-13
13
114
-2
112
20
-14
6
Reversals of impairment losses
35
35
Classification as held for sale or transfer to a disposal group
-41
1
Currency translation
37
-51
127
141
121
Payment transactions
Changes in the scope of consolidation
Reclassification to liabilities directly related to assets held for sale
Currency translation differences recognized in equity
Other changes
Other
December 31, 2017
5
8
7
December 31, 2017
20
7
-5
-211
-5
5
8
7
121
121
20
81
957
19
49
Changes in the scope of consolidation
9,402
807
1,136
4,068
3,391
Total
to vendors and
contractors
progress and
advance payments
Construction in
operating and
office equipment
Plant and
machinery
land
Cost at January 1, 2017
€ million
on third-party
Other facilities,
Land, land rights
and buildings,
including buildings
2
-24
28
Additions
-2
41
Classification as held for sale or transfer to a disposal group
-5
-543
96
258
184
Transfers
(21) Property, plant and equipment
-241
-34
-142
-50
81
936
818
35
54
30
-16
39
237
Consolidated Financial Statements
-13
2
Other changes
53
-13
40
Other
December 31, 2018
-4,719
2,391
-2,329
244
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
€ million
January 1, 2017
Current service cost
Interest expense
Interest income
15
-5
5
-10
-9
-115
-34
124
-49
75
48
48
-14
Notes to the Consolidated Financial Statements
14
13
123
Changes in the scope of consolidation
Reclassification to liabilities directly related to
assets held for sale
48
-5
43
Currency translation differences recognized in equity
110
Currency translation
Disposals
-103
Actuarial gains (+)/losses (-)
Reclassification within retained earnings
Cumulative actuarial gains (+)/losses (-) recognized in equity, December 31
2018
-1,668
-131
-40
5
Actuarial gains (+)/losses (-) arising from experience adjustments
Effects of the asset ceilings
139
-18
7
-115
121
65
-1,637
-1,668
Plan assets for funded defined benefit obligations primarily comprised
fixed-income securities, stocks, and investment funds. They did not
directly include financial instruments issued by Merck Group compa-
nies or real estate used by Group companies.
The plan assets serve exclusively to meet the defined benefit
obligations. Covering the benefit obligations with financial assets
represents a means of providing for future cash outflows, which occur
in some countries (e.g. Switzerland and the United Kingdom) on the
basis of legal requirements and in other countries (e.g. Germany)
on a voluntary basis.
8
21
-103
Remeasurements of plan assets
Actuarial gains (+)/losses (-) arising from changes in demographic assumptions
Actuarial gains (+)/losses (-) arising from changes in financial assumptions
19
8
8
Fair value of the plan assets
2,209
182
2,391
2,276
Actuarial gains (+)/losses (−) arising from experience adjustments
176
Employer contributions to plan assets and direct payments to bene-
ficiaries will probably amount to around € 33 million and € 74 million,
respectively, in the subsequent year. The weighted duration amounted
to 20 years.
0
SIGNIFICANT MANAGEMENT JUDGMENTS AND SOURCES
OF ESTIMATION UNCERTAINTY - PROVISIONS FOR
PENSIONS AND OTHER POST-EMPLOYMENT BENEFITS
Determination of present value of defined-benefit obligations
The determination of the present value of the obligation from these
defined benefit pension plans primarily requires discretionary judg-
ment as regards the selection of methods to determine discount rates
as well as estimates of future salary increases and future pension
increases. The actuarial assumptions which are used as the basis for
the calculation of the defined benefit obligation, e.g. discount rates,
salary and pension trends, were determined on a country-by-country
basis in line with the economic conditions prevailing in each country;
the latest country-specific actuarial mortality table was used in each
case. The respective discount rates are generally determined on the
basis of the returns on high-quality corporate bonds issued with
adequate maturities and currencies. For euro-denominated obliga-
tions, bonds with ratings of at least "AA" from one of the three rating
agencies Standard & Poor's, Moody's or Fitch, and a euro swap rate
of adequate duration served as the basis for the data.
The following overview shows how the present value of all defined
benefit obligations would have been impacted by changes to relevant
ctuarial assumptions.
Cumulative actuarial gains (+)/losses (−) recognized in equity, January 1
Currency translation differences
Remeasurements of defined benefit obligations
2,452
-266
2017
-1,820
11
1,176
-516
Depreciation
2
- 31
Changes in the scope of consolidation
-5,171
-858
-2,949
-1,361
January 1, 2017
Accumulated depreciation and impairment losses
9,852
1,026
4,136
3,514
December 31, 2017
-306
-40
-33
Impairment losses
-2
-147
-5
-2
209
32
138
Transfers
39
Disposals
-28
12
The payments for investments in intangible assets primarily included
payments for the development of ERP systems. In the previous year,
this item included payments for a license agreement with Vertex
Pharmaceuticals Inc., United States, for the acquisition of research
programs in the area of oncology and immuno-oncology.
1
1
13
Consolidated Financial Statements
Cash inflows from the divestment of assets held for sale essentially
included the payment received from the divestment of the Consumer
Health business, less transferred cash and cash equivalents, in the
amount of € 3,052 million. To the extent that income tax payments
were already included in the disposal gain, such payments were
taken into account in the disclosed amount. In the previous year,
Merck received an upfront payment of € 156 million associated with
the divestment of the Biosimilars business.
Net cash outflows from investments in current and non-current
financial assets amounting to € 75 million (2017: € 219 million)
mainly resulted from the purchase of short-term investments in
securities not classified as cash and cash equivalents. In the previous
year, this item included payments for the purchase of an equity
instrument option.
12
(31) Net cash flows from investing
activities
472
-16
Besides regulatory discounts, rebates and bonus payments comprised
discounts agreed upon with customers. The most significant portion
of these deductions from sales was attributable to the Healthcare busi-
ness sector and related to government rebate programs in the US.
31
49
274
423
-1
-1
-3
3
-19
Please refer to Note (8) "Net sales" for further information on
judgments and sources of estimation uncertainty.
-3
23
-25
1,317
-1,193
-902
-43
951
1,273
431
32
52
244
Total
United States
Total
United States
-22
Notes to the Consolidated Financial Statements
44
-1,235
-31
-30
-3
-3
-34
-24
255
Consolidated Financial Statements
(32) Financial result/net gains or losses from financial instruments
Subsequent measurement at fair value
through profit or loss
2017
1 Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes".
-294
-266
Financial result
-345
-343
-1
-51
-56
-15
-2
-1
-13
€ million
Held for trading
Held to maturity
Loans and receivables
Available for sale
Other liabilities
In the table above, interest income or expenses related to derivatives
without a hedging relationship are recognized within fair value adjust-
ments. The currency translation result from equity instruments with
subsequent measurement at fair value through other comprehensive
income was recognized in other comprehensive income.
-54
12
Subsequent measurement at amortized cost
through profit or loss
Notes to the Consolidated Financial Statements
The following table shows the development of net gains or losses,
interest income or expenses as well as dividend income from financial
instruments (excluding items recognized in other comprehensive
income) in the period under review by measurement category:
2018
€ million
Interest result
Net gains and losses
Currency
translation
Dividends
Interest
income
Interest
expenses
Impairment
losses
Reversals of
impairment
losses
Fair value
adjustments
Disposal
gains/losses
Financial assets
The currency differences from financing activities mainly comprised
gains or losses from hedging intragroup transactions in foreign
currency.
-47
Subsequent measurement at fair value
through other comprehensive income
Equity instruments
Debt instruments
Subsequent measurement at fair value
Financial liabilities
1
22
-259
Capital loss from disposal of debt instruments with subsequent measurement at amortized cost
Expenses from fair value changes
Interest expenses from interest rate derivatives
in other intangible assets
in property, plant and equipment
Capitalized borrowing costs of qualifying assets
Interest expenses and similar expenses
51
27
167
77
Finance income
Currency differences from financing activities
-
1
5
from debt instruments with subsequent measurement at fair value through profit or loss
Income from the change of the fair value of share-based compensation programs
23
55
20171
2018
Income from fair value changes
Interest income and similar income
€ million
600
from debt instruments with subsequent measurement at fair value through profit or loss
Expenses from fair value changes of share-based compensation programs
Interest component of the additions to pension provisions and other non-current provisions
Other interest expenses
Finance costs
-77
105
Net gains and losses
Reversals of
Interest Impairment losses impairment losses
21
-39
97
5
-14
-294
Capital Structure, Investments and Financing Activities
-669
Fair value
adjustments
Disposal gains/
losses
-203
256
-14
7
8
5
7
-294
-268
735
Subsequent measurement at amortized cost
184
92
46
30
137
316
90
370
58
203
111
11
27
780
248
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
LITIGATION
As of December 31, 2018, the provisions for legal disputes amounted
to € 551 million (December 31, 2017: € 526 million). The legal matters
described below represented the most significant legal risks.
Product-related and patent disputes
Rebif®: Merck is involved in a patent dispute with Biogen Inc., United
States, (Biogen) in the United States. Biogen claims that the sale of
RebifⓇ in the United States infringes on a Biogen patent. The dis-
puted patent was granted to Biogen in the United States in 2009.
Subsequently, Biogen sued Merck and other pharmaceutical compa-
nies for infringement of this patent. Merck defended itself against all
allegations and brought a countersuit claiming that the patent was
invalid and not infringed by Merck's actions. In the first instance, a
jury recognized the invalidity of the patent. This jury verdict was
overturned by a first-instance federal judge in September 2018. For
the time being, the patent is thus deemed to be legally valid and to
have been infringed. Merck filed a complaint with the CAFC (second
instance) against the first-instance ruling in October 2018. In this
context, Merck recognized provisions in a three-digit million euro
amount. Cash outflow is not expected to occur within the next
12 months.
PS-VA liquid crystals mixtures: In the Performance Materials business
sector, Merck is involved in a legal dispute with JNC Corporation,
Japan, (JNC). JNC claims that by manufacturing and marketing cer-
tain liquid crystals mixtures, Merck has infringed JNC patents. JNC
asserts its claims in court in various jurisdictions. In two JNC patent
infringement cases, a first-instance and a second-instance decision,
respectively, were taken in Merck's favor, against which JNC has
appealed or is highly likely to appeal.
Merck maintains that JNC's patent infringement assertion is invalid
owing to relevant prior art and has filed the corresponding nullity
actions, which in three cases were already successful in first-instance
proceedings. JNC has filed complaints in each case. In a correction
trial in Korea, a decision in favor of JNC was issued in the second
instance. Both Merck and the Korean Patent Office have filed com-
plaints with the Korean High Civil Court.
211
1,381
thereof: current
thereof: non-current
853,624
Potential number offered for the first time in 2017
739,071
Dec. 31, 2016
24,392
Forfeited
763,463
Potential number offered for the first time in 2016
Potential number of MSUS
13,089.39
In this context, Merck recognized provisions in a double-digit mil-
lion euro amount. Cash outflow within the next 12 months is consid-
ered possible at present.
91.73
95.63
3 years
Jan. 1, 2018 -
Dec. 31, 2020
2018 tranche
46
19
26
112
32
182
10,822.06
Forfeited
Antitrust and other proceedings
(EU Commission) in connection with the antitrust review proceedings
for the acquisition of Sigma-Aldrich, in which the EU Commission
informed Merck of its preliminary conclusion that Merck and Sigma-
Aldrich allegedly transmitted incorrect and/or misleading information
within the scope of the acquisition of Sigma-Aldrich. The EU Com-
mission received registration of the merger on April 21, 2015, and
granted clearance on June 15, 2015, subject to the condition that
Merck and Sigma-Aldrich divest parts of the European solvents and
inorganic chemicals businesses of Sigma-Aldrich in order to resolve
antitrust concerns. According to the preliminary viewpoint of the EU
Commission communicated in a letter dated July 6, 2017, Merck and
Sigma-Aldrich withheld related important information about an inno-
vation project. According to the EU Commission, the innovation project
should have been included in the remedies package. At present, an
administrative procedure is carried out at the EU Commission which
might result in the issuance of a fine. Merck is entitled to legal
recourse should a fine be imposed. The ongoing investigations are
limited to the examination of violations of EU merger control proce-
dures and do not affect the validity of the EU Commission's decision
to approve the merger. In this context, Merck recognized provisions
in a mid double-digit million euro amount. An outflow of resources
is expected in 2019.
13,988
37,953
Transferred as part of the disposal of Consumer Health
Dec. 31, 2018
16,336
39,889
23,760
643,954
774,850
829,632
The value of the provisions was € 114 million as of December 31,
2018 (December 31, 2017: € 45 million). Net expenses of € 92 mil-
lion were incurred in fiscal 2018 (2017: net income of € 13 million).
The three-year tranche issued in 2015 ended at the end of 2017; an
amount of € 23 million was paid out in 2018.
SIGNIFICANT MANAGEMENT JUDGMENTS AND SOURCES
OF ESTIMATION UNCERTAINTY - SHARE-BASED COMPEN-
SATION PROGRAMS
The measurement of long-term share-based compensation programs
implies extensive estimation uncertainty. The two main parameters
in the measurement of the long-term share-based compensation
programs in the form of cash-settled share-based compensation pro-
grams are long-term indicators of company performance and price
fluctuations of Merck shares in relation to the DAX®.
The amount recognized in the consolidated balance sheet as of
December 31, 2018, as non-current provisions, which comprises the
2017 and 2018 tranches from long-term variable compensation pro-
grams, amounted to € 54 million (December 31, 2017: 2016 and
2017 tranches € 22 million). The following overview shows the
amounts by which the non-current provisions would have been
impacted by changes in the DAX® (increase or decrease by 10%,
respectively) and the closing price of Merck shares, as of Decem-
ber 31, 2018 (increase or decrease by 10%, respectively). The
amounts stated would have led to a corresponding reduction or
increase in profit before income tax.
€ million
Variation of Merck share price
Variation of DAX® value
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
251
sation programs can be found in Note (69) "Share-based compen-
sation programs". The following table presents the key parameters
as well as the development of the potential number of Merck Share
Units (MSUS) for the individual tranches:
Provisions for employee benefits include obligations from long-term
variable compensation programs. More information on these compen-
PROVISIONS FOR EMPLOYEE BENEFITS/SHARE-BASED
PAYMENT
Notes to the Consolidated Financial Statements
Paroxetine: In connection with the divested generics business, Merck
is subject to antitrust investigations by the British Competition and
Market Authority (CMA) in the United Kingdom. In March 2013, the
authorities informed Merck of the assumption that a settlement
agreement entered into in 2002 between Generics (UK) Ltd. and
several subsidiaries of GlaxoSmithKline plc, United Kingdom, in con-
nection with the antidepressant drug paroxetine violates British and
European competition law. Merck, the then owner of Generics (UK)
Ltd., was allegedly involved in the negotiations for the settlement
agreement and is therefore liable. The investigations into Generics
(UK) Ltd. started in 2011, without this being known to Merck. On
February 11, 2016, the CMA imposed a fine in this matter. Merck has
taken legal action against this fine. Appropriate accounting measures
have been taken. As things stand at present, a decision and outflow
of resources are not expected within the next 12 months because
the Appeal Tribunal has since submitted the relevant legal questions
to the European Court of Justice (CJEU) for a preliminary ruling.
In addition to provisions for the mentioned litigation, provisions
existed as of the balance sheet date for various other pending legal
disputes.
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
249
SIGNIFICANT MANAGEMENT JUDGMENTS AND SOURCES
OF ESTIMATION UNCERTAINTY - OTHER PROVISIONS
FOR LEGAL DISPUTES
⚫ the validity of the arguments put forward by the opposing party
and
⚫ the legal situation and current legislation in comparable proceedings
in the jurisdiction in question.
The main parameters when determining the amount of provisions
were
Antitrust review proceedings for the Sigma-Aldrich acquisition: On
July 6, 2017, Merck received notice from the European Commission
⚫ the duration of proceedings in pending litigation,
⚫ the license rate to be applied (in patent disputes) and
the discount rate to be used.
•
To assess a recognition obligation in relation to provisions and to
quantify pending outflows of resources, Merck drew on the knowledge
of the legal department as well as outside counsel. In spite of this,
both the assessment of the existence of a present obligation and the
estimate of the probability of a future outflow of resources were
highly subject to uncertainty.
RESTRUCTURING
Restructuring provisions mainly included commitments to employees
in connection with restructuring projects and provisions for related
onerous contracts.
The additions to restructuring provisions in the amount of
€ 30 million were mainly attributable to the relocation of shared
service functions in Finance from Darmstadt to Wrocław, Poland, and
Manila, the Philippines, and to the reorganization of the distribution
structure in the Healthcare business sector in Southern Europe. Out-
flows of resources are expected within the next three years.
The utilization of restructuring provisions in the amount of € 22 mil-
lion was mainly attributable to the "Fit for 2018" transformation and
growth program, which was introduced in 2012. The provisions in
this context mainly consist of commitments to employees from par-
tial and early retirement arrangements. Further cash outflows within
the scope of the "Fit for 2018" program are largely expected in 2019.
Besides the aforementioned programs, the restructuring provi-
sions also comprise obligations from the Life Science business sector,
which will make relocations and gradually close operations in the
course of the years 2019 to 2022 at various German sites.
250
Consolidated Financial Statements
⚫ the likelihood of possible outcomes of the proceedings,
+10%
31,105
Dec. 31, 2017
Additions
Utilizations
Release
Interest and
Litigation Restructuring
Personnel
Environmental
protection
Acceptance
and follow-on
penalties
related to
obligations
income taxes
Other
Total
526
254
137
26
43
166
1,245
January 1, 2018
€ million
Other provisions developed as follows:
(26) Other provisions
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
247
Dec. 31, 2017
-435
-438
503
508
151
155
65
-130
251
256
-198
€ million
Increase (+)/decrease (-) in present value of all defined benefit obligations if
the discount rate is 50 basis points higher
the discount rate is 50 basis points lower
the expected rate of future salary increases is 50 basis points higher
the expected rate of future salary increases is 50 basis points lower
the expected rate of future pension increases is 50 basis points higher
the expected rate of future pension increases is 50 basis points lower
To determine the sensitivities, in principle each of the observed
parameters was varied while keeping the measurement assumptions
otherwise constant. The amounts for social security vary in line with
the salary trend.
Dec. 31, 2018
-196
-133
24,897
30
9
6
-1
-2
Interest portion
Currency translation
Changes in scope of consolidation/other
Reclassification to liabilities directly related
to assets held for sale
-6
-1
-4
-3
-15
December 31, 2018
551
47,676
Forfeited
891,345
Potential number offered for the first time in 2018
828,727
707,966
2
5
1
14
15
13
176
511
-22
-22
-78
-8
-3
-40
203
-174
-9
-66
-2
-7
-10
-90
-206
11
2
2
-21
-10%
The assessment of the recognition obligation and the measurement
of provisions for legal disputes was subject to estimation uncertainty
to a particular extent. The main factors used to assess the recognition
obligation in relation to provisions for legal disputes were
Increase (+)/decrease (-) of the provision
99
Non-financial items
1,211
19
1,230
1,112
315
1,427
Other liabilities
2,288
52
2,341
99
2,175
¹ Due to the first-time application of IFRS 15 as of January 1, 2018, contract liabilities included in deferred income in 2017 were reported separately as of January 1, 2018; see Note (49)
"Effects from new accounting standards and other presentation and measurement changes".
As of December 31, 2018, other financial liabilities included liabilities
to related companies amounting to € 511 million (December 31,
2017: € 584 million). These were profit entitlements of E. Merck KG.
€ million
January 1, 2018
Additions
Recognition of income/reversal
Cumulative catch-up adjustments to revenue
Reclassification from non-current to current
Reclassification to liabilities directly related to assets held for sale
Currency translation
Change in scope of consolidation/other
December 31, 2018
2,529
354
The following table provides details on the development of contract
liabilities related to payments received before performance completion:
Other non-financial liabilities
211
39
1,102
58
1,077
23
20
+10%
-10%
687
687
665
665
Contract liabilities¹
514
332
336
Liabilities from non-income related taxes
171
15
186
144
5
150
Deferred income¹
21
21
303
4
1,063
Contract liabilities
Non-current
The following table shows the development of refund liabilities in the
period under review:
€ million
January 1, 2018
Additions
Utilizations/reversals
Cumulative catch-up adjustments to revenue
thereof: attributable to performance obligations satisfied
in prior periods
Currency translation
Reclassification to liabilities directly related to assets held for sale
Change in scope of consolidation/other
December 31, 2018
Rebates/bonus payments
Rights of return
(30) Refund liabilities
thereof:
Total
379
Performance cycle
Term
Reference price of Merck shares in €
(60-day average Merck share price prior
to the start of the performance cycle)
DAX® value (60-day average of the DAX®
prior to the start of the performance cycle)
2016 tranche
Jan. 1, 2016 -
Dec. 31, 2018
3 years
87.92
10,669.76
2017 tranche
Jan. 1, 2017 -
Dec. 31, 2019
3 years
thereof:
Current
reclassified into the consolidated balance sheet, in particular in
refund liabilities. This led to a decline in trade accounts payable of
€ 434 million as of January 1, 2018 (see Note (49) "Effects from new
accounting standards and other presentation and measurement
changes").
Trade accounts payable amounted to € 1,766 million (December 31,
2017: € 2,195 million). This item included accrued amounts of
€ 622 million (December 31, 2017: € 653 million) from outstanding
invoices.
Total
311
194
506
410
2
412
-582
-2
-583
193
-193
Given the first-time application of IFRS 15 as of January 1, 2018,
some items previously recognized in trade accounts payable were
2
-2
2
332
4
336
Contract liabilities resulted mainly from the collaboration agreement
with Pfizer Inc., United States, in immuno-oncology and were released
further as planned on a pro-rata basis through profit or loss in other
operating income in 2018.
As of January 1, 2018, contract liabilities amounted to € 506 million,
of which € 299 million was recognized in fiscal 2018.
254
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
(29) Trade accounts payable
2
1,110
Accruals for personnel expenses
Notes to the Consolidated Financial Statements
253
(28) Other liabilities
Other liabilities comprised the following:
€ million
Other financial liabilities
thereof: payroll liabilies
thereof: interest accruals
Liabilities from derivatives with a hedging
relationship (operative)
Financial items
Dec. 31, 2018
Current
1,019
Non-current
Total
Current
Dec. 31, 2017
Non-current
13
1,032
1,038
21
Total
1,059
172
172
174
174
⚫ the future settlement date,
Consolidated Financial Statements
ties. The most important parameters used in the measurement of
contingent liabilities are the estimated amounts and probabilities of
individual proceeding outcomes that are considered possible.
The identification and measurement of contingent liabilities are
largely subject to management judgments and estimation uncertain-
⚫ the discount rate.
The measurement was carried out regularly in consultation with inde-
pendent experts.
ACCEPTANCE AND FOLLOW-ON OBLIGATIONS
Provisions for acceptance and follow-on obligations primarily took
into account costs stemming from discontinued development projects
as well as obligation surpluses from onerous contracts. Utilizations
and releases were mainly attributable to development projects dis-
continued in previous years.
INTEREST AND PENALTIES RELATED TO INCOME TAXES
Provisions for interest and penalties related to income taxes mainly
comprised interest payables associated with or resulting from tax
payables. In previous periods, such items were disclosed in income
tax liabilities in full.
For further information on these disclosure changes, please refer
to Note (49) "Effects from new accounting standards and other pres-
entation and measurement changes".
MISCELLANEOUS OTHER PROVISIONS
Miscellaneous other provisions mainly comprised provisions for war-
ranty obligations and for uncertain commitments from contributions,
fees and other duties.
252
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
(27) Contingent liabilities
94
€ million
Dec. 31, 2018
47
Dec. 31, 2017
66
1
1
Contingent liabilities from legal disputes included potential obliga-
tions, for which the probability of occurrence, or an outflow of
resources, did not suffice to recognize a provision as of the balance
sheet date. These mainly related to obligations under civil law, labor
law and antitrust law. The potential civil law obligations primarily
related to potential liabilities to pay damages due to a legal dispute
under antitrust law. It was possible that Merck would be subject to
claims for compensation for damages asserted by health insurance
companies due to excessively high drug prices in case of a valid
judgment under antitrust law.
In addition, there were contingent liabilities from various legal
disputes with Merck & Co., Inc. of the United States (outside the
United States and Canada: Merck Sharp & Dohme Corp. (MSD)),
among other things due to breach of the co-existence agreement
the actual severity of the identified contamination,
between the two companies and/or trademark/name right infringe-
ment regarding the use of the designation "Merck". In this context,
Merck has sued MSD in various countries and has been sued by MSD
in the United States. An outflow of resources - except costs for legal
defense - was not deemed sufficiently probable as of the balance
sheet date to justify the recognition of a provision. Since the contingent
liability from these legal disputes could not be reliably quantified as
of the balance sheet date, this matter was not taken into account in
the table presented above.
.
Contingent liabilities from tax matters included various non-Ger-
man income and non-income-related tax matters that were mainly
attributable to the determination of earnings under tax law, customs
regulations and excise tax matters.
SIGNIFICANT MANAGEMENT JUDGEMENTS AND SOURCES
OF ESTIMATION UNCERTAINTY - CONTINGENT LIABILITIES
Identification and measurement
Contingent liabilities from legal disputes and tax matters
Other contingent liabilities
⚫ the associated future costs, and
94
95
95
Dec. 31, 2018
14
-15
-10
8
Dec. 31, 2017
15
-2
16
Sensitivities were determined on the basis of the respective param-
eters in question, with all other measurement assumptions remain-
ing unchanged. The 2016 tranche reported under current provisions
will not be subject to any value fluctuations between December 31,
2018, and the payout date and was therefore not included in the
sensitivity analysis (December 31, 2017: 2015 tranche).
Provisions for employee benefits included an amount of € 51 million
for the promise of a one-time bonus for employees on the occasion
of the company's 350th anniversary, which was recognized in 2017
and paid out in 2018.
⚫ the applicable remediation methods,
With respect to provisions for pensions and other post-employment
benefits, see Note (25) "Provisions for pensions and other post-em-
ployment benefits".
Provisions for employee benefits also included obligations for par-
tial retirement programs and other severance payments that were not
set up in connection with restructuring programs as well as obligations
in connection with long-term working hour accounts and anniversary
bonuses.
78
18
43
25
The calculation of the present value of the future settlement amount
of provisions for environmental protection required estimates to be
made of
SIGNIFICANT MANAGEMENT JUDGMENTS AND SOURCES
OF ESTIMATION UNCERTAINTY - OTHER PROVISIONS
FOR ENVIRONMENTAL PROTECTION
Provisions for environmental protection, particularly for obligations
from soil remediation and groundwater protection, mainly existed in
connection with the crop protection business in Germany and Latin
America that was discontinued in 1987.
ENVIRONMENTAL PROTECTION
33
2023
2022
2021
2020
2019
500
Consolidated Financial Statements
259
Notes to the Consolidated Financial Statements
2024
€ million
2 Merck has the right to prematurely repay this tranche of the hybrid bond issued in December 2014 for the first time in December 2024.
3 Not defined by International Financial Reporting Standard (IFRS).
1 Merck has the right to prematurely repay this tranche of the hybrid bond issued in December 2014 for the first time in June 2021.
10,144
• Eurobond • USD bond¹ • Hybrid bond²
2025
0.75%/
4.25%
800
The financial liabilities of the Group were not secured by liens or
similar forms of collateral. The loan agreements do not contain any
financial covenants. The Merck Group's average borrowing cost as
of the balance sheet date was 2.7% (December 31, 2017: 2.2%).
Information on liabilities to related parties can be found in Note
(42) "Related-party disclosures".
For the hybrid bond 2014/2074 issued by Merck KGaA in two
tranches, the rating agencies Standard & Poor's, Moody's and Scope
have given equity credit treatment to half of the issuance, thus
making the issuance more favorable to Merck's credit rating than a
classic bond issue. The bond is recognized in full as financial liabilities
in the balance sheet.
Merck repaid a USD bond with a volume of € 323 million in March
2018.
2 For the hybrid bonds repayment is assumed at the earliest possible date.
1The nominal volumes of bonds denominated in U.S. dollars were converted into euros at the
closing rate on December 31, 2018.
1.375%/2.95%
1.350
3.375%
656
2.625%
874
550
1,000
70
1,398
3.25%
Utilization
90
variable
700
700
2020
Maturity of
financing
commitments
Interest
variable
2,000
260
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
CAPITAL MANAGEMENT
The objective of capital management is to secure financial flexibility
in order to maintain long-term business operations and to realize
strategic options. Maintaining a stable investment grade rating,
ensuring liquidity, limiting financial risks as well as optimizing the
cost of capital are the objectives of our financial policy and set impor-
tant framework conditions for capital management. The responsible
committees decide on the target capital structure of the balance
sheet, the appropriation of net retained profit and the dividend level.
In this context, net financial debt is one of the leading capital man-
agement indicators.
Traditionally, the capital market represents a major source of financ-
ing for Merck, for instance via bond issues. As of December 31, 2018,
there were liabilities of € 2.77 billion (December 31, 2017: € 2.77
billion) from a debt issuance program most recently renewed in 2015.
In addition, Merck had access to a commercial paper program to
meet short-term capital requirements with a volume of € 2 billion,
of which € 113 million had been utilized as of December 31, 2018
(December 31, 2017: € 838 million).
Loan agreements represent a further source of financing for Merck.
At the balance sheet date, the bank financing commitments vis-à-vis
the Merck Group were as follows:
€ million
Syndicated loan
Bilateral credit agreement with banks
Bilateral credit agreement with banks
Bilateral credit agreement with banks
Various bank credit lines
Dec. 31, 2018
Financing
commitments
from banks
Dec. 31, 2017
Financing
commitments
Utilization
from banks
400
400
variable
250
2,000
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
E. Merck KG and Merck KGaA engage in reciprocal net profit trans-
fers. This makes it possible for E. Merck KG, the general partner of
Merck KGaA, and the shareholders to participate in the net profit/
loss of Merck KGaA in accordance with the ratio of the general part-
ner's equity interest and the share capital (70.274% or 29.726% of
the total capital).
E. MERCK KG'S SHARE OF NET PROFIT
The total capital of the company consists of the share capital com-
posed of shares and the equity interest held by the general partner
E. Merck KG. As of the balance sheet date, the company's share
capital amounting to € 168 million was divided into 129,242,251
no-par value bearer shares plus one registered share and is disclosed
as subscribed capital. Each share therefore corresponds to € 1.30 of
EQUITY CAPITAL
(36) Equity
the share capital. The amount resulting from the issue of shares by
Merck KGaA exceeding the nominal amount was recognized in the
capital reserves. The equity interest held by the general partner
amounted to € 397 million. As in the prior year, the share capital did
not change in fiscal 2018.
There are no indications that the availability of credit lines already
extended was restricted.
1,653
4.5%/2.4%
3,931
2,799
2022
<1 year
variable
303
581
370
549
variable
250
250
250
620
589
324
10,823
14
16
Derivatives without a hedging relationship (financial transactions)
Financial assets
50
50
Other debt instruments
259
259
Contingent considerations
Equity instruments
30
340
16
Subsequent measurement at fair value through profit and loss
12
4
8
Debt instruments
274
274
Equity instruments
285
261
278
24
635
USD bond 2015/2018
Eurobond 2015/2019
%
Maturity
€ million
€ million
Interest rate
2017
Dec. 31,
Dec. 31,
2018
Nominal value
610
net financial debt are presented in the following table:
capital management
(35) Financial liabilities/
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
258
intention to hold these items for the long term, they were classified as
equity instruments and subsequently measured at fair value through
other comprehensive income. For further information on impairment
losses and credit risks associated with these items, please refer to
Note (38) "Management of financial risks”. Please refer to Note (49)
"Effects from new accounting standards and other presentation and
measurement changes" for further details on the first-time application
effects of IFRS 9 regarding the classification and measurement of
financial assets.
As in the previous year, contingent considerations were mainly attri-
butable to the divestments of the Biosimilars business (see Note (5)
"Acquisitions and divestments") and KuvanⓇ. In the previous year,
these items were disclosed as available-for-sale financial assets. The
shares held in Intrexon Corporation, United States, acquired in fiscal
2018, were disclosed in equity instruments with subsequent mea-
surement at fair value through other comprehensive income. Please
refer to Note (70) "List of shareholdings" for a detailed list of all
investments made in equity instruments with subsequent measure-
ment at fair value through other comprehensive income. Given Merck's
535
444
90
The composition of financial liabilities as well as a reconciliation to
8
other comprehensive income
Subsequent measurement at fair value through
€ million
(34) Financial assets
The maximum default risk is equivalent to the carrying value of
the cash and cash equivalents.
to cash and cash equivalents with subsidiaries which the Group only
had restricted access to owing to foreign exchange controls.
Cash and cash equivalents included restricted cash amounting to
€ 295 million (December 31, 2017: € 238 million). This relates mainly
Changes in cash and cash equivalents as defined by IAS 7 are pre-
sented in the consolidated cash flow statement.
589
2,170
108
1,391
Available-for-sale financial assets
481
Dec. 31, 2018
780
Cash and cash equivalents
Short-term cash investments (up to 3 months)
Cash, bank balances and checks
€ million
Cash and cash equivalents comprised the following items:
(33) Cash and cash equivalents
257
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
Dec. 31, 2017
Loans and receivables
Derivative assets (financial transactions)
Dec. 31, 2018
9
9
1
10
9
1
Loans against third parties
Subsequent measurement at amortized cost
22
13
59
12
29
47
454
420
35
Total
Dec. 31, 2017
Non-current
Current
Total
Non-current
Current
Eurobond 2009/2019
2,170
24
6,701
799
335 March 2018
Sept. 2019
Dec. 2019
994
1,328
1,389
€
550
1.375%
Sept. 2022
548
548
USD
992
1,000
€
1,350
USD
750
2.400%
4.500%
€
70
70
€
800
2.950%
0.750%
4.250%
498
March 2025
Dec. 2074¹
Dec. 2074²
8,896
8,033
6,681
2
2
86
73
54
51
850
497
250
6,304
€
500
3.375%
€
1,000
2.625%
USD
1,600
3.250%
7,040
799 Sept. 2019
70 Dec. 2019
626 March 2020
1,347 March 2020
833 March 2022
1,348
872
655
Loans from third parties and other financial liabilities
767
824
Liabilities to related parties
803
370
Bank loans
838
113
Commercial paper
20
335
Bonds (current)
€
70
4.250%
€
800
USD
Currency
million
400
1.700%
0.750%
869
19
Liabilities from derivatives (financial transactions)
16
Net financial debt³
Current financial assets
Cash and cash equivalents
less:
Financial liabilities
Non-current financial liabilities
Liabilities from derivatives (financial transactions)
Finance lease liabilities
Loans from third parties and other financial liabilities
Liabilities to related parties
Bank loans
Bonds (non-current)
Hybrid bond 2014/2074
Hybrid bond 2014/2074
USD bond 2015/2020
Eurobond 2010/2020
USD bond 2015/2022
Eurobond 2015/2022
USD bond 2015/2025
Eurobond 2009/2019
Eurobond 2015/2019
2,790
2,215
Current financial liabilities
1
2
Finance lease liabilities
27
70
The allocation of net profit/loss is based on the net income of both
E. Merck KG and Merck KGaA determined in accordance with the
provisions of the German Commercial Code. These results are
adjusted for trade tax and/or corporation tax and create the basis
for the allocation of net profit/loss. The adjustment for corporation
tax is made to compensate for the difference in the tax treatment
between the general partner and the limited liability shareholders.
Corporation tax is only calculated on the income received by the
-63
€ million
13
86
27
46
13
9
18
25
15
30
18
25
Non-current
Current
Non-current
Current
Operative transactions
Financial transactions
Negative market values
86
15
9
46
Derivative financial assets
Dec. 31, 2017
€ million
Derivative financial liabilities
Derivative financial assets
Dec. 31, 2018
€ million
The following table presents the potential netting volume of the
reported derivative assets and liabilities:
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
266
18
25
86
27
62
30
13
9
27
30
Non-current
Current
1
4
-
20
58
Non-current
Current
Non-current
Current
Operative transactions
Financial transactions
Negative market values
1
4
Non-current
Current
Non-current
Current
Operative transactions
58
20
16
14
14
Non-current
Operative transactions
Financial transactions
Current
Positive market values
Fair value/carrying amount
20
58
73
16
Derivative financial liabilities
46
14
16
45
16
16
73
73
16
45
limited liability shareholders. Its equivalent is the income tax appli-
cable to the partners of E. Merck KG which has to be paid by them
directly. The adjustment thus ensures that the share in net profit
corresponds to the respective interests held by the two shareholder
groups. The reciprocal net profit/loss transfer between E. Merck KG
and Merck KGaA as stipulated by the Articles of Association was as
follows:
Gross
presentation
Netting
January 1, 2018
-60
-64
3
-4
-25
-2
13
-1
-2
85
5
-68
-123
1
-1
December 31, 2017
Tax effect
-5
3
-1
3
-64
-60
1 Effect of the first-time application of IFRS 9, see Note (49) "Effects from new accounting standards and other presentation and measurement changes".
-47
-81
1
-33
December 31, 2018
-1
13
10
3
Tax effect
14
38
5
Reclassification to profit or loss
-68
-3
-48
1
Fair value adjustment (directly recognized in equity)
Reclassification to assets
Financial transactions
of options currency forwards
Reclassification to profit or loss
due to financial
collateral
agreements
due to
master netting
Potential netting volume
of the Group applied to the following hedging instruments:
The reserves for cash flow hedges and the cost of cash flow hedging
-155
-155
113
113
Net presentation
Netting
presentation
Gross
-168
-168
80
80
Net presentation
Potential net
amount
29
-29
51
-139
Potential netting volume
Fair value adjustment (directly recognized in equity)
January 1, 2017 (after adjustment)
Adjustment due to mandatory retrospective adoption of IFRS 9¹
January 1, 2017
€ million
swaps
-68
-123
Interest rate
Intrinsic value Spot component of
of options currency forwards
Reclassification to assets
Forward
component of
Cash flow hedge
Cost of hedging
-96
-60
54
60
Potential net
amount
due to financial
collateral
due to
master netting
agreements
Time value
Positive market values
4
265
25
60
E. Merck KG
430
Merck KGaA
171
E. Merck KG
537
Merck KGaA
162
2017
2018
Profit carried forward
Fair value/carrying amount
Withdrawal by E. Merck KG
Retained earnings Merck KGaA
Transfer to revenue reserves
Withdrawal from revenue reserves
Profit carried forward previous year
Net income
€ million
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
39
262
16
187
-62
Merck & Cie
2017
2018
Changes in reserves
Profit transfer from E. Merck KG
Profit transfer to E. Merck KG
€ million
APPROPRIATION OF PROFITS AND CHANGES IN RESERVES
shareholders. The amount withdrawn by E. Merck KG would amount
to € 430 million (2017: € 515 million).
For 2017, a dividend of € 1.25 per share was distributed. The dividend
proposal for fiscal 2018 will again be € 1.25 per share, corresponding
to a total dividend payment of € 162 million (2017: € 162 million) to
25
60
26
61
-162
-162
-515
-430
187
allocate to retained earnings a portion of Merck KGaA's net retained
profit to which they are entitled, then E. Merck KG is obligated to
allocate to the profit brought forward/retained earnings of Merck KGaA
a comparable sum determined in accordance with the ratio of share
capital to general partner's capital. This ensures that the retained
earnings and the profit carried forward of Merck KGaA correspond to
the ownership ratios of the shareholders on the one hand and
E. Merck KG on the other hand. Consequently, for distributions to
E. Merck KG, only the amount is available that results after netting
the profit transfer of Merck KGaA with the amount either allocated
or withdrawn by E. Merck KG from retained earnings/profit carried
forward. This amount corresponds to the amount that is paid as a
dividend to the shareholders and reflects their pro rata shareholding
in the company.
The profit distribution to be resolved upon by shareholders also
defines the amount of that portion of net profit/loss freely available
to E. Merck KG. If the shareholders resolve to carry forward or to
APPROPRIATION OF PROFITS
723
616
-16
-24
Merck KGaA
E. Merck KG
Merck KGaA
E. Merck KG
2017
2018
Net income
Ratio of share capital to total capital
Corporation tax
Profit transfer from E. Merck KG
Ratio general partner's capital to total capital
Profit transfer to E. Merck KG
Basis for appropriation of profits
Corporation tax
Net income of Merck KGaA before reciprocal profit transfer
Result of E. Merck KG before reciprocal profit transfer, adjusted
for trade tax
20
56
(100%)
-24
The result of E. Merck KG on which the appropriation of profits
adjusted for trade tax is based amounted to € - 24 million (2017:
€ 16 million). This resulted in a profit/loss transfer to Merck KGaA
of € - 7 million (2017: € -5 million). Merck KGaA's net income
adjusted for corporation tax, on which the appropriation of its profit is
based, amounted to € 637 million (2017: € 780 million). Merck KGaA
transferred a gain in the amount of € 447 million of its profit to
E. Merck KG (2017: € 548 million). In addition, an expense from
corporation tax charges amounting to € 20 million resulted (2017:
expense of € 56 million).
171
537
162
430
-56
-20
-5
5
Merck KGaA
-447
-7
(29.726%)
-548
548
-447
447
(70.274%)
780
-16
637
7
Total
-509
Dividend proposal
Merck KGaA
366
Non-current
Current
1,573
Nominal volume
Currency
Equity
Interest
No hedge accounting
Currency
Interest
Cash flow hedge
€ million
DEC. 31, 2017
Equity
Currency
Interest
No hedge accounting
Currency
Interest
Cash flow hedge
1,573
366
5,286
1,100
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
Netting of derivatives from an economic perspective was possible
due to the existing framework agreements on derivatives trading
that Merck had entered into with commercial banks. Actual netting
only takes place in the case of insolvency of the contract partner.
Balance sheet netting of derivatives did not take place, as with other
financial assets and financial liabilities.
Derivative financial instruments in connection with financial transac-
tions are shown in financial assets and liabilities. Derivative financial
instruments in connection with transactions in operating business
are shown in other assets and other liabilities. As in the previous year,
all hedging relationships were recognized at a point in time.
2,460
6,274
4,376
1,100
1,100
€ million
4,376
1,898
1,360
Non-current
Current
1,898
Nominal volume
1,466
6,859
5,286
1,100
Merck & Cie
DEC. 31, 2018
1,360
(37) Derivative financial instruments
Result of E. Merck KG before reciprocal profit
-593
-531
-515
-454
-62
including changes in reserves
Profit transfer to E. Merck KG
22
transfer adjusted for trade tax
22
1
-5
-5
-7
-611
-548
-63
Total
The following derivatives were held by Merck as of the balance sheet
date:
1
-24
-7
Profit transfer to E. Merck KG/
withdrawal by E. Merck KG
Notes to the Consolidated Financial Statements
-16
Consolidated Financial Statements
264
OTHER CHANGES IN EQUITY
The net equity and profit attributable to non-controlling interests
mainly related to the minority interests in the publicly traded company
P.T. Merck Tbk., Indonesia, and in Merck Ltd., Thailand. As part of the
divestment of the Consumer Health business with effect from Decem-
ber 1, 2018, the shareholdings in the publicly traded company Merck
Ltd., India, were also divested; as of December 31, 2018, therefore,
non-controlling interests in this company are only included in profit
after tax and no longer in equity.
The calculation of non-controlling interests was based on the stated
equity of the subsidiaries concerned after any adjustment required
to ensure compliance with the accounting policies of the Merck Group
as well as pro rata consolidation entries.
NON-CONTROLLING INTERESTS
263
On the occasion of the 350th anniversary of the company in 2018, a
promise of a one-time grant in the form of Merck shares in the amount
of € 350 was made to Merck employees in Germany. For the Merck
share grant in 2018, the required shares were purchased on the stock
market by a third party on behalf of Merck and then transferred to
the eligible employees. New shares were not issued. In fiscal 2018,
in accordance with IFRS 2, the award led to personnel expenses of
€ 4 million as well as to a decline in retained earnings of € 1 million.
In the previous year, personnel expenses of € 1 million and a corre-
sponding increase in retained earnings in equity were recognized;
the latter was recorded in the item "other" in the consolidated state-
ment of changes in net equity.
Consolidated Financial Statements
The proposed withdrawal of E. Merck KG in the amount of
€ 430 million (2017: € 515 million) results from the total amount of
the profit transfer to E. Merck KG, including changes in reserves, and
the result of E. Merck KG before reciprocal profit transfer.
Merck & Cie is a partnership under Swiss law that is controlled
by Merck KGaA, but distributes its operating result directly to
E. Merck KG. This distribution is a payment to shareholders and is
therefore also presented under changes in equity.
-62
in profit carried forward of E. Merck KG (€ 22 million) as well as the
profit transfer from Merck & Cie to E. Merck KG (€ -63 million).
Based on the assumed appropriation of profits, the profit transfer to
E. Merck KG for 2018, including changes in reserves, amounted to
€ -515 million. This consisted of the profit transfer to E. Merck KG
(€ -447 million), the result transfer from E. Merck KG to Merck KGaA
(€ -7 million), the change in profit carried forward of E. Merck KG
(€ 1 million) as well as the profit transfer from Merck & Cie to
E. Merck KG (€ -62 million). For 2017 the profit transfer to E. Merck KG
including changes in reserves amounted to € -593 million. This con-
sisted of the profit transfer to E. Merck KG (€ -548 million), the result
transfer from E. Merck KG to Merck KGaA (€ -5 million), the change
-515
- 63
Notes to the Consolidated Financial Statements
-430
936
Other current and non-current assets
2,923
2,923
Loans and receivables
2,923
35
Trade accounts receivable
Derivatives with a hedging relationship
35
35
276
47
47
2,923
92
Derivatives with a hedging relationship
Derivatives without a hedging relationship
Non-current financial assets
Available for sale
568
568
Non-financial items
45
568
45
276
276
Loans and receivables
46
46
46
45
2,845
Current financial assets
10,108
Cash and cash equivalents
589
589
90
47
44
Dec. 31,
20171
Held for trading (non-derivatives)
9
9
9
Held to maturity
Loans and receivables
444
Derivatives without a hedging relationship
Fair value,
items
Non-financial
1The simplification option under IFRS 7.29(a) was used for disclosures of certain fair values.
2 Measurements within the scope of IAS 17 are exempted from the requirements of IFRS 13 (IFRS 13.6(b)).
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
275
The following table presents the carrying amounts and the fair values
for each individual class of financial instrument as of December 31,
2017, pursuant to IAS 39:
€ million
Dec. 31, 2017
Assets
Subsequent measurement according to
IAS 39
Carrying
amount
Amortized
cost
At cost
Fair value
Carrying
amount
according
to IAS 172
5
12
1:1
429
2
3,004
64
66
60
399
2,415
Total
More than 360
days past due
53.1%
Overdue by
360 days
34.8%
3.3%
0.8%
0.5%
Overdue by
180 days
90 days
Not yet due
Overdue by
thereof: credit impaired
Loss allowances
thereof: credit impaired
loss allowances
1
2
16
30
Loss allowances
thereof: credit impaired
loss allowances
Trade accounts receivable before
Expected loss rate
€ million
Jan. 1, 2018
As of January 1, 2018, the date of first-time application of the impair-
ment rules amended through IFRS 9, impairments based on expected
credit losses for trade accounts receivable were as follows:
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
Trade accounts receivable before
272
-29
-14
-1
-73
-34
-23
-2
-3
-12
51
-44
thereof: credit impaired
Expected loss rate
Dec. 31, 2018
€ million
Dec. 31, 2018
open positions of all trading partners in the corresponding countries
and takes risk-mitigating measures if necessary. If there is objective
evidence that particular trade accounts receivable are fully or partially
impaired, additional loss allowances are recognized to provide for
expected credit defaults. The customer groups with comparable
default risks to be taken into account are determined at Merck in
accordance with the business sectors and location of the respective
customers. Current macroeconomic expectations are also considered
by taking into account country-specific ratings. For risk management
purposes, Merck groups the existing trade accounts receivable based
partly on the business sectors, as the customers' risk profiles within
the respective business sector are regarded as comparable, and
partly on credit ratings in the respective countries in which Merck
operates and from which the receivables originate. The table below
contains an overview of the credit risk by business sector and country
rating as of December 31, 2018:
The credit risk of customers is monitored using established credit
management processes that take the individual customer risks into
account. This is done in particular by analyzing the aging structure of
trade accounts receivable. Merck continuously reviews and monitors
The credit risk from trade accounts receivable is largely impacted by
the specific circumstances of individual customers. Merck also takes
into account additional factors such as the general default risk in the
respective industry and country in which the customer operates.
Credit risks from trade accounts receivable
The above-described impairments for trade accounts receivable
applied entirely to receivables resulting from contracts with customers.
Reversals of impairment losses on debt instruments subsequently
measured at amortized cost mainly related to an other receivable
from a final payment in connection with the generics business divested
in 2007.
271
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
27
35
69
105
-2
-75
-77
2018
of debt instruments subsequently measured at fair value through other comprehensive income
Net impairment losses on financial assets
of debt instruments subsequently measured at amortized cost
of trade accounts receivable
Healthcare
Life Science
Performance
Materials
Group
Impairments based on expected credit losses for trade accounts
receivable as of December 31, 2018, were as follows:
Goods were generally sold under retention of title so that a reim-
bursement claim exists in the event of default. Other guarantees
generally were not demanded. The scope of credit-insured receiv-
ables was immaterial for Merck.
3,004
460
1,010
1,535
465
2
36
427
€ million
Trade accounts receivable before impairment losses
420
21
146
252
External credit rating at least BBB- (rating agency Standard & Poor's)
or Baa3 (rating agency Moody's)
2,120
437
827
856
External credit rating at least AA- (rating agency Standard & Poor's)
or Aa3 (rating agency Moody's)
External credit rating lower than BBB- (rating agency Standard & Poor's)
or Baa3 (rating agency Moody's)
of debt instruments subsequently measured at fair value through other comprehensive income
Reversal of impairment losses
Overdue by
90 days
2,923
51
1
7
32
50
392
Dec. 31, 2017
2,391
Trade accounts receivable
Impaired
over 2 years
up to 24 months
up to 12 months
up to 6 months
up to 3 months
Past due, but not impaired
Neither past due nor impaired
€ million
The maturity structure of the carrying amounts of trade accounts
receivable as of December 31, 2017, was as follows:
Merck utilized a recognized impairment loss of € 299 million in 2018
in connection with loss allowances established on trade accounts
receivable from the Venezuelan subsidiary, as the probability of
receiving payments was considered to be minimal. The Venezuelan
subsidiary was deconsolidated in fiscal year 2016 due to the absence
of the possibility of exercising control.
1
-73
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
273
The corresponding impairment in the previous year developed as
follows:
In the previous year, impairment losses were recognized for
investments in companies and other non-current financial assets held
for sale in a total amount of € 14 million. Positive and negative fair
value adjustments recognized in equity offset each other in the pre-
vious year.
Merck limits credit risks from other financial assets by concluding
contracts only with contract partners whose creditworthiness is good.
The credit risk from financial contracts is monitored daily on the basis
of rating information as well as market information on credit default
swap rates.
Wherever Merck presumes a considerable increase in the default
risk, the expected credit loss over the full term of the financial asset
is taken into account.
assessment was undertaken as of the balance sheet date and the
initially assumed risk profile was maintained.
As investments in debt instruments either subsequently measured at
amortized cost or at fair value through other comprehensive income
were largely classified as low-risk investments, the expected credit
loss in the next 12 months was used as the sole basis for calculating
the impairment loss on these debt instruments. For financial assets
with only a minimal default risk, the rules concerning the mandatory
establishment of a risk provision for the expected credit loss over the
full term were not observed at the time of addition or during subse-
quent measurement. It was therefore not assessed whether there
had been a significant increase in the credit risk for such assets.
Merck does not presume an increased credit risk as of the balance
sheet date if the contract partner has an investment grade rating. If
there were indications that the debtor's creditworthiness had worsened
but that this was not yet reflected in its existing credit rating, the credit
risk assessment was adjusted and the impairments established for
expected credit losses were increased. In all other cases, no new risk
Credit risks from other financial assets
If the impairment of trade accounts receivable and contract assets
had been 10% higher in 2018, profit before income tax would have
been € 8 million lower.
⚫ the identification of customer groups with identical default risks,
⚫ the identification of a substantial increase in the credit risk and
⚫ the calculation of the expected credit losses.
In terms of the impairment of trade accounts receivable and of con-
tract assets there is significant discretion and estimation uncertainty
when it comes to
SIGNIFICANT MANAGEMENT JUDGEMENTS AND SOURCES
OF ESTIMATION UNCERTAINTY - IMPAIRMENT OF TRADE
ACCOUNTS RECEIVABLE AND CONTRACT ASSETS
-7
37
-367
-39
-464
2017
In fiscal 2017, previously recognized impairments were reversed as
a result of the improved solvency of customers, particularly in the
Middle East.
December 31
Currency translation and other changes
Reversals/utilizations
Additions
January 1
€ million
99
Not yet due
4
308
360
3264
-6
-4
-5
-22
12
7
4
45
61
402
2,408
Total
More than 360
days past due
93.3%
14.1%
6.0%
1.3%
0.9%
Overdue by
360 days
Overdue by
180 days
3,277
336
359
-336
-75
-373
-6
-367
trade accounts receivable
Loss allowances of
December 31, 2018
Change in scope of consolidation
Classification as held for sale or transfer to disposal group
Currency effects
Reversals
69
Utilizations
January 1, 2018 - IFRS 9
Adjustment on initial application of IFRS 9
December 31, 2017 - IAS 39
The corresponding loss allowances in 2018 developed as follows:
-334
-325
-6
-2
-1
-373
Additions
274
of debt instruments subsequently measured at amortized cost
Impairment losses
Subsequent measurement at fair value through
profit or loss
Loans from third parties and other financial liabilities
Other financial liabilities
Liabilities to related parties
Trade accounts payable
Bank loans
Bonds and commercial paper
Subsequent measurement at amortized cost
Dec. 31, 2018
€ million
The following liquidity risk analysis presents the contractual cash
flows such as repayments and interest on financial liabilities and
derivative financial instruments with a negative fair value:
Liquidity risks are monitored and reported to management on a
regular basis.
flexibility and by Group-wide cash management. Information on
issued bonds and other sources of financing can be found in Note
(35) "Financial liabilities/capital management”.
The risk that Merck cannot meet its payment obligations resulting from
financial liabilities, is limited by establishing the required financial
LIQUIDITY RISKS
The shares in publicly listed companies amounting to € 134 million
(December 31, 2017: € 16 million) are generally exposed to a risk
of fluctuations in fair value. A 10% change in the value of the stock
market would impact equity by € 13 million (December 31, 2017:
€ 2 million). This change in value would be recognized in equity.
SHARE PRICE RISKS
16
-26
-9
6
Contingent considerations
Derivatives without a hedging relationship
Derivatives with a hedging relationship
Refund liabilities
1,899
85
4,430
250
2
369
17
620
458
984
208
-100 basis points
7,286
Interest
Repayment
Interest
Interest Repayment
Carrying
amount
>5 years
Cash flows
Cash flows
1-5 years
Cash flows
<1 year
Finance lease liabilities
Repayment
1,766
+100 basis points
+100 basis points
1.22
(including forward points)
Weighted average hedged rate for the year
7
6
3
3
-5
58
January 1, 2018
determine hedge effectiveness since
Change in value of hedged item used to
-7
-6
3
-3
5
-58
instruments since January 1, 2018
Change in value of outstanding hedging
Hedge ratio¹
1.12
8.48
36.68
126.74
2017
2018
Effects on equity
Effects on consolidated income statement
Change in market interest rate
€ million
269
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
tions, are presented in the following table. In the event of a downward
shift, the interest rate for instruments subject to a contractual interest
rate floor of zero percent was limited accordingly.
-100 basis points
The effects of a parallel shift in the yield curve by +100 or -100 basis
points on the consolidated income statement as well as on equity
relative to all short-term or variable monetary deposits and monetary
borrowings within the scope of IAS 32, except contingent considera-
684
-3,641
Dec. 31, 2017
Dec. 31, 2018
2,196
-2,465
-269
Short-term or variable interest rate monetary deposits
Short-term or variable interest rate monetary borrowings
Net interest rate exposure
€ million
The Merck Group's net exposure to interest rate changes comprised
the following:
INTEREST RATE RISKS
In addition to the previously described transactional foreign exchange
risks, Merck was exposed to currency translation risks since many of
Merck's subsidiaries were located outside the eurozone and had func-
tional currencies other than the reporting currency. Exchange differ-
ences resulting from translation of the assets and liabilities of these
companies into euros, the reporting currency, are recognized in equity.
1The hedging instruments and the corresponding hedged items were denominated in the same currency, therefore the hedge ratio was 1:1.
1,397.39
-2,957
of trade accounts receivable
1,766
1,335
4
19
1
73
Loans from third parties and other financial liabilities
21
453
474
Other financial liabilities
1,352
1,352
Liabilities to related parties
2,195
2,195
Trade accounts payable
850
4
803
18
1,653
Repayment
1,839
54
Liabilities from derivatives
155
15
The following table shows impairments for financial assets and con-
tract assets as well as gains from their release recognized in the
consolidated income statement for fiscal year 2018:
On the balance sheet date, the theoretical maximum default risk
corresponded to the net carrying amounts less any compensation
from credit insurance.
Merck derecognizes an asset if the likelihood of receiving pay-
ments from the debtor in question is considered to be negligible. In
such a case Merck does not expect any material payments from
derecognized assets. Merck does, however, also use legal means to
recognize the existing entitlement to payment where possible.
be impaired if there are objective indications of the debtor being in
financial difficulties, such as the disappearance of an active market
for its products or impending insolvency.
If the financial asset is subject to a significant default risk, the
impairment booked for the expected credit risks is increased accord-
ingly. A default generally exists when the debtor cannot fully meet
its liabilities. By contrast, a debtor's creditworthiness is assumed to
According to IFRS 9, there is a rebuttable presumption that the
credit risk has increased significantly when contractual payments are
more than 90 days past due. Merck therefore analyzes all financial
assets that are more than 90 days past due and examines whether
there is objective evidence of impairment requiring additional risk
provisions.
Credit risk for Merck means the risk of a financial loss if a customer
or other contract partner is not able to meet its contractual payment
obligations. Merck is generally exposed to credit risks from existing
trade accounts receivable other debt instruments, derivatives and
contract assets.
CREDIT RISKS
1,839
143
143
6,179
6,046
243
14,120
2
1
4
Finance lease liabilities
18
59
52
657
1,335
Interest
590
2
2
4
472
472
20
58
78
45
16
15
90
4
1
5
50
17
67
13
508
522
12,244
241
5.528
508
1,171
210
8,213
Interest
Repayment
Interest
amount
Carrying
Bank loans
Bonds and commercial paper
Repayment
5,234
Dec. 31, 2017
> 5 years
Cash flows
Cash flows
1-5 years
Cash flows
<1 year
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
270
1,899
85
4,769
€ million
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
(39) Information on fair value
measurement
5
78
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
267
(38) Management of financial risks
Market fluctuations with respect to foreign exchange and interest rates
represent significant profit and cash flow risks for Merck. Merck aggre-
gates these Group-wide risks and steers them centrally, partly by using
derivatives. Merck uses scenario analyses to estimate existing risks
of foreign exchange and interest rate fluctuations. Merck is not subject
to any material risk concentration from financial transactions.
Merck uses marketable forward exchange contracts, options and
interest rate swaps as hedging instruments. The strategy to hedge
interest rate and foreign exchange rate fluctuations arising from
forecast transactions and transactions already recognized in the bal-
ance sheet is set by a risk committee, which meets on a regular
basis. The use of derivatives is regulated by extensive guidelines and
subject to constant risk controls by Group Treasury. Speculation is
prohibited. A strict separation of functions between trading, settle-
ment and control functions is ensured. Derivatives are only entered
into with banks that have a good credit rating. Related default risks
are continuously monitored.
The Report on Risks and Opportunities included in the combined
management report provides further information on the management
of financial risks.
FOREIGN EXCHANGE RISKS
Owing to its international business focus, Merck is exposed to trans-
actional foreign exchange risks within the scope of both its business
activities and financing activities. Foreign exchange risks are contin-
uously analyzed and different hedging strategies used to limit or
eliminate these risks. Foreign exchange risks from the following
transactions are hedged through the use of forward exchange con-
tracts and currency options:
• Forecast transactions in non-functional currency, the expected
probability of which is very high for the next 36 months,
• Firm purchase commitments of the next 36 months in non-func-
tional currency,
Intragroup financing in non-functional currency as well as
• Receivables and liabilities against third parties in non-functional
currency.
Forward exchange contracts are used to hedge foreign exchange
risks arising from transactions already recognized in the balance
sheet. Forecast transactions and firm purchase commitments in
non-functional currency are hedged using forward exchange con-
tracts and currency options which are due within the next 36 months.
The following table shows the net exposure and the effects of
transactional exchange rate movements of the key currencies against
the euro in relation to the net income and equity of the Group on the
balance sheet date.
€ million
Dec. 31, 2018
USD
CHF
CNY
TWD
5
90
78
90
78
95 Use of recognized actuarial Spot and forward rates
methods
14
73
2,677 Discounting of future cash
flows
174
2,845
observable on the market
as well as exchange rate
volatilities
Interest rate curves
available on the market
Interest rates obervable
on the market
JPY
7,258
6,714
4
2
2
5,530
Total
(measured in accordance with IAS 17)²
Finance lease liabilities
472
472
Refund liabilities
12,244
Quoted prices in an active
market and volatilities
observable on the market
Volatilities observable on
the market
KRW
618
Equity
110
-16
8
15
10
12
€ million
Dec. 31, 2017
Net exposure
USD
CHF
CNY
TWD
JPY
KRW
1,215
-184
449
135
75
16
13
15
74
-274
741
153
132
163
(€ depreciation)
Exchange rate +10%
(€ appreciation)
Consolidated income statement
Equity
-62
27
-74
Net exposure
Exchange rate -10%
-15
-16
-135
20
-9
-19
-11
-14
Consolidated income statement
62
-27
January 2019-
January 2021
115
Quoted prices in an
active market
Liabilities to banks and
other loan liabilities
Other financial liabilities
Current and non-current other liabilities
4
2,195
2,195
2,195
2,195
2,529
1,059
43
1,427
113
11,074
Derivatives without a hedging relationship
Other financial liabilities
1,059
1,059
Derivatives with a hedging relationship
43
43
43
Non-financial items
Trade accounts payable
Liabilities from finance leases
Derivatives with a hedging relationship
10,707
Derivatives without a hedging relationship
13
13
13
Held to maturity
Loans and receivables
12
12
Available for sale
420
1,427
4
416
Derivatives with a hedging relationship
Liabilities
Current and non-current financial liabilities
Derivatives without a hedging relationship
Other financial liabilities
10,823
10,707
113
113
113
4
10,707
416
Main input factors used to
determine fair values
1,427
2 Measurement within the scope of IAS 17 are exempted from the requirements of IFRS 13 (IFRS 13.6(b)).
Publicly-traded funds
2
7,258
30
7,258
Derivation from active
market
factors observable in the market (Level 2)
Equity instruments
Shares (equity investments
in listed companies)
118
Derivation from active
market considering liquidity
discount
Debt instruments (subsequent
measurement through profit or loss)
Derivatives (with or without a
hedging relationship)
Convertible note with
22
conversion right to shares
in companies
Nominal value considering
liquidity discount
Forward exchange contracts
and currency options
21
Other financial liabilities (subsequent
measurement at amortized cost)
Total
Interest rate swaps
Fair value determined using input
Total
Other financial liabilities (subsequent Bonds
measurement at amortized cost)
measurement through profit or loss)
276
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
The determination of the fair values of financial assets and liabilities
is presented in the following table:
DEC. 31, 2018
€ million
Fair Value
Financial instruments
concerned
Financial
1The simplification option under IFRS 7.29(a) was used for disclosures of certain fair values.
assets
Description of the
measurement technique
Shares (equity investments
17
in listed companies)
Bonds
12
Fair value determined by official prices
and quoted market values (Level 1)
Equity instruments
Debt instruments (subsequent
measurement through other
comprehensive income)
Debt instruments (subsequent
Financial
liabilities
Exchange rate -10%
Consolidated income statement
-122
45
30
50
27
22
259
259
4
1
76
59
50
50
259
259
64
Derivatives with a hedging relationship
Derivatives without a hedging relationship
Other debt instruments
Contingent considerations
Equity instruments
76
4
4
Finance lease receivables
Subsequent measurement at fair value
9,935
2,677
7,258
1,766
9,830
6,615
1,766
3,215
Other financial liabilities
Trade accounts payable
Subsequent measurement at amortized cost
through profit or loss
Financial liabilities
492
174
30
6,098
673
5,425
Total
1
1
(measured in accordance with IAS 17)²
696
through profit or loss
Subsequent measurement at fair value
12
(Level 2)
in the market
Fair value
determined using
inputs observable inputs unobserva-
determined using
Fair value
Fair value deter-
mined by official
prices and quoted
market values
(Level 1)
Total
Current Non-current
Fair value¹
Carrying amount
Subsequent measurement at fair value through
Other debt instruments
(excluding leasing receivables)
Trade accounts receivable
Cash and cash equivalents
Subsequent measurement at amortized cost
Financial assets
Dec. 31, 2018
€ million
The following table presents the carrying amounts and the fair values
of the individual financial assets and liabilities as of December 31,
2018, for each individual financial instrument class pursuant to IFRS 9:
ble in the market
(Level 3)
Total
2,170
2,170
12
4
8
Other debt instruments
21
21
21
21
Trade accounts receivable
274
12
140
17
274
274
Equity instruments
other comprehensive income
322
26
296
2,909
2,909
118
Contingent considerations
1
4
17
15
In this presentation, effects of cash flow hedges are taken into con-
sideration in the equity of the Group. The net exposure of each of the
aforementioned currencies consisted of the following components:
• Planned cash flows in the next 12 months in the respective currency
as well as
• Derivatives to hedge these planned cash flows, usually at a hedging
ratio of 30%-70%.
Balance sheet items in the aforementioned currencies were econom-
ically hedged in full in both 2018 and 2017 by derivatives if they did
not correspond to the functional currency of the respective company.
268
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
Accordingly, they do not affect the net exposure presented above.
The impact of cash flow hedge accounting for forecasted transactions
in foreign currency on the Group's net assets and results of opera-
tions was as follows for the major currencies:
€ million
Dec. 31, 2018
Notional amount
thereof: current
thereof: non-current
Fair value of the hedging instrument
thereof: positive market value (asset)
thereof: negative market value (liability)
Maturity date
USD
CHF
CNY
31
36
-31
147
18
-45
-14
-8
-12
(€ depreciation)
Equity
-172
39
-44
TWD
-38
-18
Exchange rate +10%
(€ appreciation)
Consolidated income statement
122
-18
45
14
8
12
Equity
-19
JPY
KRW
1,180
-5
-8
-3
-10
January 2019-
December 2020
January 2019-
December 2020
January 2019-
December 2019
January 2019-
1:1
-3
1:1
December 2020
1:1
January 2019-
December 2020
1:1
20
58
Derivatives with a hedging relationship
90
73
16
Derivatives without a hedging relationship
5
1:1
4
-49
2
178
85
1,055
125
85
88
169
125
129
122
3
101
125
53
47
24
44
-49
-2
-5
-8
-10
85
-13
DEC. 31, 2018
2018
144
Dec. 31, 2017
3,328
2,763
Dec. 31, 2018
-17
-17
32
32
40
earnings
income
comprehensive equity in retained
Transfers of the
cumulative gain
(+) or loss (-)
within group
The cumulative
gain (+) or loss
(-) on disposal
included in other
Fair value at the
date of disposal
Other financial obligations
Remaining other financial obligations
Cascadian Therapeutics, Inc., United States
Nature's Best Health Products Ltd., United Kingdom
1 Disposals due to liquidations are not included.
Reasons for the disposal
Portfolio adjustments
and acquisitions
Acquired by Seattle Genetics,
Inc., United States
Sale of Consumer Health
business to Procter & Gamble
Company, United States
151
The M Ventures portfolio companies that were disposed of are Prexton
Therapeutics SA, Switzerland, ObsEva SA, Switzerland, and F-Star
Gamma Limited, United Kingdom.
Other financial obligations comprised the following:
€ million
Acquisition of intangible assets and due to collaboration agreements
Acquisition of property, plant and equipment
Operating lease
Long-term purchase commitments
(40) Other financial obligations
577
530
150
more than 5 years
266
247
1,255
1,572
1,242
in 1-5 years
1,509
3,328
Other financial obligations were recognized at nominal value.
The maturities of liabilities from lease agreements were as follows:
€ million
Dec. 31, 2018
Present value of future payments from finance leases
2,763
M Ventures portfolio companies
within one year
€ million
236
52
63
3,686
4,308
Obligations to acquire intangible assets existed in particular owing to
contingent considerations within the scope of in-licensing and research
and development collaborations. In these agreements Merck has
entered into an obligation to make milestone payments once specific
targets have been reached. In the not very likely event that all con-
tract partners achieve all milestones, Merck would be obligated to
pay up to € 1,548 million (December 31, 2017: € 1,968 million) for
the acquisition of intangible assets. The table above does not contain
Obligations to acquire intangible assets and from collaboration agreements
other financial obligations from possible future sales-based license
fees and milestone payments.
284
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
The expected maturities of these obligations were as follows:
Dec. 31, 2018
Dec. 31, 2017
Moreover, within the scope of collaboration agreements, individual
research and development or commercialization budgets were con-
tractually set, upon the basis of which collaboration partners can
commit Merck to make payments in the amount of up to € 1,215 mil-
lion (2017: € 1,360 million)
Interest component of finance leases
Equity instrument¹
The compensation of the Supervisory Board amounting to
€ 869.0 thousand (2017: € 868.3 thousand) consisted of a fixed
portion of € 822.5 thousand (2017: € 822.5 thousand) and meeting
attendance compensation of € 46.5 thousand (2017: € 45.8 thousand).
-4
-9
-9
thereof: other operating result
-6
-6
recognized in profit or loss.
Gains (+)/losses (-)
Fair value changes
68
68
measurement at cost/Level 1/Level 2
Transfers to Level 3 from previous
Additions as result of acquisitions/divestments
-2
46
228
Net carrying amounts, January 1,
2017 (IAS 39)
Financial assets
Financial liabilities
Available-for-sale
Total
financial assets
thereof: attributable to assets/liabilities
thereof:
Derivatives
contingent without a hedging
considerations
relationship
thereof:
contingent
considerations
74
75
50
-1
258
Other liabilities
held as of the balance sheet date
-9
-9
Disposals due to divestments
-1
-1
Transfers out of Level 3 into Level 1/Level 2
Net carrying amounts, December 31,
2017 (IAS 39)
440
-2
397
46
-1
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
283
The following equity instruments measured at fair value through
other comprehensive income were disposed of in fiscal year 2018:
277
€ million
-2
-1
thereof: financial result
3
03
4
3
thereof: attributable to assets/liabilities
Currency translation
held as of the balance sheet date
3
3
Gains (+)/losses (-)
recognized in other comprehensive income
5
5
3
Future finance lease payments
Future operating lease payments
€ million
Liabilities to related parties
729
349
-314
765
Other current and non-current financial liabilities
Financial liabilities
3,136
147
-546
12,597
497
-1,792
-38
-16
-463
-16
2,683
10,823
As of December 31, 2018, there were receivables of € 12.0 million
(December 31, 2017: € 8.3 million) and liabilities of € 10.1 million
(December 31, 2017: € 9.1 million) vis-à-vis non-consolidated sub-
sidiaries. From January to December 2018, the Merck Group gener-
ated revenues of € 0.1 million (December 31, 2017: € 0.1 million)
with these companies. During the same period, expenses amounting
to € 0.3 million (December 31, 2017: € 0.8 million) were incurred
as a result of transactions with these companies.
As of December 31, 2018, there were no receivables or liabilities
from the Venezuelan entities deconsolidated as of February 29, 2016
(December 31, 2017: receivables with a carrying amount of € 22.7 mil-
lion after impairment losses and liabilities with a carrying amount of
€ 21.5 million).
From January to December 2018, Merck KGaA performed services
for E. Merck KG with a value of € 1.0 million (2017: € 0.9 million)
and for E. Merck Beteiligungen KG with a value of € 0.3 million (2017:
€ 0.1 million); in the previous year, Merck KGaA performed services
for Emanuel-Merck-Vermögens-KG with a value of € 0.2 million. During
the same period, E. Merck KG performed services for Merck KGaA
with a value of € 0.5 million (2017: € 0.5 million).
As of December 31, 2018, there were liabilities by Merck Financial
Services GmbH, Merck KGaA and Merck & Cie, Switzerland, to
E. Merck KG in the amount of € 1,331.6 million (December 31, 2017:
€ 1,349.2 million). The balances result mainly from mutual profit
transfers between Merck KGaA and E. Merck KG as well as the profit
transfer by Merck & Cie, Switzerland, to E. Merck KG. These included
financial liabilities of € 820.8 million (December 31, 2017: € 764.8 mil-
lion), which were subject to standard market interest rates. As of
December 31, 2017, Merck KGaA had receivables from E. Merck
Beteiligungen KG in the amount of € 140.9 million and Merck Financial
Services GmbH had receivables from Merck Pensionstreuhandverein
e.V. in the amount of € 0.1 million. They included receivables of
€ 0.1 million that were subject to standard market interest rates.
Neither collateral nor guarantees existed for any of the balances
either in favor or to the disadvantage of Merck.
Related parties in respect of the Merck Group are E. Merck KG,
Emanuel-Merck-Vermögens-KG and E. Merck Beteiligungen KG.
Furthermore, direct or indirect subsidiaries of Merck KGaA, associates
of the Merck Group, jointly controlled companies where the Merck
Group is involved, as well as pension funds that are classified as
defined benefit plans in accordance with IAS 19 are also related
parties within the meaning of IAS 24. Members of the Executive
Board and the Supervisory Board of Merck KGaA, the Executive Board
and the Board of Partners of E. Merck KG as well as close members
of their families are also related parties, as are companies controlled
by this group of persons.
(42) Related-party disclosures
7,040
Other Disclosures
Consolidated Financial Statements
286
The amount of undrawn borrowing facilities that could be tapped
for future operating activities and to meet obligations is disclosed in
Note (35) "Financial liabilities/capital management".
the consolidated cash flow statement includes cash changes in assets
from derivatives that are not contained in the changes noted above.
In 2017, the repayment of other current and non-current financial
debt mainly related to the repayment of liabilities to finance the
acquisition of the Sigma-Aldrich Corporation, United States. The
repayment of the remaining current and non-current financial debt in
"Other changes" relate to the reclassification of bonds owing to a
change from long-term to short-term.
Notes to the Consolidated Financial Statements
-354
-400
7,794
8,896
902
5
119
5
-2
1 Values effective January 1, 2018, have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes".
-1,821
-2,463
2,687
10,827
821
- 319
375
765
6,304
32
407
Between January and December 2018, sales of € 0.7 million (2017:
€ 0.6 million) from supplies of goods resulted from transactions with
Altmann-Analytik GmbH & Co. KG, Munich, which is controlled by a
member of the Supervisory Board of Merck KGaA who also served
as a member of the Board of Partners of E. Merck KG until January 27,
2019. As of December 31, 2018, there were receivables of € 0.1 mil-
lion vis-à-vis this company (December 31, 2017: € 0.1 million).
€ million
thereof: current
thereof: non-current
335
354
-25
-932
7,375
Bonds
2017
Dec. 31,
Fair value
changes
Currency
translation
-425
Cash inflows Repayments consolidation
-932
Changes
in scope of
Jan. 1,
2017
8,731
937
Other
Information on pension funds that are classified as defined ben-
efit plans in accordance with IAS 19 can be found in Note (25) "Pro-
visions for pensions and other post-employment benefits".
Information on Executive Board and Supervisory Board compen-
sation can be found in Note (43) "Executive Board and Supervisory
Board compensation". Activities above and beyond those set forth in
Note (43) such as, for example, the provision of services or the
granting of loans, between companies of the Merck Group and mem-
bers of the Executive Board or the Supervisory Board of Merck KGaA,
the Executive Board or the Board of Partners of E. Merck KG or mem-
bers of their immediate families took place neither in 2018 nor 2017.
(43) Executive Board and Supervisory
Board compensation
577
More than
Within 1 year
1-5 years
5 years
Total
138
4
2
1
3
4
137
287
1
106
308
4
Dec. 31, 2017
Present value of future payments from finance leases
Interest component of finance leases
Future finance lease payments
Future operating lease payments
More than
131
Within 1 year
5 years
2
2
Total
4
2
2
1-5 years
€ million
530
Notes to the Consolidated Financial Statements
2018
-323
121
7,173
335
-323
Other
-12
869
7,040
133
-869
For the period from January to December 2018, fixed salaries of
€ 5.9 million (2017: € 6.0 million), variable compensation of
€ 17.2 million (2017: € 16.3 million), and additional benefits of
€ 0.4 million (2017: € 0.3 million) were recorded for members of
the Executive Board of Merck KGaA by E. Merck KG and by companies
included in these consolidated financial statements. Furthermore,
additions to provisions for the Long-Term Incentive Plan for members
of the Executive Board of Merck KGaA resulted in expense of
€ 15.9 million from (2017: gains of € 1.8 million from the release of
provisions), and additions to the pension provisions for members of
the Executive Board of Merck KGaA included current service costs of
€ 3.1 million (2017: € 3.2 million) and, in 2017, past service costs of
€ 0.9 million.
The compensation of the Executive Board of Merck KGaA is basically
paid by the general partner, E. Merck KG. Furthermore, companies
included in these consolidated financial statements recorded expenses
for the period from January to December 2018 in the amount of
€ 3.2 million (2017: € 3.5 million) for services provided by members
of the Executive Board of Merck KGaA at those companies.
869
Consolidated Financial Statements
Dec. 31,
Currency
translation
285
Operating leasing agreements related mainly to leasing arrangements
to lease real estate, vehicles as well as operating and office equip-
ment. The payments resulting from operating leasing agreements
amounted to € 153 million (2017: € 146 million) and were recorded
as an expense in the reporting period.
(41) Net cash flows from financing
activities
The change in financial debt was as follows:
€ million
Bonds
Fair value
changes
thereof: current
Liabilities to related parties
Other current and non-current financial liabilities¹
Financial liabilities¹
Jan. 1,
Changes
in scope of
2018 Cash inflows Repayments consolidation
7,375
thereof: non-current
tion with the contingent consideration from the sale of the Biosimilars
business. Transfers from Level 3 to Level 1 comprised the now listed
equity investment Translate Bio Inc., United States. The gains and
losses from Level 3 assets recognized in other comprehensive income
were reported in the consolidated statement of comprehensive income
under the item "fair value adjustments".
302
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
€ million
DEC. 31, 2017
Market observable
interest rates
Interest rate curves
available on the market
Spot and forward rates ob-
servable on the market and
exchange rate volatilities
3,511
67
3,355 Discounting of future
cash flows
Liabilities to banks and
other loan liabilities
86
13
Interest rate swaps
actuarial methods
Use of recognized
and currency options
70
Classified as other liabilities
Total
Bonds
35
active market
2
7,719
Notes to the Consolidated Financial Statements
53
Quoted prices in an
active market
Fair value determined using input factors
observable in the market (Level 2)
Derivatives with and without a
hedging relationship
Classified as other Liabilities
Total
Forward exchange contracts
54
7,719
279
Fair Value determined using input factors
unobservable on the market (Level 3)
Classified as available for sale/
classified as other liabilities
Financial instruments
concerned
Additions during the reporting period comprised particularly acqui-
sitions of equity investments by Merck Ventures B.V., Netherlands,
trade accounts receivable that are designated to be sold on account
of a factoring agreement as well as bonds with a conversion right for
shares in unlisted companies. Disposals during the reporting period
related particularly to divestments of equity investments by Merck
Ventures B.V., Netherlands, as well as payments received in connec-
Expected cash flows from
recent business planning,
average cost of capital,
expected long-term growth
rate
Observable prices derived
from equity refinancing
3 Discounting of probability-
weighted future milestone
payments and license fees
Taking into account the
fair value of the companies
in which the funds are
invested
Option pricing models
Derived from observable
prices within the scope
of equity refinancing
sufficiently close to the
balance sheet date
Sales planning, milestone
payments, probabilities of
regulatory and commercial
events, discount rates
Net asset values of the fund
interests
443
3
280
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
Counterparty credit risk was taken into consideration for all valua-
tions of financial instruments. In the case of non-derivative financial
instruments, such as other liabilities or interest-bearing securities,
this was reflected using risk premiums on the discount rate, while
discounts on market value (so-called credit valuation adjustments
and debit valuation adjustments) were used for derivatives.
Sales planning, milestone
payments, probabilities of
regulatory and commercial
events, discount rates
Publicly-traded funds
Description of the
measurement technique
Discounting of expected
future cash flows
company
Equity investements in
unlisted companies
Fair Value
Financial
assets
Financial
liabilities
6
96
Total
Contingent considerations
from the sale and purchase
of businesses or shares in
corporations
Interests in unlisted funds
18
Derivatives without a hedging
relationship
Option on equity instru-
ments in an unlisted
46
277
Derived from
Bonds, investment funds
16
Taking into account the
fair value of the companies
in which the funds are
invested
Main input factors used to
determine fair values
Expected cash flows from
recent business planning,
average cost of capital,
expected long-term growth
rate
Observable prices derived
from equity refinancing
Acquisition cost
Nominal value of potentially
sold trade accounts receiv-
able, average fees for sales
of trade accounts receivable
Sales planning, milestone
payments, probabilities of
regulatory and commercial
events, discount rates
Sales planning, milestone
payments, probabilities of
regulatory and commercial
events, discount rates
5 Discounting of probability-
weighted future milestone
payments and license fees
Net asset values of the fund
interests
Trade accounts receivable
Trade accounts receivable
21
that are intended for sale
due to a factoring
agreement
Derivatives (without hedging
relationship)
1
Option on equity
instruments in an
unlisted company
Option pricing models
Derived from observable
prices within the scope
of equity refinancing
sufficiently close to the
balance sheet date
Cost-based determination
Nominal value less factoring
fees
€ million
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
277
Fair value determined using input factors
unobservable in the market (Level 3)
Equity instruments
Fair Value
45
Financial instruments
concerned
assets
Financial
liabilities
Equity interests in unlisted
companies
10
129
Description of the
measurement technique
Discounting of expected
future cash flows
Financial
The planning periods used to determine the fair value of equity
investments in unlisted companies ranged from two to eight years.
Cash flows for periods in excess of this are included in the terminal
value calculation using long-term growth rates of between 0.5% and
2.0% (December 31, 2017: 0.5%). The applied average cost of
capital (after tax) was 7.0% on December 31, 2018 (December 31,
2017: 7.0%)
Contingent considerations
Total
Notes to the Consolidated Financial Statements
DEC. 31, 2017
€ million
Fair Value
Fair value determined by official prices
and quoted market values (Level 1)
Classified as available for sale
Consolidated Financial Statements
Financial instruments
concerned
assets
Financial
liabilities
Description of the
measurement technique
Main input factors used to
determine fair values
Shares (equity investments
in listed companies)
Financial
Other debt instruments
278
5
Contingent considerations
259
from the sale and purchase
of businesses or shares in
corporations
Interests in
Market observable interest
rates
19
Bond with embedded
7
settlement option for equity
Used of standard market
valuation models
in a unlisted company
492
unlisted funds
0
Main input factors used to
determine fair values
AND SOURCES OF ESTIMATION UNCERTAINTY -
CONTINGENT CONSIDERATIONS
3
24
held as of the balance sheet date
thereof: attributable to assets/liabilities
22
3
24
thereof: financial result
-36
-1
-37
held as of the balance sheet date
thereof: attributable to assets/liabilities
-29
-1
-31
operating result
8
I
33
Transfers into Level 3 out
of Level 1/Level 2
Fair value changes
22
49
recognized in profit or loss
-7
2
-7
-1
SIGNIFICANT MANAGEMENT JUDGMENTS
Gains (+)/losses (-)
-1
Gains (+)/losses (-)
recognized in other comprehensive income
Net carrying amounts,
December 31, 2018 (IFRS 9)
3
-3
-1
487
8
27
45
140
21
-5
282
Consolidated Financial Statements
259
15
-9
-29
30
30
Currency translation
1
I
1
-28
Disposals due to divestments/
-80
Transfers out of Level 3 into Level 1/Level 2
Other
-9
-8
-4
-20
payments received
I
thereof: other
conclusion of factoring agreements
10%
-34
5
45
-38
0
105
38
-5
32
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
281
The changes in financial assets and liabilities for each of the indi-
vidual categories of financial instruments allocated to Level 3 and
measured at fair value were as follows:
-42
€ million
-10%
rial impact on profit before income tax.
The fair values of contingent considerations were calculated by weight-
ing the expected future milestone payments and royalties using their
probability of occurrence and discounting them. This calculation is
subject to judgment to a high degree. The main parameters when
determining contingent considerations represent
•
•
the estimated probability of occurrence of the individual milestone
events,
the sales planning assumed to derive royalties and
⚫ the discount rate used.
When determining the probability of occurrence of the individual mile-
stone events in connection with the development of drug candidates,
the focus was on empirically available probabilities of success of
development programs in comparable phases of clinical development
in the relevant therapeutic areas. To determine the sales planning,
Change in probability of regulatory approval
internal sales plans and sales plans of external industry services were
used. The discount rate (after tax) of between 6.3% and 7.3%
(December 31, 2017: 6.5% to 7.6%) was calculated using the
weighted average cost of capital.
€ million
Change of discount rate
5.8%
unchanged (6.3%)
6.8%
A change in the main input parameters used for the measurement
of the other contingent compensations would not have had a mate-
The most significant contingent consideration was the future pur-
chase price claim from the disposal of the Biosimilars business. It
was calculated by an external valuation expert on conclusion of the
transaction in 2017. As of December 31, 2018, the carrying amount
was € 196 million (December 31, 2017: € 228 million). If, in the
context of determining the fair value of this contingent consideration
at the date of transaction, the probability of approval as well as the
discount factor of the three major development programs had been
estimated to be lower or higher to the extent presented below, this
would have led to the following changes in the measurement and the
corresponding effects on the profit before income tax as of Decem-
ber 31, 2018:
Financial assets
unchanged
Subsequent measurement
46
Adjustment on initial application of IFRS 9
7
-18
21
102
4
277
Net carrying amounts,
447
21
277
46
106
Subsequent measurement at fair value
through profit or loss
January 1, 2018 (IFRS 9)
18
Additions due to acquisitions/divestments/
December 31, 2017 (IAS 39)
440
Financial
liabilities
Subsequent
measure-
ment at
fair value
through
profit or loss
Equity
instruments
Other debt
at fair value through other
comprehensive income
instruments considerations
Derivatives
without a
hedging
relationship
Equity
instruments
Trade
accounts
Contingent
receivable considerations
Net carrying amounts,
Contingent
VIBRANT CHINA
26
Merck's Bioethics Advisory Panel
(MBAP) has defined a clear operational
position under consideration of scien-
tific and social questions to provide a
framework for the use of promising
therapeutic approaches in research and
application. For instance, Merck rejects
any CRISPR/Cas-mediated heritable
human genome editing in embryos and
any manipulation of germ cell lines.
The Merck Bioethics Advisory Panel
(MBAP) is staffed with international
biomedical experts. It develops guide-
lines for research in which Merck's
business sectors are involved, includ-
ing the investigation or use of
genome editing. The panel looks at
important ethical issues related to
processes of discovery, development,
manufacturing, sales, and distribu-
tion of genome editing technology, such
as clustered regularly interspaced
short palindromic repeat (CRISPR).
HEARTBEATS
Well-founded bioethical positions
In its 13th Five-Year Plan, which was published
in 2015, the Ministry confirmed that innovations
in biotechnology and the corresponding indus-
try play a significant role in the economic and
social development of the entire country. It is
therefore important that the number of high-
tech companies and growth technologies in
this sector continues to grow.
We are able to establish our
brands in China and cement
our leading position for
CRISPR in the Chinese re-
search community. Right
after the announcement of
our partnership with Tongji,
we received inquiries from
other universities in the
country. We have a clear
plan and an extensive port-
folio of solutions ranging
How does Merck benefit
from this partnership?
We have been collaborating with the
university for many years. Tongji is
currently one of the leading universities
in China, especially in the areas of stem
cell research and genetic modification.
How did the partnership with
Tongji University come about?
Research drives us all
Semiconductors as a new driver of growth
from equipment and reagents to lab-
oratory devices and services. As a
partner to the life science research
community, we want to accelerate
innovation.
Technology mega-
vative materials
in demand for increas-
ingly smaller but more
powerful microchips.
17
processes. Demand for innovative materials among
Chinese chip manufacturers will probably continue
to rise in the future," says Winnie Hui, Head of Busi-
ness Planning and acting representative of the
Semiconductor Solutions business unit in China. Born
in Hong Kong, Hui grew up in New Zealand and
has now returned to her home country, where she
works in a team at Merck that is restructuring the
semiconductor business in China.
Head of Business Planning, Specialty
Accounts Business Field, Semiconductor
Solutions
WINNIE HUI
tinue to rise."
will probably con- materials contribute to the development of new
trends such as AI are
driving an increase
The Performance Materials business sector sees
enormous growth potential for semiconductor mate-
rials in China. "The Semiconductor Solutions sec-
tor is active in specialized markets. Our innovative
-
in China for inno-
"The demand
from chip
manufacturers
With local production and development
sites, the Performance Materials
business sector is moving even closer
to its partners and customers in
China. In the future, it will concentrate
on the continued growth of its
semiconductor solutions business.
a new driver
of growth
Semicon-
ductors as
The semiconductor industry is another focal point
of China's development strategy. In the medium
to long term, China aims to operate on an equal
footing with leading countries such as the United
States or South Korea. According to the "Economist",
China's goal is to nearly quintuple the sales vol-
ume from local chip manufacturers in the coming
years from USD 65 billion in 2016 to more than
USD 305 billion in 2030. By the same year, it also
wants most of the domestic demand to be met
with products made in China. So far, this is only
true for a third of the country's total demand.
China intends to invest about USD 150 billion in its
domestic industry - a plan that also offers Merck
the opportunity to further enhance its position as the
leading solution provider for the electronics industry.
"I am simply fascinated
Big plans for China
can achieve with tech-
nology and science.
Our knowledge can be
found in so many
products around the
world. I am very
proud of that."
瑞士美度
MIDO
Radis
ness.
The service is delivered by Merck and Alibaba Health,
a subsidiary of the Chinese Internet giant Alibaba,
and it represents one of the first results of a cooper-
ation that the two companies began in 2018. Rogier
Janssens, Managing Director of Merck's Biopharma
business in China, describes the partnership as "a
great step forward in China's digital ecosystem." Every
year, more than 600 million consumers are active
on Alibaba's retail marketplaces in China. Its subsid-
iary Alibaba Health develops digital hospitals and
connects them with bricks-and-mortar clinics, and
the two companies want to expand this digital infra-
structure with a joint health platform. This opens up
very interesting opportunities for offering services
and solutions that add value beyond the medications
themselves and thus create a solid foundation for
reaching the ambitious goals of the Biopharma busi-
23
VIBRANT CHINA
The health platform for everyone
People in China who want to keep an eye on their
health need only scan the barcodes on their
medication with a mobile phone. Users then re-
ceive the digital package information leaflet
along with instructions on how to take the medi-
cation as well as details on the disease and the
drug itself. All of this information is provided by
Alibaba Health's drug tracking platform to help
ensure safe drug use. Medication reminders and
the contact between doctors and patients help
enhance therapeutic compliance among patients.
Merck's Healthcare business sector
has great ambitions in China -
take, for instance, its partnership
with the Internet giant Alibaba.
The health
platform for
everyone
At the end of this transformation, Merck will pro-
duce and offer its services in China for China
and thus grow along with the country as part of
the local ecosystem, boosted by a national
focus on innovation.
To achieve its ambitious goals in this extremely
dynamic business environment, Merck must also
make some changes. "We have to be more agile
and flexible so that we can adapt to the incredibly
high speed of change in China through fast deci-
sion-making and processes. We must also be even
more open to taking risks, trying new things and
being more pragmatic in the best sense of the
word," explains Allan Gabor.
SWIFTER DECISION-MAKING,
A MORE PRAGMATIC APPROACH
million
€ 250
Investments in the
Nantong production
site since 2017:
years of presence
in China
85
employees on site
3,500
per year should be
treated with
medications
from Merck by the
year 2025.
million patients
"By 2025, we want at least 40 million patients to be
treated with our medications every year, and sales
in Biopharma will triple compared with today," says
Janssens. Other than tracking and tracing drugs,
the joint health platform with Alibaba will be used
above all for online health services in areas such
as diabetes, thyroid disorders, colorectal cancer and
cardiovascular diseases. "Demand in China is
immense," says Janssens. Every second case of a
common illness such as diabetes or cardiovascular
disease is believed to be undiagnosed. "That means
that millions of sick people in China are currently
not being treated. We can help these people with our
digital solutions," says Janssens. The right diag-
nosis is a precondition for effective therapy. Millions
of patients can gain access to much needed medi-
cations through these new digital tools.
40
Merck is moving forward vigorously with the imple-
mentation of its plans. For instance, Merck and
Tencent, a leading provider of Internet-based ser-
vices, agreed in January 2019 on a cooperation.
"As part of this cooperation, we will work with Ten-
cent to investigate the innovative combination of
patient-centered healthcare and digital platforms,"
says Rogier Janssens, describing the goals of the
agreement. These co-operations with Alibaba Health
and Tencent complement each other, adding huge
value to Merck's current and future products in China
through using more efficient and effective digital
methods.
TWO SECTORS, TWO SITES IN NANTONG
In 2011 China's Ministry for Science and
Technology (MOST) published a Five-Year
Plan for the development of modern biotech-
nological science and the corresponding
technology. The aim was to establish an inno-
vative biotechnology sector in China.
Focus on
biotechnology
in China's
Five-Year Plan
China's plan for the future
25
VIBRANT CHINA
New partner
A molecular biology reagent kit that
makes it possible to edit gene se-
quences quickly and simply with the
help of gene scissors. Thanks to
CRISPR, a procedure that used to take
months can now be completed in
just one week. That's a real break-
through in biomedical research.
Simpler access and faster processing
mean that far more researchers
can work on fundamental questions,
such as the influence of individual
genes on various illnesses.
Which concrete products does
Merck offer for CRISPR Cas/9?
and technical expertise as well as
our extensive portfolio of more than
300,000 products. Genome editing
tools, for example, have become much
more readily available thanks to our
technology. This also includes CRISPR
Cas/9, for which we hold fundamen-
tal patents.
Of course. After all, our aim is to solve
the biggest challenges in the life sci-
ences - and we want to accomplish
that together with our customers. For
this purpose, we provide our scientific
Does Merck also provide expertise?
Steve Vermant: Biotechnology is one
of the Chinese government's main
areas of investment at the moment.
The focus on research at universities
has been rising rapidly, with Merck also
seeing increasing demand for its sup-
plies and materials. In the world of
highly complex biotech research, our
CRISPR Core Workflow and other new
technologies are very attractive to
both universities and our renowned
industry partners, and we help them
use these technologies efficiently for
their research.
What role do technologies such
as CRISPR/Cas9 play in academic
research in China?
Steve Vermant, Managing Director of the Life
Science business sector and Head of Research
Solutions in China
A chat with Steve Vermant, Managing Director of
Merck's Life Science business sector and Head of
Research Solutions in China, about the partnership
with Tongji University under the CRISPR Core
Partnership Program and the potential for CRISPR/
Cas9 in China.
New partner
New partner
VIBRANT CHINA
24
Lil
ZARA
NO.1PRA
Since 2017, the medications for which Merck and
Alibaba offer these additional services on their joint
platform in China are packaged in Nantong, a city
on the Yangtze River not far from Shanghai. More
than €250 million have been invested in two
modern production facilities there. After Darmstadt,
Nantong is Merck's second largest pharmaceutical
production location in the world. Here, we produce
the diabetes medication Glucophage XR®, the
thyroid medications Euthyrox® and ThyrozolⓇ, and
ConcorⓇ for the treatment of cardiovascular disease.
In the future, the Life Science business sector will
also produce inorganic salts and biochemical cultures
for environmental audits in Nantong and deliver them
to pharmaceutical manufacturers and laboratories
from there.
Owing to China's large
population, the need for
digital treatment
solutions there is
enormous.
At least
Merck supports further innovations with its
Accelerator program, which is already established
at the company's headquarters in Darmstadt,
Germany and was recently launched in China as
well. Selected startups can work for three
months on collaboration projects with Merck
experts at the Innovation Hub in China. In
addition, they have the opportunity to continue
their projects at the Innovation Center in
Darmstadt to explore the European market. They
are thus able to make an important contribu-
tion on China's path to becoming a global innova-
tion leader. This development enables China to
potentially contribute more innovative solutions
supported by Merck.
Stefan Oschmann announced the launch of inno-
vation hubs in China during his visit to the coun-
try in February 2018. To achieve this goal, a team
of representatives from science and industry is
being set up in Shanghai to form the Merck China
Innovation team. The team members have ex-
tensive knowledge in the areas of healthcare,
chemistry and digital technologies and are led
by Sophie Sun, Head of Merck China Innovation
Hub. Together, they will explore the opportuni-
ties in the Chinese innovation ecosystem. "A very
lively innovation ecosystem is developing in
China, allowing the country to become an indus-
try leader for technological innovation," says
Sun. "The Chinese government promotes innova-
tion and industry developments through a
number of programs and initiatives that are also
highly relevant to Merck's areas of business
and expertise. We therefore want to collaborate
closely with startups, academic institutions,
industry players and local governments so that
we can jointly develop new technologies and
solutions for China and for the world."
在中国展宏图
Beijing
25005
Big plans for China
VIBRANT CHINA
20
T31142
China is on the way to becoming a leading high-tech.
nation. We intend to take an active role in shaping this
transformation with our China strategy.
vibrant
china..
19
VIBRANT CHINA
PAPAR
RECERCE
路
15709
上海银行
2
VIBRANT CHINA
18
10
MERCK
Deputy Foreman, Performance Materials,
Darmstadt, Germany
FRANZISKA HÖLY
Big plans
for china
China intends to become a leading high-
tech nation. Merck is benefiting from this
transformation and will soon implement
an important aspect of its China strategy:
increasing production and research in
China for China. After a long history as
one of the world's largest sales markets,
the country will now take on a key role in
the realization of Merck's global strategy.
China has big plans for the future. In fewer than
ten years, it aims to become a world market leader
in industries such as mechanical engineering, green
technology and biotechnology. Modern high-speed
trains made in China are already traveling through
the country and competing with established Western
manufacturers at the global level. In 2020, more
than five million electric vehicles are expected to be
on China's streets. An investment program of more
than € 850 billion is available for the Belt and Road
Initiative, with 900 projects planned in more than
64 countries to develop the Eurasian continent into
a huge economic area.
By 2049 at the latest, what is now an emerging
economy intends to be the world's leading and most
innovative industrial nation. According to Allan
Gabor, President of Merck China and Head of Perfor-
mance Materials in the country since February
2018, the company is orienting itself toward China's
ambitious development: "We aspire to double our
Group sales within China. By 2025 we want every
single person in China to come into contact with
our products or services in a positive way. Given
Merck's diverse portfolio across pharmaceuticals,
life science and electronic materials, such a bold
vision is attainable."
signed with the local authorities to build an Inno-
vation Hub. Located at the heart of Guangzhou
International Biotech Island, this hub will serve
as a place of knowledge exchange for experts,
partners and customers in all three business sec-
tors, enabling them to develop and enhance inno-
vative technologies for strategic markets in the
Pearl River Delta and beyond.
VIBRANT CHINA
22
Merck is also greatly intensifying its R&D in China.
Research centers and laboratories have existed in
Shanghai, Suzhou and Beijing for some time, and a
new OLED technology center was opened in Shang-
hai in 2018. In Guangzhou, an agreement was
NEW INNOVATION CENTERS
One of the most important steps along the way is
to ensure that partnerships and networks become
more effective. Gabor adds that this endeavor is
particularly challenging because of "the special com-
plexity of stakeholder management in China," saying:
"We're looking at other, predominantly local compa-
nies and also initiating diverse collaborations with
a variety of public-sector players."
The realization of this aim requires a host of mea-
sures, in Allan Gabor's opinion. Among them are
smart collaborations with key stakeholders in the
country as well as re-thinking some of the company's
structures to be able to optimize local future growth.
Other measures include increasing local production
efforts and fostering talent development in China
more efficiently. Finally, networking more closely with
the country's innovation ecosystem and rigorously
digitalizing products, services and processes.
China needs technologies and know-how for its trans-
formation. Immense investments are earmarked
for this, and Merck hopes to benefit from these in-
vestments in its businesses.
DEMAND FOR TECHNOLOGIES AND EXPERTISE
President of Merck China and Head of Performance Materials in China
ALLAN GABOR
by everything we
to come into contact with
our products or services
in a positive way."
we look at China now, we see so much more than
just a huge sales market; the country is becoming
a key factor in shaping global trends and influencing
our global strategy."
Similar ideas were voiced by Allan Gabor: "When
That's why part of the 2018 festivities to celebrate
Merck's 350th anniversary took place in Shanghai.
During the celebration, Stefan Oschmann, Chairman
of the Executive Board and CEO of Merck, spoke
to 400 guests from politics, business and industry:
"We look ahead to the future with curiosity - and
it is precisely this future of science and technology
that will be shaped to a large extent right here in
China."
The optimism with which our employees work on
the diverse projects in China is also a product of our
current success: In 2018, Merck generated sales of
€1.9 billion in the country, an increase of more than
18% over the previous year. China is thus the largest
growth driver for Merck, with the highest sales after
the United States. And in the business units Display
Solutions (Performance Materials) as well as General
Medicine & Endocrinology (Healthcare), China is
already the number one global market for Merck.
21
VIBRANT CHINA
Big plans for China
A GROWTH MARKET WITH IMMENSE
POTENTIAL
diverse and the economic development exciting
and dynamic. My colleagues here are all very highly
motivated and it is a great environment to work in."
Merck is pursuing these ambitious goals with a
strong and dedicated team in China. Among the
team members is Christopher Neff, who has been
with Merck for nine years and was appointed
Head of Merck China Office in 2018. As early as
2012, Neff spent a few months in China as part
of his university degree. "It's great to be back here
now. The country is incredibly fascinating, the culture
DYNAMIC EVOLUTION, MOTIVATED TEAM
"By 2025 we want every
single person in China
What role does the collaboration
with Tongji University play in all of
this?
We provide Tongji University with tech-
nologies and train the employees
there. Besides Tongji University, more
than 80 other academic institutions
worldwide are part of our international
CRISPR Core Program. They get
access to our CRISPR products and
technical expertise and can attend
the program's board meetings in North
America and Europe, where they
can talk about the latest intellectual
resources with scientists from lead-
ing industry and research organizations.
In this way, we help our Chinese
customers and partners set foot in
the world of top-level research.
Notes to the Consolidated Financial Statements
value through other comprehensive
income (debt instruments)
Subsequent measurement at
amortized cost
Derivatives without a hedging
relationship
Derivatives with a hedging
relationship
Financial assets
Adjustments from the first-time application of IFRS 9
ƏT
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
291
Subsequent measurement at fair
Carrying amount
Remeasure-
ment due to the
application of the
impairment model
589
Carrying amount
in accordance
with IFRS 9
Jan. 1, 2018
Retained earnings
Retained earnings/ Fair value reserve
Gains/losses recognized in equity
Fair value reserve
net retained
in accordance
with IAS 39
Dec. 31, 2017
(debt instruments)
Derivatives with a hedging
relationship
Consolidated Financial Statements
Subsequent measurement at
amortized cost
→a
Current financial assets
Loans and receivables
Subsequent measurement at
amortized cost
Available-for-sale financial assets
Subsequent measurement at fair
value through other comprehensive
income (debt instruments)
Derivatives without a hedging
relationship
Other current financial assets
Derivatives without a
hedging relationship
Loans and receivables
Non-current financial assets
→ b
Subsequent measurement at
amortized cost
→a
Derivatives with a hedging
relationship
Loans and receivables
Derivatives with a hedging
relationship
Derivatives without a hedging
relationship
Available-for-sale financial assets
Subsequent measurement at
amortized cost
Derivatives without a hedging
relationship
Subsequent measurement at fair
value through profit or loss
+c+d
Other non-current financial assets
Loans and receivables
Derivatives without a hedging
relationship
profit effect
Jan. 1, 2018
Loans and receivables
for equity
instrustuments
Jan. 1, 2018
for debt
instruments
Jan. 1, 2018
-6
-23
29
29
46
46
15
4,415
-16
4,399
23
29
-6
-1
35,621
8,635
35,621
8,635
Total equity and liabilities
Liabilities directly related to assets held for sale
2,175
2,175
Other current liabilities
1,016
-31
123
-8
15
589
2,923
-15
2,908
47
35
47
35
9
9
-13 - ▬▬
247
246
-1
30
30
12
12
13
13
297
8
420
29
46
Available-for-sale
financial assets
Jan 1, 2018
Trade accounts receivable
Subsequent measurement at
amortized cost
Cash and cash equivalents
0.4
0.6
0.4
1.0
0.9
11.3
4.1
10.4
3.9
Other audit-related services pertain to various statutory or contrac-
tually agreed audits. Tax consultancy services encompass services
in connection with the preparation of tax returns for employees del-
egated abroad.
(45) Corporate governance
0.9
The Statement of Compliance in accordance with section 161 of the
German Stock Corporation Act (Aktiengesetz) was published in the
corporate governance section of the website www.merckgroup.com/
investors → Corporate governance in March 2018 and thus made
permanently available.
• Merck 12. Allgemeine Beteiligungs-GmbH, Darmstadt
• Merck 16. Allgemeine Beteiligungs-GmbH, Darmstadt
• Merck 20. Allgemeine Beteiligungs-GmbH, Darmstadt
• Merck Accounting Solutions & Services Europe GmbH, Darmstadt
• Merck Chemicals GmbH, Darmstadt
• Merck Export GmbH, Darmstadt
• Merck Healthcare KGaA, Darmstadt
• Merck Life Science Germany GmbH, Darmstadt
• Merck Life Science GmbH, Eppelheim
• Merck Patent GmbH, Darmstadt
Merck Performance Materials Germany GmbH, Darmstadt
• Merck Real Estate GmbH, Darmstadt
• Litec-LLL GmbH, Greifswald
0.2
0.3
0.2
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
287
Further individualized information and details can be found in the
Compensation Report on pages 168 et seq.
(44) Auditor's fees
The costs of the auditors (KPMG) of the financial statements of the
Merck Group consisted of the following:
€ million
Audits of financial statements
Other audit-related services
Tax consultancy services
Other services
2018
2017
thereof:
KPMG AG
Wirtschaftsprü-
fungsgesellschaft,
thereof:
KPMG AG
Wirtschaftsprü-
fungsgesellschaft,
Merck Group
Germany
Merck Group
Germany
10.0
3.5
8.5
2.4
0.4
•
Merck Serono GmbH, Darmstadt
(46) Companies opting for exemption
under section 264 (3) HGB or
section 264b HGB
The following companies, which have been consolidated in these
financial statements, opted for exemption:
Allergopharma GmbH & Co. KG, Reinbek
For equity instruments held as of January 1, 2018, that are not
held for trading, Merck has uniformly exercised the option of recog-
nizing future changes in fair value in other comprehensive income in
the consolidated statement of comprehensive income, and thus
retaining them in consolidated equity upon disposal of the financial
instrument.
The first-time application of IFRS 9 did not lead to any material
changes in the disclosure of financial liabilities.
Impairments
The first-time application of IFRS 9 resulted in the application of a
new impairment model which takes into account expected credit
losses already at initial recognition of a financial asset. This account-
ing change leads to an earlier recognition of impairment losses for
financial assets. The following financial assets are affected by the
new impairment model:
• Trade accounts receivable
• Contract assets
• Other debt instruments measured at amortized cost
• Debt instruments measured at fair value through other compre-
hensive income
Merck uses the simplified impairment model for trade accounts
receivable and contract assets pursuant to which any credit losses
expected to occur over the entire lifetime of the relevant financial
assets are taken into account. Further information can be found in
Note (60) "Financial assets".
Hedge accounting
Merck applied the hedge accounting provisions of IFRS 9 effective
January 1, 2018, and did not opt for the option to continue to apply
IAS 39. The existing hedging relationships were continued, even after
the first-time application of IFRS 9.
The adjustments relevant to Merck arising from the first-time appli-
cation of the IFRS 9 provisions regarding hedge accounting are pre-
sented below:
• In the case of hedging relationships where Merck uses options as
hedging instruments, only the intrinsic value of options has been
designated as the hedging instrument since the first-time applica-
tion of IFRS 9. Changes in the fair value of the time value compo-
nent of options that are used for hedge accounting have to be
recognized in other comprehensive income and in a new reserve
for hedging costs within equity. The subsequent accounting of
these amounts depends on the type of the hedged transaction. The
table presented under "Adjustments of prior periods" shows the
effects on the affected financial statement components arising from
the retrospective application of the hedging approach in accor-
dance with IFRS 9.
• In the case of hedging relationships where Merck uses forward
contracts as hedging instruments, only the spot element is desig-
nated as a hedging instrument. Changes in the fair value of the
forward element in forward contracts are initially recognized in a
new reserve for hedging costs within equity. The subsequent
accounting of these amounts depends on the type of the hedged
transaction. These amendments did not have any impact on the
consolidated balance sheet as of January 1, 2018.
290
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
The following reclassifications and measurement effects upon first-
time application of IFRS 9 resulted from the change in the classifi-
cation and measurement of financial assets as well as the amended
impairment requirements:
RECONCILIATION OF FINANCIAL ASSETS FROM IAS 39 TO IFRS 9 AS OF JANUARY 1, 2018
€ million
Measurement category
Consolidated balance sheet item
Cash and cash equivalents
IAS 39
IFRS 9
Explanation
According to IFRS 9, the classification and measurement of financial
assets are determined by the business model of the company and
the characteristics of the cash flows of the respective financial asset.
Upon initial recognition, a financial asset is designated either as "at
amortized cost", "at fair value through other comprehensive income"
or "at fair value through profit or loss".
-43
Classification and measurement
CHANGES TO ACCOUNTING AND MEASUREMENT
PRINCIPLES RESULTING FROM IFRS 9 "FINANCIAL
INSTRUMENTS"
• Allergopharma Verwaltungs GmbH, Darmstadt
• Biochrom GmbH, Berlin
• Chemitra GmbH, Darmstadt
(47) Information on preparation
and approval
The Executive Board of Merck KGaA prepared the consolidated financial
statements on February 14, 2019, and approved them for forwarding
to the Supervisory Board. The Supervisory Board has the responsi-
bility to examine the consolidated financial statements and to declare
whether it approves them.
288
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
(48) Subsequent events
On February 5, 2019, Merck signed an agreement with a subsidiary
of GlaxoSmithKline plc, United Kingdom, (GSK) to co-develop and
co-commercialize the immuno-oncology drug candidate M7824. A
bifunctional fusion protein, M7824 is currently an investigational can-
didate for several types of cancer. Of particular note is a Phase II
study to investigate M7824 as a first-line treatment in patients with
PD-L1-expressing advanced non-small cell lung cancer (NSCLC).
After receipt of the required anti-trust approvals, Merck will
receive an upfront payment of € 300 million from GSK and, depending
on data from the lung cancer trial program, is eligible to receive
potential payments totaling as much as € 500 million for development
milestones. In addition, Merck can receive future payments as high
as € 2.9 billion for the achievement of certain milestones related to
approval and commercialization. Merck expects that part of the
upfront payment in 2019 will be recognized as other operating
income.
The two companies will jointly develop and commercialize M7824.
In case of regulatory approval, Merck will realize the net sales in the
United States and GSK in all other countries. The collaboration part-
ners will evenly split the net result from net sales less defined
expense components.
Subsequent to the balance sheet date, no further events of special
importance occurred that could have a material impact on the net
assets, financial position and results of operations.
Accounting and Measurement Policies
(49) Effects from new accounting
standards and other presentation
and measurement changes
FIRST-TIME APPLICATION OF IAS 29 "FINANCIAL
REPORTING IN HYPERINFLATIONARY ECONOMIES"
IN ARGENTINA
During the financial year under review, Argentina was classified as a
hyperinflationary economy in accordance with IAS 29. Therefore, the
respective non-monetary items disclosed in the consolidated balance
sheet as of January 1, 2018, were no longer carried at historical cost,
but on the basis of current costs, adjusted for the inflationary effects
in previous periods. In accordance with IAS 21 "Effects of Changes
in Foreign Exchange Rates", financial statement figures from previous
years reported in non-hyperinflationary reporting currencies have
not been adjusted. Further information can be found in Note (52)
"Currency translation".
CHANGES TO ACCOUNTING AND MEASUREMENT
PRINCIPLES APPLICABLE TO INTEREST AND
PENALTIES RELATED TO INCOME TAXES
IAS 12 "Income Taxes" shall be applied to interest and penalties
related to income taxes only if these items are based on profit before
tax. In all other cases, such items are within the scope of application
of IAS 37 "Provisions, Contingent Liabilities and Contingent Assets".
Therefore, all obligations in connection with interest and penalties
related to income taxes that are within the scope of application of
IAS 37 are disclosed separately under the "other provisions" item in
the consolidated balance sheet. This applies in particular to interest
payables which are related to income tax obligations. Adjustments
of figures pertaining to previous years are disclosed in the column
"Reclassification of interest and penalties related to income taxes",
in the section "Effects of changed accounting and measurement policies
on the consolidated balance sheet as of December 31, 2017, and
January 1, 2018". Further information can be found in Note (26)
"Other provisions". There were no changes in the disclosure of
income and expenses from interest and penalties in connection with
income taxes, given that these items were previously not disclosed
within income taxes.
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
289
IFRS 9 sets forth new rules for classification and measurement of
financial instruments and the impairment of financial assets as well
as for hedge accounting. The modified retrospective method was
used for the adoption of IFRS 9 at Merck, with the exception of the
provisions for hedge accounting. In the case of hedging relationships
where Merck used options as hedging instruments, the first-time
application of IFRS 9 was made retrospectively, as required, by dis-
closing comparative information for prior periods (see "Adjustments
of prior periods" in this Note). In the case of hedging relationships
where Merck used forward contracts as hedging instruments, the new
IFRS 9 rules were applied for the first time using the prospective
method.
1,059
2,632
2,195
adjustments)
Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Non-current financial assets
Other non-current assets
Deferred tax assets
788
2,257
14,066
63
14,003
(before
12,919
Trade accounts payable
Current financial liabilities
Current provisions
Current liabilities
1,489
Deferred tax liabilities
354
8,033
Other non-current liabilities
Non-current financial liabilities
788
Refund liabilities
January 1, 2018
Dec. 31, 2017
(restated)/
Reclassification
of interest and
penalties related
to income taxes
16
32
-16
2
2
-20
17
4
1
-2
4
4
12,379
296
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
EFFECTS OF CHANGED ACCOUNTING AND MEASUREMENT
POLICIES ON THE CONSOLIDATED BALANCE SHEET AS OF
DECEMBER 31, 2017, AND JANUARY 1, 2018
The following table shows the effects of the aforementioned changes
to the accounting and measurement principles on the consolidated
balance sheet.
€ million
Dec. 31, 2017
(as reported)
IFRS 9
IAS 12/IAS 37
Reclassification
(mandatory retro-
spective adoption)
Other non-current provisions
2,257
Provisions for pensions and other post-employment benefits
14,066
90
90
Current financial assets
2,923
2,923
Trade accounts receivable
292
2,632
Inventories
Current assets
28,166
1,106
205
444
4,512
8,317
13,582
28,166
1,106
205
444
4,512
8,317
13,582
Income tax liabilities
Other current assets
12,358
731
Income tax receivables
63
Non-controlling interests
14,003
Equity attributable to Merck KGaA shareholders
1,082
Gains/losses recognized in equity
12,357
Reserves
Equity capital
1,081
12,358
565
565
35,621
7,455
35,621
7,455
Total equity
Total assets
589
589
490
490
Assets held for sale
Cash and cash equivalents
731
1
Non-current liabilities
12,357
2018
Profit before income tax
Other operating income
Gross profit
Cost of sales
Net sales
€ million
The following table shows the consolidated income statement in the
reporting period had IAS 18 been applied on an ongoing basis:
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
294
•⚫ separate performance obligations from transportation or other
logistic services
• repurchase agreements
• barter transactions
financing components
IFRS 15
bill-and-hold arrangements
(as reported)
14,836
-5,382
IAS 18
1,459
-2
1,461
-8,621
-8,621
628
1
627
9,451
-3
9,454
-5,379
3
14,830
-6
Reconciliation
to IAS 18
principal-agent relationships
⚫ costs of obtaining or fulfilling a contract
• collaboration agreements
e) Equity instruments with a carrying amount of € 123 million have
been recognized at fair value through other comprehensive income
in the consolidated statement of comprehensive income. As of
January 1, 2018, the first-time application of IFRS 9 resulted in
a reclassification, in the amount of € 23 million, from gains/losses
recognized in equity (due to available-for-sale financial assets) to
equity instruments measured through other comprehensive income.
Within retained earnings, an additional amount of € 29 million
was reclassified from retained earnings/net retained profit to
equity instruments measured through other comprehensive
income due to impairment losses recognized through profit or loss
in the past.
d) Financial assets from closed investment funds in the amount of
€ 18 million were designated as "measured at fair value through
profit or loss" in accordance with IFRS 9, given their cash flows
were not solely payments of principal and interest. As of January 1,
2018, this reclassification led to a transfer within gains/losses
recognized in equity (due to market value fluctuations) from avail-
able-for-sale financial assets to retained earnings in the amount
of € 9 million.
b) Debt instruments in the amount of € 35 million, which represented
available-for-sale debt instruments under IAS 39, were designated
as measured at "fair value through other comprehensive income"
in accordance with IFRS 9. As of January 1, 2018, this reclassifi-
cation led to a transfer within gains/losses recognized in equity
from available-for-sale financial assets to the fair value reserve
for debt instruments in the amount of € -1 million.
c) Pursuant to IFRS 9, financial assets from contingent considerations
with a carrying amount of € 277 million were designated as debt
instruments "measured at fair value through profit or loss". As of
January 1, 2018, this reclassification led to a transfer within gains/
losses recognized in equity (due to market value fluctuations)
from available-for-sale financial assets to retained earnings in the
amount of € -1 million.
a) As of January 1, 2018, the first-time application of IFRS 9 led to
an increase in impairment losses from expected credit risks of
financial assets in the amount of € 16 million (before taking
deferred taxes into account). This increase related mainly to trade
accounts receivable.
The first-time application of IFRS 9 led to the following transition
effects:
8,033
354
1,489
12,919
414
43
457
1
2,790
2,790
CHANGES TO ACCOUNTING AND MEASUREMENT
PRINCIPLES RESULTING FROM IFRS 15 "REVENUE
FROM CONTRACTS WITH CUSTOMERS"
IFRS 15 defines comprehensive principles for revenue recognition as
well as for the provision of information about the nature, amount,
timing and uncertainty of revenue from contracts with customers.
Since Merck generates approximately 95% of its revenues from con-
tracts on the sale of goods that usually have a simple structure and
normally do not constitute long-term contracts, the first-time appli-
cation of IFRS 15 only had minor effects on the Group's assets,
liabilities, financial position, and financial performance.
Within the context of the introduction of IFRS 15, Merck made
use of the option to apply the modified first-time application method
and thus recognized the cumulative adjustments in retained earnings
as of January 1, 2018. Comparative information for prior periods was
not disclosed under IFRS 15. The changes to the accounting and
measurement principles as well as the resulting adjustment effects
from the first-time application of IFRS 15 and the impact on equity
as of January 1, 2018, or the consolidated income statement, were
as follows:
Timing of transfer of control: In the case of specific supplies of
goods, the transfer of control and thus the timing of revenue rec-
ognition in accordance with IFRS 15 occurred later than the transfer
of risks and rewards within the meaning of IAS 18. As of January 1,
2018, inventories and contract liabilities for the supply of goods
were recognized for which the related revenues were already rec-
ognized in 2017 in accordance with IAS 18. However, these revenues
did not meet the criteria for revenue recognition under IFRS 15 as
of the date of first-time application. As of January 1, 2018, this led
to a reduction in retained earnings in the amount of € 20 million
(before tax). The new rules did not have a material impact on the
consolidated income statement for fiscal 2018.
consignment arrangements
• revenue recognition over time for long-term service contracts and
customer-specific construction contracts
• variable consideration
Moreover, the new rules of IFRS 15 in the following areas were of no
relevance - or only very minor relevance - for Merck:
The presentation of customer refund claims was adjusted according
to IFRS 15; since January 1, 2018, assets resulting from expected
product returns were presented within other current assets, provided
that resale of the returned products was deemed possible. Effective
January 1, 2018, this led to a slight increase in trade accounts
payable and other current assets.
• As of January 1, 2018, discounts that customers were expected to
apply when making payments were recognized in the consolidated
balance sheet as reductions of trade accounts receivable. This led
to a slight reduction in trade accounts payable and trade accounts
receivable.
• Sales deductions from refunds related to contracts with customers
were reclassified from trade accounts payable into the separate
item “Refund liabilities” in the consolidated balance sheet, effective
January 1, 2018. Therefore, trade accounts payable declined by
€ 431 million.
Income tax
Besides the adjustment effects described above, the first-time appli-
cation of IFRS 15 had the following presentation effects on the con-
solidated balance sheet as of January 1, 2018:
Long-term supply contracts with minimum purchase quantities
(take-or-pay contracts): Occasionally, contracts with customers
provide for minimum purchase quantities. In such cases, in accor-
dance with IFRS 15, the expected transaction price attributable to
the minimum purchase quantity had to be allocated to the individ-
ual supplies. However, under IAS 18, revenue was recognized in
the amount of the invoiced selling price for the individual supplies.
A contract asset was recognized as of January 1, 2018. This led to
a corresponding increase in retained earnings by € 4 million (before
tax). The impact of these new rules on the consolidated income
statement for fiscal 2018 was negligible.
•
.
293
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
Out-licensing of intellectual property: With the application of
IFRS 15, out-licensing intellectual property led, in some cases, to
earlier revenue recognition as compared with IAS 18 if the out-
licensed intellectual property meets the right-to-use criteria (rec-
ognition of revenue at a point in time), rather than right-to-access
criteria (recognition over a period of time) and the consideration
is not paid in the form of sales- or usage-based royalties. As of
January 1, 2018, contract liabilities for licenses were derecognized
which would have led to a recognition of revenue at a point in time
(at the inception of the license) on the basis of an assessment
pursuant to IFRS 15. Accordingly, this led to an increase in retained
earnings in the amount of € 17 million (before tax) as of the date
of transition. In fiscal 2018, these new rules resulted in a decrease
in net sales and in other operating income in the low single-
digit million euro range.
Multiple-element contracts: Revenues from multiple-element con-
tracts are recognized when the respective contract component is
delivered or rendered. In the Life Science business sector, there
were multiple-element contracts with service components to a
minor extent. In future, the transaction price will have to be allo-
cated in some cases in a different manner than under IAS 18. This
led to a slight increase in retained earnings as of January 1, 2018.
The impact on the consolidated income statement for fiscal 2018
was negligible.
2,195
Other income and expenses/financial result
Expected credit loss on trade accounts receivable and other debt instruments
-369
Profit after tax from continuing operations
1,093
-3
1,090
Profit after tax from discontinued operation
2,303
2
2,305
Profit after tax
3,396
-1
3,395
Consolidated Financial Statements
-1
Notes to the Consolidated Financial Statements
EFFECTS OF CHANGED ACCOUNTING AND MEASUREMENT
POLICIES ON RESERVES AS OF DECEMBER 31, 2017, AND
JANUARY 1, 2018
The following table shows the effects of the first-time application of
IAS 29, IFRS 9 and IFRS 15 on reserves as of December 31, 2017,
and January 1, 2018, respectively.
€ million
December 31, 2017 (as reported)
IFRS 9 (after income tax)
Hedge accounting (mandatory retrospective adoption)
December 31, 2017 (restated)/January 1, 2018 (before adjustments)
IFRS 9 (before income tax)
Reclassification of financial assets
Multiple-element arrangements
Income tax effect IFRS 9
IFRS 15 (before income tax)
Timing of transfer of control from the sale of goods
Out-licensing of intellectual property
295
-368
Take-or-pay contracts
Income tax effect IFRS 15
IAS 29 (after income tax)
Hyperinflation in Argentina
January 1, 2018 (restated)
-5
Earnings per share in € (basic/diluted)
10
4
2,600
thereof: attributable to Merck KGaA shareholders (net income)
thereof: attributable to non-controlling interests
10
2,605
57
2,615
Profit after tax
- attributable to continuing operations
2,610
2,615
4
Other non-cash income and expenses
-3
2,610
57
2,557
-57
-4
-7
4
-5
- attributable to discontinued operation
Profit after tax
1
1
-1,843
-4
-1,847
767
767
Net cash flows from operating activities
2,615
4
Consolidated Statement of Comprehensive Income
2,610
5.87
-0.12
0.12
0.01
5.98
Comprehensive income
Other comprehensive income
Tax effect
Fair value adjustments
Cost of cash flow hedge reserve
Items of other comprehensive income that may be reclassified to
profit or loss in subsequent periods:
0.12
Consolidated Cash Flow Statement
Depreciation/amortization/impairment losses/reversals of impairments
2,696
2,525
¹ Not defined by International Financial Reporting Standards (IFRSS).
Business free cash flow¹
Elimination first-time consolidation of BioControl Systems
Changes in trade accounts receivable as well as receivables from royalties and licenses
Changes in inventories
advance payments for intangible assets
Notes to the Consolidated Financial Statements
Investments in property, plant and equipment, software as well as
EBITDA pre¹
Business free cash flow¹
-102
EBITDA pre¹
Acquisition-related adjustments
Gains (+)/losses (-) on the divestment of businesses
Integration expenses/IT expenses
Restructuring expenses
EBITDA¹
299
2017
as reported
IFRS 5
adjustment
adjusted
Reconciliation of EBIT¹ to EBITDA pre¹
Other adjustments
2,696
2,423
Consolidated Financial Statements
1 Not defined by International Financial Reporting Standards (IFRSS).
Group
€ million
4,414
81
-26
106
63
63
Operating result (EBIT)¹
-310
1,758
-310
-1
189
61
-23
84
4,164
-118
4,282
4
1,741
-17
188
2,610
Research and development costs
43
-434
431
1,761
431
1,016
25
2,200
-3
25
8,657
-15
-3
7
5
35,614
298
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
ADJUSTMENTS OF PREVIOUS PERIODS
€ million
Net sales
Cost of sales
Derivative assets (operative)¹
-168
2,790
Gross profit
457
1
Other receivables (financial instruments)¹
Other assets (current/non-current)
Derivative assets (financial transactions)
Debt instruments
Amortized cost (subsequent measurement: impairment-only approach)
Amortized cost
Amortized cost
-15
565
4
12,379
1,049
4
13,992
63
4
14,055
2,257
788
8,036
-17
334
1,489
-17
12,903
as reported
Consolidated Income Statement
Marketing and selling expenses
-899
-2,140
32
-2,108
1,227
-14
1,212
-937
56
-880
2,525
-102
2,423
-300
5
1
-294
2,224
5
-101
2,129
386
-1
31
-930
-4,349
353
Administration expenses
Other operating income
Other operating expenses
Operating result (EBIT)¹
Financial result
Profit before income tax
Income tax
Profit after tax from continuing operations
Profit after tax from discontinued operation
Profit after tax
15,327
428
-5,320
2017
IFRS 9
adjustment
IFRS 5
adjustment
adjusted
-809
14,517
249
-5,071
-560
9,446
-4,702
10,007
4,246
-299
-168
Liabilities directy related to assets held for sale
Income tax liabilities
Refund liabilities
Trade accounts payable
Deferred tax liabilities
Amortized cost
Fair value
Fair value
Amortized cost
Amortized cost
Amortized cost
-15
3
-3
-32
-15
32
Amortized cost
Settlement amount
Settlement amount
Undiscounted measurement based on tax rates that are expected to apply
to the period when the asset is realized or the liability is settled
Amortized cost
companies prepared in the functional currency are translated at the
respective closing rates. Exchange differences from the translation
of monetary items are recognized in the income statement with the
exception of net investments in a foreign operation.
When the financial statements of consolidated companies are pre-
pared, business transactions that are conducted in currencies other
than the functional currency are disclosed using the current
exchange rate on the date of the transaction. Foreign currency
monetary items (cash and cash equivalents, receivables and pay-
ables) in the year-end financial statements of the consolidated
303
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
The functional currency concept applies to the translation of financial
statements of consolidated companies prepared in foreign currencies.
The subsidiaries of the Merck Group generally conduct their operations
independently. The functional currency of these companies is nor-
mally the respective local currency. Assets and liabilities are mea-
sured at the closing rate, and income and expenses are measured
at weighted average annual rates in euros, the reporting currency.
Any currency translation differences arising during consolidation of
Group companies are recognized in equity. If Group companies are
deconsolidated, existing currency differences are reversed and
reclassified to profit or loss.
(52) Currency translation
Intragroup sales, expenses and income, as well as all receivables
and payables between the consolidated companies, are eliminated.
The effects of intragroup deliveries reported under non-current
assets and inventories are adjusted by eliminating any intragroup
profits. In accordance with IAS 12, deferred taxes are applied to
these consolidation measures.
has significant influence were recognized in accordance with IAS 28
using the equity method of accounting.
IFRS 11 was applied for joint arrangements. A joint arrangement
exists when, on the basis of a contractual arrangement, Merck and
third parties jointly control business activities. Joint control means
that decisions about the relevant activities require unanimous con-
sent. Joint arrangements are either joint operations or joint ventures.
Revenues and expenses as well as assets and liabilities from joint
operations were included in the consolidated financial statements in
accordance with Merck's rights and obligations. By contrast, interests
in joint ventures as well as in material associates over which Merck
When additional shares in non-controlling interests are acquired,
the purchase price amount that exceeds the carrying amount of this
interest was offset directly in equity.
Acquisitions were accounted for using the purchase method in
accordance with IFRS 3. In cases where a company was not acquired
in full, non-controlling interests were measured using the fair value
of the proportionate share of net assets. The option to measure
non-controlling interests at fair value on the date of their acquisition
(full goodwill method) was not utilized.
The consolidated financial statements are based on the single-entity
financial statements of the consolidated companies as of the balance
sheet date, which were prepared applying consistent accounting pol-
icies in accordance with IFRSS.
(51) Consolidation methods
1 As from January 1, 2018, in accordance with IFRS 9; see Note (49) "Effects from new accounting standards and other presentation and measurement changes".
Expected tax payments based on tax rates that have been enacted or
substantively enacted by the end of the reporting period
Fair value
Expected reimbursement amount
35,614
Currency translation was based on the following key exchange
5
-3
444
4,514
2
8,317
4,414
1
Jan. 1, 2018
(after
adjustments)
205
1
Reclassification Remeasurement
Reclassification Remeasurement
IAS 29
IFRS 15
IFRS 9
297
Notes to the Consolidated Financial Statements
Remeasurement
1,105
-2
2
-15
7,447
2
9
-3
-16
589
490
735
90
2,904
4
-15
2,639
2
5
28,167
7
Consolidated Financial Statements
rates:
Chinese renminbi (CNY)
INTANGIBLE ASSETS WITH INDEFINITE USEFUL LIVES
AND INTANGIBLE ASSETS NOT YET AVAILABLE FOR USE
Intangible assets with indefinite useful lives and intangible assets
not yet available for use are not amortized; however they are tested
for impairment when a triggering event arises or at least once a year.
Here, the respective carrying amounts are compared with the recov-
erable amount and impairments are recognized as required. Impair-
ment losses recognized on indefinite-life intangible assets and intan-
gible assets not yet available for use are reversed if the original
reasons for impairment no longer apply.
Acquired intangible assets are capitalized at cost. Self-developed
intangible assets are only capitalized if the requirements specified
by IAS 38 have been met. Intangible assets acquired in the course
of business combinations are recognized at fair value on the acqui-
sition date. If the development of intangible assets takes a substantial
period of time, the directly attributable borrowing costs incurred up
until completion are capitalized as part of the costs.
(57) Other intangible assets
Goodwill is recognized on the acquisition date in the course of busi-
ness combinations. Goodwill is measured at cost, and is defined as
the excess amount of the purchase price paid for the company shares
over the value of the acquired portion of net assets. Net assets are
defined as the net balance of the fair values of the acquired identi-
fiable assets, and the assumed liabilities and contingent liabilities.
Goodwill is allocated to cash-generating units or groups of cash-
generating units and tested for impairment either annually or if there
are indications of impairment. The carrying amounts of the cash-gen-
erating units or groups of cash-generating units are compared with
their recoverable amounts and impairment losses are recognized
where the recoverable amount is lower than the carrying amount.
(56) Goodwill
Reimbursements for R&D are offset against research and devel-
opment costs.
capitalized as soon as the aforementioned criteria have been met.
Provided the relevant criteria set forth in IAS 38 are fulfilled, software
development costs are capitalized.
306
The costs of research cannot be capitalized and are expensed in
full in the period in which they are incurred. As internally generated
intangible assets, it is necessary to capitalize development expenses
if the cost of the internally generated intangible asset can be reliably
determined and the asset can be expected to lead to future economic
benefits. The condition for this is that the necessary resources are
available for the development of the asset, technical feasibility of the
asset is given, its completion and use are intended, and marketability
is given. Owing to the high risks up to the time that pharmaceutical
products are approved, these criteria are not met in the Healthcare
business sector regarding the development of drug candidates. Costs
incurred after regulatory approval were insignificant and were there-
fore not recognized as intangible assets. In the Life Science and
Performance Materials business sectors, development expenses are
(55) Research and development costs
Furthermore, collaboration agreements in the pharmaceutical
area typically allocate the revenue generated in specific markets, or
with specific products, to individual collaboration partners; simulta-
neously, specific income and expense items are carried by the collab-
oration partners according to predefined allocation ratios. Merck
recognizes the revenue from the sale of products to third-party cus-
tomers, if it is the principal within the meaning of IFRS 15. Expenses
resulting from payments made to collaboration partners in connection
with profit-sharing agreements are recognized in other operating
expenses. Reimbursements of research and developments costs made
between the collaboration partners are recognized in research and
development costs. Merck's most important collaboration agreement
is the strategic alliance with Pfizer Inc., United States, in the immuno-
oncology area (see Note (6) "Collaboration agreements of material
significance").
the individual promised goods or services are invariably not distinct
in the context of the contract, the performance obligations are often
integrated into bundles, income from which is recognized in this case
in other operating income during the period where the material
development activities are provided.
305
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
In individual cases, Merck enters into collaboration agreements
with other pharmaceutical and biotechnology companies whereby
both contract parties develop drug candidates on a collaborative
basis; in case of regulatory approval, such drugs will be commercial-
ized by both contract parties. As a general rule, such collaboration
agreements comprise the granting of rights to intellectual property
as well as additional goods or services promised by Merck, such as
the provision of development activities or production services. For
these activities and services, Merck usually receives consideration
from its contract parties, such as upfront payments, or regulatory
and commercial milestone payments and license fees (see Note (63)
"Contingent consideration"). Furthermore, specific income and
expense items are commonly carried collectively amongst the contract
parties. When entering into this kind of collaboration agreements,
Merck must determine whether the individual promised goods or
services are separate performance obligations, or whether they
instead must be combined with other performance obligations. Given
that the collaboration partner is usually not able to obtain any bene-
fit from the license alone, or from the license in combination with
other readily available resources, and considering, moreover, that
Research and development costs comprise the costs of research and
development departments, the expenses incurred as a result of
research and development collaborations as well as the costs of
clinical trials in the Healthcare business sector (both before and after
approval is granted).
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
The marketing authorizations, patents, licenses and similar rights, (58) Property, plant and equipment
Financial assets are recognized as at the settlement date. Debt
instruments are reclassified only if the business model used to manage
such assets has changed. Financial assets with embedded derivatives
are considered as one item, provided that the respective cash flows
are solely payments of principal and interest.
Since January 1, 2018, the classification and measurement of finan-
cial assets are determined by the business model of the company
and the characteristics of the cash flows of the respective financial
asset in accordance with IFRS 9. Upon initial recognition, a financial
asset is designated either as "at amortized cost", as "at fair value
through other comprehensive income" or as "at fair value through
profit or loss".
CLASSIFICATION
Where non-current assets are leased and economic ownership lies with
Merck (finance lease), the asset is recognized at the present value
of the minimum lease payments or the lower fair value in accordance
with IAS 17 and depreciated over its useful life. The corresponding
payment obligations from future lease payments are recognized as
liabilities. If an operating lease is concerned, the associated expenses
are recognized in the period in which they are incurred.
(59) Leasing
The useful lives of the assets are reviewed regularly and adjusted if (60) Financial assets
necessary. If indications of a decline in value exist, an impairment
test is performed. If the reasons for an impairment loss no longer
exist, a reversal of the impairment loss recognized in prior periods
is recognized.
3 to 10 years
maximum of 33 years
maximum of 40 years
6 to 25 years
Useful life
Operating and office equipment; other facilities
Plant and machinery
Administration buildings
Production buildings
USEFUL LIFE OF PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is measured at cost less depreciation
and impairments plus reversals of impairments. The component
approach is applied here in accordance with IAS 16. Subsequent costs
are only capitalized if it is probable that future economic benefits will
arise for the Group and the cost of the asset can be measured reli-
ably. The cost of self-constructed property, plant and equipment is
calculated on the basis of the directly attributable unit costs and an
appropriate share of overheads. If the construction of property, plant
and equipment takes a substantial period of time, the attributable
borrowing costs incurred up until completion are capitalized as part
of the costs. In accordance with IAS 20, costs are reduced by the
amount of government grants in those cases where government
grants or subsidies have been paid for the acquisition or manufacture
of assets (grants related to assets). Grants related to expenses which
no longer offset future expenses are recognized in profit or loss.
Property, plant and equipment is depreciated using the straight-line
method over the useful life of the asset concerned. Depreciation of
property, plant and equipment is based on the following useful lives:
INTANGIBLE ASSETS WITH FINITE USEFUL LIVES
Intangible assets with a finite useful life are amortized using the
straight-line method. The useful lives of customer relationships, brand
names and trademarks as well as marketing authorizations, acquired
patents, licenses and similar rights, and software are between three
and 24 years. Amortization of intangible assets and software is allo-
cated to the functional costs in the consolidated income statement.
An impairment test is performed if there are indications of impairment.
Impairment losses are determined using the same methodology as
for indefinite-life intangible assets. Impairment losses are reversed
if the original reasons for impairment no longer apply.
and other items not yet available for use primarily relate to rights
that Merck acquired for active ingredients, products or technologies
that are still in development stages. Amortization begins when the
product reaches market approval, and is charged on a straight-line
basis over the shorter of the patent or contract term and the esti-
mated useful life.
In the Healthcare business sector, Merck regularly enters into collab-
oration agreements, as well as in-licensing and out-licensing con-
tracts, in particular with research institutions, pharmaceutical and
biotechnology companies. In the majority of cases, Merck acquires
rights to the intellectual property of the respective contract parties
against the provision of upfront payments, regulatory or commercial
milestone payments, or license fees. The portion of the consideration
paid by Merck to acquire intellectual property is recognized as an
intangible asset. If additional service is acquired from the contract
party - besides intellectual property - an appropriate portion of the
consideration is allocated to research and development costs in line
with the service performance of the contract party.
€ 1 =
in-licensing and out-licensing in
the Healthcare business sector
Please refer to the Annual Report 2017 for further information on the
accounting and measurement principles applied in the previous year
with regard to the recognition of net sales and other income.
1.195
35.538
Dec. 31, 2017
7.791
134.669
1.168
1,275.923
1.128
1,271.164
34.958
1.144
1,275.143
34.398
1.130
1.112
Dec. 31, 2018
7.869
126.131
Since July 2018, Argentina's economy has been classified as hyper-
inflationary in accordance with IAS 29 "Financial Reporting in Hyper-
inflationary Economies". Accordingly, Merck's business activities in
Argentina were no longer disclosed at historical cost, but were
restated retrospectively for the entire reporting year, adjusted for
inflation. For this purpose, Merck used a dedicated index combining
the wholesale index IPIM (Índice de precios internos al por mayor)
and the consumer price index IPC (Índice de precios al consumidor).
As of the balance sheet date, Merck's dedicated index stood at
2,462.1 (January 1, 2018: 1,656.6).
2017
7.621
126.921
Closing rate
Average annual rate
U.S. dollar (USD)
Taiwan dollar (TWD)
South Korean won (KRW)
Swiss franc (CHF)
Japanese yen (JPY)
2018
7.815
130.372
1.153
1,294.331
35.544
1.181
(53) Recognition of net sales and
other income
Depending on the business sector, Merck uses various distribution
channels to provide its products. In the Healthcare business sector,
pharmaceutical prescription products are often sold to specialized
wholesalers and distributors, and to a lesser extent directly to phar-
macies, physicians or hospitals. In the Life Science and Performance
Materials business sectors, products are largely sold to business
customers, and to a lesser extent to distributors.
Net sales and other income are recognized when (or as) the customer
obtains control of the asset. In the case of product sales, the cus-
tomer usually obtains control as soon as delivery is made, given that
the customer is generally not able to obtain any benefits from the
asset before that point in time. To a lesser extent, Merck generates
net sales from the sale of goods based on bill-and-hold arrange-
ments. In these cases, net sales are recognized before the goods are
delivered to the customer, i.e. as soon as Merck has invoiced the
respective products and the additional criteria laid out in IFRS 15.
B81 are fulfilled. In the case of sales of hardware and equipment in
the Life Science business sector, the revenue recognition criteria are
Expected revenue from contracts with customers is not disclosed
for contracts with a term of up to one year.
•
• The promised amount of consideration is not adjusted for the
effects of a significant financing component if the period between
the fulfillment of a performance obligation and the payment by the
customer amounts to up to one year.
Merck uses the following practical expedients of IFRS 15:
contractual services.
Given that the Merck Group generates the large majority of its revenue
via sales transactions with simple structures, the company usually
has an enforceable right to payment after the performance obligation
has been fulfilled. The payment targets contractually agreed between
Merck Group and its customers usually range between 30 and 60 days.
For some service contracts, the company receives the contractually
agreed consideration before the service is delivered; in such cases,
the consideration received is presented as a contract liability in the
consolidated balance sheet until revenue is recognized. A contract
asset is recognized for an over-time realization of sales of services
and customer-specific equipment/hardware if Merck does not have
an unconditional right to payment until complete fulfillment of the
Sales deductions, such as discounts provided on the invoice as
price-reducing items, which will likely be applied by customers when
making the respective payments, are recognized in the consolidated
balance sheet as reductions of trade accounts receivable. Expected
refunds, such as bonus payments, reimbursements for returns, or
rebates from health plans and programs, are recognized in the sepa-
rate item "refund liabilities" in the consolidated balance sheet (see
Note (30) "refund liabilities").
Net sales are recognized net of sales-related taxes and sales
deductions. When net sales are recognized, estimated amounts are
taken into account for sales deductions, for example rebates, dis-
counts and returns. Payments to customers are generally recognized
as sales deductions, unless the payments are made for distinct goods
or services provided by the customer, provided that their value does
not exceed the fair value of the goods or services received by Merck.
Dividend income is recognized when the right of dividend payment
is established, when it is considered probable that the economic
benefit attributable to the dividend payment will flow to Merck, and
when the dividend payment can be measured reliably.
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
304
Net sales from contracts comprising several separate performance
obligations (particularly sales of goods in combination with services)
are recognized when the respective obligation has been fulfilled.
Therefore, the transaction price is allocated beforehand to each
performance obligation identified in the contract on a relative stand-
alone selling price basis. To a limited extent, there are multiple-ele-
ment contracts in the Life Science business sector.
In the Healthcare and Life Science business sectors, a limited
number of contracts provide for the out-licensing of intellectual prop-
erty. In the Healthcare business sector, out-licensing agreements are
usually not part of ordinary activities, meaning that the corresponding
income is not presented within net sales, but within other operating
income. If the license represents a separate performance obligation,
it must be determined whether a right-to-use asset (recognition of
revenue at a point in time), or an access right (recognition over a
period of time), is transferred to the customer. Irrespective of the
classification of licenses, sales- or usage-based royalties are recog-
nized only after the customer makes the corresponding disposals, or
uses the corresponding intellectual property.
For service contracts, and customer-specific equipment construc-
tion contracts, revenue is recognized over time, based on the progress
towards complete satisfaction of the performance obligation, provided
that Merck has an enforceable right to payment for performance
completed to date. The progress is mostly determined according to
the cost-to-cost method, and the milestones achieved as at the
reporting date.
In addition to revenue from the sale of goods, net sales also
include commission income, profit-sharing participations, revenue
from services, and in the Life Science business sector - license
income, but the volume involved is insignificant.
only met after installation has been successfully completed - to the
extent that the installation requires specialized knowledge, does not
represent a clear ancillary service and the relevant equipment can
only be used by the customer once successfully set up.
(54) Collaboration agreements,
Present value of the expenditures expected to be required to settle the
obligation
13,582
Measurement principle
708
Depreciation/amortization/impairment losses/reversals of impairments
1,337
-111
1,447
Operating result (EBIT)¹
731
-17
43
Other operating income and expenses
-1,600
32
-1,632
Research and development costs
-271
28
688
EBITDA¹
2,155
-127
-26
42
-316
-316
27
28
17
-23
40
Business free cash flow¹
EBITDA pre¹
Projected unit credit method
Acquisition-related adjustments
Gains (+)/losses (-) on the divestment of businesses
Integration expenses/IT expenses
Restructuring expenses
691
2,028
Administration expenses
16
-2,373
-2,722
300
3,193
-125
3,318
-2
-2
-22
Consolidated Financial Statements
2
-18
5
-23
-1,012
35
-1,047
4,246
-24
Notes to the Consolidated Financial Statements
Healthcare
€ million
Marketing and selling expenses
4,850
-562
5,412
-1,340
248
6,190
-809
6,999
-1,587
Financial performance
adjusted
IFRS 5
adjustment
as reported
2017
Gross profit
Cost of sales
Net sales
349
1,949
Other adjustments
1,773
According to IAS 17 (see Note (59) "Leasing")
Amortized cost
Lower of cost and net realizable value
-177
Undiscounted measurement based on tax rates that are expected to apply
Amortized cost
Fair value
Expected tax refunds based on tax rates that have been enacted or
substantively enacted by the end of the reporting period
Amortized cost
Amortized cost or fair value, depending on the business model
(see Note (60) "Financial assets").
Fair value
Assets held for sale
Cash and cash equivalents¹
Income tax receivables
Lease receivables
Trade accounts receivable (without lease receivables)¹
Fair value
Amortized cost
Lower of carrying amount and fair value less costs to sell
1 As from January 1, 2018, in accordance with IFRS 9; see Note (49) "Effects from new accounting standards and other presentation and measurement changes".
Other liabilities
Liabilities from non-income related taxes
Liabilities from derivatives (operative)¹
Other liabilities (current/non-current)
Finance lease liabilities
Liabilities from derivatives (financial transactions)¹
Loans from third parties and other financial liabilities
Bank loans
Bonds and commercial paper
Financial liabilities (current/non-current)
Other provisions (current/non-current)
Provisions for pensions and other post-employment benefits
Equity and liabilities
Balance sheet item
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
302
Inventories
Deferred tax assets
to the period when the asset is realized or the liability is settled
Amortized cost (subsequent measurement: impairment-only approach)
2
-51
Changes in trade accounts receivable as well as receivables from royalties and licenses
Business Free Cash Flow¹
-34
5
-39
Changes in inventories
-49
-375
-411
advance payments for intangible assets
Non-financial items
1,773
-177
1,949
EBITDA pre¹
35
1,448
Investments in property, plant and equipment, software as well as
1,314
-134
Measurement principle
Equity instruments
Financial assets (current/non-current)¹
Property, plant and equipment
With indefinite useful life or not yet available for use
With finite useful life
Other intangible assets
Goodwill
Liabilities to related parties
Balance sheet item
sheet are measured as follows:
The main assets and liabilities disclosed in the consolidated balance
(50) Measurement policies
301
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
Assets
¹ Not defined by International Financial Reporting Standards (IFRSS).
Other European
countries
Austria
Allergopharma Vertriebsgesellschaft m.b.H.
Vienna
Austria
Austria
100.00
Merck Chemicals and Life Science GesmbH
Merck Gesellschaft mbH
Vienna
100.00
100.00
100.00
100.00
Sigma-Aldrich Verwaltungs GmbH
Germany
Steinheim
Sigma-Aldrich Produktions GmbH
Germany
100.00
Steinheim
Germany
100.00
Steinheim
Sigma-Aldrich Grundstücks GmbH & Co. KG
100.00
Steinheim
Sigma-Aldrich Logistik GmbH
Germany
Thereof:
Darmstadt
100.00
Germany
Merck Life Science GmbH
Eppelheim
100.00
100.00
Germany
Merck Life Science Holding GmbH
Darmstadt
100.00
100.00
Germany
Merck Patent GmbH
Darmstadt
100.00
Germany
Merck Performance Materials Germany GmbH
Darmstadt
100.00
Germany
Merck Performance Materials GmbH
Wiesbaden
Merck Life Science Germany GmbH
100.00
Germany
Darmstadt
100.00
100.00
Germany
Merck Healthcare Holding GmbH
Darmstadt
100.00
100.00
Germany
Merck Healthcare KGaA
Darmstadt
100.00
Germany
Merck Holding GmbH
Gernsheim
100.00
100.00
Germany
Merck International GmbH
Darmstadt
100.00
100.00
Germany
Merck Internationale Beteiligungen GmbH
100.00
Gernsheim
Germany
Darmstadt
100.00
Germany
Merck Wohnungs- und Grundstücksverwaltungsgesellschaft mbH
Darmstadt
100.00
100.00
Germany
Millipart GmbH
Gernsheim
100.00
Germany
Sigma-Aldrich Biochemie GmbH
Steinheim
100.00
Germany
Sigma-Aldrich Chemie GmbH
Steinheim
100.00
Germany
Sigma-Aldrich Chemie Holding GmbH
Taufkirchen
100.00
Germany
Gernsheim
Merck Performance Materials Holding GmbH
Merck Vierte Allgemeine Beteiligungsgesellschaft mbH
100.00
100.00
100.00
Germany
Merck Real Estate GmbH
Darmstadt
100.00
100.00
Germany
Merck Schuchardt OHG
Hohenbrunn
100.00
100.00
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
313
Country
Company
Germany
Merck Serono GmbH
Registered office
Darmstadt
Equity interest
(%)
Thereof:
Merck KGaA (%)
100.00
Vienna
Merck Financial Trading GmbH
Germany
100.00
100.00
Australia
Proligo Australia Pty. Ltd.
Castle Hill
100.00
Australia
SAFC Biosciences Pty. Ltd.
Castle Hill
100.00
Australia
Sigma-Aldrich Oceania Pty. Ltd.
Castle Hill
100.00
Australia
Sigma-Aldrich Pty. Ltd.
Castle Hill
100.00
China
Beijing Skywing Technology Co., Ltd.
Beijing
100.00
China
Merck Chemicals (Shanghai) Co., Ltd.
Sydney
Shanghai
Merck Serono Australia Pty. Ltd.
100.00
100.00
Beijing
100.00
Nantong
100.00
Nantong
Merck Pharmaceutical Distribution (Jiangsu) Co., Ltd.
Merck Pharmaceutical Manufacturing (Jiangsu) Co., Ltd.
Merck Serono (Beijing) Pharmaceutical Distribution Co., Ltd.
China
China
China
100.00
Hong Kong
100.00
Hong Kong
Merck Performance Materials Hong Kong Ltd.
Merck Pharmaceutical (HK) Ltd.
China
China
100.00
Shanghai
Merck Management Consulting (Shanghai) Co., Ltd.
China
100.00
Hong Kong
Australia
100.00
China
Merck Display Materials (Shanghai) Co., Ltd.
100.00
Germany
Merck Chemicals GmbH
Darmstadt
100.00
Germany
Merck China Chemicals Holding GmbH
Darmstadt
100.00
Germany
Merck Consumer Health Holding Germany GmbH
Darmstadt
100.00
100.00
Germany
Merck Export GmbH
Darmstadt
100.00
100.00
Germany
Merck Financial Services GmbH
Darmstadt
100.00
100.00
Darmstadt
Merck Accounting Solutions & Services Europe GmbH
Germany
Shanghai
100.00
China
Merck Electronic Materials (Suzhou) Ltd.
Suzhou
100.00
China
Merck Holding (China) Co., Ltd.
Shanghai
100.00
China
Merck KGaA (%)
Merck Life Science Ltd.
100.00
China
China
Merck Life Science Technologies (Nantong) Co., Ltd.
Merck Ltd.
Nantong
Darmstadt
100.00
Germany
Merck 21. Allgemeine Beteiligungs-GmbH
Darmstadt
100.00
Hong Kong
100.00
Bayswater
Sigma-Aldrich Handels GmbH
(66) Inventories
while avoiding the fluctuations in expenses that can result espe-
cially when the calculation parameters change. The actuarial gains
and losses recognized in the respective reporting period are
disclosed separately in the consolidated statement of compre-
hensive income.
Deferred tax liabilities are recognized for projected dividend pay-
ments of subsidiaries. If no dividend payments are projected in
the foreseeable future, no deferred tax liability is recognized for
the difference between proportional equity in line with IFRSS and
the investment value determined for tax purposes.
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
310
Deferred tax assets resulting from deductible temporary differences,
tax credits as well as tax loss (and interest) carryforwards, are rec-
ognized if it is considered probable that taxable profit will be available
in the future to apply such tax assets. Deferred tax liabilities are
recognized for temporary differences subject to tax in the future.
Our calculations are based on the expected prevailing tax rates in
the respective countries as at the date the tax will be due. As a rule,
our tax projections are based on the statutory regulations applicable,
or endorsed, at the balance sheet date. Deferred tax assets and
liabilities are offset, provided they relate to the same tax authority,
and provided that Merck has an enforceable right to offset tax. Mate-
rial effects on deferred tax assets and liabilities resulting from changes
of tax rates, or amendments of tax laws, are usually recognized in
the period in which the legislative procedure is completed. As a rule,
these effects are recognized through profit or loss. In case of deferred
tax items recognized in equity, such effects are recognized either in
the consolidated statement of comprehensive income (gains/losses
recognized in equity), or in consolidated equity.
Deferred taxes are recognized through profit or loss, except when
they relate to items recognized in equity; in the latter case, deferred
taxes are recognized either in gains/losses recognized in equity, or in
consolidated equity.
Deferred tax assets and liabilities result from temporary differences
between the carrying amount of an asset or liability in the IFRSS and
tax balance sheets of consolidated companies as well as from con-
solidation activities, insofar as the reversal of these differences will
occur in the future.
(65) Deferred taxes
Changes in the fair value of financial assets and financial liabilities
from contingent consideration are recognized as other operating
income or other operating expenses, except for changes due to inter-
est rate fluctuations and the effect from unwinding discounts. Inter-
est rate effects from unwinding of discounts as well as changes due
to interest rate fluctuations are recognized in financial income or
financial expenses.
Inventories are carried at the lower of cost or net realizable
value. When determining cost, the "first-in, first-out" (FIFO) and
weighted average cost formulas are used. In addition to directly
attributable unit costs, manufacturing costs also include overheads
attributable to the production process, which are determined on
the basis of normal capacity utilization of the production facilities.
Inventories are written down if the net realizable value is lower
than the acquisition or manufacturing cost carried in the balance
sheet.
For contingent consideration that was contractually agreed with the
acquirer or seller within the context of the disposal or the acquisition
of businesses within the meaning of IFRS 3, the fair value of the claims
or obligations as at the transaction date is recognized as a financial
asset or financial liability. The subsequent measurement is at fair
value through profit or loss. Contingent consideration in connection
with the purchase of individual assets outside of business combina-
tions is recognized as a financial liability only when the consideration
is contingent upon future events that are beyond Merck's control. In
cases where the payment of contingent consideration is within
Merck's control, the liability is recognized only as from the date when
a non-contingent obligation arises. Contingent consideration linked
to the purchase of individual assets primarily relates to future mile-
stone payments in connection with in-licensed intellectual property
in the Healthcare business sector.
Other non-financial assets are carried at amortized cost. Impair-
ments are recognized for any credit risks. Long-term non-interest
bearing and low-interest receivables and liabilities are carried at their
present value. Other non-financial liabilities are carried at their
repayment amount
(64) Other non-financial assets and
liabilities
Reclassifications of cash flow hedge reserve to profit or loss are
recognized in the operating result, while reclassifications of the cost
of cash flow hedge reserve are recognized in the financial result.
In the case of hedging relationships where Merck uses forward con-
tracts as hedging instruments, only the spot element is designated
as the hedging instrument. Changes in the fair value of the forward
element in forward contracts are initially recognized in a new reserve
for hedging costs within equity. The subsequent accounting of these
amounts depends on the type of the hedged transaction.
309
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
In the case of hedging relationships where Merck uses options
as hedging instruments, only the intrinsic value of options has been
designated as the hedging instrument since the first-time application
of IFRS 9. Changes in the fair value of the time value component of
options that are used for hedge accounting have to be recognized in
other comprehensive income and in a new reserve for cost of hedging
within equity. The subsequent accounting of these amounts depends
on the type of the hedged transaction.
Merck currently only uses derivatives as hedging instruments. The
hedging relationship must be effective at all times, i.e. the change in
fair value of the hedging instrument almost fully offsets changes in
the fair value of the hedged item. Merck uses the dollar offset method
as well as regression analyses to measure hedge effectiveness.
Hedging ineffectiveness may occur when the forecast cash flows are
made/received, or if hedged items are dissolved. Derivatives that do
not or no longer meet the documentation or effectiveness require-
ments for hedge accounting, whose hedged item no longer exists,
or for which hedge accounting rules are not applied are classified as
"financial assets and liabilities at fair value through profit or loss".
Depending on the nature of the hedged item, changes in the fair
values of derivatives used for hedging purposes are recognized in
the consolidated income statement either in the operating result or
in the financial result.
-
(63) Contingent consideration
Since inventories are for the most part not manufactured
within the scope of long-term production processes, the manu-
facturing costs do not include any borrowing costs.
Inventory prepayments are recognized under other current
assets.
List of Shareholdings
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
312
On the occasion of the 350th anniversary of the company in
2018, every Merck Group employee in Germany was granted Merck
shares worth € 350. For the Merck share grant, the required shares
were purchased on the stock market by a third party on behalf of
Merck and then transferred to the eligible employees.
The Executive Board members have their own Long-Term Incen-
tive Plan, the conditions of which largely correspond to the Long-Term
Incentive Plan described here. A description of the plan for the Exec-
utive Board can be found in the compensation report, which is part
of the Statement on Corporate Governance.
The fair value of the obligations is recalculated by an external
expert using a Monte Carlo simulation based on the previously
described KPIs on each balance sheet date. The expected volatilities
are based on the implicit volatility of Merck shares and the DAX® in
accordance with the remaining term of the respective tranche. The
dividend payments incorporated into the valuation model are based
on medium-term dividend expectations. Changes of the intrinsic
value of share-based compensation programs are allocated to the
respective functional costs according to the causation principle. Fair
value changes are recognized in financial income or financial expenses.
Depending on the development of the KPIs, at the end of the
respective performance cycle the eligible participants are granted
between 0% and 150% of the MSUS they could be eligible to receive.
Based on the MSUS granted, the eligible participants receive a cash
payment at a specified point in time in the year after the three-year
performance cycle has ended. The value of a granted MSU, which is
relevant for payment, corresponds to the average closing price of
Merck shares in Xetra® trading during the last 60 trading days prior
to January 1 after the performance cycle. Whereas the payout for
the 2016 tranche is limited to two times the reference price, the
payout for the 2017 and 2018 tranches is limited to two and a half
times the individual grant.
a weighting of 25%. The development of organic sales growth as a
proportion of a defined target value with a weighting of 25% is a new
key performance indicator now taken into account.
As of fiscal 2017, the program conditions were modified. For the
2017 and 2018 tranches, the performance of the Merck share price
relative to the performance of the DAX® is considered with a weight-
ing of 50%, and the development of the EBITDA pre margin during
the performance cycle as a proportion of a defined target value with
For the 2016 tranche, these are on the one hand the performance
of the Merck share price compared to the performance of the DAX®
with a weighting of 70%, and on the other hand the development of
the EBITDA pre margin during the performance cycle as a proportion
of a defined target value with a weighting of 30%.
Provisions have been set up for obligations from long-term variable
compensation programs (Merck Long-Term Incentive Plan). These
share-based compensation programs with cash settlement are
aligned not only with target achievement based on key performance
indicators, but above all with the long-term performance of Merck
shares. Certain executives and employees could be eligible to receive
a certain number of virtual shares Merck Share Units (MSUS) - at
the end of a three-year performance cycle. The number of MSUs that
could be received depends on the individual grant defined for the
respective person and the average closing price of Merck shares in
XetraⓇ trading during the last 60 trading days prior to January 1 of
the respective performance cycle (reference price). In order for
members of top management to receive payment for the 2016
tranche, they must personally own an investment in Merck shares
dependent on their respective fixed annual compensation. For the
2017 and 2018 tranches, an obligatory personal investment is not a
precondition to receive payments. Since 2017, the personal invest-
ment for top management is defined in a separate Share Ownership
Guideline (SOG). When the three-year performance cycle ends, the
number of MSUS to then be granted is determined based on the
development of defined key performance indicators (KPIs).
-
programs
(69) Share-based compensation
311
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
Contingent liabilities comprise not only possible obligations
arising from past events and whose existence is subject to the
occurrence of uncertain future events, but also present obligations
arising from past events where an outflow of resources embody-
ing economic benefits is not probable or where the amount of
the obligation cannot be measured reliably. Contingent liabilities
that were not assumed within the context of a business combi-
nation are not recognized in the consolidated balance sheet.
Unless the possibility of an outflow of resources embodying eco-
nomic benefits is remote, information on the relevant contingent
liabilities is disclosed in the notes. In this context, the present
value of the future settlement amount is used as the basis for
measurement. The settlement amount is determined in accor-
dance with the rules set out in IAS 37 and is based on the best
estimate.
Measurement of other provisions is based on the settlement
amount with the highest probability or, if a large number of
similar cases exist with respect to the provision being measured,
it is based on the expected value of the settlement amounts.
Long-term provisions are discounted and carried at their present
value as of the balance sheet date if the discount rate effect is
material. To the extent that reimbursement claims exist as
defined in IAS 37, they are recognized as an asset - separately
from provisions - if their realization is virtually certain and the
asset recognition criteria have been met. Restructuring provi-
sions are recognized after detailed restructuring plans have been
established and disclosed.
Provisions are recognized if it is more likely than not that an
outflow of resources will be required to settle the obligation and
the amount of the obligation can be measured reliably. The car-
rying amount of other provisions takes into account the amounts
required to cover future payment obligations, recognizable risks
and uncertain obligations of the Merck Group to third parties.
(68) Other provisions and
contingent liabilities
Provisions for pensions and other post-employment benefits are
recognized in accordance with IAS 19. The obligations under
defined benefit plans are measured using the projected unit
credit method. Under the projected unit credit method, dynamic
parameters are taken into account in calculating the expected
benefit payments after an insured event occurs; these payments
are spread over the entire period of service of the participating
employees. Annual actuarial opinions are prepared for this pur-
pose. Actuarial gains and losses resulting from changes in actu-
arial assumptions and/or experience adjustments (the effects of
differences between the previous actuarial assumptions and
what has actually occurred) are recognized immediately in equity
as soon as they are incurred, taking deferred taxes into account.
Consequently, the consolidated balance sheet provides after
deduction of the plan assets - the full scope of the obligations
and other post-employment
benefits
(67) Provisions for pensions
Merck uses derivatives solely to economically hedge recognized
assets or liabilities and forecast transactions. Merck applied the
hedge accounting rules exclusively to forecast cash flow hedges.
Hedging transactions were entered into for highly probable forecast
transactions in foreign currencies. Cash flow hedge accounting for
forecasted transactions in foreign currency will lead to the hedged
item being recognized at a fixed exchange rate on a net basis
instead of being recognized at the spot exchange rate at the trans-
action date.
(70) List of Shareholdings
Merck applied the hedge accounting provisions of IFRS 9 effective
January 1, 2018, and did not opt for the option to continue to apply
IAS 39. The existing hedging relationships were continued, even after
the first-time application of IFRS 9.
Contingent consideration, as well as derivatives with negative market
values, are subsequently measured at fair value. Value changes are
recognized through profit or loss.
Other operating income or other Other operating income
operating expenses
Financial result
Other operating
income or other
operating expenses
Other operating income
or other operating
expenses
Financial result
Foreign currency
gains or losses
• Results recognized directly in
equity (value adjustments)
• Recycling of the cumulative
results previously recognized
directly in equity through the
operating result (derecognition)
when asset is disposed
⚫ Results recognized directly in
equity (value adjustments)
Recycling of the cumulative
results previously recognized
directly in equity through the
operating result (derecognition)
when asset is disposed
Financial result
Net gain (or loss) on disposal/
value adjustments
Other operating income or
other operating expenses
Financial
ment at fair value
through profit or loss
Financial result
Operative
Financial result
Financial
Impairment losses, and
reversals of impairment
losses on financial
assets (net)
Impairment losses/rever-
sals of impairment losses
Impairment losses, and
reversals of impairment
losses on financial
assets (net)
Financial result
Operative
Financial
prehensive income
through other com-
surement at fair value
Subsequent mea-
amortized cost
Subsequent measure-
or other operating
expenses
Financial result
LIABILITIES SUBSEQUENTLY MEASURED AT FAIR VALUE
THROUGH PROFIT OR LOSS
Except for contingent consideration, which only occurs in the context
of business combinations in accordance with IFRS 3, and derivatives
with negative market values, all financial liabilities are subsequently
measured at amortized cost using the effective rate method. Merck
primarily assigns financial liabilities such as issued bonds and bank
loans, trade payables, and non-derivative current and non-current
liabilities to this category.
OTHER FINANCIAL LIABILITIES
(61) Financial liabilities
For further information on the accounting and measurement principles
applied in the previous year (IAS 39 "Financial instruments: recog-
nition and measurement"), please refer to the Annual Report 2017.
ACCOUNTING AND MEASUREMENT PRINCIPLES APPLIED
IN THE PREVIOUS YEAR (IAS 39)
Merck derecognizes financial assets if there is no reasonable expec-
tation that the contract party will fulfill its contractual obligations. In
this context, Merck takes individual discretionary decisions in order
to evaluate whether contract fulfillment can be reasonably expected.
DERECOGNITION
Dividend income from equity instruments of both categories is
recognized in the consolidated income statement in other operating
income. Impairments and impairment reversals of equity instruments
are disclosed together with other fair value changes.
Changes in the fair value of equity instruments held for trading
are recognized through profit or loss (other operating income/
expenses).
For equity instruments not held for trading, Merck has uniformly
exercised the option of recognizing future changes in fair value in
other comprehensive income in the consolidated statement of com-
prehensive income and thus to retain them in consolidated equity
upon disposal of the financial instrument.
Equity instruments are subsequently measured at fair value.
Equity instruments
Provided that Merck expects default risk to be low, the impairments
of all other debt instruments are limited to the 12-month expected
credit losses. If the default risk has increased significantly since
initial recognition, impairments are increased to the amount of credit
losses expected to occur over the entire lifetime of the respective
asset. Merck considers default risk to be low if the risk of non-per-
formance is remote and the contract party is able to fulfill its payment
obligations at short notice at any time. The probabilities used to
establish 12-month expected credit losses, or lifetime expected credit
losses, are based on historical default rates, taking current credit
ratings into consideration.
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
308
customers. The default rates used in the simplified impairment model
are derived on the basis of historical experience and current macro-
economic expectations by taking into account country-specific ratings.
These country ratings are aggregated to three separate rating
groups. In this context, historical default rates generally also represent
the best approximation for future expected defaults to the extent that
a country's rating remains unchanged. Accordingly, when a country's
rating changes, the historical default rates of the rating group to which
the respective country has been re-allocated have to be applied,
rather than the historical default rates of the previous rating group.
Further information on the impairment of financial assets can be
found in Note (38) "Management of financial risks".
Merck uses the simplified impairment model for trade accounts
receivable and contract assets pursuant to which any credit losses
expected to occur over the entire lifetime of an asset are taken into
account. In order to measure expected credit risks, the assets are
grouped on the basis of the existing credit risk structure and the
respective maturity structure. The customer groups with comparable
default risks to be taken into account are determined at Merck in
accordance with the business sectors and location of the respective
Depending on the category of debt instrument, at initial recognition
Merck recognizes either the credit losses expected to occur over the
entire lifetime or the 12-month expected credit losses. Except debt
instruments with subsequent measurement through profit or loss,
the impairment model of IFRS 9 is applied to all debt instruments.
Financial result
(applying the effective
interest method)
Financial result
(applying the effective
interest method)
Financial result
(applying the effective
interest method)
or expenses
Interest income
(62) Derivatives and hedge
accounting
Operative
The shareholdings of Merck KGaA as of December 31, 2018, are
presented below, and a list of the fair values for equity instruments
subsequently measured at fair value through other comprehensive
income.
Company
Epichem Group Limited
Gillingham
100.00
United Kingdom
Merck Chemicals Ltd.
Gillingham
100.00
United Kingdom
Merck Holding Ltd.
Feltham
100.00
United Kingdom
United Kingdom
Feltham
100.00
United Kingdom
Merck Performance Materials Services UK Ltd.
Feltham
100.00
United Kingdom
Merck Serono Europe Ltd.
London
100.00
100.00
Merck Investments Ltd.
100.00
London
BioReliance U.K. Acquisition Limited
Merck Ilac Ecza ve Kimya Ticaret AS
Aldrich Chemical Co. Ltd.
Buchs
100.00
St. Gallen
100.00
Buchs
100.00
Istanbul
100.00
Gillingham
100.00
United Kingdom
AZ Electronic Materials (UK) Ltd.
Feltham
100.00
United Kingdom
BioControl Systems Limited
London
100.00
United Kingdom
BioReliance Limited
Aberdeen
100.00
United Kingdom
Darmstadt
Country
100.00
Merck 15. Allgemeine Beteiligungs-GmbH
Merck 16. Allgemeine Beteiligungs-GmbH
Merck 20. Allgemeine Beteiligungs-GmbH
Germany
100.00
100.00
Darmstadt
Allergopharma Verwaltungs GmbH
Germany
100.00
Reinbek
100.00
100.00
Zossen
Biochrom GmbH
AB Allgemeine Pensions GmbH & Co. KG
Allergopharma GmbH & Co. KG
Germany
Parent
Company
Darmstadt
Merck KGaA
Germany
Germany
Thereof:
Merck KGaA (%)
(%)
Registered office
Equity interest
I. Fully consolidated companies
Germany
Berlin
100.00
Germany
Germany
Germany
Germany
100.00
Darmstadt
Merck 13. Allgemeine Beteiligungs-GmbH
Germany
100.00
100.00
Darmstadt
Merck 12. Allgemeine Beteiligungs-GmbH
Germany
100.00
100.00
Greifswald
Litec-LLL GmbH
Germany
100.00
Gernsheim
Emedia Export Company mbH
Germany
100.00
100.00
Darmstadt
Chemitra GmbH
Darmstadt
measurement at
Asset type
Category
Subsequent
100.00
United States
Millipore UK Holdings I, LLC
Wilmington
100.00
United States
United States
Ormet Circuits, Inc.
United States
Millipore UK Holdings II, LLC
Research Organics, LLC
Wilmington
Wilmington
San Diego
100.00
Cleveland
100.00
United States
United States
United States
United States
SAFC Biosciences, Inc.
Lenexa
100.00
SAFC Carlsbad, Inc.
SAFC, Inc.
Carlsbad
100.00
100.00
Millipore Asia Ltd.
United States
100.00
EMD Millipore Corporation
United States
EMD Performance Materials Corp.
Registered office
Rockland
Burlington
Philadelphia
Equity interest
(%)
100.00
100.00
100.00
United States
EMD Serono Holding, Inc.
Rockland
100.00
United States
EMD Serono Research & Development Institute, Inc.
Billerica
100.00
United States
EMD Serono, Inc.
Rockland
100.00
United States
Grzybowski Scientific Inventions Ltd.
Evanston
Madison
EMD Holding Corp.
100.00
Rockland
United States
Sigma-Aldrich Research Biochemicals, Inc.
Natick
100.00
United States
Sigma-Aldrich RTC, Inc.
Laramie
100.00
United States
Sigma-Aldrich, Inc.
Milwaukee
100.00
100.00
Sigma-Genosys of Texas LLC
The Woodlands
100.00
United States
Supelco, Inc.
Bellefonte
100.00
Asia-Pacific
(APAC)
Australia
Merck Pty. Ltd.
United States
St. Louis
Sigma-Aldrich Missouri Insurance Company
United States
100.00
United States
Sigma Chemical Foreign Holding LLC
St. Louis
100.00
United States
Sigma Redevelopment Corporation
St. Louis
100.00
United States
Sigma-Aldrich Co. LLC
St. Louis
100.00
United States
Sigma-Aldrich Corporation
St. Louis
100.00
United States
Sigma-Aldrich Foreign Holding Co.
St. Louis
100.00
United States
Sigma-Aldrich Manufacturing LLC
St. Louis
100.00
Serono Laboratories, Inc.
Company
United States
Country
United States
United Kingdom
Sigma-Aldrich Financial Services Limited
Gillingham
100.00
United Kingdom
Sigma-Aldrich Holdings Ltd.
Gillingham
100.00
United Kingdom
Sigma-Genosys Limited
Gillingham
100.00
100.00
Canada
EMD Chemicals Canada Inc.
Toronto
100.00
Canada
EMD Crop BioScience Canada Inc.
Toronto
100.00
Canada
EMD Inc.
Mississauga
North America
Gillingham
Sigma-Aldrich Company Limited
100.00
The following table provides details on the measurement effects of
debt instruments on the consolidated income statement:
Debt instruments
on account of a factoring agreement are measured at fair value
through other comprehensive income. Provided that the trade
accounts receivable are sold, the factoring fees previously recognized
directly in equity are recycled through the operating result upon
derecognition of the trade accounts receivable sold.
At initial recognition, Merck recognizes financial assets at fair value,
plus any transaction costs directly attributable to the acquisition of
such assets - provided the financial assets are subsequently not
measured at fair value through profit or loss. However, trade accounts
receivable without significant financing components are exempted
from this general rule and measured at their transaction price. Trans-
action costs of assets measured at fair value through profit or loss
are recognized as expenses in the consolidated income statement.
Trade accounts receivable that are potentially designated to be sold
MEASUREMENT
307
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
United Kingdom
Merck Serono Ltd.
Feltham
100.00
United Kingdom
United Kingdom
United Kingdom
Millipore (U.K.) Ltd.
Feltham
100.00
Austria
Feltham
100.00
SAFC Biosciences Limited
Gillingham
100.00
United Kingdom
United Kingdom
SAFC Hitech Limited
Gillingham
100.00
Canada
Millipore (Canada) Ltd.
Toronto
BioReliance Corporation
Rockville
100.00
United States
Cell Marque Corporation
Rocklin
100.00
United States
Cerilliant Corporation
Round Rock
100.00
United States
EMD Accounting Solutions & Services America, Inc.
Rockland
100.00
United States
United States
EMD Digital Inc.
Burlington
100.00
EMD Finance LLC
Wilmington
100.00
316
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
United States
Sigma-Aldrich Production GmbH
100.00
BioControl Systems, Inc.
100.00
Canada
Canada
United States
Natrix Separations, Inc.
Sigma-Aldrich Canada Co.
Aldrich Chemical Co. LLC
Burlington
100.00
Oakville
100.00
Milwaukee
100.00
United States
Aldrich Chemical Foreign Holding LLC
St. Louis
100.00
United States
Aldrich-APL, LLC
Urbana
100.00
United States
Allergopharma USA, Inc.
Alexandria
100.00
United States
Wilmington
Sigma-Aldrich International GmbH
Millipore UK Holdings LLP
United Kingdom
314
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
Ireland
Ireland
Country
Company
Sigma-Aldrich Ireland Ltd.
Silverberry Limited
Registered office
Equity interest
(%)
Thereof:
Merck KGaA (%)
Arklow
100.00
Arklow
100.00
Italy
Italy
Allergopharma S. p. A.
Istituto di Ricerche Biomediche Antoine Marxer RBM S. p. A.
Rome
100.00
Colleretto Giacosa
100.00
100.00
Arklow
100.00
Carrigtwohill
100.00
Hungary
Merck Kft.
Budapest
100.00
Hungary
Sigma-Aldrich Kft.
Budapest
100.00
Ireland
Merck Finance Limited
Italy
Carrigtwohill
Ireland
Merck Millipore Ltd.
Carrigtwohill
100.00
Ireland
Merck Serono (Ireland) Ltd.
Dublin
100.00
Ireland
Ireland
Millipore Cork Unlimited Company
Shrawdine Limited
100.00
Maroussi, Athens
Merck S. p.A.
100.00
Luxembourg
Merck Finance S. a. r.l.
Luxembourg
100.00
Luxembourg
Merck Finanz S. a. r. l.
Luxembourg
100.00
Luxembourg
Merck Holding S. a. r. l.
Luxembourg
100.00
Luxembourg
Merck Invest SCS
Luxembourg
100.00
Luxembourg
Merck Re S. A.
Luxembourg
100.00
100.00
Luxembourg
Millilux S. a. r.l.
100.00
Luxembourg
Merck Chemicals Holding S. a.r.l.
Luxembourg
Italy
Merck Serono S. p. A.
Rome
99.74
Italy
Sigma-Aldrich S. r. I.
Milan
100.00
Latvia
Merck Serono SIA
Riga
Milan
100.00
Merck Serono, UAB
Vilnius
100.00
Luxembourg
AZ Electronic Materials S. a. r.l.
Luxembourg
100.00
Luxembourg
Mats Finance S. a. r. l.
Luxembourg
100.00
Lithuania
Luxembourg
Merck A. E.
100.00
Prague
100.00
Denmark
Merck A/S
Soborg
100.00
Denmark
Merck Life Science A/S
Soborg
100.00
Denmark
Sigma-Aldrich Denmark ApS
Sigma-Aldrich Chemie GmbH
100.00
Denmark
Survac ApS
Frederiksberg
100.00
100.00
Estonia
Merck Serono OÜ
Tallinn
100.00
Sigma-Aldrich spol. s r. o.
Czech Republic
100.00
Prague
Vienna
100.00
Belgium
Belgium
Belgium
Merck Chemicals N. V./S. A.
Merck N. V.-S. A.
Sigma-Aldrich BVBA/SPRL
Overijse
100.00
Overijse
Finland
100.00
100.00
Bulgaria
Merck Bulgaria EAD
Sofia
100.00
Croatia
Merck d.o.o.
Zagreb
100.00
Czech Republic
Merck spol. s r. o.
Overijse
Greece
Merck Life Science OY
100.00
France
Merck Santé S. A. S.
Lyon
100.00
France
Merck Serono S. A. S.
Lyon
100.00
France
Millipore S.A.S.
Molsheim
100.00
France
Sigma-Aldrich Chimie S. a. r. l.
Saint Quentin Fallavier
100.00
France
Sigma-Aldrich Chimie SNC
Saint Quentin Fallavier
100.00
France
Sigma-Aldrich Holding S. a. r.l.
Saint Quentin Fallavier
99.84
Lyon
Merck S. A.
France
Finland
Merck OY
Espoo
100.00
Finland
Sigma-Aldrich Finland OY
Espoo
100.00
France
Gonnon S. A. S.
Lyon
Espoo
100.00
Merck Biodevelopment S.A. S.
Lyon
100.00
France
Merck Chimie S.A. S.
Fontenay s/Bois
100.00
France
Merck Performance Materials S. A. S.
Trosly-Breuil
100.00
France
100.00
Soborg
100.00
Portugal
Laquifa Laboratorios S.A.
Algés
100.00
Portugal
Merck, S.A.
Algés
100.00
Romania
Merck Romania S. R. L.
100.00
Bucharest
Russia
Merck LLC
Moscow
100.00
Serbia
Russia
Merck d.o.o. Beograd
Sigma-Aldrich Rus LLC
Moscow
100.00
100.00
Belgrade
Poznan
Poland
Sigma-Aldrich B. V.
Zwijndrecht
100.00
Netherlands
Zwijndrecht
100.00
Norway
Merck Life Science AS
Oslo
100.00
Sigma-Aldrich Sp.z.o.o.
Norway
Oslo
100.00
Poland
Merck Business Solutions Europe Sp.z.o.0.
Wroclaw
100.00
Poland
Merck Sp.z.o.o.
Warsaw
100.00
Sigma-Aldrich Norway AS
Netherlands
100.00
Merck spol. s r.o.
Sigma-Aldrich Sweden AB
Company
Switzerland
Sweden
Country
315
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
100.00
Solna
Allergopharma AG
Merck Chemicals and Life Science AB
100.00
Solna
Merck AB
Sweden
100.00
Madrid
Sigma-Aldrich Quimica S. L.
Spain
100.00
Madrid
Sweden
Slovakia
Switzerland
Registered office
Stockholm
Bratislava
100.00
Slovakia
Sigma-Aldrich, spol. s r.o.
Bratislava
100.00
Slovenia
Merck d.o.o.
Ljubljana
100.00
Ares Trading SA
Spain
Madrid
100.00
Spain
Merck, S. L. U.
100.00
100.00
Thereof:
Merck KGaA (%)
Equity interest
(%)
Aubonne
Therwil
Merck Chemicals and Life Science S. A. U.
100.00
Sigma-Aldrich Chemie N. V.
100.00
Merck (Schweiz) AG
Schiphol-Rijk
51.63
51.63
Altdorf
Merck & Cie
Switzerland
Zug
Luxembourg
Luxembourg
100.00
Luxembourg
Ridgefield Acquisition S. a. r.l.
Luxembourg
100.00
Luxembourg
Millipore International Holdings, S.a. r.l.
100.00
Switzerland
Merck Performance Materials (Suisse) SA
Switzerland
Turkey
Switzerland
Switzerland
100.00
Buchs
Sigma-Aldrich (Switzerland) Holding AG
Switzerland
100.00
Coinsins
SeroMer Holding SA
Switzerland
100.00
Coinsins
Merck Serono SA
Switzerland
100.00
Coinsins
Sigma-Aldrich Global S. a. r. l.
Luxembourg
Switzerland
Luxembourg
Netherlands
Netherlands
Netherlands
Merck Chemicals B. V.
Merck Holding Netherlands B. V.
Merck Ventures B. V.
Merck Window Technologies B. V.
Netherlands
Serono Tri Holdings B. V.
100.00
Schiphol-Rijk
Amsterdam
100.00
100.00
100.00
100.00
Amsterdam Zuidoost
Netherlands
Veldhoven
Schiphol-Rijk
100.00
Sigma-Aldrich S. a. r. l.
100.00
Malta
Malta
Netherlands
Merck Capital Holding Ltd.
Merck Capital Ltd.
Luxembourg
Pietà
100.00
Pietà
100.00
Nieuwerkerk Ad Ijssel
100.00
Netherlands
BioControl Systems B. V.
Merck B. V.
A)
Gillingham
100.00
SAF-LAB LLC
Russia
<0.5
100.00
< 0.5
MedChem Limited
Russia
100.00
Moscow
Chemical Trade Limited LLC
73.60
Russia
Moscow
Plan-les-Ouates
United Kingdom
United Kingdom
Merck KGaA (%)
< 0.5
Moscow
100.00
< 0.5
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
319
Country
Switzerland
Company
iOnctura SA
B-Line Systems Limited
Bristol Organics Ltd.
Registered office
Equity interest
(%)
Thereof:
Fair value
(€ million)
100.00
Merck Serono Co., Ltd.
Merck Europe B. V.
100.00
< 0.5
Darmstadt
100.00
100.00
< 0.5
Darmstadt
100.00
100.00
100.00
<0.5
100.00
100.00
<0.5
Darmstadt
100.00
100.00
< 0.5
Darmstadt
100.00
Darmstadt
Darmstadt
< 0.5
100.00
Zossen
100.00
100.00
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Merck 24. Allgemeine Beteiligungs-GmbH
Merck 25. Allgemeine Beteiligungs-GmbH
Merck 26. Allgemeine Beteiligungs-GmbH
Merck 27. Allgemeine Beteiligungs-GmbH
Merck 28. Allgemeine Beteiligungs-GmbH
Merck 29. Allgemeine Beteiligungs-GmbH
Merck 30. Allgemeine Beteiligungs-GmbH
Merck 31. Allgemeine Beteiligungs-GmbH
Merck 36. Allgemeine Beteiligungs-GmbH
Merck 37. Allgemeine Beteiligungs-GmbH
Merck 38. Allgemeine Beteiligungs-GmbH
Darmstadt
100.00
100.00
< 0.5
<0.5
Darmstadt
100.00
100.00
< 0.5
Darmstadt
100.00
Darmstadt
100.00
100.00
< 0.5
Darmstadt
100.00
100.00
< 0.5
Other European
countries
Greece
Sigma-Aldrich (OM) Ltd.
Athens
100.00
< 0.5
Ireland
SAFC Arklow Ltd.
Arklow
100.00
< 0.5
Netherlands
< 0.5
Amsterdam
100.00
Darmstadt
100.00
<0.5
< 0.5
Darmstadt
100.00
100.00
<0.5
Darmstadt
100.00
100.00
< 0.5
Germany
Merck 39. Allgemeine Beteiligungs-GmbH
Darmstadt
100.00
100.00
<0.5
Germany
Germany
Germany
Merck 40. Allgemeine Beteiligungs-GmbH
Merck 41. Allgemeine Beteiligungs-GmbH
Merck Foundation gGmbH
100.00
Gillingham
100.00
<0.5
Netherlands
countries
Other European
<0.5
100.00
<0.5
100.00
Caracas
Caracas
IV. Associates not included at equity due to secondary importance
Representaciones MEPRO S.A.
Venezuela
Merck S. A.
Venezuela
Latin America
Calypso Biotech B. V.
III. Non-controlled companies majority-owned
100.00
<0.5
100.00
Casablanca
Lagos
Merck Pharmaceutical and Life Sciences Ltd.
Merck Maroc S.A.R.L.
<0.5
100.00
Santo Domingo
Nigeria
Morocco
Africa (MEA)
Middle East and
Merck Dominicana, S.R.L.
<0.5
Dominican Republic
Amsterdam
A)
Country
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
320
A) These are affiliates in the portfolio of M Ventures. The fair value of the M Ventures portfolio on December 31, 2018, amounted to € 145 million.
B) These are closed funds that are classified as debt within the meaning of IFRS 9.
B)
50.58
B)
38.32
St. Louis
St. Louis
Prolog Healthy Living Fund II, L.P.
United States
Prolog Healthy Living Fund, L.P.
38.81
United States
A)
22.06
Basel
Vaximm AG
2
39.11
Muttenz
CAMAG Chemie-Erzeugnisse und
Adsorptionstechnik AG
Switzerland
Switzerland
A)
25.35
Lausanne
Asceneuron SA
Switzerland
North America
Latin America
<0.5
100.00
AB Pensionsverwaltung GmbH
Gillingham
Ultrafine Limited
Sigma Entity One Limited
UFC Ltd.
United Kingdom
United Kingdom
United Kingdom
<0.5
100.00
Gillingham
Sigma Chemical Co. Ltd.
United Kingdom
<0.5
100.00
Feltham
Merck Pension Trustees Ltd.
<0.5
United Kingdom
100.00
Feltham
Merck Ltd.
United Kingdom
<0.5
100.00
Feltham
Merck Cross Border Trustees Ltd.
United Kingdom
<0.5
100.00
Gillingham
Fluka Chemicals Ltd.
United Kingdom
<0.5
Gillingham
100.00
<0.5
Guangzhou
Merck Innovation Hub (Guangdong) Co., Ltd.
<0.5
100.00
Bayswater
Biochrom Australia Pty. Ltd.
A)
62.83
Burlington
<0.5
100.00
St. Louis
China
Australien
(APAC)
Asia-Pacific
Fluka Chemical Corp.
TocopheRx, Inc.
Gillingham
100.00
<0.5
United Kingdom
Webnest Ltd.
Gillingham
100.00
100.00
United Kingdom
Wessex Biochemicals Ltd.
Gillingham
100.00
A)
North America
United States
United States
<0.5
Germany
100.00
Fair value
(€ million)
Singapore
Merck Performance Materials Pte. Ltd.
Singapore
100.00
Bonifacio Global City
Merck Inc.
Philippines
99.99
Bonifacio Global City
Merck Business Solutions Asia Inc.
Philippines
100.00
Christchurch
100.00
100.00
Palmerston North
100.00
Kuala Lumpur
Petaling Jaya
Sigma-Aldrich New Zealand Co.
Merck Ltd.
Sigma-Aldrich (M) Sdn Bhd.
Merck Sdn Bhd
New Zealand
New Zealand
Malaysia
Malaysia
100.00
Tokyo
Sigma-Aldrich Japan G.K.
100.00
Japan
Singapore
Merck Pte. Ltd.
Taiwan
100.00
Taipei
Merck Performance Materials Ltd.
Taiwan
100.00
Taipei
Merck Ltd.
Taiwan
100.00
Yongin City
Sigma-Aldrich Korea Ltd.
South Korea
100.00
Singapore
Pyeongtaek-shi
South Korea
100.00
Seoul
Merck Ltd.
South Korea
100.00
Seoul
Merck Electronic Materials Ltd.
South Korea
100.00
Singapore
100.00
Singapore
Sigma-Aldrich Pte. Ltd.
Merck Performance Materials Ltd.
100.00
Tokyo
Merck Serono Co., Ltd.
India
India
100.00
Wuxi
Sigma-Aldrich (Wuxi) Life Science & Technology Co., Ltd.
China
100.00
Shanghai
Sigma-Aldrich (Shanghai) Trading Co., Ltd.
China
100.00
Shanghai
SAFC Hitech (Shanghai) Co., Ltd.
China
India
100.00
Notes to the Consolidated Financial Statements
317
Equity interest
Thereof:
Country
Company
Registered office
(%)
Merck KGaA (%)
China
Merck Serono (Beijing) Pharmaceutical R&D Co., Ltd.
Beijing
100.00
China
Consolidated Financial Statements
India
Merck Life Science Pvt. Ltd.
Merck Performance Materials Pvt. Ltd.
Japan
100.00
Tokyo
Merck Performance Materials Ltd.
Japan
100.00
Tokyo
Merck Ltd.
Japan
100.00
Tokyo
BioReliance K.K.
Japan
86.65
Jakarta
100.00
Jakarta
Merck Specialities Pvt. Ltd.
Sigma-Aldrich Chemicals Private Limited
Mumbai
100.00
Mumbai
100.00
Vietnam
Mumbai
Bangalore
100.00
Indonesia
Indonesia
P.T. Merck Chemicals and Life Sciences
P.T. Merck Tbk.
Middle East and
100.00
Germany
Thailand
Merck Ltd.
Company
Country
Merck Serono Middle East FZ-Ltd.
United Arab Emirates
Merck SARL
Merck Promotion SARL
Tunisia
Tunisia
Sigma-Aldrich (Pty) Ltd.
Merck (Pty) Ltd.
Merck Healthcare and Life Science Limited
Sigma-Aldrich Israel Ltd.
QLight Nanotech Ltd.
South Africa
II. Companies not consolidated due to secondary importance
South Africa
Israel
Israel
PMatX Ltd.
Israel
Merck Serono Ltd.
Israel
InterPharm Laboratories Ltd.
Israel
Inter-Lab Ltd.
Israel
Merck Ltd.
Egypt
Africa (MEA)
Middle East and
Kenya
Country
Equity interest
(%)
Thereof:
Merck KGaA (%)
Equity interest
(%)
Registered office
Thereof:
Merck KGaA (%)
100.00
Dubai
100.00
Tunis
100.00
Tunis
100.00
Kempton Park
100.00
Halfway House
Registered office
100.00
100.00
Rehovot
100.00
Jerusalem
90.00
Yavne
100.00
Herzliya Pituach
100.00
Yavne
100.00
Yavne
100.00
Cairo
Nairobi
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
318
Mexico
Mexico
Mexico
Sigma-Aldrich Quimica, S. de R.L. de C. V.
Mesofarma Corporation
Merck Biopharma Distribution S.A. de C. V.
Merck, S. A. de C. V.
Ecuador
Guatemala
Merck, S.A.
Merck C. A.
Merck S. A.
Colombia
Sigma-Aldrich Quimica Ltda.
Chile
Merck S.A.
Chile
Panama
Sigma-Aldrich Brasil Ltda.
Sigma-Aldrich de Argentina S. r. I.
Merck S.A.
Brazil
Brazil
Argentina
Argentina
Latin America
100.00
Ho Chi Minh City
45.11
Bangkok
100.00
Kaohsiung
Merck Vietnam Ltd.
Merck S. A.
Peru
Merck Peruana S.A.
Uruguay
100.00
Montevideo
100.00
Lima
100.00
Panama City
100.00
Toluca
100.00
Mexico City
100.00
Mexico City
100.00
Guatemala City
100.00
Quito
100.00
ARES Trading Uruguay S.A.
Buenos Aires
100.00
Buenos Aires
100.00
Rio de Janeiro
SAFC Hitech Taiwan Co. Ltd.
100.00
Beijing
Santiago de Chile
100.00
Santiago de Chile
100.00
Bogota
São Paulo
Africa (MEA)
Company
Company
Israel
< 20.00
Haifa
MediSafe Project Ltd.
Israel
A)
22.50
Yavne
Explore Bio 3 Ltd.
Israel
A)
20.00
Yavne
Explore Bio 1 Ltd.
Israel
A)
<0.5
20.00
< 20.00
Yavne
Metabomed Ltd.
ARTSAVIT Ltd.
Yavne
A)
A)
Belén Garijo
Macus вишива
Kai Beckmann
Udit Batra
UditBatry Bohm
Stefan Oschmann
S. man
Darmstadt, February 14, 2019
A) These are affiliates in the portfolio of M Ventures. The fair value of the M Ventures portfolio on December 31, 2018, amounted to € 145 million.
A)
< 20.00
Caesarea
Wiliot Ltd.
Israel
A)
< 20.00
Yavne
Pantheon Biosciences Ltd.
Israel
< 20.00
Marcus Kuhnert
Israel
Novapharm Production SARL
Durham
A)
< 20.00
Cambridge
Raze Therapeutics, Inc.
Ribometrix Inc.
United States
United States
A)
< 20.00
Menlo Park
Progyny, Inc.
United States
A)
< 20.00
New York
<0.5
< 20.00
Ann Arbor
Kraig Biocraft Laboratories, Inc.
Lumiode, Inc.
< 20.00
Wilaya de Tipiza
A)
Tioga Pharmaceuticals, Inc.
Algeria
Africa (MEA)
<0.5
< 20.00
Sydney
Immutep Limited
Middle East and
Australia
(APAC)
Asia-Pacific
A)
< 20.00
Cambridge
Translate Bio, Inc.
United States
<0.5
< 20.00
< 20.00
San Diego
United States
322
Responsibility Statement
Responsibility Statement
326
We reconciled the expected net cash flows underlying the value in use
calculations with the current medium-term plan approved by manage-
ment. To assess the assumptions used in preparing the medium-term
plan, we obtained an understanding of the planning process through
discussions with company representatives, including corporate man-
agement and representatives from the corporate divisions and the
research and development department, we assessed the plausibility
and consistency of the explanations received with the projections,
and we compared the assumptions used with the expectations of
external analysts and sources.
Using our own sensitivity analyses, we assessed the extent to which
the goodwill of each cash generating unit would still be sufficiently
covered by the respective values in use if assumptions and parameters
underlying the calculations were to change in a manner that is deemed
possible. On the basis of these analyses, our audit particularly focused
on the cash-generating unit Life Science.
Our audit approach
There is a risk for the financial statements that an existing goodwill
impairment loss was not recognized as of the reporting date. In addi-
tion, there is a risk that the related disclosures in the notes to the
consolidated financial statements are not complete and appropriate.
Goodwill is to be tested for impairment at least once a year, and may
need to be tested ad hoc if necessary. In performing the goodwill
impairment test, Merck primarily determines the value in use by
means of a discounted cash flow method. The valuation model used
to determine the value in use is complex and the result of this valu-
ation are highly dependent on the projection of future net cash flows
(taking into account future revenue growth, profit margins, exchange
rates and long-term growth rates) and the discount factor used, and
therefore is subject to significant estimation uncertainty.
Due to the acquisition of Sigma-Aldrich Corporation, United States,
in November 2015, goodwill, in particular for the cash-generating
unit Life Science, increased significantly. In aggregate, goodwill
amounts to EUR 13,764 million and thus represents 37% of the
Group's total assets as of December 31, 2018, with EUR 10,896 million
of this attributable to Life Science.
The financial statement risk
Explanatory notes on the impairment tests can be found in note 19
of the notes to the consolidated financial statements.
IMPAIRMENT TESTING OF GOODWILL
The valuation model and assumptions underlying the recognition and
measurement of income tax liabilities are reasonable. The approach
regarding the recognition and measurement of deferred tax liabilities
is adequate.
Our conclusions
In addition, we analyzed correspondence with the relevant tax author-
ities and assessed the assumptions underlying the determination of
income tax liabilities based on our knowledge and experience of how
the relevant legal requirements are currently applied by the tax author-
ities and courts. We have scrutinized Merck´s approach regarding
the recognition and measurement of deferred tax liabilities, based
on laws and regulations enacted as of the reporting date, and per-
formed recalculations.
We obtained an understanding of existing tax risks through inquiry of
management of the affected group companies and employees of the
tax department. We assessed the competence, capabilities and objec-
tivity of the external experts and evaluated their expert opinions.
We involved our own specialists in international tax law into the audit
team in order to evaluate Merck's assessment of tax risks and the
related opinions of external experts engaged by Merck.
Our audit approach
There is a risk for the financial statements that income tax liabilities
and deferred tax liabilities are not fully recognized or not appropriately
measured.
The measurement of income tax liabilities as well as the assessment
of unrecognized contingent tax liabilities are subject to judgment and
estimation uncertainty. Among others, this relates to intra-group
business transfers, legal disputes attributable to the determination
of earnings under tax law, and transfer pricing adjustments. Merck
routinely engages external experts to support its own risk assessment
with expert opinions from tax specialists.
Merck operates in different jurisdictions with different legal systems.
The application of local regulations on income tax, tax incentives and
transfer pricing rules is complex. The recognition and measurement of
income tax liabilities require Merck to exercise judgment in assessing
tax matters and to make estimates regarding uncertain tax positions.
Independent Auditor's Report
As of December 31, 2018, the balance sheet of the Company includes
current income tax liabilities in the amount of EUR 1,176 million and
deferred tax liabilities of EUR 1,288 million.
As part of our audit of the discount factor, we analyzed the peer group
used. With regard to other assumptions and parameters (e.g. risk-free
interest rate, beta factor, market risk premium), we compared those
assumptions and parameters with our own assumptions and publicly
available data to assess whether these were appropriate and whether
they were within the range of external recommendations, to the
extent available. In addition, we verified the calculation model used
to determine the discount factor.
In addition, we assessed whether the Company's disclosures regarding
the goodwill impairment test in the notes to the consolidated financial
statements are complete and appropriate.
• otherwise appears to be materially misstated.
In connection with our audit, our responsibility is to read the other
information and, in so doing, to consider whether the other information
is materially inconsistent with the consolidated financial state-
ments, with the combined management report or our knowledge
obtained in the audit, or
•
Our opinions on the consolidated financial statements and on the
combined management report do not cover the other information, and
consequently we do not express an opinion or any other form of
assurance conclusion thereon.
Management is responsible for the other information. The other infor-
mation comprises the annual report, with the exception of the audited
consolidated financial statements and combined management report
and our auditor's report.
Other Information
The assumptions for the measurement of the provisions for patent law
disputes are appropriate. The disclosures in the notes to the consoli-
dated financial statements appropriately illustrate the key assumptions.
Our conclusions
In addition, we assessed whether the Company's explanations on the
measurement of provisions for patent disputes in the notes to the
consolidated financial statements include appropriate and complete
disclosures on the key assumptions.
To ensure arithmetical accuracy of the valuation model used, we used
a risk-based audit approach to recalculate the Company's calculations
on a sample basis.
As supporting evidence for the estimated expenditure required to
settle the patent disputes, we obtained written confirmations from
external legal counsel engaged by Merck to obtain an understanding
of the current status of the pending legal proceedings, reviewed
correspondence with the plaintiffs and relevant courts and other
authorities, and also assessed underlying documents and minutes.
In this context we also interviewed the Company's in-house patent
counsel, employees in Merck's controlling and accounting depart-
ments, and verified the plausibility and consistency of the explana-
tions obtained with the determination of the best estimate of the
expenditure required to settle the disputes.
Our audit approach
There is a risk for the financial statements that the provisions for
patent disputes were not measured appropriately as of the balance
sheet date. There is also a risk that the notes to the consolidated
financial statements do not contain the required disclosures on the
key assumptions.
If the outflow of ressources embodying economic benefits is probable
the amount of the provisions for patent disputes is determined based
on the best estimate of the expenditure required to settle the dispute.
Consequently, the measurement of related provisions is based on
estimates and judgment of external lawyers and management.
As of December 31, 2018, provisions for legal disputes amount to
EUR 551 million, which among others include provisions for patent
disputes.
The financial statement risk
MEASUREMENT OF PROVISIONS FOR PATENT DISPUTES
Explanatory notes on the provisions for patent disputes can be found
in note 26 of the notes to the consolidated financial statements.
The calculation method used for the goodwill impairment test is
appropriate and in line with the applicable valuation principles. Overall,
the assumptions and parameters used by management are balanced.
The disclosures in the notes to the consolidated financial statements
are complete and properly depict the judgment associated with the
subsequent measurement of goodwill.
Our conclusions
We assessed the appropriateness of the valuation model used. To
ensure arithmetical accuracy, we used a risk-based audit approach
to recalculate the Company's calculations on a sample basis.
The financial statement risk
325
Independent Auditor's Report
We have audited the consolidated financial statements of MERCK
Kommanditgesellschaft auf Aktien, Darmstadt, and its subsidiaries
(the Group), which comprise the consolidated balance sheet as of
December 31, 2018, the consolidated income statement, the con-
solidated statement of comprehensive income, consolidated state-
ment of changes in net equity and consolidated cash flow statement
for the financial year from January 1, 2018, to December 31, 2018,
and notes to the consolidated financial statements, including a sum-
mary of significant accounting policies. In addition, we have audited
the combined management report of MERCK Kommanditgesellschaft
auf Aktien for the financial year from January 1, 2018, to Decem-
ber 31, 2018.
Opinions
323
Report on the Audit of the Consolidated Financial
Statements and of the Combined Management Report
TO MERCK Kommanditgesellschaft auf Aktien, Darmstadt
Independent Auditor's Report
Independent Auditor's Report
Marcus Kuhnert
Belén Garijo
flarus
karus laket
вишива
Kai Beckmann
Udit Batra
UditBatey Bohn
Stefan Oschmann
S. ma
report includes a fair review of the development and performance of
the business and the position of the Group, together with a description
of the material opportunities and risks associated with the expected
development of the Group.
Darmstadt, February 14, 2019
To the best of our knowledge, and in accordance with the applicable
reporting principles, the consolidated financial statements of the
Merck Group give a true and fair view of the assets, liabilities, financial
position and profit or loss of the Group, and the combined management
In our opinion, on the basis of the knowledge obtained in the audit,
⚫ the accompanying consolidated financial statements comply, in all
material respects, with the IFRSS as adopted by the EU, and the
additional requirements of German commercial law pursuant to
Section 315e (1) HGB [Handelsgesetzbuch: German Commercial
Code] and, in compliance with these requirements, give a true and
fair view of the assets, liabilities, and financial position of the Group
as of December 31, 2018, and of its financial performance for the
financial year from January 1, 2018, to December 31, 2018, and
⚫ the accompanying combined management report as a whole pro-
vides an appropriate view of the Group's position. In all material
respects, this combined management report is consistent with the
consolidated financial statements, complies with German legal
requirements and appropriately presents the opportunities and
risks of future development.
Pursuant to Section 322 (3) sentence 1 HGB, we declare that our
audit has not led to any reservations relating to the legal compliance
of the consolidated financial statements and of the combined man-
agement report.
Basis for the Opinions
We conducted our audit of the consolidated financial statements and
of the combined management report in accordance with Section 317
HGB and EU Audit Regulation No 537/2014 (referred to subsequently
as "EU Audit Regulation") and in compliance with German Generally
Accepted Standards for Financial Statement Audits promulgated by
the Institut der Wirtschaftsprüfer [Institute of Public Auditors in Ger-
many] (IDW). Our responsibilities under those requirements and
principles are further described in the "Auditor's Responsibilities for
the Audit of the Consolidated Financial Statements and of the Com-
bined Management Report" section of our auditor's report. We are
independent of the group entities in accordance with the requirements
of European law and German commercial and professional law, and
we have fulfilled our other German professional responsibilities in
accordance with these requirements. In addition, in accordance with
Article 10 (2)(f) of the EU Audit Regulation, we declare that we have
not provided non-audit services prohibited under Article 5 (1) of the
EU Audit Regulation. We believe that the evidence we have obtained
is sufficient and appropriate to provide a basis for our opinions on
the consolidated financial statements and on the combined manage-
ment report.
RECOGNITION AND MEASUREMENT OF INCOME TAX
LIABILITIES AND DEFERRED TAX LIABILITIES
Explanatory notes on the recognition and measurement of income
tax liabilities and deferred tax liabilities can be found in notes 14, 26
and 27 of the notes to the consolidated financial statements.
The values used in the calculation of the disposal gain recorded from
the sale of the global Consumer Health business to Procter & Gamble
were determined appropriately and the gain on disposal was accu-
rately determined.
Our conclusions
⚫ referred to the information obtained through analytical procedures
as part of our audit to assess whether the transferred assets
(including goodwill) and liabilities were completely and accurately
identified.
• verified the calculations performed by the Company to determine
the total purchase price by agreeing the amounts to the purchase
agreement. In doing so, we assessed whether the amount of the
purchase price adjustments expected to be ultimately determined
in the first half of 2019, including adjustments for transferred oper-
ating assets and liabilities, was estimated with sufficient accuracy,
performed tests of details based on specific items sampling to
verify whether the assets (including goodwill) and liabilities to be
transferred pursuant to the provisions of the purchase agreement
were completely identified with accurate carrying amounts as of
the time of the sale,
Based on this understanding, we
We first gained an understanding of the economic substance of the
agreements by reading the sales, production, supply and service
agreements that were concluded with Procter & Gamble. We then
assessed whether a de-recognition for accounting treatment of the
Consumer Health business was appropriate on the date when the
sale was completed, notwithstanding the fact that certain supply and
performance obligations continue to be in effect going forward.
Our audit approach
⚫ to identify the assets and liabilities transferred to P&G as part of
the sales transaction and it was necessary to determine the pro-
portional value of goodwill that was disposed of as part of the sale.
In light of the complexity involved in identifying the disposal group
and the need for estimates, there is a risk for the consolidated financial
statements that the gain on disposal may not have been determined
appropriately.
United States
To determine the amount of net assets transferred, it was necessary
⚫ to assess whether, given that a series of production, supply and
service arrangements were concluded along with a sales agreement,
a disposal of the Consumer Health business activities was realized
at the date of sale, and
In return for the sale of global Consumer Health business to Procter &
Gamble, Merck received sale proceeds amounting to EUR 3.4 billion
before certain subsequent purchase price adjustments. The disposal
gain recorded from the transaction, which was determined by deduct-
ing the transferred net assets including goodwill from the total pur-
chase price, amounted to EUR 2.6 billion before taxes.
On April 19, 2018, Merck entered into a contract with The Procter &
Gamble Company, United States (Procter & Gamble), regarding the
sale of the Consumer Health business. The sale of the business
activities was completed on December 1, 2018.
The financial statement risk
Explanatory notes on the sale of Consumer Health business activities
can be found in note 5 of the notes to the consolidated financial
statements.
MEASUREMENT OF DISPOSAL GAIN RECORDED FROM THE
SALE OF THE CONSUMER HEALTH BUSINESS
Key audit matters are those matters that, in our professional judg-
ment, were of most significance in our audit of the consolidated
financial statements for the financial year from January 1, 2018, to
December 31, 2018. These matters were addressed in the context
of our audit of the consolidated financial statements as a whole, and
in forming our opinion thereon, we do not provide a separate opinion
on these matters.
Key Audit Matters in the Audit of the
Consolidated Financial Statements
Independent Auditor's Report
324
In order to determine the total purchase price, it was necessary,
among other things, to estimate the expected amount of purchase
price adjustments that are expected to be ultimately determined in
the first half of 2019 based on the amounts of operating assets and
liabilities transferred.
United States
Israel
Thereof:
Merck KGaA (%)
< 20.00
Wiesbaden
2
< 20.00
< 20.00
Moers
A)
< 20.00
Darmstadt
A)
7.75
69.00
Peratech HoldCo Limited
Storm Therapeutics Limited
F-Star Beta Limited
F-Star Delta Limited
Macrophage Pharma Limited
United Kingdom
United Kingdom
United Kingdom
United Kingdom
F-Star Alpha Limited
Canbex Therapeutics Ltd.
Artios Pharma Limited
United Kingdom
United Kingdom
United Kingdom
United Kingdom
2
ObsEva SA
Berlin
< 0.5
< 20.00
Leuven-Heverlee
A)
< 20.00
Vienna
<0.5
< 20.00
< 20.00
Neuried
3
< 20.00
< 20.00
Bönen
1
< 20.00
Sankt Augustin
A)
< 20.00
Martinsried
< 20.00
A)
Inthera Bioscience AG
Galecto Biotech AB
Germany
IOmx Therapeutics AG
Germany
Inuru GmbH
Germany
Germany
Germany
Alcan Systems GmbH
Germany
Germany
V. Other equity investments
Yavne
Neviah Genomics Ltd.
(€ million)
Fair value
Thereof:
Merck KGaA (%)
Equity interest
(%)
Registered office
Fair value
(€ million)
Germany
Switzerland
Switzerland
Germany
PharmLog Pharma Logistik GmbH
PrintCity GmbH & Co. KG
Sweden
SynAffix B. V.
Mosa Meat B. V.
DNA Script S.A. S.
Aveni S. A. S.
Forendo Pharma OY
Netherlands
Netherlands
France
France
Finland
Abacus Diagnostica OY
Finland
ReWind Therapeutics N.V.
Belgium
Austria
f-star Biotechnologische Forschungs- und
Entwicklungsgesellschaft mbH
countries
Other European
pharma mall Gesellschaft für Electronic
Commerce mbH
Turku
Azelis Deutschland Kosmetik GmbH
InfraServ GmbH & Co. Wiesbaden KG
<0.5
Bird Rock Bio, Inc.
United States
United States
A)
< 20.00
San Diego
A)
< 20.00
Seattle
ApoGen Biotechnologies, Inc.
Bioling Inc.
United States
< 0.5
< 20.00
Seattle
A)
< 20.00
Boston
Akili Interactive Labs, Inc.
Allozyne, Inc.
North America
United States
United States
United States
A)
La Jolla
< 20.00
< 20.00
CLEARink Displays, Inc.
Equity interest
(%)
< 20.00
Registered office
Company
Country
321
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
118
A)
< 20.00
A)
< 20.00
A) These are affiliates in the portfolio of M Ventures. The fair value of the M Ventures portfolio on December 31, 2018, amounted to € 145 million.
Fremont
Culver City
Germantown
Intrexon Corporation
United States
Indi Molecular, Inc.
United States
A)
London
< 20.00
< 20.00
23.28
Schlieren
A)
< 20.00
Lund
A)
< 20.00
Nijmegen
A)
< 20.00
Maastricht
A)
< 20.00
A)
< 20.00
Massy
A)
A)
< 20.00
A)
Cologny
Paris
A)
Brompton-on-Swale
A)
< 20.00
< 20.00
Windsor
A)
< 20.00
Cambridge
A)
< 20.00
Cambridge
Turku
< 20.00
Cambridge
A)
London
A)
< 20.00
London
< 20.00
A)
2.2%
1,762
1,843
2,481
2,423
1,727
16.5%
15.5%
14.3%
16.7%
11.6%
3,123
3,354
4,415
4,164
-28.7%
14,836
12,845
15,024
Employees (number as of December 31)
Dividend per share (in €)
3,528
Research and development costs
1 Fiscal 2017 has been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes" in the Notes
to the Consolidated Financial Statements.
2 Not defined by International Financial Reporting Standards (IFRSS).
3 According to the consolidated cash flow statement.
14,517
4 Proposal on the appropriation of profits for 2018.
change
2014
2016
2017¹
2018
in %
11,363
Business Development 2014-2018
2015
29.9%
27.5%
1,557
1,487
2,154
2,129
1,461
- 31.4%
1,165
25.6%
1,124
2,615
3,396
2.66
2.56
Equity ratio (in %)²
3.75
5.99
1,633
-15.3%
29.3%
29.8%
26.1%
29.4%
28.7%
23.8%
-265
-276
-75
28.3%
-82
> 100.0%
3,388
3,630
4,490
4,246
3,800
-10.5%
-272
Other key data
Wirtschaftsprüfungsgesellschaft
Business free cash flow²
• Evaluate the consistency of the combined management report with
the consolidated financial statements, its conformity with [Ger-
man] law, and the view of the Group's position it provides.
• Perform audit procedures on the prospective information presented
by management in the combined management report. On the basis
of sufficient appropriate audit evidence we evaluate, in particular,
the significant assumptions used by management as a basis for
the prospective information, and evaluate the proper derivation of
the prospective information from these assumptions. We do not
express a separate opinion on the prospective information and on
the assumptions used as a basis. There is a substantial unavoidable
risk that future events will differ materially from the prospective
information.
We communicate with those charged with governance regarding,
among other matters, the planned scope and timing of the audit and
significant audit findings, including any significant deficiencies in
internal control that we identify during our audit.
We also provide those charged with governance with a statement
that we have complied with the relevant independence requirements,
and communicate with them all relationships and other matters that
may reasonably be thought to bear on our independence, and where
applicable, the related safeguards.
From the matters communicated with those charged with governance,
we determine those matters that were of most significance in the
audit of the consolidated financial statements of the current period
and are therefore the key audit matters. We describe these matters
in our auditor's report unless law or regulation precludes public dis-
closure about the matter.
Independent Auditor's Report
329
on the combined management report. We are responsible for the
direction, supervision and performance of the group audit. We
remain solely responsible for our opinions.
Other Legal and Regulatory Requirements
German Public Auditor Responsible for
the Engagement
We were elected as group auditor at the annual general meeting on
April 27, 2018. We were engaged by the Supervisory Board on June 25,
2018. We have been the group auditor of MERCK Kommanditgesell-
schaft auf Aktien without interruption since the financial year 1995.
We declare that the opinions expressed in this auditor's report are
consistent with the additional report to the Supervisory Board pursu-
ant to Article 11 of the EU Audit Regulation (long-form audit report).
The German Public Auditor responsible for the engagement is Bodo
Rackwitz.
Frankfurt am Main, February 15, 2019
KPMG AG
[Original German version signed by:]
Braun
Further Information pursuant to
Article 10 of the EU Audit Regulation
Wirtschaftsprüfer
• Obtain sufficient appropriate audit evidence regarding the financial
information of the entities or business activities within the Group
to express opinions on the consolidated financial statements and
concern.
Responsibilities of Management and
the Supervisory Board for the Consoli-
dated Financial Statements and the
Combined Management Report
7.76
Management is responsible for the preparation of the consolidated
financial statements that comply, in all material respects, with IFRSS
as adopted by the EU, and the additional requirements of German
commercial law pursuant to Section 315e (1) HGB and that the
consolidated financial statements, in compliance with these require-
ments, give a true and fair view of the assets, liabilities, financial
position, and financial performance of the Group. In addition, man-
agement is responsible for such internal control as they have deter-
mined necessary to enable the preparation of consolidated financial
statements that are free from material misstatement, whether due
to fraud or error.
In preparing the consolidated financial statements, management is
responsible for assessing the Group's ability to continue as a going
concern. They also have the responsibility for disclosing, as applicable,
matters related to going concern. In addition, they are responsible for
financial reporting based on the going concern basis of accounting
unless there is an intention to liquidate the Group or to cease oper-
ations, or there is no realistic alternative but to do so.
Furthermore, management is responsible for the preparation of the
combined management report that, as a whole, provides an appro-
priate view of the Group's position and is, in all material respects,
consistent with the consolidated financial statements, complies with
German legal requirements, and appropriately presents the oppor-
tunities and risks of future development. In addition, management
is responsible for such arrangements and measures (systems) as
they have considered necessary to enable the preparation of a com-
bined management report that is in accordance with the applicable
German legal requirements, and to be able to provide sufficient
appropriate evidence for the assertions in the combined management
report.
The Supervisory Board is responsible for overseeing the Group's
financial reporting process for the preparation of the consolidated
financial statements and of the combined management report.
Auditor's Responsibilities for the Audit
of the Consolidated Financial State-
ments and of the Combined Man-
agement Report
• Evaluate the overall presentation, structure and content of the
consolidated financial statements, including the disclosures, and
whether the consolidated financial statements present the under-
lying transactions and events in a manner that the consolidated
financial statements give a true and fair view of the assets, liabil-
ities, financial position and financial performance of the Group in
compliance with IFRSS as adopted by the EU and the additional
requirements of German commercial law pursuant to Section 315e
(1) HGB.
Our objectives are to obtain reasonable assurance about whether
the consolidated financial statements as a whole are free from material
misstatements, whether due to fraud or error, and whether the com-
bined management report as a whole provides an appropriate view
of the Group's position and, in all material respects, is consistent with
the consolidated financial statements and the knowledge obtained
in the audit, complies with the German legal requirements and appro-
priately presents the opportunities and risks of future development,
as well as to issue an auditor's report that includes our opinions on the
consolidated financial statements and on the combined management
report.
We exercise professional judgment and maintain professional skep-
ticism throughout the audit. We also:
Identify and assess the risks of material misstatements of the con-
solidated financial statements and of the combined management
report, whether due to fraud or error, design and perform audit
procedures responsive to those risks, and obtain audit evidence
that is sufficient and appropriate to provide a basis for our opinions.
The risk of not detecting a material misstatement resulting from
fraud is higher than for one resulting from error, as fraud may
involve collusion, forgery, intentional omissions, misrepresenta-
tions, or the override of internal controls.
328
Independent Auditor's Report
• Obtain an understanding of internal control relevant to the audit
of the consolidated financial statements and of arrangements and
measures (systems) relevant to the audit of the combined man-
agement report in order to design audit procedures that are appro-
priate in the circumstances, but not for the purpose of expressing
an opinion on the effectiveness of these systems.
• Evaluate the appropriateness of accounting policies used by man-
agement and the reasonableness of estimates made by manage-
ment and related disclosures.
• Conclude on the appropriateness of management's use of the
going concern basis of accounting and, based on the audit evidence
obtained, whether a material uncertainty exists related to events
or conditions that may cast significant doubt on the Group's ability
to continue as a going concern. If we conclude that a material
uncertainty exists, we are required to draw attention in the audi-
tor's report to the related disclosures in the consolidated financial
statements and in the combined management report or, if such
disclosures are inadequate, to modify our respective opinions. Our
conclusions are based on the audit evidence obtained up to the
date of our auditor's report. However, future events or conditions
may cause the Group to cease to be able to continue as a going
Reasonable assurance is a high level of assurance, but is not a guar-
antee that an audit conducted in accordance with Section 317 HGB
and the EU Audit Regulation and in compliance with German Generally
Accepted Standards for Financial Statement Audits promulgated by
the Institut der Wirtschaftsprüfer (IDW) will always detect a material
misstatement. Misstatements can arise from fraud or error and are
considered material if, individually or in the aggregate, they could
reasonably be expected to influence the economic decisions of users
taken on the basis of these consolidated financial statements and
this combined management report.
Net financial debt²
Rackwitz
[German Public Auditor]
of which:
Goodwill
Other intangible assets
Property, plant and equipment
Current assets
of which:
Inventories
Non-current assets
Trade accounts receivable
Equity
Financial liabilities
Non-current
Current
Liquidity
Investments in intangible assets³
Investments in property, plant and equipment³
Cash and cash equivalents
Wirtschaftsprüfer
Total equity and liabilities
Earnings per share (in €)
330
Business Development 2014-2018
Business Development
2014-2018
This overview may include historically adjusted values in order to ensure comparability with 2018.
€ million
Results of operations
Net sales
Assets and liabilities
Operating result (EBIT)²
EBITDA²
Margin (% of net sales)²
Adjustments²
EBITDA pre²
Margin (% of net sales)2
Profit before income tax
Profit after tax
Margin (% of net sales)²
29.9%
29.5%
2,605
38,081
33.8%
36.7%
39.5%
46.7%
1,704
1.00
1,709
1,976
45.4%
2,108
5.6%
1.05
1.20
1.25
1,254
39,639
49,613
2,225
50,348
-33.9%
10,144
-72.9%
481
514
716
919
910
-0.9%
6,701
327
3,318
3,193
2,508
-21.4%
559
12,654
11,513
2,766
106
52,880
-2.2%
PRINTING
AC medienhaus GmbH
PAPER
Druckfein
FINANCIAL CALENDAR
for 2019
March
3/7/2019
Annual Press Conference
Leinhäuser Language Services GmbH
August
8/8/2019
April
4/26/2019
Annual General Meeting
November
11/14/2019
Quarterly Statement Q3
May
5/14/2019
Quarterly Statement Q1
E
Half-yearly Financial Report
51,713
TRANSLATION
Rüdiger Nehmzow (pages 44, 48-49)
331
332
Information and Service
Information and Service
The Annual Report for 2018 was published in German and
English. A fully navigable online version of the report along with
the consolidated financial statements is available on the Web at
ar.merckgroup.com/2018/. It has been optimized for mobile devices.
More information about Merck can be found on the Web at
www.merckgroup.com and in the brochure "Merck - Who we are",
which you may read or download at merckgroup.com/who-we-are.
You can order all publications from Group Communications,
Merck KGaA, 64271 Darmstadt, service@merckgroup.com.
Unsplash, Frank V. (pages 28-29)
Published on March 7, 2019 by
Merck KGaA, Group Communications
Frankfurter Strasse 250,
64293 Darmstadt, Germany
Telephone: +49 6151 72-0
E-Mail: service@merckgroup.com
Website: www.merckgroup.com
CONCEPT AND DESIGN
3st kommunikation GmbH, Mainz
www.3st.de
PHOTOS
Getty (pages 1, 10-11, 18-19, 20, 23, 26, 27, 33)
Konstantin Eckert (pages 12-17)
Mosa Meat (pages 34-35)
Fax: +49 6151 72-5577
392
132
179
7,237
-13.0%
2,990
4,008
4,231
4,512
4,811
8,317
6.6%
7,344
7,670
7,455
9,236
23.9%
1,660
2,610
10,480
2,609
9,980
5,702
38,258
35,621
36,888
3.6%
15,530
30,737
30,589
10,930
28,166
-1.8%
5,694
14,492
15,015
13,582
13,764
1.3%
27,652
2,632
2,764
5.0%
10,823
8,896
-17.8%
3,561
9,616
8,809
8,033
12,597
6,681
2,076
4,097
3,788
2,790
2,215
-20.6%
143
-16.8%
13,713
5,637
22.5%
2,220
2,738
2,889
2,923
2,931
0.3%
2,879
832
939
589
2,170
> 100.0%
11,801
12,855
14,050
14,066
17,233
26,010
Independent Auditor's Report
[German Public Auditor]
side effects
A wealth of knowledge thus lies
untapped in this data, and it can't
be examined and analyzed or col-
lectively leveraged in part because
the data isn't uniform. This is a re-
sult of common research practices:
One scientist enters findings in an
Excel table, while another researcher
collects data using a specialized soft-
ware program. Sometimes it's not even
possible to integrate data within a
single large institution. For instance,
one department in a cancer registry
may have developed a computer pro-
gram to record all the parameters
of its work, while another department
stores everything on the Internet in
a central database. In addition, scien-
tific journals currently contain the
most transparent publication of scien-
tific discoveries and the methods
used to obtain them, but they reveal
mainly only the findings; the data
itself is usually not accessible.
Syntropy aims to address this chal-
lenge in two steps. First, Syntropy will
help standardize data within organi-
zations, breaking down internal silos
and uniting disparate datasets in one
place. Second, Syntropy users will have
the option of engaging in secure, trans-
parent data exchanges, enabling oppor-
tunities for collaboration. Syntropy
users will be able to collaborate world-
"We are committed
to tailoring Syntropy
to meet the precise
needs of cancer
researchers and
clinical doctors."
STEFAN OSCHMANN
Chairman of the Merck Executive Board
-
DATA ACROSS THE GLOBE
IS PACKAGED DIFFERENTLY
wide in a structured form and
could be the source of a great knowl-
edge and developmental boost in
modern medicine.
The foundation of Syntropy is its plat-
form, based on Palantir Foundry,
which integrates different types of data
from across organizations and makes
it uniform. Syntropy's purpose is not
to market the data - ownership re-
mains with the users, generally re-
searchers and scientists. Instead,
Syntropy's business model consists of
selling software while fostering an
environment for collaboration through
the creation of a data ecosystem to
further scientific discovery. The idea
is that the platform expands on its
own once the scientific community re-
alizes how effective the tool is for
its work. "With Syntropy, we intend to
unlock the value of untapped data
A platform for the fight against cancer
BEYOND TOMORROW
33
and to enable the world's leading ex-
perts to collaborate in the fight
against cancer and other diseases,"
says Stefan Oschmann, Chairman
of the Merck Executive Board. Syntropy
could become not just a data eco-
system, but also a new "place to be"
for researchers: a place to meet
and support one another - prompted
by the exchange of data. Increased
networking among the scientific com-
munity would take the quality of
research and collaboration between
researchers to a new level.
EXTERNAL AND IN-HOUSE
DATA WILL BE AGGREGATED
SYNTROPY IS EXPECTED TO TAKE
RESEARCH TO A NEW LEVEL
Research institutions around the world
produce huge amounts of biomedical
data, but much of it is trapped in silos
within and between institutions. For
example, data may be stored in cen-
tral cancer center registries, collected
in research projects, or produced as a
result of clinical trials. This critical
data is often inaccessible to the scien-
tists and clinicians who need it to
advance their own work as well. En-
abling the global scientific community
to integrate, analyze and collaborate
on this data could help us develop
a more accurate picture of the human
body and its diseases. Finding simi-
larities, parallels or differences in vari-
ous genes and disease variants could
unlock valuable discoveries.
How does cancer develop? How can it
be prevented? And which treatment is
particularly effective in which patients
and for which kind of cancer? Despite
significant scientific gains in recent
years, there are still few answers to
these critical questions. Advances
in medical research have generated a
tremendous amount of knowledge
about diseases, their development and
the treatments for them, but the full
potential of this knowledge has not yet
been tapped.
As announced by Merck and the U.S. company Palantir
Technologies, their Syntropy joint venture seeks to network
research data around the world and enable scientists to
collaborate more effectively.
Diabetes is, however, not the only field of application
for Bioling's tiny sophisticated sensors. Because
the sensors can potentially also detect ketone and
lactate levels in the future, they can also be used
to analyze the influence of nutrition and physical
activity on health. As a result, Bioling can also
contribute to weight loss and the promotion of a
healthy lifestyle. And that is just the beginning.
Each Nectar patch contains dozens of sensors that
allow for each patch to analyze several biomarkers.
M Venture's investment in Bioling is more than just
a strategic move to help Merck gain a foothold in the
growing field of what is known as biosensoring; in
the medium term, a paradigm shift in medicine initi-
ated by Biolinq could well be on the horizon - a
shift toward needle-free blood monitoring.
Liquid biopsy
Sometimes, a needle
prick can also
make everything easier.
As noted, daily needle pricks can be a burden for a
diabetic. But there are other patients for whom a blood
sample can bring genuine relief – in particular when so
much information can be derived from the blood drawn
that complex diagnostic procedures and therapeutic
failures can be avoided. For example, within the concept
of personalized medicine, many types of cancers are
now treated with highly specialized therapeutics. But
that requires precise knowledge of the characteristics
of the tumor cells and their genetic basis. In some types
of cancer, the tumor is positioned in such a way that
a needle biopsy is risky. One way to get around this is
a liquid biopsy, in which traces of mutated genetic
material of cancer cells are detected in the blood.
That is precisely the focus of the research collaboration
Merck began in 2016 with Biocartis, a Belgian mole-
cular diagnostics company. This collaboration is already
seeing results: In November 2017, Biocartis and Merck
were proud to announce the CE-IVD marking for their
first two fluid biopsy tests, the Idylla™ ctKRAS Mutation
Assay and the IdyllaTM ctNRAS-BRAF Mutation Assay.
Together, they detect 44 mutations of colorectal cancer
tumor cells that are relevant for choosing the appropri-
ate treatment. "With these tests, we can help patients
with colorectal cancer around the world," explains Erwin
Sablon, Head of Research and Development at Biocartis.
"With these tests,
we can help patients
with colorectal
cancer around the
world."
ERWIN SABLON
Head of Research and Development at Biocartis
The tests are based on Biocartis' Idylla™ platform,
a fully automated molecular diagnostics system. It
integrates all the sample preparation steps and pro-
vides doctors with sameday results of the desired test.
This enables quicker access to the right treatment
for patients - and as such they can benefit from further
progress in personalized medicine.
BEYOND TOMORROW
A platform for the fight against cancer
A platform for the
fight against cancer
The fact that Syntropy may simplify
this exchange of information creates
immense opportunities - if only be-
cause of the sheer amount of data that
exists. Genetic material is a good ex-
ample: At the turn of the millennium,
hundreds of scientists worked to-
gether for years on the Human Genome
Project to sequence the first human
genome. Today, machines can comple-
tely sequence a human genome
for less than $1,000 in three days.
The information obtained this way
is increasingly being used to guide
decisions about treatment. For in-
stance, a tumor disease has between
1,000 and 10,000 gene changes. If
the critical points are known, medica-
tions can be chosen that are particu-
larly effective. This breakthrough would
not be possible without collaborative
efforts within the scientific community,
and while we can't predict what the
future outcomes created from Syntropy
will be, we are optimistic about the
possibilities.
Syntropy will drive the creation of
new knowledge and accelerate scien-
tific discovery.
"Syntropy aims to
help researchers
collaborate securely
If, in ten years' time, the aim
is for 100 million people all
around the world to eat Mosa
Meat's ground beef...
MARK POST
Mark Post (61) is the founder
of Mosa Meat. He and his team
have big plans. In the following
four short scenarios, he looks
at a future with "clean"
hamburger meat.
If, as a developer of
"clean" meat, you could
make one wish...
If, one day, there is a clear
global demand for "clean" meat
that does not require killing
animals...
THEN
...then the overheated production of meat will have
a major negative impact on climate change and
the food security of the soon-to-be ten billion people
on this planet. This in turn will make meat a rare,
expensive, and thus exclusive product for those who
can still afford it.
...then we have to ensure that our ground beef
doesn't cost any more than products that are
still produced with meat from slaughtered animals.
It is also important to us that our production pro-
cesses use resources sparingly and respect the envi-
ronment. What we also need is sales staff who
know how our ground beef is made and understand
the philosophy behind the process.
...then I'd wish that everyone who is interested in
our hamburgers already had the opportunity to
sink their teeth into one. We could then demonstrate
even more convincingly that our concept works.
...then we will be able to see a positive impact very
quickly. We anticipate that "clean" meat production
will require 90% less grazing land and water. Energy
consumption for meat will fall by 60% and green-
house gas emissions will also decrease significantly,
as there will be fewer herds of cattle emitting meth-
ane, which is very harmful to the global climate.
36 BEYOND TOMORROW
New heroes wanted
New Heroes
wanted
The world is facing numer-
ous challenges, not least
because the global popula-
tion is growing rapidly.
Greater scientific and tech-
nical progress is more
important than ever. So
who are the new heroic
researchers who are bold
enough to tackle big chal-
lenges? Merck wants to
find them - and support
them with the Future
Insight Prize.
C
not ensure that a greater share
of the world's meat is produced
without large-scale livestock
farming...
Another major advantage of Nectar over the tradi-
tional method of analyzing blood sugar levels with
a drop of blood is that it measures continuously.
There are other alternatives (traditional CGMS) that
enable continuous measuring, such as sensors
implanted under the skin, but in contrast to Nectar,
those methods always involve a foreign body under
the skin, and that can cause problems. Nectar is cur-
rently being validated and optimized in clinical
trials with patients and is expected to be approved
and launched commercially in the coming years. Kli-
phuis says the results so far are impressive.
If, in the near future, we do
35
to realize the value
of scientific data,
driving discoveries
that will deliver
better treatments
to patients faster."
ALEXANDER KARP
Palantir Technologies co-founder and CEO
34
BEYOND TOMORROW
Real meat without the side effects
Real Meat
without the
Meat consumption around the world continues to rise,
with negative consequences for animals, the earth's
climate, and the environment. Should meat be banned?
That's unrealistic. A better solution is to develop meat
for which no animals have to be slaughtered. Mosa Meat
is working on that. It won't be long before the Dutch
company introduces the first cultured hamburger to the
market. Delicious, affordable - and "clean".
When Mark Post eats a juicy prototype
hamburger from his own manufacture,
it's not just because it tastes good:
he also sinks his teeth in for scientific
reasons. For nearly 13 years, Post,
who is Professor of Pharmacology at
the University of Maastricht, has been
conducting research on meat for which
no animal has to die. This was the
idea behind the company Mosa Meat,
which Post founded in 2015 and in
which Merck's venture capital fund
M Ventures has an equity stake. And
the idea is now on the verge of a
breakthrough: In 2021, Post is aiming
for the market launch of his ground
beef made from cultured meat. Al-
though there are still challenges to
overcome, Mark Post is optimistic:
"We intend to fulfill our mission
of making meat more sustainable,
healthy, and animal-friendly."
But how can you produce real meat
without slaughtering animals? There
are two key steps: First, researchers
take animal muscle cells which have
the function of creating new muscle
tissue when the muscle is injured,
and cultivate them in a bioreactor,
allowing them to proliferate until there
are trillions of cells. Second, when
researchers stop feeding the cells, they
naturally merge to form myofibers.
Under specific conditions, these pri-
mary myofibers increasingly put on
bulk and lengthen, until these strands
of muscle tissue naturally - without
genetic tricks - form the shape of what
we intend to produce: meat. This
process is not automated yet, so the
price of the cultured ground beef
is still expensive. Furthermore, fetal
bovine serum is traditionally used
to feed the cells, and the process to
extract it is not in line with stan-
dards of the developers at Mosa Meat.
For this reason, Mosa Meat is research-
ing sustainable solutions that would
eliminate animal products from the
production process. In light of this, the
M Ventures investment could also
lead to a strategic partnership: Merck
has immense expertise in cultivating
cells and developing bioreactors, and
could help Mosa Meat master these
challenges.
Burger with patty
made by Mosa Meat
Alexander Hoffmann is a member of
the New Businesses Team at M Ven-
tures and a member of the Mosa Meat
Board of Directors since Merck in-
vested in the company. He believes
strongly in the great significance of
Post's innovation: "It is clear that our
global hunger for meat is leading to
increasingly greater problems," he says.
In addition to the issue of animal
welfare, the demand for meat requires
grazing land for large-scale livestock
farming, wastes water, drives climate
change, and worsens global injustice.
"The solution is not to ban the con-
sumption of meat, but to promote al-
ternatives," Hoffmann explains. He
believes Mosa Meat burgers offer ex-
actly that: a promising way to over-
come the meat dilemma.
Real meat without the side effects
BEYOND TOMORROW
IF
Investment Director of M Ventures
and Bioling Board Member
32
"Bioling is on the verge
of improving and
simplifying the lives
of millions of people
living with diabetes with
just a small patch."
Beyond
29
BEYOND TOMORROW
3
BEYOND TOMORROW
28
as US$ 150 billion
into its domestic industry - a
significant part of which should
flow into the chip industry -
offering opportunities for Merck.
The Chinese government
intends to invest as much
High-tech materials
from Merck are essential
for the manufacture
of powerful microchips.
According to Winnie Hui, partners who set up local
production operations are our most important
customers, yet regulatory institutions are also key,
since they have and exert a lot of regional
influence in shaping requirements from central
government. She also expects to see mergers
between local companies: "If we want to stay suc-
cessful in this competitive environment, we have
to be agile and maintain our high pace."
-
Winnie Hui sees the development of local production
as a key prerequisite for maintaining successful
business relationships with national and international
customers in China in the future as well. This is
only logical, since Merck focuses on long-term part-
nerships in its business and will continue to supply
specialized materials and customized solutions that
require a great deal of technical expertise.
CONTINUOUS TECHNOLOGICAL ADVANCES
HELP SHAPE THE INDUSTRY
27
VIBRANT CHINA
Semiconductors as a new driver of growth
EDWARD KLIPHUIS
tomorrow
Can pandemics be predicted? How does smart-
phone glucose monitoring work? Where will
our meat come from in the future? How can we
better connect researchers with each other?
Technology megatrends such as big data, the Inter-
net of Things and artificial intelligence call for in-
creasingly smaller but more powerful microchips.
These technology megatrends are also driving
the growth of the materials market. If China evolves
into a leading microchip manufacturer and in-
creases its domestic IC production, demand for high-
tech materials will continue to rise. Merck is regar-
ded as the global technology leader for many of these
high-tech products. Its portfolio includes, among
other things, high-precision materials and solutions
based on colloidal silicon dioxide as well as process
and deposition materials. Merck has developed ma-
terials in which polymers arrange themselves along
the conductive structure to address the miniatur-
ization process. This directed self-assembly (DSA)
technology, as it's called, is used in the computer
chips of tomorrow.
30
31
If you want to actively shape the future, you
need to ask the right questions.
BEYOND TOMORROW
The needle-free sensor
So the new development from Bioling - a U.S.-based
company backed by M Ventures, Merck's venture
capital arm - could improve the lives of many people.
Nectar, the name of this revolutionary product,
looks like a patch the size of a euro 50-cent coin. It
contains tiny sensors that, when applied to the
skin, analyze what is known as the interstitial fluid
directly beneath the top layer of the skin. This fluid
is not within skin cells or other cells, but in the space
between cells. The sensors currently measure glu-
cose, but in the future could measure a number of
things, such as lactate and ketone levels. Studies
have shown that measuring glucose in the interstitial
fluid leads to even more precise results than inter-
stitial fluid from the subcutaneous tissue, where tradi-
tional Continuous Glucose Monitors (CGMs) operate.
Would you prick yourself with a needle 100 times
to maintain your own health? And what about
1,000 times? Or tens of thousands of times? That's
a lifetime's number of needle pricks for many of
the 380 million people suffering from diabetes. Yet
the concentration of blood sugar, or glucose, must
be monitored regularly in order to minimize the long-
term complications of diabetes, such as increased
atherosclerosis and nerve disorders. And so far, moni-
toring requires a drop of blood - every single time.
So most patients prick themselves several times a
day, their entire lives. Over time, this is not only
extremely bothersome; it also has a negative effect
on their quality of life.
Bioling, a portfolio company of the
Merck venture capital arm M Ventures,
is on the edge of a breakthrough that
could not only significantly improve the
lives of people suffering from diabetes,
but medical diagnostics as a whole.
physiology
Moreover, Nectar is not only affordable, it is also
easy to use. It is completely pain-free, can remain
on the skin for more than seven days, and sends
the data wirelessly to a smartphone. The app that
goes along with it is also easy to use. "Bioling is
on the verge of improving and simplifying the lives
of millions of people living with diabetes with just
a small patch," explains Edward Kliphuis, Bioling
Board Member and Investment Director of M Ven-
tures.
Ketone
Lactat
Glukose
BEYOND TOMORROW
8
The
needle-
free
sensor
221 Mg/dl 8 Mg/dl
The needle-free sensor
Governance
200
201
Consolidated Statement of
163-196
Capital Structure and Corporate Bodies
of Merck KGaA
165
201
Consolidated Balance Sheet
Consolidated Income Statement
Letter from Stefan Oschmann
43
Comprehensive Income
197-321
Report on Expected Developments
TABLE OF CONTENTS ANNUAL REPORT
Corporate
Commercial Code (HGB)
Additional Information on Merck KGaA
in accordance with the German
156
154 Report in accordance with Section 315a
(1) of the German Commercial Code
(HGB)
150
Report on Risks and Opportunities
137
Corporate and Other
Performance Materials
To Our Shareholders
Healthcare
Consolidated
Financial Statements
Merck Shares
322
The Executive Board
Merck Group
Consolidated Cash Flow Statement
166
Statement on Corporate Governance
204
193
Report of the Supervisory Board
Consolidated Statement of Changes
in Net Equity
203
195 Objectives of the Supervisory Board
with respect to Its Composition and
Profile of Skills and Expertise
206
Notes to the Consolidated Financial
Statements
Responsibility Statement
Independent Auditor's Report
330
Business Development 2014-2018
332
Information and Service
Financial Calendar for 2019
* The management report of Merck KGaA has been
combined with the Group management report and
published in both the 2018 Merck Annual Report and
the annual financial statements of Merck KGaA. The
authoritative German versions of the annual financial
statements and the combined management report of
the Merck Group and Merck KGaA for 2018 have been
filed with the electronic German Federal Gazette and
are available on the website of the German company
register.
39
TABLE OF CONTENTS ANNUAL REPORT
TO OUR
SHAREHOLDERS
41-52
TO OUR
SHAREHOLDERS
43
Letter from Stefan Oschmann
48
50
Course of Business and Economic Position
In business terms, 2018 proved challenging, but we held up well over the
year. We also made decisions that will guide our future path and allow us to
generate profitable growth again in 2019.
Review of Forecast against Actual
Combined
Management
Report*
Shareholders
To Our
Annual Report
Table of Contents
TABLE OF CONTENTS ANNUAL REPORT
38
CO2-to-fuel converter - Generating fuel through
photocatalytic conversion of atmospheric CO2
(category: energy)
2022
Food generator - Technology to help feed the
world's growing population (category: nutrition)
2021
Multi-drug resistance breaker - Solving
the problem of antibacterial resistance to
multiple antibacterials (category: health)
2020
Pandemic Protector - Protection against newly
emerging pathogens and identification of an
active substance for the treatment or prevention
of disease (category: health)
2019
Merck plans to support
courageous projects
over the next years in
the following areas:
Future Insight Prize
http://futureinsightprize.merckgroup.com
to propose candidates of their own. The jury
comprises distinguished scientists and managers
both from Merck and from renowned academic
reseach institutions and other technology groups.
The exciting question is: Whose project will
receive this big boost? One thing is already cer-
tain: It will help a great idea continue to grow.
Merck will announce the winner of this prize in
the summer of 2019. Until then, a scouting team
will monitor scientific activity worldwide with the
aim of selecting potential candidates for the
award. Experts in relevant fields are likewise free
We're starting with a focus on progress in the
health category. The prize will be awarded to
scientists whose work enables the subsequent
development of a pandemic protection system.
This "dream product", which is not yet possible
with current technology, is intended to provide
faster protection against newly emerging patho-
gens. The aim of such a "pandemic protector" is
to analyze these pathogens in the shortest pos-
sible time and identify an active substance for the
treatment or prevention of disease to prevent
the outbreak of a new global epidemic.
AN OPPORTUNITY FOR VISIONARY IDEAS
Solutions for these mammoth challenges require
collaboration between many stakeholders from
politics, business and industry. But above all, we
need clever minds in research who can drive
forward progress in science and technology and
want to change the future for the better. Pre-
cisely this bold and inventive spirit is what Merck
wants to support. That's why we launched the
"Future Insight Prize" with an award of up to one
million euros annually. We'll be awarding it for
the next 35 years to promote groundbreaking
scientific innovations in the categories of health,
nutrition and energy.
In the not too distant future, almost ten billion
people will share the earth - most likely as soon
as the middle of the century. Two-thirds of the
population will move to the cities, many of which
are already reaching their limits. At the same
time, as the climate continues to warm, the effects
of climate change may become even worse in
some regions of the world. Where will the food
and energy for all the people come from?
How will healthcare be provided? How can we
make better use of limited resources such
as land and water?
37
BEYOND TOMORROW
New heroes wanted
GROWTH HAS ITS PRICE
We had a special year in 2018: The company commemorated an amazing
anniversary - 350 years of Merck. We were able to look back on a long his-
tory of contributing to the progress of science again and again. Above all,
however, we have been directing our focus on what lies ahead. After all, the
most important history remains the one we are writing today.
53-162
Business Developments
41-52
Letter from Stefan Oschmann
Sector-Specific Environment
-
-
-
111
104
Macroeconomic and
101
Report on Economic Position
99
People at Merck
91
Research and Development
81
Corporate Responsibility
72
Internal Management System
68
Strategy
61
Merck
55
about the Group
Fundamental Information
50 Merck Shares
The Executive Board
48
dear friends
55
43
Dear shareholders, dear
of March,
Life Science
•
Life Science plays a leading role in attractive markets, and we want it to stay
that way. This is the reason we are strengthening fast-growing business
areas such as bioprocessing technology for the manufacturing of medicines.
It is also the reason we are pushing promising new technologies such as our
BioContinuum Platform. It will help us to significantly simplify the complex
process of producing biological medicines over the coming years as well as
accelerate it.
In Healthcare, we continue to pursue our long-term goal of becoming a
global specialty innovator. To this end, we focus on oncology, immuno-on-
cology and immunology. Our pharma pipeline harbors great potential, which
we want to harness further in 2019 and beyond, also in collaboration with
strong partners.
This is good news for Merck because we are helping to shape all these devel-
opments. Science is at the heart of everything we do. It forms the basis for
the technologies we get off the ground. Every day, our more than 7,000
researchers work to push the boundaries of the possible.
Letter from Stefan Oschmann
To Our Shareholders
46
45
3 Dow Jones European Chemical Index.
2 MSCI European Pharma Index.
1 Excluding the Consumer Health business divested in 2018.
At the same time, more and more items in our everyday lives will be inter-
connected. The Internet of Things is becoming a reality, and unimagined
possibilities are emerging in almost all areas of our lives.
Falling equipment costs, improved access to knowledge and new financing
options will raise scientific research and development to a completely new
level. It will, for example, become easier for smaller biotech companies to
bring new technologies and therapies to market maturity with greater
speed.
•
• Precision medicine will profoundly change the entire healthcare sector. New
technologies and high-performance data analyses will enable us to gain
an ever greater understanding of serious and complex diseases. Looking
ahead, we will be able to tailor medicines even more exactly to the needs
of each patient.
Once again, there is much to do for us this year. The markets and industries
in which we operate continue to develop at a rapid pace.
As you can see, we achieved a solid result in 2018. This result is largely thanks
to our employees. Numbering some 52,000 worldwide, they worked hard and
achieved much in 2018. On behalf of the entire Executive Board, I would like
to express my heartfelt thanks for their extraordinary dedication.
Merck shares essentially closed out the year 2018 at the level they recorded
at the start of the year. The shares performed well when compared with the
sector, particularly in the fourth quarter, and closed out the year above the
relevant benchmark index for the pharmaceutical industry² and well above
the relevant chemical industry index³ and the German benchmark DAX index.
For 2018, we will propose to the Annual General Meeting a dividend of € 1.25
per share.
Our Group sales in 2018 showed a slight increase of 2.2% to € 14.8 billion¹,
supported primarily by the Life Science and Healthcare business sectors.
EBITDA pre, the key performance indicator to measure our operations,
dropped by -10.5% to € 3.8 billion¹. There are several reasons for this decline:
Last year, we invested in research and development as well as the market
launches of the new products in our pharmaceutical business. Our Liquid Crys-
tals business recorded further price declines. For the most part, however,
the decline in earnings was due to negative foreign exchange effects that
are primarily attributable to movements in the currencies of various growth
markets. Over the past year we reduced our debt load by € 3.4 billion and
thus reached our target for 2018, which was to achieve a net financial debt
to EBITDA pre ratio of less than two.
Letter from Stefan Oschmann
To Our Shareholders
Chairman of the Executive Board and CEO
Stefan Oschmann
44
Letter from Stefan Oschmann
• In our Healthcare business sector, we presented a number of results from
clinical studies involving our drug candidates. Not all of the studies achieved
the results we had hoped for; this is normal when developing innovative
medicines. We gained many important insights that will help us streamline
the development of our Biopharma pipeline. One further key milestone was
the FDA's acceptance of our application for market approval of cladribine
tablets as a potential treatment for relapsing-remitting multiple sclerosis.
Finally, we also further refined our focus on innovation-driven businesses
through the sale of the over-the-counter products business (Consumer
Health).
To Our Shareholders
In the Performance Materials business sector, we have developed a new
strategy and restructured our organization. With the help of our multi-year
"Bright Future" transformation program, we will implement our new strategy
and create the basis for future profitable growth beyond 2019. Our goals in
taking this step are to sharpen our focus on our customers' needs as well
as to centrally decide on the assessment of projects and the related use
of resources as part of an integrated approach to research and development.
In Performance Materials, we aim to expand our position as a leading solutions
supplier for the electronics industry. The electronics sector is considerably
benefiting from the megatrends of digitalization, mobility and urbanization.
It services a broad range of different customers, making it less susceptible
to the ups and downs of individual markets. In particular, our business with
semiconductor materials will continue to advance Performance Materials over
the long term.
At Merck, we are also working on technologies of the future beyond our three
business sectors.
The announced Syntropy joint venture we plan to create with Palantir Tech-
nologies represents a particularly exciting project. Syntropy aims to markedly
accelerate cancer research. To achieve this, the large volume of biomedical
data being collected by scientists and physicians worldwide every day plays
a key role. This data may prove very valuable to science. Far too often, how-
ever, it's not accessible to the scientists who need it. We aim to change this
through Syntropy. We want to enable researchers to structure and analyze
data from various sources through the use of pattern recognition. In addition,
it is planned that scienctists can securely exchange data in a traceable manner
while retaining control of their own data at all times.
Syntropy is a project with considerable potential, an attribute it shares with
other issues of the future - for example, new interfaces between the human
body and the digital world and new technological approaches for liquid biopsy
or for the biotechnological production of meat. Please see the magazine section
of this Annual Report for more information on these issues.
Growth in our Life Science business sector continued to perform above the
market. We have further expanded our position as the most profitable
technology and solutions supplier in the life science industry. We recorded
particularly strong sales growth in our Process Solutions area, where we
offer leading-edge processing technologies for biotech and pharmaceutical
companies as well as products critical to the advancement of cell and gene
therapy. Moreover, our e-commerce platform made a significant contribution
to business growth.
.
Corporate Responsibility
16.1%
Europe (excl. Germany/UK)
28%
Value
35.6%
United States
Source: Nasdaq Shareholder Identification. Total number of shares outstanding: 129.2 million.
Source: Nasdaq Shareholder Identification.
1%
Other
32%
Growth
17%
GARP (Growth At
Reasonable Price)
COMBINED MANAGEMENT
REPORT*
53-162
Report on Economic Position
REPORT*
55
Fundamental Information
about the Group
55
Merck
61
Strategy
68
Internal Management System
72
99
COMBINED MANAGEMENT
Research and Development
101
We are Merck, a vibrant science and technology company. Science is
at the heart of everything we do. It drives the discoveries we make
and the technologies we create. Our work makes a positive difference
in millions of people's lives every day.
Merck
Fundamental Information
about the Group
55
Merck
Fundamental Information about the Group
Combined Management Report
The separate, combined non-financial (Group) report of Merck KGaA, which we issue pursuant to sections 289b-289e and 315b-315c HGB, is available as online version on
our website as of April 15, 2019 at https://www.merckgroup.com/en/cr-report/2018/. It is integrated into the 2018 Corporate Responsibility Report in accordance with DRS 20
subsection 252 (b). We have prepared an overview of the information contained in the combined non-financial (Group) declaration at https://www.merckgroup.com/nfr18.
The figures presented in this combined management report have been rounded. This may lead to individual values not adding up to the totals presented.
This combined management report contains certain financial indicators such as operating result (EBIT), EBITDA, EBITDA pre, business free cash flow (BFCF), free cash flow, net financial
debt and earnings per share pre, which are not defined by International Financial Reporting Standards (IFRSS). These financial indicators should not be taken into account in order to
assess the performance of Merck in isolation or used as an alternative to the financial indicators presented in the consolidated financial statements and determined in accordance with
IFRSS.
*The management report for Merck KGaA has been combined with the Group management report and published in the 2018 Merck Annual Report as well as in the annual financial state-
ments of Merck KGaA. The annual financial statements and the combined management report of the Merck Group and Merck KGaA for 2018 are filed with the electronic German Federal
Gazette (elektronischer Bundesanzeiger) and are available on the website of the German company register.
Additional Information on Merck KGaA
in accordance with the German
Commercial Code (HGB)
156
Report in accordance with Section 315a (1)
of the German Commercial Code (HGB)
154
Report on Expected Developments
150
Report on Risks and Opportunities
137
- Corporate and Other
People at Merck
91
- Performance Materials
- Life Science
111
81
- Healthcare
In Healthcare, we discover unique ways to treat the most chal-
lenging diseases such as multiple sclerosis and cancer. Our Life Science
experts empower scientists by developing tools and solutions that help
deliver breakthroughs more quickly. And in Performance Materials,
we develop science that sits inside technologies and changes the way
we access and display information.
Index
Everything we do is fueled by a belief in science and technology
as a force for good. A belief that has driven our work since 1668 and
will continue to inspire us to find more joyful and sustainable ways
to live. We are curious minds dedicated to human progress.
In November, we announced the intent to form a joint venture
under the brand name Syntropy, a joint venture with technology and
software company Palantir Technologies. Syntropy is expected to
empower scientists and research centers with a collaborative tech-
nology platform to advance cancer research, help drive scientific
discovery and improve human lives.
Macroeconomic and Sector-Specific Environment
104
Review of Forecast against Actual Business Developments
In addition, we launched two new technologies at the annual
meeting of the European Society of Human Reproduction and Embry-
ology (ESHRE) in Barcelona. Our connectivity platform QBOX IVF
streamlines the data transfer between lab instruments and electronic
medical records, improving data management across the clinic. GeriⓇ
Assess 2.0 extends our innovative software portfolio, enabling auto-
matic detection of key events in embryo and blastocyst development.
The Pergoveris® Pen is the first product with a combination of
recombinant follicle-stimulating hormone (FSH) and recombinant
luteinizing hormone (LH) in a ready-to-use liquid version, eliminating
the need for mixing. It thus provides an improved and convenient
treatment option for women with severe deficiency of both FSH and
LH, a group of patients that is difficult to treat. Launches will con-
tinue. The number of countries in which PergoverisⓇ Pen has launched
reached 13 in 2018 and we will continue to provide patients with
access to this innovative therapeutic.
Being the global market leader in fertility drugs and treatments,
with a unique and broad portfolio from therapeutics to technologies,
our Fertility franchise is an important growth driver for our Biopharma
business. Infertility represents an increasing challenge globally due
to demographic changes and growing lifestyle trends like delayed
childbearing. In this highly specialized market, the focus lies on
quality, standardization and outcomes. With our portfolio we are
confident of being well-equipped to face the challenges in this field,
aiming to be the preferred fertility treatment partner of our custom-
ers and offering innovative solutions across therapeutics, lab tech-
nologies, connectivity and services.
Earlier pipeline highlights included the presentation of new data for
M7824 (TGF-B-trap/anti-PD-L1) in a range of tumors, adding to
existing evidence for the potential of this bifunctional immunotherapy
and supporting our plans to continue its exploration in advanced solid
tumors and ongoing cohort expansions. Additionally, in August we
initiated a trial to investigate M7824 compared with pembrolizumab
as a first-line treatment in patients with PD-L1-expressing advanced
non-small cell lung cancer (NSCLC). In December, the FDA granted
orphan drug designation to M7824, its first regulatory designation,
for the treatment of biliary tract cancer (further details can be found
under "Research & Development"). Data shared for oral MET inhib-
itor tepotinib included positive results in NSCLC and advanced hepa-
tocellular carcinoma (HCC). We are currently assessing the potential
of investigating tepotinib in combination with novel therapies for the
treatment of advanced HCC after the two HCC Phase II trials met
their primary endpoints, with clinical activity and safety demon-
strated both as first-line and second-line treatment. Both M7824 and
tepotinib were discovered in-house at Merck.
We are continuing to explore all potential options and have entered
into a number of strategic collaborations to evaluate avelumab in
combination with a range of complementary oncology medicines
(further details can be found under "Research & Development"). Key
data from the JAVELIN program were presented at major medical
congresses in 2018, including the European Society for Medical
Oncology Congress (ESMO), where we shared promising new results
from the Phase III JAVELIN Renal 101 study evaluating avelumab in
combination with axitinib compared with sunitinib as initial therapy
for patients with advanced renal cell carcinoma.
The BavencioⓇ approvals were based on data from our compre-
hensive clinical development program JAVELIN, which currently
comprises at least 30 clinical programs, including several Phase III
trials and over 9,000 patients evaluated across more than 15 differ-
ent tumor types. In addition to MCC and UC, these cancers include
gastric/gastro-esophageal junction, head and neck, non-small cell
lung, ovarian and renal cell carcinoma.
Together with Pfizer Inc., we are developing much-needed new
treatment options for patients with hard-to-treat cancers. We have
made key progress in this area, with regulatory approvals in 46 coun-
tries for our anti-PD-L1 antibody avelumab under the brand name
BavencioⓇ. In 2018, approvals were granted in several countries
including Australia and Brazil for Merkel cell carcinoma (MCC), Israel
for both MCC and urothelial carcinoma (UC) and Canada for UC.
BavencioⓇ was initially granted two approvals in 2017 by the U.S.
Food and Drug Administration (FDA) for the treatment of adults and
pediatric patients 12 years and older with metastatic MCC and pre-
viously treated patients with locally advanced or metastatic UC.
These indications were approved under accelerated approval based
on tumor response rate and duration of response. Continued approval
for these indications may be contingent upon verification and descrip-
tion of clinical benefit in confirmatory trials. The prognosis for both
patient groups is very poor, so for patients around the world this may
represent a welcome new treatment option.
Erbitux® (cetuximab) remains the second-best-selling drug in terms
of revenue in the portfolio of our Biopharma business and is our
flagship product in oncology. Treating more than 900,000 patients
since authorization, the product is a standard of care for patients
with epidermal growth factor receptor (EGFR)-expressing, RAS wild-
type metastatic colorectal cancer (mCRC), as well as both recurrent
and/or metastatic and locally advanced squamous cell carcinoma
of the head and neck (SCCHN). We continue to invest in Erbitux®Ⓡ
and are committed to making it available to those patients it will
benefit most.
-
Merck
Fundamental Information about the Group
Combined Management Report
56
2 Merck also has employees at sites which are not fully consolidated subsidiaries. These figures refer to all people directly employed by Merck and therefore may deviate from figures in the
financial section of this report.
1The Consumer Health business was transferred to Procter & Gamble (P&G) on December 1, 2018, and was already classified as a discontinued operation according to IFRS 5 in April 2018.
With the completion of the sale, around 3,300 employees joined P&G.
In March, we announced positive Phase IIb data for the first
Bruton's tyrosine kinase (BTK) inhibitor to show clinical proof-of-
concept in relapsing MS, namely evobrutinib, a highly specific, oral
BTK inhibitor, and we further demonstrated our commitment to
improving the lives of people with MS and other chronic progressive
diseases via scientific advances and new data on our marketed and
pipeline therapies (further details can be found under "Research &
Development").
2018 also saw further launch progress of MavencladⓇ (cladribine
tablets), with approvals encompassing more than 40 countries. In
addition, in July, the FDA accepted the resubmission of the New Drug
Application (NDA) for cladribine tablets. The acceptance indicates that
the FDA found the company's resubmission sufficiently complete to
permit a substantive review. We view MavencladⓇ as a complementary
new oral treatment option in our MS product portfolio. Our MS treat-
ment Rebif® is and remains a well-established therapy.
2018 marked the 20th anniversary of the European Commission's
approval of our top-selling product Rebif® (interferon beta-1a), a
disease-modifying drug used to treat relapsing forms of MS, acting
in a way similar to that of interferon beta protein produced by the
human body. RebifⓇ, which was approved in Europe in 1998 and in
the United States in 2002, is registered in more than 90 countries
worldwide. Rebif® has been proven to delay the progression of disa-
bility, reduce the frequency of relapses and reduce magnetic resonance
imaging (MRI) lesion activity and area.
Our Biopharma business discovers, develops, manufactures and mar-
kets innovative pharmaceutical and biological prescription drugs to
treat cancer, multiple sclerosis (MS), infertility, growth disorders as
well as certain cardiovascular and metabolic diseases. Biopharma
is the larger of our Healthcare businesses and operates in four fran-
chises: Oncology, Neurology & Immunology, Fertility and General
Medicine & Endocrinology. Our R&D pipeline positions us with a clear
focus on becoming a global specialty innovator in oncology, immuno-
oncology and immunology including MS.
BIOPHARMA
Europe and North America generated 58% of Healthcare's net sales
in 2018. In recent years, we have steadily expanded our presence in
growth markets. In 2018, Asia-Pacific and Latin America accounted
for 35% of sales.
Our Healthcare business sector comprises the two businesses Bio-
pharma and Allergopharma. On December 1, our Consumer Health
business tranferred to Procter & Gamble (P&G). Since 2015, Belén
Garijo has been CEO of the Healthcare business sector and member
of the Executive Board. In 2018, Healthcare generated 42% of Group
sales and 37% of EBITDA pre (excluding Corporate and Other),
making it the largest of our three business sectors. The regions
Healthcare
Apart from our three business sectors, our financial reporting
presents the five regions Europe, North America, Asia-Pacific (APAC),
Latin America as well as Middle East and Africa (MEA). As of Decem-
ber 31, 2018, we had 51,749 employees worldwide¹, which compares
with 52,941 on December 31, 2017.²
We hold the global rights to the Merck name and brand. The only
exceptions are Canada and the United States. In these countries,
we operate as EMD Serono in the biopharmaceutical business, as
MilliporeSigma in the life science business and as EMD Performance
Materials in the high-tech materials business.
19%
3%
Hedge
10.3%
Germany
Merck Shares
To Our Shareholders
Merck Shares
At a glance
The performance of Merck shares was, on the whole, characterized
by volatility in 2018: Following a downswing in the first quarter amid
a market setting that came under visible pressure, the share price
staged a recovery by the year-end. The Merck share price remained
almost unchanged over the previous year at +0.26%, finishing the
year at € 89.98. The shares substantially outperformed the relevant
reference indices, which all recorded a downswing during the same
period. When compared with the DAX® reference index, which fell by
around 18% during the period as a whole, the Merck shares performed
just under 19 percentage points better. Their outperformance vis-à-vis
the relevant chemical industry index, which fell by almost 16% in
2018, was around 16 percentage points. The pharmaceutical industry
index declined by around 3% in 2018, thus underperforming Merck
shares by 3 percentage points in the same period.
In 2018, the Merck Executive Board and the Investor Relations team
gave in-depth briefings to more than 660 investors at investor con-
ferences as well as during roadshows and conference calls.
The average daily trading volume of our shares increased by 23%
from approximately 474,000 in 2017 to over 584,000 in 2018. The
North America region continued to dominate: its proportion of the
free float increased to around 36% (2017: 29%). By investor type,
growth and value investors dominated, as in the previous year. In
2018, growing interest could be seen among value investors, who
now hold approximately 28% of the free float. At the end of 2018,
the top five investors held around 28% of the free float (2017: 19%).
To Our Shareholders
Merck Shares
51
MERCK SHARES
Share price development from January 1, 2018 to December 31, 2018
in %
15
10
5
0
-5
- 10
-15
thin
-20
гори
Share price low March 26, 2018 → € 74.80
• Merck
• DAX®
MSCI European Pharma Index
Dow Jones European Chemical Index
Share price high December 3, 2018 → € 99.82
50
Jan.
49
To Our Shareholders
To Our Shareholders
Letter from Stefan Oschmann
To advance our research, we are present in all of the world's technology
regions, which, of course, today also means China. Alongside Germany, the
United States, and Israel, China has become a top location for science and
technology, and we are investing heavily in the country. Last November, we
announced the establishment of our new Innovation Hub in the southern
Chinese city of Guangzhou, one of the country's major technology hubs. We
are also stepping up our production in China: we operate one of our biggest
pharmaceutical production plants in the eastern Chinese city of Nantong.
Contributing to advancements in science and technology is a great opportunity
but it also comes with considerable responsibility. We strongly believe what
matters is not just what a company does, but also how it achieves its goals.
Our long history has taught us that sustainable business success always
derives from responsible conduct. I am very pleased we achieved a very
good fourth place in the 2018 "Access to Medicine" index for the second time
in a row. Every two years, experts from the Access to Medicine Foundation
compare the activities of the 20 leading pharmaceutical companies in this
area. Our fourth-place ranking is a gratifying recognition of our commitment
to improving access to healthcare for people in developing countries, and it
is a strong incentive for us to continue our efforts.
For us, scientific research and responsible entrepreneurship go hand in hand.
Only when combined do they enable technological advancement that benefits
all of us - our customers, our employees, society and, of course, you, our
shareholders.
Over the coming years, we at Merck want to develop breakthrough technolo-
gies that will make a substantial difference in the lives of millions of people.
This is what drives us, now and in the future.
Sincerely,
Stefan Suman
Dr. Stefan Oschmann
Chairman of the Executive Board and CEO
47
48
To Our Shareholders
The Executive Board
The Executive Board
Udit Batra
Member of the Executive Board
CEO Life Science
Marcus Kuhnert
Member of the Executive Board
Chief Financial Officer
Stefan Oschmann
Chairman of the
Executive Board and CEO
Kai Beckmann
Member of the Executive Board
CEO Performance Materials
Belén Garijo
Member of the Executive Board
CEO Healthcare
The Executive Board
- Merck Group
Feb.
Apr.
€
89.98
89.75
number
583,653
473,740
€ million
39,121
39,021
Market value of authorized shares5 (at year-end)
€ million
11,629
11,599
1 Share-price relevant figures relate to the closing price in XETRAⓇ trading on the Frankfurt Stock Exchange.
22018 dividend subject to approval by the AGM.
3 Based on the floor trading systems of all German exchanges and the regulated market on XETRA®.
*Based on the theoretical number of shares (434.8 million).
5 Based on the number of shares in free float (129.2 million).
Source: Bloomberg, Thomson Reuters.
MERCK SHARES
Identified investors by region as of December 2018
in %
16.2%
German Retail/Undisclosed
7.0%
Rest of World
14.8%
United Kingdom
MERCK SHARES
Identified investors by type as of December 2018
in %
87.90
Mar.
74.80
114.40
May
June
July
Aug.
Sept.
Oct.
Nov.
Dec.
Source: Bloomberg (closing rates).
52
MERCK SHARES
Key share price data¹
To Our Shareholders
Merck Shares
2018
2017
Dividend²
Share price high
Share price low
Year-end share price
Daily average number of Merck shares traded³
Market capitalization (at year-end)
€
1.25
1.25
€
99.82
€
Course of Business and Economic Position
Semiconductor Solutions, the second-largest business unit in
Performance Materials, supplies products for integrated circuits,
microelectronic systems, for antireflection coatings and for the min-
iaturization of transistor structures. Deposition materials and con-
ductive pastes for semiconductor packaging round off the portfolio.
We are continuously looking for new materials for metallization pro-
cesses with low resistance and various dielectric characteristics for
faster or better processors, servers and data storage density. Our
business with dielectric materials for spin-on procedures is growing
steadily. Furthermore, we are reporting rising demand for krypton
fluoride (KrF) thick film resists, an important material in the produc-
tion of 3D NAND staircase structures.
Combined Management Report
ConcorⓇ, containing bisoprolol, is the leading beta-blocker for
chronic cardiovascular diseases such as hypertension, coronary
artery disease and chronic heart failure. Euthyrox®, with the active
ingredient levothyroxine, is the worldwide market leader with a mar-
ket share above 40% for the treatment of hypothyroidism, a disease
with high prevalence but still low diagnosis rates in most emerging
markets. Glucophage®, containing the active ingredient metformin,
is the drug of choice for first-line treatment of type 2 diabetes. Dur-
ing 2018, several health authorities worldwide continued to author-
ize Glucophage® for prediabetes when intensive lifestyle changes
have failed. This indication for Glucophage® is now approved in
40 countries. Due to an increasing prevalence of diabetes we see
great potential for this product.
We also help to raise awareness and education in the areas we
operate in, such as thyroid diseases and diabetes. This is well demon-
strated by our active role in International Thyroid Awareness Week
and partnership with the International Diabetes Federation (IDF),
which serves as a basis for implementation of education and com-
munication activities emphasizing the importance of type 2 diabetes
prevention.
Earlier in the year we announced our collaboration with U.S.-
based Medisafe to help our cardiometabolic patients better manage
medication intake and adhere to prescribed treatment regimens. In
the countries of scope, Merck patients will have access to a customized
version of Medisafe's mobile platform that could combine reminders,
motivation and support systems, targeted content, coupons and
interventions in their local language.
SaizenⓇ (somatropin) is our main endocrinology product and is indi-
cated for the treatment of growth hormone deficiency in children and
adults. SaizenⓇ is delivered with the Easypod® electromechanical
injection device, the only growth hormone injection device of its kind.
Easypod® is able to wirelessly transfer data such as injection times,
dates and doses to the web-based software system Easypod® con-
nect, making it easier for healthcare practitioners and patients to
ensure adherence and reach their treatment goals.
CONSUMER HEALTH
Our Consumer Health business tranferred to P&G on December 1.
The cash purchase price was approximately € 3.4 billion. The trans-
action comprises the Consumer Health business in 44 countries with
more than 900 products and two production facilities in Spittal
(Austria) and Goa (India). Around 3,300 employees have transferred
to P&G. The successful completion of the transaction marks a further
step in our company's strategic focus on innovation-driven busi-
nesses.
ALLERGOPHARMA
Every day, more than 66 million patients around the world use
our trusted general medicine and endocrinology (GM&E) medications.
Today, Concor®, Euthyrox®, Glucophage® and SaizenⓇ are highly
valued brands and market leaders in many key markets around the
world. As a result, in terms of sales GM&E is the largest business
franchise of the Healthcare business sector, with strong growth in all
major therapeutic areas of focus, contributing significantly to the
overall profitability of Biopharma and Merck. Although no longer
patent-protected, the brand equity built over decades makes our
flagship products cornerstones for the treatment of chronic cardio-
vascular, metabolic and endocrine diseases.
Our allergy business Allergopharma is one of the leading companies
in the field of allergy immunotherapy (AIT) in Europe. For high-pre-
cision, effective allergy therapy, we offer comprehensive diagnosis
solutions as a basis for individual treatment concepts. Our AIT prod-
ucts concentrate on causal treatment of type 1 allergies such as
allergic rhinitis (for example, hay fever) and allergic asthma to meet
patients' needs. For AIT, strong evidence of efficacy and an accept-
able safety profile have been well-documented in allergy-induced
allergic rhino-conjunctivitis in numerous clinical trials. Furthermore,
there is a potential positive effect on the long-term course of the
allergic disease. AIT is designed to induce tolerance in the immune
system of the allergy patient to the allergy-triggering allergen, thus
potentially inducing an immune modification.
58
Combined Management Report
Fundamental Information about the Group
Merck
-
Life Science
In Life Science, we are a leading, global supplier of tools, high-grade
chemicals, and equipment for academic labs, biotech and biophar-
maceutical manufacturers, as well as the industrial sector. We make
scientific discovery easier and faster with technologies like CRISPR
for gene-editing; and we provide drug manufacturers with process
development expertise that make medicines safer and more effective
for patients. We offer both testing kits and services to ensure that
our food is safe to eat and water is clean to drink.
We offer high dosage, hypoallergenic, standardized preparations
for allergen-specific immunotherapy for pollen and house dust mite
allergies as well as a wide range of diagnostic allergy tests. Based
on long-standing expertise, scientific excellence and entrepreneurial
responsibility, we do our utmost to provide physicians with first-class
therapy options and help people with allergies lead more fulfilled lives.
Products of Allergopharma are available in 18 countries worldwide.
In Life Science, our purpose is to solve the toughest problems in
life science by collaborating with the global scientific community.
Since acquiring the chemical and technology company Sigma-Aldrich
in 2015, we have put a strategy in place that we continue to execute
today: complete the integration of Sigma-Aldrich; strengthen our
core businesses by delivering a broad and relevant portfolio to our
customers and establishing new pillars of growth in scientific areas
like cell and gene therapy and continuous bioprocessing. As ranked
by sales, the Life Science business sector of Merck has achieved a
top-three ranking in the global life science industry.
During the ESHRE meeting we also introduced our new online plat-
form, www.fertility.com. It is the gateway to two online portals: one
for healthcare professionals, offering the latest scientific information
in the advancing field of fertility, and one supporting women, men
and couples who are looking for information about fertility and/or
undergoing fertility treatment.
On October 26, the Surface Solutions business unit announced
that it would align itself even more closely with the needs of its
markets. The future business areas of Surface Solutions will be auto-
motive coatings, cosmetic solutions and industrial solutions.
Combined Management Report
62
Our Group Strategy considers certain foundational elements such as,
first and foremost, a risk diversification strategy that ensures that
we are not over-exposed to any single customer, industry or region.
We want to be a forward-thinking company generating long-term
sustainable value. We focus our efforts and activities on innovative
areas to add maximum value to the future of science and technology.
We continue to operate under our current ownership structure with
the Merck family, as a majority owner, and external shareholders.
We aim to maintain an attractive financial profile. M&A (mergers &
acquisitions) is an important part of our long-term value creation
strategy with a focus on innovation-driven technology. In 2018, we
further prioritized our activities in line with our strategic ambition to
become the vibrant science and technology company. This includes
the initiation of a new strategic approach in Performance Materials
focused on the expanding electronics market, optimizing R&D
through the efficient reallocation and adjustment of resources, and
increasing our customer focus. In Healthcare, in addition to the
aforementioned divestment of Consumer Health, we have continued
our strategy of becoming a Global Specialty Innovator through con-
tinued development and externalization of selected pipeline projects.
This way, we aim to ensure that promising products can be brought
to the market quickly for the benefit of patients everywhere. Life
Science is on track with the integration of Sigma-Aldrich and has
continued along the path of science and technology leadership
through its sustained investment and focus on its strategic initiatives
of Gene Editing & Novel Modalities, which includes gene editing tools,
viral and gene therapies, cellular therapies and RNA therapies, End-
to-End Solutions for Bioprocessing and Connected Labs.
THE ROADMAP
Strategically, what we have achieved is the transformation of a
classic chemicals and pharmaceuticals supplier into the vibrant sci-
ence and technology company with leading positions in Healthcare,
Life Science and Performance Materials. To further achieve our stra-
tegic goals from 2011-2017, we completed a transformation and
growth program known as "Fit for 2018", primarily targeting organi-
zational effectiveness and process optimization, and in the later years
new initiatives such as the commencement of our Merck Innovation
Center in Darmstadt, new product innovations and the new Merck
brand.
helped us further diversify our product portfolio that was strongly
driven by liquid crystals.
THE TRANSFORMATIONAL JOURNEY SINCE 2007
Throughout the past years, Merck has grown significantly through a
series of strategic moves that have enabled us to develop into the
vibrant science and technology company we are today. We have
systematically and continuously strengthened and focused our port-
folio of innovative science and technology throughout our business
sectors. In Healthcare we divested our Generics business (2007) to
focus on highly specialized products and acquired Serono (2007) to
expand our pipeline and strengthen our business. This focused
approach has continued until today with the divestments of the Bio-
similars business (2017) and Consumer Health business (2018), so
that we can increase our efforts on our Oncology, Immuno-oncology
and Immunology franchises. Within Life Science, we have signifi-
cantly transformed to become a diversified industry leader through
the acquisition of Millipore (2010) and Sigma-Aldrich (2015). We
continue to leverage the Sigma-Aldrich e-commerce platform to
expand our reach and leadership in the industry as well as investing
in strategic initiatives such as Gene Editing & Novel Modalities and
End-to-End Bioprocessing. During this time, Performance Materials
has continued to deliver profitable growth and a significant cash
contribution, and we evolved this business further into attractive
science and technology areas such as semiconductor materials
through the acquisition of AZ Electronic Materials (2014), which also
In the Surface Solutions business unit our goal is to help custom-
ers with our materials and solutions to make innovative surfaces of
all kinds more beautiful, more resistant or even more intelligent. Our
pearlescent pigments enable striking automotive coatings, fascinating
cosmetics, extraordinary packaging, innovative product design and
even unique food creations. With our functional solutions we serve a
large number of innovative applications, from dirt-repellent and easy-
care surfaces to laser markings of plastic parts and cables.
Group Strategy
We believe that scientific exploration and responsible entre-
preneurship are key to technological advances that benefit us all.
Our everyday decisions are guided by our company values. We want
to live courage, achievement, responsibility, respect, integrity and
transparency in every step we take, in every decision we make.
At Merck, we believe in the opportunities of science, the transforma-
tional power of technology and the endless possibilities to change
the lives of patients, researchers and customers. Our purpose is
"We are curious minds dedicated to human progress". Science is at
the heart of everything we do. It drives the discoveries we make and
the technologies we create, it inspires our ideas and drives our entre-
preneurial spirit.
General principles
61
Fundamental Information about the Group _ Strategy
Combined Management Report
Strategy
Together, we have defined the road ahead for Merck until 2022.
This strategy is based on our Group Foundation, external trends that
will impact our industry and a concrete map on how to reach our
future ambition.
Fundamental Information about the Group _ Strategy
Udit Batra was named CEO of the Life Science business sector in
2014 and was appointed to the Executive Board in 2016. In 2018,
Life Science generated 42% of Group sales as well as 44% of EBITDA
pre (excluding Corporate and Other).
Our e-commerce platform, sigmaaldrich.com, continues to grow
and connect customers in nearly every country with the products
needed to advance their research, development and production efforts.
In 2018, we implemented initiatives to optimize how our customers
search and find our products, engage with our content and make
purchasing decisions. With our teams' technical expertise and dedica-
tion to customer service, we continued to experience growth in both
user sessions and revenue. This was recognized with three external
awards.
Performance Materials
Our Performance Materials business sector comprises the specialty
chemicals business of Merck and supplies solutions for displays, com-
puter chips and surfaces of all kinds. Effective April 1, 2018, Performance
Materials comprises three business units: Display Solutions, Semi-
conductor Solutions and Surface Solutions. If we compare Performance
Materials with a smartphone, Display Solutions represents the user
interface, Semiconductor Solutions the intelligence and Surface
Solutions the aesthetics.
On July 3, the Performance Materials business sector presented
a strategy update explaining how, after 2019, it aims to achieve
average annual sales growth of around 2% to 3% with an expected
sustainable EBITDA pre margin of around 30%. We expect to be able
to more than offset the decline in our liquid crystals business for
displays with growth in the other businesses after 2019.
One pillar of the "Bright Future" transformation program is the
realignment of Research and Development (R&D) as presented at
the Capital Markets Day on October 16. In the wake of this realign-
ment, the business sector is seeking to align its resources more
60
Combined Management Report
Fundamental Information about the Group
We will continue to actively manage our comprehensive portfolio
by tapping into innovation and placing it in the best hands to con-
tinuously drive value for customers.
Merck
purposefully to the requirements of end customers. On top of this,
decisions on the evaluation of projects and the allocation of resources
are to be made centrally, and the business sector aims to push ahead
with integrated and interdisciplinary R&D.
We are currently undergoing a transformation in the Performance
Materials business sector with a view to adjusting to new market
realities and customer requirements. We are building the foundations
for the future. It is our strategic goal to return to sustainable profit-
able growth, to ensure an attractive margin and to remain compet-
itive as Performance Materials. In order to achieve this, we have to
optimize our cost base and to adopt our R&D ratio, which is far
beyond industry benchmark. Our goal is a ratio of R&D investments
compared to Sales of around 8%. This is at the upper end of what
comparable companies invest in Research and Development. We are
adjusting our cost structure in the Display Solutions and Integrated
Supply Chain business units as well as in Research & Development,
in particular.
The bond market additionally represents a key source of financ-
ing. The most recent bond issues took place in 2014 and 2015 in
connection with the acquisition of Sigma-Aldrich. They have terms
that run to 2025, with the first redemption options for hybrid bonds
in 2021 and 2024. The use of various instruments provides a broad
financing basis and addresses different investor groups.
Performance Materials accounted for 16% of Group sales in 2018
and its share of EBITDA pre (excluding Corporate and Other) was
19%. The EBITDA pre margin amounted to 32.7% of net sales.
Our Display Solutions business unit comprises the liquid crystals,
OLED (organic light-emitting diodes), photoresists and liquid crystal
windows businesses. Even though competition has intensified, we
defended our position as the global market and technology leader
in the display materials business in 2018. Modern, energy-efficient
technologies such as UB-FFS (ultra-brightness fringe-field-switch-
ing) have further established themselves on the market. We have
secured projects in the area of large-surface displays and for high-
resolution mobile devices for our product offerings of the newly
launched XtraBright™ brand.
The first commercial lighthouse projects in the architecture seg-
ment are running with our liquid crystal window modules. In October,
we launched our new product brand, eyrise™. Its launch follows the
opening of our production plant for liquid crystal window modules in
Veldhoven, the Netherlands, at the end of 2017. Our business with
photoresists for displays continues to consolidate thanks to proven
technical success in high-performance product lines, in particular.
This growth is supported by a strong position in new display produc-
tion lines on the growing Chinese market. As a result of continuous
improvements as well as substantial increases in the current lifetime
and efficiency of the OLED materials in our portfolios, these materials
have been selected for a large number of new devices being launched
on the market.
-
Materials for Directed Self Assembly (DSA) provide cost-effective
patterning solutions which enable further chip scaling. DSA combines
bottom-up with conventional top-down patterning. DSA uses a vari-
ety of different materials, in particular so-called block copolymers
(BCP) that consist of two continuous, linked strands of different
polymers. These BCPs have the ability to arrange themselves in even
shapes along the conductive structure under certain conditions. They
form the basis for the extremely fine transistors and printed circuit
paths for the computer chips of the future. Our technological com-
petence in combination with a strengthened supply chain have con-
tributed to this growth.
In October, we announced an agreement to sell our AmnisⓇ Flow
Cytometry and Guava® Technologies businesses to Luminex Corpo-
ration for € 63 million. The transaction transferred our flow cytometry
platforms Amnis and Guava as well as the associated reagents under
those brands. This included a portfolio of leading technologies serving
the research space.
In addition to awarding grants to academic institutions, our busi-
nesses also extend to the wider community through SPARK, our
global volunteer program. In 2018, through this initiative, nearly
1,700 employees volunteered nearly 9,000 hours to engage 66,500
students around the world in science learning. For the second year,
our Curiosity Cube™, mobile science lab toured North America,
traveling 30,000 kilometers and engaging approximately 36,000 stu-
dents at schools and city centers in 24 communities.
In the first quarter of 2018, we made the first of several invest-
ment announcements. In February, we invested €40 million in Asia,
which included an integrated cell culture facility in Songdo, Incheon,
Korea; a new manufacturing and distribution center near Mumbai,
India; and a single-use manufacturing facility in Wuxi, China.
The Songdo center includes cell culture media facilities (imMEDIAte
Advantage® Custom Media) and a logistics infrastructure to help
meet the rapid growth in the biopharmaceutical industry in Songdo
(Incheon, Korea). The new center in Mumbai, which is expected to
be completed in 2019, is being built to ensure that our customers
have ready access to the products needed to develop new therapies
and biosimilars to accelerate access to health.
In June, we announced expansion plans to our operations in
Gillingham, United Kingdom. The distribution center, which will grow
by 5,250 square meters, will supply the pharmaceutical industry, bio-
technology companies, research institutes and academic centers with
biochemical and chemical reagents, laboratory supplies and testing
services. The € 9 million investment will boost distribution capabilities
for the business. Anticipated to open in early 2019, the updated facil-
ity will serve as the primary distribution center for the United Kingdom.
In September, we established our first Mobius® single-use manu-
facturing facility in China to support the development of the bio-
pharma industry in the region. This facility, which is expected to be
operational by the first quarter of 2019, will provide flexible and
customized single-use solutions to support local customers in accel-
erating drug development and manufacturing.
In the second half of 2018, we opened a € 13 million (SG
$ 20 million), 3,800-square-meter laboratory in Singapore, the only
lab of its kind in Singapore and outside of the United States and the
United Kingdom. The lab will focus on biologics testing, which is a
major step in the drug development process.
In October, we also opened a new, 1,000-square-meter M Lab™
Collaboration Center in São Paulo, Brazil, to serve the Latin America
region. The lab, which is one of nine such centers around the world,
includes a non-good manufacturing practice (non-GMP) pilot and
bench scale labs for customers. This allows customers to engage in
process development support, troubleshooting, demonstrations and
hands-on training to explore new ways to increase productivity,
improve processes and mitigate risks.
In addition to new facilities, in 2018 we also announced a new
platform for our biopharmaceutical customers who manufacture
monoclonal antibodies. In the third quarter, we launched our Bio-
Continuum™ Platform, which addresses intensified bioprocessing and
continuous manufacturing. Continuous bioprocessing integrates the
typical batch-based, separate manufacturing steps into a connected
process, enabling a continuous flow from the addition of raw mate-
rials through product harvest, purification and testing. Pilot studies
suggest that conversion to such a manufacturing method may reduce
manufacturing costs by up to 50%.
A key goal for our Life Science business units is to help our cus-
tomers that manufacture drugs, from small to large innovator com-
panies, bring life-enhancing medicines and therapies to market - and
In 2018, we served as the exclusive sponsor of TeleScience, a
new online platform for Seeding Labs, an organization that provides
scientists in developing countries with lab equipment, training and
opportunities to collaborate with experts in their field. To date, our
partnership with Seeding Labs has enabled the organization to equip
65 universities in 34 developing countries with 77 shipments (con-
taining nearly 200 tons) of equipment, providing access to the global
scientific community and helping to accelerate scientific research.
Combined Management Report
Merck
59
to patients - faster. To facilitate reaching this target, we opened our
first BioReliance® End-to-End Biodevelopment Center in North Amer-
ica in June 2018. This center supplies drug manufacturers with com-
plete solutions for the development of cell lines, upstream processes
and downstream processes as well as production not subject to good
manufacturing practices, or non-GMP production. The facility is designed
to help customers with their biopharmaceutical manufacturing pro-
cesses and accelerate clinical development from DNA to market.
Today, 60% of drugs in the pipeline are being developed by biotech
start-ups focused on innovative therapies, including those intended
to treat niche diseases with small patient populations. These com-
panies are the focus of our global health commitment to support them
in bringing their drugs to market through our grant programs. Grants
provide these companies with free Merck products and services to
help accelerate market entry of new therapies. Through our Advance
Biotech Grant Program, every six months, three recipients around
the globe are awarded a total of € 200,000 in services and products
to address their process development challenges.
In February, we announced a two-year research collaborative
with Washington University in St. Louis, Missouri, United States, that
includes the use of our CRISPR genome-editing technology. The goal
of the research is to determine the differences between gut bacterial
communities in healthy and malnourished children, and to identify
what features of healthy intestinal bacteria are critical for supporting
healthy growth.
Further to these grants, in the second quarter of 2018, we
announced three new partnerships with leading academic institu-
tions. The first is a partnership with Oxford University's Jenner Insti-
tute, in the United Kingdom, which seeks to develop more robust
and scalable vaccine manufacturing processes. A second collabo-
ration, in addition to the aforementioned grant, is with Washington
University in St. Louis, Missouri, United States, to optimize nutritional
supplements to restore a healthy gut microbial community (micro-
biome). The third is a partnership with Tongji University in Shanghai,
China, for our CRISPR Core Partnership Program to provide the uni-
versity with exclusive access to our genome-editing technology and
comprehensive technical support.
Related to our advancements in CRISPR, in December we
announced a strategic alliance in the CRISPR/Cas9 rodent model
market with France-based biotechnology company genOway. Through
an exclusive worldwide license of our foundational CRISPR integra-
tion patents, genOway will develop new models and solutions allow-
ing non-profit and for-profit scientists to use CRISPR/Cas9 technol-
ogy. Under the agreement, genOway will also develop a network of
sublicensees in both the model creation and distribution businesses
and preclinical services for all potential applications worldwide, with
a strong focus on the United States, Asia and Europe.
Fundamental Information about the Group
From now until 2022, we categorize our strategy as a period of
growth and expansion, with all business sectors contributing to our
growth ambition. In order to achieve our strategic ambition by 2022,
we want to work on ensuring strong and innovative, specialty-focused
pillars with strong positions in our priority growth areas, such as
Oncology, Immuno-oncology and Immunology, Bioprocessing, and
Semiconductor Solutions.
Our portfolio comprises more than 300,000 products ranging
from lab water systems to genome-editing tools, antibodies and cell
lines, as well as end-to-end bioprocessing systems to support the
manufacturing needs of both emerging biotech and large pharma
companies. For example, our Life Science business sector has built
the expertise to further develop our BioReliance® End-to-End Solu-
tions, a service offering for process development and manufacturing
for emerging biotechs. Another example is BrightLabTM, our digital
ecosystem for complete lab management.
We expect the Performance Materials business sector to generate
an EBITDA pre margin of around 30% after 2019. The business
sector initiated the "Bright Future" transformation program. Besides
the ambition to get back to organic top-line growth, the program
focuses on resource allocation, process excellence and active port-
folio management.
66
Looking ahead, we expect our strategy to continue to deliver net
sales growth ahead of the market and maintain our market leading
EBITDA pre margin. Our priorities for 2019 are to continue to support
new growth pillars with our Gene Editing & Novel Modalities offerings,
as well as differentiated gene editing tools, drug safety systems and
models, and clinical viral manufacturing. In addition, we will further
develop our BioReliance® End-to-End Solutions, a service offering for
process development and manufacturing for emerging biotechs as
well as our BioContinuum TM Platform, to address intensified biopro-
cessing and continuous manufacturing. We will also focus on expand-
ing the use of BrightLab™, our digital ecosystem for complete lab
management.
Throughout 2018, we streamlined our business through inte-
grating strategic initiatives, such as single-use technologies for Bio-
processing, into the base business. We expanded our foundational
intellectual property for our CRISPR technology with patents in key
markets in Asia Pacific, the Middle East and Europe. We also expanded
our business sector through the opening of new facilities throughout
Asia and South America.
We began the year 2018 with a recently signed commercial sup-
ply agreement to manufacture viral vectors for bluebird bio, Inc., of
Cambridge (Massachusetts, United States), a clinical-stage company
that develops potentially transformative gene and cell therapies for
severe genetic diseases and T-cell-based immunotherapies for cancer.
As part of the multi-year agreement, we will manufacture lentiviral
vectors for bluebird bio's drug products developed to treat a variety
of rare genetic diseases.
3. Establish new growth pillars through our four strategic initia-
tives: Gene Editing & Novel Modalities, BioReliance® End-to-End
Solutions, BioContinuum® Platform and BrightLab™.
2. Strengthen the core organization by rejuvenating chemistry
and reagents, expanding our leadership in bioprocessing, con-
tinuing to access new growth areas and strengthening our
e-commerce platform to maintain our leadership position
1. Ensure operational excellence by focusing on creating value,
building a strong organization and implementing consistent
processes
To sustain our leadership for the future, Life Science has estab-
lished a strategy based on three key pillars:
Our aspiration remains to reinforce our leadership position as a
tools and equipment supplier that is solving the toughest problems
in life science. This has allowed us to achieve quality growth with a
well-leveraged balance sheet.
The Life Science business sector is executing an ambitious strat-
egy to capture near-term opportunities and to invest for future growth.
Our integration is on track, and we have consistently outperformed
the market during the largest integration in our history and that of
the industry.
Since closing the acquisition of Sigma-Aldrich, in November 2015,
Life Science's organic sales growth has exceeded that of the industry
and has remained the highest among integrated peers.
LIFE SCIENCE
On December 1, 2018, we announced the completion of the sale
of our Consumer Health business to Procter & Gamble. The divest-
ment of Consumer Health was aligned with our strategy of focusing
on our pipeline of innovative medicines.
In this context, strategic collaborations are an integral part of
delivering on our commitment to transforming the lives of patients
living with serious unmet medical needs. We recognize the value
of collaboration in the research and development of breakthrough
therapies, as well as in strengthening our current portfolio. Here, we
focus on balancing the right blend of internal capabilities and exter-
nal partnerships, building strong collaborations with other leaders in
the industry.
success.
Combined Management Report
Strategy
PERFORMANCE MATERIALS
Performance Materials targets attractive end markets that are driven
by megatrends: digitalization, urbanization, mobility and affluency
will drive advanced electronic systems with semiconductors at their
heart. As a result, electronics demand is expected to grow for the
foreseeable future. Roughly 80% of our sales are currently linked to
the electronics market, which of course includes our Semiconductor
Solutions and Display Solutions business units, but also parts of
Surface Solutions.
In more detail, it is our goal to continue to accelerate organic
growth, expand our market footprint and sustain our leadership posi-
tions within our science and technology specialty areas. We have
clearly defined goals, such as generating annual sales of at least
€ 2 billion by 2022 with products from our Healthcare R&D pipeline -
products that we launched recently or expect to bring to market
soon. In addition, we aim to double our Group sales in China. Health-
care shall contribute significantly to our growth ambition with the
main drivers being new product launches and stable base business
delivery. We expect Life Science to continuously target above-market
growth with Process Solutions contributing significantly to this.
Fundamental Information about the Group
Merck
57
We ensure that we can fulfill our obligations at all times. In this
context, we pursue a conservative, proactive financing strategy in
which we deploy a variety of financial instruments. We have diver-
sified and profitable business activities as the basis for our strong
and sustainable cash flow generation capacity. In addition, we have
several sources of financing, including a € 2 billion syndicated loan
facility that was renewed in 2018 and is in place until 2023 to cover
any unexpected cash needs. The facility is a pure back-up credit
facility and has not been drawn on so far. In addition, we have a
commercial paper program with a volume of € 2 billion at our dis-
posal. Within the scope of this program, we can issue short-term
commercial paper with a maturity of up to one year. Furthermore,
in 2018 we used bilateral bank loan agreements with first-class banks
in order to optimize the funding structure and cost.
FINANCIAL FLEXIBILITY AND A CONSERVATIVE FUNDING
STRATEGY
We are pursuing a conservative financial policy characterized by the
following aspects:
The third pillar of our aspiration is innovation: to develop high-
quality, first-to-market and best-in-class therapies, and to build a
portfolio in each of our franchises. We have streamlined our pipeline
and expanded our innovation capabilities with strong investigational
drug candidates. In order to maximize the output of our R&D invest-
ments and increase our chances of success in discovering and devel-
oping new therapies, we focus our expertise on specific franchises
and are exploiting synergies in disease mechanisms and biological
pathways. We are investing in digital technologies as well as person-
alized and translational medicine in order to drive continued pipeline
Strategic finance and dividend policy
• Allocate our resources more efficiently to maintain an above-
industry EBITDA pre margin of around 30%
• Focus on the attractive electronics market to achieve long-term
organic growth perspective of 2-3% per year (CAGR)
Our priorities are:
The market segments we operate in represent a well-balanced mix
of new and fast-growing areas (such as deposition materials in Semi-
conductor Solutions or OLED materials in Display Solutions), but also
more mature segments where we have established ourselves as the
clear market leader (liquid crystals for Display Solutions, for example,
or pearlescent pigments used for coatings).
We have a solid foundation: a strong global customer network,
a proven track record of delivering high-tech solutions, an efficient
production infrastructure and the highest quality standards through-
out the industry. Our innovative solutions allow us to establish inti-
mate and long-term customer relationships, and understand the
changing requirements of end customers in markets as diverse as
consumer electronics, automotive and cosmetics.
Within the electronics market, we are active in the field of semi-
conductor and display solutions, targeting a material market of
about € 85 billion. We are already one of the largest players in this
field, while operating in selected and highly attractive market seg-
ments. In coming years, we expect that the market for liquid crystal
materials for TVs - still our largest business and one of the most
attractive - will continue to decline. For us, after 2019, this devel-
opment is expected to be more than offset by growth in OLED mate-
rials and photoresists as well as in semiconductor materials and our
solutions for surfaces. As a result, we want to achieve an attractive
average sales growth of 2-3% after 2019 and to generate EBITDA
pre margins of around 30%, substantially above the specialty chem-
icals industry average.
The remaining 20% of our sales relate to the automotive and
cosmetics market served by Surface Solutions. We expect demand
in these segments to likewise benefit from global trends such as
increasing affluency in developing countries.
Actively manage our portfolio and expand our partnership network
• Foster our customer-centric orientation with an integrated R&D
approach to better serve market and customer needs
The second pillar of our strategy is the focus on specialty medi-
cine franchises. Here, we expect oncology, immuno-oncology and
immunology markets to remain highly attractive in terms of size,
growth prospects, and profitability. Within each specialty franchise,
our approach is to develop deep internal expertise and insight from
internal research to commercialization, augmented by external talent
sourcing, strategic partnering and asset acquisitions. Fertility and
Endocrinology offer significant opportunities to bring value to patients,
with high profitability and growth potential; maximizing the commer-
cial potential of these areas will remain important.
Fundamental Information about the Group
bringing high value to patients and consumers. Therefore, we con-
tinue to invest in research and development to discover new treat-
ment options and improve existing ones. Together with our stake-
holders and partners, we want to ensure that people can access the
medicines they need to stay healthy and live longer.
Our leaders play a decisive role in our new "People Strategy". We
aim to place next to our employees leaders who will develop them
for future requirements, not just current needs, and foster the diver-
sity and unique strengths within the organization. At the same time,
we want the leadership style of our managers to enable strategic
innovation. On top of this, we promote curious talents who can solve
complex problems and are passionate about the work they do. We
will also strengthen results-driven teams and networks by valuing
team collaboration and providing flexible frames for teams and indi-
viduals to drive.
Moreover, it is crucial to be perceived as an attractive employer
in the market in order to continue to capture the interest of potential
employees. The fact that we rank among the world's best employers
was also confirmed by the distinction as "Global Top Employer 2018"
by the Dutch Top Employers Institute. In addition, we were ranked
fifth among employers worldwide in the field of biotechnology and
pharmaceutics by Science magazine, a leading peer-reviewed inter-
national scientific publication.
Merck's People Strategy aims at building the capability of the organi-
zation to shape the future and to address how we as a science and
technology company can create a working environment that meets
our employees' individual needs and allows curiosity to unfold. Our
growth strategy calls for people with diverse experience and back-
grounds who work together on the basis of shared values to create
innovation and respond flexibly to changing demands.
People
China is a major innovation hotspot and one of our strategically
most important growth markets. Cornerstones of our strategy are
further localization via our Healthcare and Life Science production
sites in Nantong and the OLED application center in Shanghai, the
engagement of key stakeholders in the local environment and tap-
ping into the Chinese innovation ecosystem via our future innovation
hubs in Shanghai and Guangzhou. The establishment of both these
hubs is already well underway, with scheduled openings in the second
half of 2019. Together they will create a strong platform for us and
our partners to drive innovation, while also significantly contributing
to the range of our activities and general footprint in China.
The focus of Performance Materials is on bringing the business
back to a 2-3% organic sales growth trajectory from 2020 onwards,
implementing our 5-year "Bright Future" transformation program
and ensuring efficient resource allocation to foster the EBITDA pre
margin of around 30%. We aim to further strengthen Performance
Material's position as a leading electronics solutions provider, ensure
a stronger focus on existing end market needs and implement a
rigorous innovation and project prioritization process.
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Fundamental Information about the Group _ Strategy
Combined Management Report
We are a highly differentiated leader, positioned for sustained
and profitable growth, in Life Science. Working towards 2022, our
strategy is to sustain above-market growth in our core businesses,
with a focus on our leadership in Bioprocessing and delivering on our
strategic initiatives such as End-to-End Bioprocessing and Gene
Editing & Novel Modalities. The business sector will concentrate on
advancing the already favorable portfolio mix with exposure to
growth market segments, full operating leverage driving margin pro-
gression, ensuring that our strategic initiatives enable sustained
above-market growth and making capacity investments that support
industry growth dynamics.
In Life Science, we have achieved our € 280-million synergies
target for 2018 and a net sales organic CAGR of around 6% since
2015, which is around 200 basis points (bps) above the market
average - despite the integration of Sigma-Aldrich. Furthermore, we
started various innovation projects to support our industry-leading
growth and profitability in the future.
Going forward, in Healthcare, we will drive our positioning as a
global specialty innovator by fully leveraging our pipeline potential.
Here we aim to focus and prioritize development of key pipeline
projects, deliver multiple study readouts in major tumor types and
ensure a regular inflow of promising early-stage projects to ensure
the long-term pipeline potential. We expect that our pipeline will
continue to progress quickly. It therefore requires regular prioritiza-
tion and de-risking decisions, with strategic partnerships and exter-
nal financing being key. At the same time, it is our goal to continue
to profitably deliver on our core business while further expanding
our global reach.
In Healthcare, a successful 2018 included our innovative product
launches of BavencioⓇ and MavencladⓇ, which together reached
around € 160 million in sales in 2018. Our Healthcare core business
has grown consistently for many quarters and we continue to dili-
gently develop and manage our pipeline of innovative medicines. The
2018 news flow clearly shows that our pipeline contains highly attrac-
tive and innovative assets in key indications, in various stages of the
clinical development process.
Our priority area "Performance" includes all activities that create
sustainable, profitable growth. We have defined a strategic roadmap
until 2022 to meet our ambition. Our primary aim is to deliver accel-
erated profitable growth through sustained core business delivery
and selective portfolio strengthening.
Performance
The first pillar of our strategy is to reinforce our global footprint,
e.g. bringing the innovation of our pipeline to patients and grow our
presence in the United States and in China. The emerging markets
and China are expected to be the largest growth driver for our
established products in the future. Managing the balance between
delivery of innovative medicines while expanding reach and ensur-
ing profitable growth of the existing business will be one of the
strategic challenges.
We aim to keep an attractive financial profile, regain our financial
flexibility through stringent deleveraging and sustain our strong
investment-grade rating. It is of utmost importance to us that we meet
our obligations at all times through our diversified and profitable
businesses as the basis for sustained cash flow generation. We are
aiming to achieve sustained organic profitable growth, while targeted
acquisition remains a growth option. We pursue a sustainable dividend
policy. Provided that the economic environment develops in a stable
manner, the current dividend represents the minimum level for future
dividend proposals. In addition, our Group Strategy is always aimed
at delivering our ambition of becoming the vibrant science and
technology company, and be an innovation leader within our fields
of activity. We will therefore strive to achieve our strategy by con-
tinuing to focus on our three core priorities: "Performance", "People"
and "Technology".
In this process, it is our goal to take data-driven decisions, both
when hiring new members of staff and in the personnel development
of employees (people analytics). Another element of this strategy is
the promotion of diversity, with a special focus on women and talent
in Asia, and the use of the unique strengths and understanding of
key customers and markets that these employees bring. We have to
value different perspectives and encourage constructive conflicts.
We place great importance on the continuous advanced training
and further development of our managers. This is essential for them
to address the diverse needs of their team members and the chang-
ing requirements of the businesses and of digitalization. Our leaders
are responsible for pushing our strategy ahead by building up the
right competences, thereby fostering innovation. As part of this, they
take calculated risks, set clear and inspiring direction to their employ-
ees and provide the requisite structures and resources.
Despite a decline in sales and profits at Performance Materials in 2018,
we remain a market leader in this sector. In parallel we embarked
on a transformation program to deliver on our strategy of becoming
a leading electronics solutions provider and established a new R&D
framework.
In the context of the "People Strategy" we also want to look at
new forms of cooperation and experiment with methods that result
in better decision-making. For example, pilot initiatives focus on
expanding the "Merck Science Network" further. Through this project
we are promoting the establishment of a science community within
the company to accelerate the exchange of innovative ideas and
improve the collaboration between all employees in the Research
and Development sector. In the Healthcare sector, we have begun
to deepen the awareness of unbiased decision-making. We want to
support leaders to help them reflect on their decision-making pro-
cesses and take unbiased decisions.
65
Fundamental Information about the Group Strategy
Combined Management Report
Following on from the successes over the past two years, we
continue to drive pipeline projects with the aim of bringing ground-
breaking medicines to patients, maximizing our existing portfolio and
continuing our expansion in growth markets. The ambition of the
Healthcare business sector is to become a global specialty innovator,
operating in franchises with significant unmet medical need and
Our Healthcare business sector comprises the Biopharma and Aller-
gopharma businesses. Our businesses specialize in key franchises
and specific diseases. Global megatrends such as a growing world
population and an increase in average life expectancy continue to
drive the demand for our healthcare products. To meet these
demands and respond appropriately to the dynamics of our healthcare
markets, we have significantly transformed our Healthcare business
sector in recent years.
Business strategies
Merck's transformation towards a science and technology com-
pany is evident at our Darmstadt site, which we are growing into a
center of excellence for science and technology. Our largest site in
the world already stands for excellent research and development as
well as production that creates value. Darmstadt is the only site at
which all three Merck business sectors have a presence. In addition
to being global Group headquarters, Darmstadt is home to our Exec-
utive Board and Group functions. At our new Innovation Center in
Darmstadt, internal and external experts collaborate on identifying
trends of significance to our business and markets as well as gener-
ating technology-driven growth going forward. All in all, this site
offers a very good foundation for implementing our Group strategy
successfully.
Additionally we focus on disruptive innovation beyond our cur-
rently established business sectors. To achieve innovation success,
we transform ideas into businesses through different pathways. They
include M Ventures, the strategic corporate venture capital fund of
Merck, with a total volume of € 300 million. M Ventures invests in
promising start-ups and businesses within our core business areas
and in innovations outside these areas by providing financial and/or
strategic value. Furthermore, our Digital Office works to generate
new digital business opportunities within our areas of expertise.
It also supports the existing businesses in selecting digital projects
where maximum value for Merck can be generated. The Innovation
Ecosystem is responsible for scouting, ideating and delivering new
internal projects across and beyond Merck's current scope.
HEALTHCARE
Furthermore, we opened our Innovation Center in Darmstadt as
a Group-wide infrastructural commitment to our science- and tech-
nology-driven growth. The Innovation Center aims to develop entirely
new businesses beyond the current spectrum as well as bring
together people, scientific expertise, technologies and skills from
different areas under one roof. Our cross- and beyond-sector inno-
vation offers incremental and disruptive ideas and aims to keep us
ahead of the game. We are focusing on our activities within three
core innovation fields of interest: Liquid Biopsy, Clean Meat and
Biosensing and Interfaces. With liquid biopsies, a variety of diseases
can be diagnosed through the detection of biomarkers in body fluids.
This could be a key technology for early disease detection and for
expanding the delivery of precision medicine to more patients. The
innovation field Clean Meat comprises technological innovations to
meet the world's growing demand for protein- and nutrient-dense
foods made by ethical, eco-friendly methods. The innovation field of
Biosensing and Interfaces focuses on the integration of electronics
with the human body to create a digital human/biological interface.
Our priority area "Technology" is twofold. It is inherent in our business
sectors through our innovations, product pipelines and digitalization
strategies. In addition, the ways in which we address cross-sector
innovations is reflected in our approach to potentially disruptive tech-
nologies. It covers the closely interlinked areas of innovation and
digitalization. Developing and marketing innovative products and
services are at the forefront of our Group strategy and all the busi-
ness strategies. Our objective is to foster innovations both within the
businesses and between them as well as beyond existing businesses
into areas in which we are not yet active. In particular, we want to
capture the opportunities that digitalization offers in order to create
value for patients, customers and business associates. To us, digi-
talization means the digital integration of our entire value chain, the
digitalization of our products, services and communication interfaces
to customers as well as the development of new digital business
models. This is supported by state-of the-art methods to collect
and analyze vast amounts of data. Another example is Syntropy,
our intended joint venture with Palantir Technologies to advance
cancer research. Syntropy is expected to empower scientists and
research centers with a collaborative technology platform to advance
cancer research, help drive scientific discovery and improve human
lives. Research institutions around the world are generating a rapidly
growing amount of biomedical data, but much of it is trapped in
silos within and between institutions. Today, this critical data is often
inaccessible to the scientists and clinicians who need it to advance
their work. Syntropy aims to unlock the value of this untapped data,
enabling the world's leading experts to collaborate in the fight against
cancer and many other diseases.
Technology
Fundamental Information about the Group _ Strategy
Combined Management Report
64
This could enable faster and more accurate (remote) health moni-
toring and treatment.
Federations
& policy
Community
makers
Merck
Patients
Employee
represen-
tatives
Scientists
Healthcare
systems
Our good standing in other major sustainability indices was also
maintained in 2018, with our inclusion in the STOXX Global ESG
Leaders index, the Euronext Vigeo Eurozone 120 index and the
Ethibel Sustainability Index (ESI) Excellence Europe. In early 2019,
EcoVadis, an independent rating agency, granted us Gold status for
our sustainability performance. EcoVadis assesses around 45,000
suppliers from 150 countries across the four categories of Environ-
ment, Social, Ethics and Sustainable Procurement.
Competitors
Customers
74
Combined Management Report
Fundamental Information about the Group Corporate Responsibility
principles by following the guidelines of the Responsible Care Global
Charter, which is an initiative of the International Council of Chemi-
cal Associations (ICCA). Responsible Care aims to help the chemical
industry enhance its environmental, health and safety performance.
We are also a member of the Chemie³ initiative in Germany, a col-
laboration between the German Chemical Industry Association (VCI),
the German Employers' Federation of the Chemical Industry (BAVC)
and the German Mining, Chemical and Energy Industrial Union (IG
BCE). This globally unique alliance seeks to make sustainability a
core part of the chemical industry's guiding principles and to drive
the sector's position within the German economy as a key contributor
to sustainable development.
To us, corporate responsibility means listening and taking action,
and so we place great importance on dialogue with our various stake-
holders. These stakeholders include employees, business associates,
the Merck family, investors, regulatory agencies and industry asso-
ciations. This continuous exchange creates transparency and clearly
demonstrates how we live our values. In recognition of our dedication
to responsible and sustainable business practices, we were again
listed on the FTSE4Good index in 2018. Inclusion in this leading
international sustainability index is only possible if a company meets
stringent social, environmental and ethical behavior criteria.
Suppliers
NGOS
Share-
holders
Minds
Media
Broad
Strategic sphere of activity:
Global Health
License
to
Operate
Solutions
Sustainable
Combined Management Report
Fundamental Information about the Group _ Corporate Responsibility
73
Global Health: In low- and middle-income countries, many people
lack access to high-quality health solutions. We join forces with part-
ners to provide local solutions and develop treatments for neglected
tropical diseases in Africa. For instance, we are using praziquantel
tablets to fight schistosomiasis. Through our Global Health Institute,
we are developing diagnostics, therapies and preventive solutions to
address infectious diseases such as malaria and therapeutic chal-
lenges such as antimicrobial resistance.
Sustainable Solutions: We are constantly working to improve the
sustainability footprint of our products - even during their use phase -
which also helps our customers achieve their own sustainability goals.
To this end, we have established systematic approaches for product
development such as Design for Sustainability, a program within our
Life Science business sector that allows us to assess the sustaina-
bility of our products during development. Product developers use
various tools, such as product lifecycle analyses.
Broad Minds: As a science and technology company, we endeavor
to excite people about science, inspire curiosity and help creativity
to soar. Our goal is to strengthen our reputation in the field of science,
especially in those areas where we have particular expertise. We not
only support educational programs for schools, but also back pioneer-
ing research at institutes of higher learning. Reflecting the way that
music and literature inspire people, we promote a range of cultural
initiatives worldwide. Creativity and curiosity are the bedrock of sci-
ence, culture and art, and also underpin our holistic approach.
Our corporate responsibility efforts are aligned with the United
Nations (UN) Sustainable Development Goals (SDGs), and we are
working to help achieve this ambitious agenda by 2030. In addition
to promoting the SDGs, we also support relevant responsible gov-
ernance initiatives. Through our membership in the UN Global Com-
pact we are committed to upholding the Compact's principles on
human rights, labor standards, environmental protection and anti-
corruption. We ensure that we live our own corporate responsibility
Sales &
business
partners
Regulatory
agencies
Employees
Merck
family
Our aim is to create a healthier future for all: for individuals, com-
munities and countries. We want to use innovation in science and
technology to improve the health of underserved populations in low-
and middle-income countries. To achieve this, we are leveraging our
expertise from all business sectors and collaborating closely with a
wide range of partners. We also participate in industry-wide initiatives
and work closely with other businesses to develop new approaches.
In 2018, we refined our strategy for addressing the global needs
that impact access to healthcare. Our strategy is designed to over-
come barriers to access for underserved populations and communi-
ties in developing countries in a business-integrated and sustainable
manner, thereby creating "shared value”. For us, creating shared
value means developing business models that increase the value and
competitiveness of our company and at the same time solve unmet
health needs and bring value to underserved populations. We want
to be instrumental in the elimination of schistosomiasis and fight
To utilize our market and technological leadership in liquid crys-
tals beyond applications in energy-saving displays, we started man-
ufacturing liquid crystal window modules at a new site in Veldhoven
(Netherlands). According to initial measurement results, our smart
windows can cut energy use in climate-controlled buildings by up to
40% and replace conventional sun shading solutions. In this way,
we help builders to save resources and costs. These windows can
be manually or automatically controlled to darken and provide sun
protection or can create privacy by switching from transparent to
opaque. In contrast to competing technologies, our newly branded
Eyrise™ products switch within seconds and are highly color-neutral.
Architects and builders can customize the desired color to suit the
setting. In response to market demand, we have prioritized solar
control during 2018, and we have three sophisticated architectural
projects in the pipeline. We were able to realize the first commercial
project in October 2018: large solar control windows for the company
Orkla in Oslo (Norway). Furthermore, we presented a selection of
these innovative architectural solutions at the trade fair “BAU 2019",
where we focused on our eyrise™ technology. Among other things,
we showed an iconic building design by renowned Brazilian architect
Oscar Niemeyer. The building is currently being constructed for the
company Kirow Ardelt in Leipzig (Germany).
The 2018 Access to Medicine Index continues to rank us in fourth
place. Every two years, this index assesses the world's leading
pharmaceutical companies on activities and initiatives they have
implemented to promote access to medicine in developing countries.
We received particular recognition for leading practices such as
establishing our Global Health Institute to accelerate research and
development (R&D) targeting schistosomiasis, malaria and bacterial
infections, strengthening commitment to open innovation and estab-
lishing the Capacity Advancement Program to improve access to
better diabetes, cancer, hypertension and fertility therapies in under-
served regions.
76
Combined Management Report
Fundamental Information about the Group Corporate Responsibility
Strategic sphere of activity:
Sustainable Solutions
Through our products, we are helping overcome global challenges
such as climate impact and resource scarcity. In doing so, we are
also supporting our customers in reducing the impacts of their own
activities and achieving their own sustainability goals.
Life Science: reducing environmental impacts throughout the
product life cycle
It is important to us that we improve the environmental impact of
our products. This applies to the entire life cycle - from production
and use through to the disposal of our products. With our Design for
Sustainability (DFS) program, we have developed a comprehensive
approach for more sustainable life science products. This keeps sus-
tainability criteria in the foreground during product development or
re-engineering, and documents them in a scorecard. When develop-
ing a new product, our aim is to improve on as many of these criteria
scores as possible. The objective is to lower environmental impacts
of devices and instruments, also during use by customers. Beginning
with the concept stage, product teams identify potential environmen-
tal impacts and opportunities to make improvements. By the end of
2018, 27% of these product development projects met three or more
sustainability criteria.
In addition, our researchers are developing innovative solutions
in line with the "12 Principles of Green Chemistry" developed by chem-
ists Paul T. Anastas and John C. Warner. The objective is to permit
research that is as environmentally compatible as possible, and to
minimize adverse effects on human health. More than 750 greener
alternatives to conventional products are available so far. With
DOZNⓇ, we have developed a web-based quantitative Green Chem-
istry analysis tool. To date, we have used this matrix to assess and
improve more than 40 products. It is our goal to make this system
available to our customers in 2019, so that they can measure the
environmental impact of their research and make more environmen-
tally conscious decisions.
We are expanding our portfolio to include greener alternatives,
such as the new bio-based solvent, Cyrene™, which is derived from
waste cellulose and is employed as an alternative to solvents that
are widely used but are under increasing regulatory restriction due
to their associated toxicity.
-
The focus is not just on the current life of our products, as we
also look ahead to end-of-life considerations and potential future
product lives as well. The application of single-use products - many
of which pose a challenge to recycle in the current infrastructure
is growing as life science markets are expanding and adopting new
technologies. We have therefore developed innovative recycling pro-
grams, which led to the recycling of more than 2,738 metric tons of
our customers' products from 2015 to 2018.
Performance Materials: increasing the sustainability
of manufacturing processes and end products
In 2018, our Performance Materials launched the new liquid crystal
technology SA-VA (Self-Aligned Vertical Alignment). We have been
developing the materials and process in the scope of close technical
partnerships with our customers. SA-VA is an eco-friendly and
resource-conserving technology that requires less energy and cre-
ates fewer waste products than conventional technologies during
display manufacture. SA-VA also provides a more efficient display
manufacturing process. Since SA-VA technology can be applied at
lower temperatures, it is also suitable for sensitive materials such as
those used in premium products, or for forward-looking applications
such as flexible displays.
Organic light-emitting diodes (OLEDS) likewise increase the
energy efficiency of displays while also providing brilliant colors and
razor-sharp images. To further enable unique display applications
and efficient production of large-area OLED displays, Merck is devel-
oping high-performance OLED materials for vacuum evaporation
methods or printing processes.
For the semiconductor industry, we have developed a series of
environmentally sustainable specialty chemicals and materials
including PFOS-free antireflective and photoresist coatings.
In the cosmetics industry, we are addressing the continuing trend
for ingredients that meet stringent sustainability criteria. Our port-
folio of fillers eliminates the need for microplastic particles that are
heavily criticized for polluting waters and damaging marine life. We
are also committed to continuously increasing the energy efficiency
of our production processes. Our cosmetic formulations comply with
strict criteria. By the end of 2018, 68 of our cosmetic pigments and
active ingredients were certified according to Ecocert's COSMOS
standard for organic and natural cosmetics.
CR
Strategy
In 2018, we started the CURAFATM project as part of our vision
to improve primary healthcare for everyone everywhere. So-called
CURAFATM points of care for integrated primary healthcare services
are run by local pharmacists and nurses, who provide pharmaceu-
tical and clinical services, medicine, digital health solutions, and
insurance and financing schemes. The project was implemented in
collaboration with the non-governmental organization Amref Health
Africa. We rolled out five primary healthcare points in Kenya during
2018.
malaria and other infectious diseases while helping to build local
capacity across the value chain and positioning our company as a
leading and reliable partner.
NTDeliver is our digital information tool, which facilitates trans-
parency in supply chains for medicine donations. Deliveries from
companies running donation programs are clearly displayed - from
purchase orders made by the WHO through to delivery to the first
warehouse in the destination country. This improves coordination
and provides a more transparent overview of the in-country inven-
tory. Following a pilot in 2017, we carried out two implementation
rounds in 2018, including using NTDeliver last mile tracking as a
standard reporting tool in the school-based schistosomiasis pro-
gram in Kenya. The system is collecting and consolidating field infor-
mation and has helped us to reach out to more than 12,000 teachers
throughout Kenya.
Promoting accessibility and improving supply chains
Strengthen the availability of healthcare solutions
We research, develop and refine healthcare solutions that address
unmet needs, tailoring them to local environments. With the Merck
Global Health Institute, we have defined a comprehensive portfolio
of R&D projects to develop integrated health solutions. This includes
treatments, diagnostics, preventive measures against infections and
approaches to strengthen health systems, targeting schistosomiasis,
malaria and bacterial infections. The Institute operates as a social
business enterprise delivering innovations for the most vulnerable -
with a special focus on women and children in the developing world.
This portfolio also includes the development of a new pediatric
formulation of praziquantel to treat the worm disease schistosomiasis
in children under the age of six, through the Pediatric Praziquantel
Consortium, which is a public-private partnership. Marketing Authori-
zation Application is planned for 2020, and we expect the product to
be ready to launch in the first endemic countries in Africa in 2021.
For malaria, we are completing the Phase I/Ib clinical activities
of our anti-malarial compound, which has the clear potential to treat
and prevent malaria. In the drug discovery area, our strategic col-
laboration with the University of Cape Town in South Africa has led
a new research and development platform. In 2018, this collaboration
(including Medicines for Malaria Venture) was extended to continue
screening activities with the aim of identifying new therapeutic solu-
tions while building up research capacity in and for Africa. This pro-
gram continues to leverage our proprietary chemical library of almost
100,000 compounds to identify new lead programs for the treatment
of malaria. The program is co-funded by the German Federal Ministry
of Education and Research.
We have developed a kit for malaria diagnosis based on our MuseⓇ
cell analyzer. It aims to accurately diagnose malaria and measure the
type of malaria parasite as well as the infection level. The malaria
kit was launched for research use in 2018. At the end of 2018, we
divested the technology platform developed by our Life Science busi-
ness sector to the U.S. laboratory supplier Luminex, which is now
marketing the diagnostic kit.
Additionally, we are working towards demonstrating the efficacy
of our product IR3535Ⓡ for malaria prevention in Africa. The insect
Combined Management Report
Fundamental Information about the Group _ Corporate Responsibility
75
repellent is already used for complementary prevention from vec-
tor-borne diseases, such as dengue fever or ZIKA. Products contain-
ing this active ingredient stand out due to their particularly good
tolerance in young children and pregnant women. In 2018, we
entered a collaboration to support the National Malaria Control Pro-
gram in Ghana. Here we develop malaria prevention solutions based
on IR3535®.
Address affordability challenges
Through intellectual property initiatives and equitable pricing strat-
egies we are able to provide assistance to those people who are
unable to pay for the health solutions they need. Publicly available
databases enable us to be transparent about our patents and patent
applications. To strengthen our commitment to the London Decla-
ration to fight neglected tropical diseases, we formed a partnership
with the Drugs for Neglected Diseases initiative (DNDI), under which
we are involved in the Drug Discovery Booster project for neglected
tropical diseases. The objective is to find potential cures for leish-
maniasis and Chagas disease.
As one of more than 100 members of WIPO Re: Search, an open
innovation platform sponsored by the World Intellectual Property
Organization (WIPO), we share intellectual property and knowledge
with the aim of accelerating early discovery for infectious diseases.
Through WIPO we are collaborating with the University of Buea
(Cameroon) and University of California San Diego (United States)
to find potential cures for onchocerciasis, leishmaniasis, Chagas dis-
ease and African trypanosomiasis (sleeping sickness).
We continue to work with the World Health Organization (WHO)
to combat the worm disease schistosomiasis in Africa. In 2018, we
donated approximately 200 million praziquantel tablets for distribu-
tion in 34 African countries, and this year our donation program was
expanded to include Burkina Faso, Niger and Sierra Leone. We keep
production capacities at a level sufficient for manufacturing 250 mil-
lion tablets a year. Since 2007 we have supplied almost 900 million
tablets free of charge, which is equivalent to the treatment of around
360 million schoolchildren. As a founding member of the Global
Schistosomiasis Alliance, we are helping to eliminate schistosomiasis
worldwide.
Raising awareness
Health professionals, communities and patients are empowered
through access to the appropriate tools, knowledge and skills to help
them make informed decisions about prevention, diagnostics, treat-
ment and care. Our regular campaigns help to increase awareness
of certain diseases globally, with a focus on those diseases where we
have extensive expertise, such as cancer, thyroid disorders, diabetes
and multiple sclerosis. In addition, Merck has championed World
Malaria Day with awareness campaigns and through engagement
around the One Merck for Malaria program. In 2018, we hosted
events in Ghana that created the opportunity for collaborations in
research and business activities to tackle preventive methods against
malaria. Via the Merck Foundation, a charitable organization, we bring
together some of our activities in underserved regions of the world.
Our Access Dialogues series promote discussion with numerous
public and private stakeholders on access-to-healthcare challenges.
Dialogues in 2018 covered the topics of innovation and intellectual
property as well as supply chain and delivery.
A schistosomiasis health education project in Ethiopia was
launched jointly with the NALA Foundation at the end of 2017, with
the aim of promoting the long-term behavioral change that is needed
to eliminate schistosomiasis. The project targets a rural area in
Ethiopia, focusing on approximately 260,000 students in 290 schools
through activities such as distribution of customized educational
material. In 2018, we reached 74 schools with nearly 70,000 stu-
dents. The goal is to extend this model to other regions in Africa.
The Global Pharma Health Fund (GPHF), a non-profit organization
funded by Merck, works to combat falsified medicines in developing
and emerging countries. To date, the GPHF has supplied 843 Minilabs
at cost to detect falsified medicines in around 100 countries. In 2018,
the GPHF developed testing methods for five additional active ingre-
dients so that the Minilab can now test 90 active ingredients, ranging
from antimalarials, antimycobacterials and antivirals to antipyretics
and antibiotics.
We promote initiatives to strengthen supply chains and to develop
localized health solutions in order to deliver and reach out efficiently
at the point of care. We are a founding member of the Accessibility
Platform, an informal, private-sector initiative that is working on a
comprehensive approach to meeting supply chain and distribution
challenges in developing countries. The platform promotes informa-
tion exchanges between the various stakeholders and creates joint
options for action.
Global
Health
-15
-
Net sales
2018
14,836
Change
2017
€ million
in %
319
2.2%
14,517
1 Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes" in the Notes to the Consolidated Financial
Statements.
EBITDA PRE
EBITDA pre is the main performance indicator measuring ongoing
operational profitability and is used internally and externally. To
provide an alternative understanding of the underlying operational
performance, it excludes from the operating result depreciation and
amortization, impairment losses and reversals of impairment losses
as well as adjustments. These adjustments are restricted to the
following categories: integration expenses, IT expenses for selected
projects, restructuring expenses, gains/losses on the divestment
of businesses, acquisition expenses, and other adjustments. The
classification of specific income and expenses as adjustments follows
clear rules and underlies strict governance at Group level. Within
the scope of internal performance management, EBITDA pre allows
for the necessary changes or restructuring without penalizing the
performance of the operating business.
MERCK GROUP
Reconciliation EBIT to EBITDA pre¹,2
Change
€ million
Operating result (EBIT)²
Depreciation and amortization
Impairment losses/reversals of impairment losses
EBITDA²
Restructuring expenses
2018
1,727
2017
€ million
2,423
-696
in %
-28.7%
€ million
1,743
Net sales¹
Net sales are defined as the revenues from the sale of goods, services
rendered to external customers, commission income and profit-sharing
from collaborations, net of value added tax and after sales deductions
such as rebates or discounts. Net sales are the main indicator of our
business growth and therefore an important parameter of external as
well as internal performance measurement. In addition, acquisition-
and currency-adjusted sales are used for internal performance man-
agement. Organic sales growth shows the percentage change in net
sales versus a comparative period, adjusted for exchange rate and
portfolio effects. Exchange rate effects may arise as a result of foreign
exchange fluctuation between the functional non-euro currency of a
consolidated company and the reporting currency (euro). By contrast,
portfolio effects reflect sales changes due to acquisitions and divest-
ments of consolidated companies or businesses.
EBITDA pre margin
M&A
NPV, IRR,
Licensing
Projects
eNPV, IRR,
EBITDA pre margin,
POS, ROCE
Capex
NPV, IRR,
Payback period,
EBITDA pre margin, ROCE
Abbreviations
EBITDA pre¹ = Earnings before interest, income tax, depreciation and amortization as well as adjustments
EPS Earnings per share
MEVA¹ = Merck value added
BFCF¹ = Business free cash flow
ROCE¹ = Return on capital employed
NPV¹
Net present value
IRR¹ = Internal rate of return
eNPV¹ = expected Net present value
POS¹ = Probability of success
M&A = Mergers & Acquisitions
1 Not defined by International Financial Reporting Standards (IFRSS).
Combined Management Report
Fundamental Information about the Group — Internal Management System
69
Key performance indicators of
the Group and its businesses
The three key performance indicators of net sales, EBITDA pre and
business free cash flow are the most important factors for assessing
operational performance. Therefore, we refer to these KPIs in the
Report on Economic Position, the Report on Risks and Opportunities,
and in the Report on Expected Developments. As the most important
indicators of financial business performance, the KPIs are key ele-
ments of our performance management system.
NET SALES
MERCK GROUP
Net sales growth,
1,742
58
-446
-10.5%
¹ Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes" in the Notes to the Consolidated Financial
Statements.
² Not defined by International Financial Reporting Standards (IFRSS).
70
Combined Management Report
Fundamental Information about the Group _ Internal Management System
BUSINESS FREE CASH FLOW (BFCF)
Business free cash flow comprises the major cash-relevant items that
the operating businesses can influence and are under their full control.
It comprises EBITDA pre less investments in property, plant and
equipment, software, advance payments for intangible assets, changes
in inventories, trade accounts receivable as well as receivables from
royalties and licenses. To manage working capital on a regional and
local level, the businesses use the two indicators days sales out-
standing and days in inventory.
MERCK GROUP
Business free cash flow¹,2
Change
€ million
2018
2017
EBITDA pre²
3,800
4,246
€ million
-446
in %
-10.5%
Investments in property, plant and equipment as well as software and
advance payments for intangible assets
-932
-1,012
80
-7.9%
Changes in inventories
-214
-18
4,246
1
3,800
-28.1%
3,528
-1
4,164
58
> 100.0%
-636
-15.3%
46
61
-24.6%
Integration expenses/IT expenses
142
188
-46
-24.4%
Gains (-)/losses (+) on the divestment of businesses
25
-310
335
> 100.0%
Acquisition-related adjustments
2
63
-61
-97.2%
Other adjustments
Responsibility
58
81
-23
EBITDA pre²
ROCE, MEVA
EBITDA pre margin,
EPS, ROCE, MEVA
Net income, EPS,
Dividend ratio,
Credit rating
73
-814
-741
> 100.0%
264
64
327
-1.9%
-23
1,198
1,175
> 100.0%
> 100.0%
-2,246
796
-428
368
> 100.0%
in %
29.5%
€ million
769
12
10
-57
-2,303
22
MEVA
3,374
2018
Change
Earnings per share pre² (in €)
Net income pre²
Non-controlling interests to be adjusted
-9.0%
-3
-3
0.4%
-
healthcare in low- and middle-income countries. Responsible gov-
ernance can help solve these global issues. We believe that in pur-
suing this approach, we can also strengthen our financial performance.
In 2018, we strategically repositioned ourselves: We focus even more
on creating sustainable value for both our company and society. To
achieve this, we are taking a shared value approach. We have adapted
our three strategic spheres of activity to bring them more in line with
our business. These spheres are organized under the headings of
"Global Health", "Sustainable Solutions" and "Broad Minds". We focus
our resources on those areas where we can have the greatest impact.
The effects our actions have on society such as the development
of new products should be considered strategically in their own
right. Needless to say, we respect the interests of our employees,
customers, investors and the community, and work to minimize
ethical, economic and social risks, thereby sustainably contributing
to our long-term corporate success.
Humankind is being confronted with global societal challenges
such as climate change, resource scarcity and insufficient access to
Our corporate responsibility (CR) activities are steered by our CR Com-
mittee, which consists of representatives from our business sectors
and relevant Group functions. The Chairman of the Executive Board
and CEO is responsible for the committee, which is chaired by the head
of the Group Corporate Responsibility unit.
Strategy and Management
We take responsibility every day and have been doing so for
350 years. This commitment is codified in our corporate strategy
and values. Responsible conduct with respect to employees, prod-
ucts, the environment and society is a fundamental prerequisite
for our business success.
Corporate Responsibility
Fundamental Information about the Group Corporate Responsibility
Combined Management Report
72
Employing a highly qualified and motivated workforce is the basis
for achieving our ambitious business goals. Therefore, we put a
strong focus on establishing the processes and the environment
needed to attract and retain the right talent with the right capabilities
at the right time. To measure the success of the related measures,
we have implemented talent retention as an important non-financial
indicator.
TALENT RETENTION
Apart from the indicators of the financial performance of the busi-
nesses, non-financial measures also play an important role in fur-
Other relevant/non-financial
performance measures
Income taxes on the basis of the underlying tax rate²
With the aim of ensuring an attractive return for our shareholders,
we are pursuing a reliable dividend policy with a target payout ratio
based on EPS pre (see definition above).
Innovations are the foundation of our business and will also be the
prerequisite for future success in changing markets. We are con-
tinuously working to develop new products and service innovations
for patients and customers. Indicators for the degree of innovation
are defined individually depending on the specifics of the respective
businesses.
INNOVATION
thering the success of the company. From a Group perspective,
specifically innovations in the businesses as well as the attraction
and retention of highly qualified employees are of central impor-
tance.
The rating of our creditworthiness by external agencies is an important
indicator with respect to our ability to raise debt capital at attractive
market conditions. The capital market makes use of the assessments
published by independent rating agencies in order to assist debt
providers in estimating the risks associated with a financial instru-
ment. We are currently assessed by Moody's, Standard & Poor's and
Scope. The most important factor for the credit rating is the ability
to repay debt, which is determined in particular by the ratio of oper-
ating cash flow to net financial debt.
CREDIT RATING
1 Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes" in the Notes to the Consolidated Financial
Statements.
2 Not defined by International Financial Reporting Standards (IFRSS).
-13.9%
-0.82
5.92
5.10
-13.8%
-355
2,574
2,219
DIVIDEND RATIO
Adjustments²
2017
2,605
Income tax
-22
-145
2,508
Business free cash flow²
Elimination first-time consolidation of BioControl Systems
Changes in trade accounts receivable as well as receivables
from royalties and licenses
Amortization of acquired intangible assets
-197
Combined Management Report
Fundamental Information about the Group Strategy
67
MAINTAINING SUSTAINABLE AND RELIABLE BUSINESS
RELATIONS WITH A CORE GROUP OF BANKS
We mainly work with a well-diversified, financially stable and reliable
group of banks. Due to Merck's long-term-oriented business approach,
bank relationships typically last for many years and are characterized
by professionalism and trust. The banking group consists of banks
with strong capabilities and expertise in various products and geo-
graphic regions. We regard these banks as strategic partners. Accord-
ingly, we involve them in important financing transactions.
STRONG INVESTMENT-GRADE RATING
The rating of our creditworthiness by external rating agencies is an
important indicator of the company's financial stability. A strong
investment-grade rating is an important cornerstone of Merck's finan-
cial policy, as it safeguards access to capital markets at attractive
financial conditions. Merck currently has a Baa1 rating from Moody's,
an A rating from Standard & Poor's (S&P), and an A- rating from
Scope, each with a stable outlook.
DIVIDEND POLICY
We are pursuing a sustainable dividend policy. Provided that the
economic environment develops in a stable manner, the current div-
idend represents the minimum level for future dividend proposals.
The dividend policy is oriented towards the business development
and earnings increase of the coming years. However, dividend growth
could deviate, for example, within the scope of restructuring or in
the event of significant global economic developments. We aim for a
target corridor of 20% to 25% of earnings per share pre.
68
Combined Management Report
Fundamental Information about the Group _ Internal Management System
Internal Management System
As a global company with a diverse portfolio of products and services,
we use a comprehensive framework of indicators to manage perfor-
mance. The most important KPI (key performance indicator) to
measure performance is EBITDA pre¹.
The Value Creation and Financial KPI Pyramid, which summarizes
the important financial performance measures of the Merck Group,
reflects the comprehensive framework of financial KPIs to steer
the businesses and prioritize the allocation of cash resources. It
consists of three managerial dimensions, namely Merck Group,
Business and Projects, each of which require the use of different
indicators.
Merck Group
Business
Net sales,
EBITDA pre,
BFCF
Net Sales,
EBITDA pre, BFCF
-123
> 100.0%
> 100.0%
2
Profit after tax from discontinued operation
Non-controlling interests
Net income
€ million
RECONCILIATION OF NET INCOME TO NET INCOME PRE¹, 2
IT expenses for selected projects, restructuring expenses, gains/
losses on the divestment of businesses, acquisition expenses and
other adjustments. Moreover, amortization of acquired intangible
assets as well as impairment losses on property, plant and equipment
and intangible assets are eliminated. The adjustment excludes
impairment losses on intangible assets for acquired research and
development (R&D) projects below a threshold value of € 50 million.
Income tax is calculated on the basis of the company's underlying
tax rate. The following table presents the reconciliation of net income
to net income pre for the calculation of EPS pre.
-2
NET INCOME, EARNINGS PER SHARE (EPS) AND
EARNINGS PER SHARE PRE (EPS PRE)¹
Capital market-related parameters
71
Fundamental Information about the Group — Internal Management System
Combined Management Report
MEVA gives information about the financial value created in a period.
Value is created when the return on capital employed (ROCE) of the
company or the business is higher than the weighted average cost
of capital (WACC). MEVA metrics provide us with a powerful tool to
weigh investment and spending decisions against capital require-
ments and investors' expectations.
MERCK VALUE ADDED (MEVA)
Earnings per share are calculated by dividing profit after tax attri-
butable to the shareholders of Merck KGaA (net income) by the
weighted average number of theoretical shares outstanding. The use
of a theoretical number of shares takes into account the fact that the
general partner's capital is not represented by shares. To provide an
alternative view, we also report earnings per share pre, in other
words after the elimination of the effects of integration expenses,
PAYBACK PERIOD
An additional parameter to prioritize investments in property, plant
and equipment as well as intangible assets is the payback period,
which indicates the time in years after which an investment will
generate positive net cash flow.
3,193
-685
-21.4%
2 Not defined by International Financial Reporting Standards (IFRSS).
Investments and value management
Sustainable value creation is essential to secure the long-term
success of the company. To optimize the allocation of financial
resources, we use a defined set of parameters as criteria for the
prioritization of investment opportunities and portfolio decisions.
1 Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes" in the Notes to the Consolidated Financial
Statements.
NET PRESENT VALUE
The main criterion for the prioritization of investment opportunities
is net present value. It is based on the discounted cash flow method
and is calculated as the sum of the discounted free cash flows over
the projection period of a project. The weighted average cost of
capital (WACC), representing the weighted average of the cost of
equity and cost of debt, is used as the discount rate. Depending on
the type and location of a project, different mark-ups are applied to
the WACC.
INTERNAL RATE OF RETURN (IRR)
The internal rate of return is a further important criterion for the
assessment of acquisition projects and investments in property,
plant and equipment as well as intangible assets. It is the discount
rate that makes the present value of all future free cash flows equal
to the initial investment or the purchase price of an acquisition.
A project adds value if the internal rate of return is higher than the
weighted cost of capital including mark-ups.
RETURN ON CAPITAL EMPLOYED (ROCE)
In addition to NPV and IRR, when looking at individual accounting
periods, ROCE is an important metric for the assessment of invest-
ment projects. It is calculated as the adjusted operating result (EBIT)
pre divided by the sum of property, plant and equipment, intangible
assets, trade accounts receivable and trade accounts payable, as well
as inventories.
Non-small cell lung cancer, 1st line
M7824 (anti-PD-L1/TGF-ẞ trap)
Urothelial cancer
Phase II³
Colorectal cancer, 1st line
Phase II4
M9241 (NHS-IL12, cancer immunotherapy)
Phase II
Solid tumors
Phase I
Hematological malignancies
Phase I
Solid tumors
Phase I
Phase I
Avelumab (anti-PD-L1 mAb)
Solid tumors
Avelumab (anti-PD-L1 mAb)
M3541 (ATM inhibitor)
Abituzumab (pan-av integrin inhibiting mAb)
of BTC are estimated to occur every year in the United States. These
cancers present late in the majority of patients and treatment options
are limited. The median survival rate in the advanced setting is less
than one year and the objective tumor response with commonly used
chemotherapy is typically less than 10% with a short duration of
response.
In August, we initiated a trial to investigate M7824 compared
with pembrolizumab as a first-line treatment in patients with PD-L1-
expressing advanced NSCLC. In December, the FDA and the Euro-
pean Medicines Agency (EMA) granted orphan drug designation (ODD)
to M7824 for the treatment of biliary tract cancer (BTC). The FDA's
ODD follows the recent presentation of the first clinical data for
M7824 in BTC at the ESMO Congress (see below). BTC is a collective
term for a group of rare and aggressive gastrointestinal cancers,
including intrahepatic cholangiocarcinoma, extrahepatic cholangio-
carcinoma and gallbladder carcinoma. Approximately 16,000 cases
In March, tepotinib received its first regulatory designation when
the Japanese Ministry of Health, Labor and Welfare (MHLW) granted
SAKIGAKE "fast-track" designation to tepotinib for patients with
advanced non-small cell lung cancer (NSCLC) harboring MET exon
14 skipping mutations. The SAKIGAKE designation promotes research
and development in Japan, aiming at early practical application for
innovative pharmaceutical products, medical devices and regenera-
tive medicines, and can reduce a drug's review period down from
12 months to a target of 6 months. The SAKIGAKE designation
system is a core component of the MHLW's "Strategy of SAKIGAKE”.
The system's objective is to designate drugs that have the potential
of prominent effectiveness against serious and life-threatening dis-
eases in order to make them available to patients in Japan ahead of
the rest of the world.
In 2018, we celebrated several important milestones for our lead-
ing oncology pipeline molecules we discovered in-house, including
tepotinib, an investigational oral MET inhibitor, and M7824, an inves-
tigational bifunctional immunotherapy.
Finally, in November, we entered into two collaboration agree-
ments. The first was with Kyowa Hakko Kirin to study avelumab with
Kyowa Hakko Kirin's novel IDO inhibitor, KHK2455, in a Phase I clinical
trial of patients with solid tumors. The second agreement was with
Immunicum to investigate avelumab in combination with ilixadencel,
an off-the-shelf, cell-based, cancer immune primer, in a planned multi-
indication Phase Ib/II clinical trial of patients with advanced head and
neck cancer and gastric adenocarcinoma.
Also in September, we announced a collaboration with Immutep
to evaluate avelumab in combination with eftilagimod alpha ("efti"
or "IMP321"), an investigational LAG-3Ig fusion protein, in a Phase I
trial in patients with advanced solid malignancies. Shortly afterwards,
in October we entered into a clinical trial collaboration agreement
with Daiichi Sankyo Company to study the combination of avelumab
and/or an investigational Merck DNA damage repair (DDR) inhibitor
with [fam-] trastuzumab deruxtecan (DS-8201), an investigational
HER2-targeting antibody drug conjugate, in patients with HER2-
expressing or mutated solid tumors.
The collaboration will evaluate the safety and effectiveness of CMP-
001 administered in combination with avelumab in selected previ-
ously treated patients with advanced squamous cell carcinoma of the
head and neck (SCCHN) whose disease has progressed.
Fundamental Information about the Group _ Research and Development
Combined Management Report
82
In September, together with Pfizer, we entered into a clinical trial
collaboration and supply agreement with Checkmate Pharmaceuticals
to evaluate CMP-001, a TLR9 agonist, in combination with avelumab.
cancers.
As part of our ongoing commitment to developing new treatment
options for patients with hard-to-treat cancers who would otherwise
have a low chance of survival, and to exploring all potential options,
we entered into various new strategic collaborations in 2018 with
avelumab. The first was in July, when our collaboration with Vyriad to
evaluate avelumab in combination with Voyager-V1, an oncolytic virus
therapy, in a Phase I clinical trial in patients with solid tumors was
announced. A few days later, we announced a collaboration with Leap
Therapeutics to investigate avelumab in combination with Leap Ther-
apeutics' GITR agonist, TRX518, and chemotherapy in a Phase I/II
clinical trial in advanced solid tumors including expansion populations
in patients with relapsed/refractory ovarian, breast and prostate
We provided an update on our Phase III JAVELIN Lung 200 trial
in February, Phase III JAVELIN Ovarian 200 trial in November and
Phase III JAVELIN Ovarian 100 trial in December. While these stud-
ies did not meet or were not expected to meet their pre-specified
primary endpoints of overall survival (JAVELIN Lung 200), superior
overall survival or PFS (JAVELIN Ovarian 200) and PFS (JAVELIN
Ovarian 100), the data are being further examined to better under-
stand the results.
Through our strategic alliance with Pfizer, we continue to explore
the therapeutic potential of avelumab. Our clinical development pro-
gram JAVELIN comprises more than 30 clinical programs, including
various Phase III trials, involving over 9,000 patients across more
than 15 different tumor types. In addition to MCC, UC and RCC, these
cancers include breast, gastric/gastro-esophageal junction and head
and neck cancers, non-small cell lung cancer and ovarian cancer.
as initial therapy for patients with advanced renal cell carcinoma
(RCC). As part of a planned interim analysis, an independent data
monitoring committee confirmed that the trial showed a statistically
significant improvement in progression-free survival (PFS) by central
review for patients treated with the combination whose tumors had
PD-L1+ expression greater than 1% (primary objective), as well as
in the entire study population regardless of PD-L1 tumor expression
(secondary objective). The detailed analysis of this clinical trial read-
out was presented at the 2018 European Society for Medical Oncol-
ogy (ESMO) Congress. The US Food and Drug Administration (FDA)
granted Breakthrough Therapy Designation for avelumab in combi-
nation with InlytaⓇ for treatment-naive patients with advanced RCC
in December 2017.
In September, we announced positive top-line results from the
pivotal Phase III JAVELIN Renal 101 study evaluating avelumab in
combination with InlytaⓇ (axitinib), compared with SutentⓇ (sunitinib)
Our integrated R&D capacity is strongly supported by external
innovation to complement our pipeline, strengthen our technology
base and enhance our scientific capabilities. In 2018, we initiated
new pipeline collaborations to further diversify our development risks
and enable a more efficient pipeline prioritization.
In January, we announced a multi-project and licensing deal with
Cancer Research UK's Commercial Partnerships Team and The Insti-
tute of Cancer Research (ICR), London, to discover and develop new
anticancer drugs. Together we will collaborate on three independent
research projects spanning discovery to preclinical candidate nomi-
nation. This work will progress the discovery and development of
potential cancer drugs, as well as develop biomarkers for target
engagement and patient selection. Under the terms of the deal,
Merck has worldwide rights to take molecules discovered through
the collaboration forward into clinical development. Cancer Research
UK and the ICR will receive milestone payments based on the
achievement of research and development, regulatory and sales
goals plus royalty payments on net sales of future products discov-
ered or developed under the agreement. Any payments made to
Cancer Research UK and the ICR will be invested in future lifesaving
research.
In April, we announced a development and risk-sharing collabo-
ration with the SFJ Pharmaceuticals Group (SFJ), a U.S.-based com-
pany focused on increasing R&D output and productivity through
innovative models. In a novel innovation model recently emerging
in the biopharma industry, SFJ - one of the pioneers of such collab-
orations - will finance and be responsible for Phase II/III develop-
ment of abituzumab, Merck's IgG1 monoclonal antibody, as a first-line
treatment for metastatic colorectal cancer (mCRC) in combination
with ErbituxⓇ and chemotherapy.
Additionally, we are currently assessing the potential of investi-
gating tepotinib in combination with novel therapies for the treat-
ment of advanced heptocellular carcinoma (HCC) after the two HCC
Phase II trials met their primary endpoints, with clinical activity
demonstrated both as first-line and second-line treatment and safety
findings in line with earlier studies.
In June, 14 abstracts were presented further characterizing the
complementary profiles of MavencladⓇ and RebifⓇ at the 4th Congress
of the European Academy of Neurology (EAN) in Lisbon, Portugal.
In May, the Multiple Sclerosis Journal published data outlining
the effects of MavencladⓇ treatment on patients with highly active
RMS. The data showed that MavencladⓇ reduced the risk of 6-month
Expanded Disability Status Scale (EDSS) progression by 82% vs
placebo.
In April, data for MavencladⓇ and Rebif® (interferon beta-1a)
were presented at the American Academy of Neurology (AAN) 70th
Annual Meeting, April 21-27 in Los Angeles (California, United States).
MavencladⓇ data presented included poster presentations highlight-
ing analyses of the CLARITY, CLARITY Extension and ORACLE-MS
trials evaluating long-term safety and durable efficacy in patients
with MS.
On March 7, we announced positive results from our Phase IIb
study in RMS of evobrutinib, an investigational, highly specific, oral
BTK inhibitor and the first BTK inhibitor to show clinical proof-of-
concept in RMS. The study met its primary endpoint, demonstrating
that oral evobrutinib resulted in a clinically meaningful reduction of
gadolinium-enhancing T1 lesions on MRI scans measured at weeks
12, 16, 20 and 24 in comparison to patients receiving placebo.
The results from the key magnetic resonance imaging (MRI)
findings of the CLARITY Extension study of MavencladⓇ (cladribine
tablets) were published in January in the journal Therapeutic Advances
in Neurological Disorders. The findings suggest that two-year treat-
ment with MavencladⓇ (given over 20 days) has a durable effect on
MRI during observation in years 3 and 4.
On July 30, we announced that a resubmission of the New Drug
Application (NDA) for cladribine tablets as a potential treatment for
patients with relapsing forms of MS was accepted for review by the
FDA. The acceptance indicates that the FDA found the company's
resubmission sufficiently complete to permit a substantive review.
The resubmission was in response to the Complete Response Letter
issued by the FDA in 2011 requesting an improved understanding of
safety risks and the overall benefit-risk profile. The NDA acceptance
follows global approvals of cladribine tablets under the trade name
MavencladⓇ in more than 40 countries since August 2017, including
the European Union (EU), Canada, Australia, Israel, Argentina, United
Arab Emirates, Chile and Lebanon. In 2018, MavencladⓇ was approved
in a total of 11 countries. Additional filings in other countries are
planned.
Multiple sclerosis (MS) is one of the world's most common neurolo-
gical disorders. Despite the emergence of several therapies in the
last two decades, there are still significant unmet needs for MS
patients, particularly those with highly active relapsing MS (RMS).
Neurology & Immunology
We continue to develop much-needed new treatment options for
patients with hard-to-treat cancers and have made key progress in
this area with avelumab, an anti-PD-L1 antibody that we are co-
developing and co-commercializing with Pfizer. To date, avelumab
has received approval in 46 countries across the world under the
brand name BavencioⓇ. In 2018, approvals were granted in several
countries, including Australia and Brazil, for Merkel cell carcinoma
(MCC) as well as Israel for MCC and urothelial carcinoma (UC) and
Canada for UC.
Moreover, data from our legacy brand Erbitux® (cetuximab) were
presented, adding to the growing body of real-world evidence sup-
porting the therapy's role as a standard of care in RAS wild-type
mCRC, first-line recurrent or metastatic SCCHN and for patients with
locally advanced SCCHN who may not be able to tolerate cisplatin-
based regimens in full.
They included the first presentation of data from the pivotal
Phase III study JAVELIN Renal 101 evaluating avelumab in combi-
nation with axitinib compared with sunitinib as initial therapy for
patients with advanced RCC. For avelumab, updated data in MCC
and advanced gastric or gastroesophageal junction cancer were also
presented.
At the 2018 ESMO Congress (October 19-23 in Munich, Germany),
we presented a total of 41 abstracts representing eight therapeutic
agents and 14 tumor types. The data presented showcased the diver-
sity of Merck's pipeline, with results from a number of high-priority
clinical development programs.
Multiple presentations on avelumab at ASCO included two-year
safety and efficacy data in metastatic MCC for avelumab from the
pivotal JAVELIN Merkel 200 trial, as well as data in NSCLC and UC.
Pipeline updates at ASCO also included early clinical results for tepo-
tinib patients with NSCLC harboring MET exon 14 skipping mutations,
M7824 in patients with HPV-associated cancers and NSCLC, M6620
in NSCLC and advanced solid tumors as well as data for M3814 and
M2698 in solid tumors.
for molecules including avelumab and Erbitux®, and pipeline updates
on M7824, tepotinib, the p70S6K/AKT targeted agent M2698, the
DNA-PK inhibitors M3814 and M6620.
83
Fundamental Information about the Group _ Research and Development
Combined Management Report
At the 2018 ASCO Annual Meeting (June 1-5 in Chicago, Illinois,
United States), we shared results from our increasingly broad oncol-
ogy portfolio, from immuno-oncology to DDR approaches, in a wide
range of hard-to-treat cancers. Representing seven therapeutic
agents and eight tumor types, we showcased the significant poten-
tial in not only later-stage priority programs, but also in early pipe-
line programs that could make a real difference for patients. We
presented data across our oncology and immuno-oncology pipeline
Additionally, new data for M7824 were presented from expansion
cohorts of two ongoing Phase I clinical trials, including the first pres-
entation data for SCCHN, BTC and esophageal cancers. In addition,
updated data for M7824 in NSCLC and gastric cancer were shared.
Data presented for tepotinib included results from three Phase II
trials, two in advanced HCC and one in NSCLC, providing further
evidence of this precision medicine's promising clinical activity in
solid tumors. In DDR, results were presented from a Phase I trial
investigating M6620 (formerly VX-970) in combination with gem-
citabine in patients with advanced NSCLC; and two Phase I trials of
DNA-dependent protein kinase inhibitor M3814. From the broader
pipeline, results were also shared from the Phase I/II trial of M7583,
a Bruton's tyrosine kinase (BTK) inhibitor, in patients with B cell
malignancies, as well as a retrospective analysis of the Phase I/II
Poseidon study investigating abituzumab in patients with mCRC.
In October, we presented 23 abstracts, including new safety and
efficacy data on MavencladⓇ, Rebif® and investigational therapy
evobrutinib at the 34th Congress of the European Committee for
Treatment and Research in Multiple Sclerosis (ECTRIMS) in Berlin,
Germany. The data presented at ECTRIMS build on the existing
real-world and clinical evidence around the safety and efficacy of
MavencladⓇ and reaffirm a positive benefit-risk profile of the oral
treatment, which is taken for a maximum of 20 days over two years.
Oncology and immuno-oncology are core focus areas in our R&D
portfolio. With an emphasis on biomarker-driven research, we aim
to deliver personalized treatments and a transformative pipeline.
Translational research is embedded into the whole R&D process, with
several projects addressing unmet needs in hard-to-treat cancers
through innovative treatment approaches and novel combinations.
In 2018, we achieved a number of significant milestones across our
oncology and immuno-oncology pipeline.
BIOPHARMA
331
408
0
354
373
384
391
378
698
704
689
722
786
2018
2017
2016
2015
2006³
305
13
14
331
13
Healthcare
In 2018, approximately 7,200 employees worked for Merck research-
ing innovations to serve long-term health and technology trends in
both established and growth markets (in 2017: approximately 6,800).
Merck spent around € 2.2 billion on research and development
(R&D) in 2018 (2017: around € 2.1 billion). In our research and
development activities, we focus on both in-house research and
external collaborations that enable us to increase the productivity of
our research while simultaneously reducing financial outlay. The
organizational set-up of our R&D activities reflects the structure of
Merck with three business sectors.
We conduct research and development (R&D) worldwide in order to
develop new products and services designed to improve the quality
of life of patients and to satisfy the needs of our customers. Further
optimizing the relevance and efficiency of our research and devel-
opment activities - either on our own or in cooperation with third
parties - is one of our top priorities.
Research and Development
81
Fundamental Information about the Group _ Research and Development
Combined Management Report
To mark our 350-year anniversary, we stepped up our commit-
ment and carried out more than 350 charitable projects in 60 coun-
tries in 2018. In more than 60% of all initiatives our colleagues
joined us in our efforts, whether through donations in cash or in
kind or through their active collaboration in projects.
Oncology and Immuno-Oncology
Our subsidiaries are engaged in a wide variety of local projects.
We have defined a general set of criteria for selecting projects, and
the decisions concerning specific projects are made by our sub-
sidiaries. In 2018, we spent a total of € 36 million on community
engagement activities. For the first eleven months this amount
includes the Consumer Health business, which was divested as of
December 1, 2018. This figure does not include contributions from
the Merck Foundation.
We see ourselves as part of society - both at our individual sites and
worldwide. Taking responsibility towards society is an integral part
of our entrepreneurial approach. We believe that we can make an
important contribution to the community through our knowledge,
our skills and our products.
monitor the development of the amount of waste we produce. Based
on this score, we have set ourselves the goal of reducing the envi-
ronmental impact of our waste by 5% by 2025 (2016 baseline). For
this purpose, we continuously analyze the improvement potential of
our production processes and disposal routes. In 2018, we also
established two expert panels on the topic of waste management.
They regularly discuss best practice examples and thus facilitate an
exchange of experience between our global sites.
Alongside energy efficiency and climate protection, we also focus
on water. Since 2016, we have been pursuing the goal of implement-
ing a sustainable water management system at sites with high con-
sumption levels by 2020. At sites with relevant water use located in
areas of high water stress, we are aiming to cut our water consump-
tion by 10% by 2020 (2014 baseline). At the end of 2018, we had
lowered our water consumption at the relevant sites by 11% in
comparison with 2014. In 2018, the CDP gave our efforts to conserve
water a "B-" rating (2017: B). Natural resources are becoming
scarcer. We therefore want to use raw materials as efficiently as
possible and to limit the loss of raw materials. In this way, we intend
to minimize the environmental impacts of our waste as far as pos-
sible. In 2016, we developed the Merck Waste Score, which allows
us to compare the amount of waste our sites are producing and
At the same time, we are pushing forward with the changeover
to renewable energies. In 2017, we installed a solar voltaic system
in Burlington, Massachusetts, United States. It has an installed
capacity of 182 kilowatts and generated 136,000 kilowatt hours in
2018. Energy management plays a key role in our efforts for energy
efficiency and climate impact mitigation. Our production sites in
Darmstadt and Gernsheim account for 29% of our global energy
consumption. Both these facilities have fulfilled the international
energy management standard ISO 50001 since 2012. Currently,
12 of our production sites have a certified energy management sys-
tem. We are working to implement further measures to achieve our
climate goal. For example, we are steadily reducing our process-
related emissions in the Life Science business sector through process
optimization. In 2018, this enabled us to save 16,000 metric kilotons
of CO2 equivalents.
To achieve our climate impact mitigation goals, we have launched the
EDISON program, which consolidates all our climate impact mitigation
and energy efficiency activities. Through the more than 360 EDISON
projects initiated since 2012, we aim to annually save around 177 met-
ric kilotons of CO2 in the medium term. Overall, thanks to the EDISON
projects we have saved approximately 89,000 megawatt hours of
energy since 2012.
3 Baseline for our emission targets is 2006.
4 eq = equivalent.
1 In line with the Greenhouse Gas Protocol, for all previous years (up to the 2006 baseline) the greenhouse gas emissions have been calculated based on the corporate structure as of
December 31 of the reporting year and retroactively adjusted for acquisitions or divestments of (parts of) companies, or for changes in emission factors (portfolio-adjusted).
2 All reported environmental key figures do not include data on the Consumer Health business, since these operations were transferred to Procter & Gamble - effective December 1, 2018 - and
have been classified as discontinued operations within the meaning of IFRS 5 since April 2018.
344
13
Our social responsibility activities are primarily focused on those
areas in which we have problem-solving expertise stemming from
our core businesses. We are thus engaged in health and culture
projects and furthermore support education, especially in the nat-
ural sciences. Additionally, we provide disaster relief and support
people in need in the areas in which we operate.
Combined Management Report
Fundamental Information about the Group _ Research and Development
84
Gastric cancer, 1st line maintenance
Phase III
Non-small cell lung cancer, 1st line
Phase I
Hematological malignancies
Phase I
Solid tumors
Phase I
Solid tumors
Phase I
Solid tumors
Phase I
Solid tumors
Phase I
Solid tumors
Phase I
Solid tumors
Phase III
Avelumab (anti-PD-L1 mAb)
Ovarian cancer, 1st line
Phase III²
Avelumab (anti-PD-L1 mAb)
Phase II³
Non-small cell lung cancer
Avelumab (anti-PD-L1 mAb)
Phase II³
Solid tumors
Avelumab (anti-PD-L1 mAb)
Phase II
Phase II
Merkel cell carcinoma, 1st line
Phase III
Locally advanced head and neck cancer
Avelumab (anti-PD-L1 mAb)
Phase III
Phase III
Urothelial cancer, 1st line maintenance
Renal cell cancer, 1st line
Avelumab (anti-PD-L1 mAb)
Avelumab (anti-PD-L1 mAb)
Avelumab (anti-PD-L1 mAb)
Hepatocellular cancer
Phase II
Non-small cell lung cancer
Fundamental Information about the Group _ Research and Development
Combined Management Report
86
On September 28, we announced the recipients of the Grant for
Growth Innovation (GGI) for 2018 during the 57th European Society
of Paediatric Endocrinology (ESPE) meeting in Athens, Greece. Appli-
cations were reviewed by an independent scientific steering commit-
tee consisting of six internationally renowned endocrinologists and
researchers. Research groups based in Finland and Italy were each
awarded a grant for innovation projects in the field of growth and
growth disorders.
In July, the EU worksharing procedure was finalized and the German
Federal Institute for Drugs and Medical Devices (BfArM) recom-
mended the approval of our new formulation of Euthyrox® (levothy-
roxine) in 21 EU countries. The German BfArM decision was based
on a study demonstrating bioequivalence between the old and new
formulations and a dose form proportionality study with the new
formulation. The new formulation came at the request of several
health authorities worldwide. It was introduced in France in March
2017 and Switzerland in April 2018. Since October the product has
been available on the Turkish market. Following the positive recom-
mendation from BfArM, which is acting as a representative of all
21 EU countries involved in the EU worksharing procedure, we expect
the new formulation of Euthyrox® to be available in these countries
from 2019 onwards.
During 2018, we received further authorizations for GlucophageⓇ
(metformin) for the reduction in the risk or delay of the onset of type
2 diabetes when intensive lifestyle changes have failed. We now have
this indication in 40 countries, among them Brazil, United Kingdom,
Singapore and Saudi Arabia. Global roll-out in other countries is
ongoing.
General Medicine & Endocrinology
-
BIOPHARMA PIPELINE
At the Grant for Fertility Innovation (GFI) ceremony at the annual
meeting of the European Society of Human Reproduction and Embry-
ology (ESHRE) in Barcelona, Spain, we confirmed our commitment
to supporting potential breakthrough research projects in the field
of fertility. With an amount of € 300,000, the GFI is again supporting
the advancement of medical science, aiming to bring innovation to
life. The two winners Louise Glover from Ireland and Cinzia Di
Pietro from Italy - received their awards during the ceremony, which
was also attended by Louise Brown, the world's first person to be
conceived using in vitro fertilization (IVF), as well as IVF pioneer
Professor Bruno Lunenfeld.
85
Fundamental Information about the Group _ Research and Development
Combined Management Report
At the European Lupus Society in March (Düsseldorf, Germany),
data were presented on atacicept, a recombinant fusion protein
thought to target the cytokines APRIL and BLYS. Two oral presenta-
tions of analyses of the Phase II ADDRESS II clinical trial assessing
atacicept in patients with systemic lupus erythematosus (SLE)
reported attainment of low-disease activity and reduction of flares
in patients with high SLE disease activity.
At the Osteoarthritis Research Society International (OARSI)
2018 World Congress - held in April in Liverpool (United Kingdom)
16 abstracts, including two oral presentations, were presented.
Merck's presence at OARSI reflects the company's dedication to help-
ing optimize outcomes for patients living with chronic progressive
diseases, with the goal of developing novel disease-modifying ther-
apies for osteoarthritis (OA). Oral presentations on sprifermin offer
further insights supporting its dose-response structural effect in
patients with knee OA, observed in earlier studies.
We also announced in Berlin (Germany) the winners of the annual
Grant for Multiple Sclerosis Innovation (GMSI) Award, which supports
the advancement of science and medical research in the field of MS
and provides a grant of up to € 1,000,000 per year to one or more
selected research projects. The winners were Professor Franca Deriu
of the University of Sassari (Italy); Professor Jennifer Gommerman
and Dr. Valeria Ramaglia of the University of Toronto (Canada);
Professor Edgar Meinl of the Institute of Clinical Neuroimmunology
of the University of Munich (Germany); as well as Dr. Gerd Meyer zu
Hörste and Professor Heinz Wiendl of Münster University Hospital
(Germany).
In addition, following the #MSInside Out campaign launch on
World MS Day at the end of May, Merck premiered the MS Inside Out
Documentary film executively produced by Shift.ms during an event
on October 11. At the event, Merck shone a light on the untold stories
of MS, as well as revealing the findings from a new global MS carers
survey conducted in collaboration between leading international carer
organizations IACO (International Alliance of Carer Organizations)
and Eurocarers. The data presented at ECTRIMS further demon-
strated the need for a deeper understanding of those affected by MS
and their carers.
Based on an integrated analysis of patients from the CLARITY,
CLARITY EXT and ORACLE-MS trials, including two additional years
of data from the long-term PREMIERE Registry, the treatment emer-
gent adverse event (TEAE) profile associated with MavencladⓇ in
patients with RMS was confirmed, with no new safety findings. Late-
breaking data from the multi-sponsored European IFNẞ Pregnancy
Registry and Nordic health registers demonstrated that treatment
with interferon beta formulations - including Rebif® - before concep-
tion or during pregnancy did not affect outcomes for the pregnancy
or for the infant. Positive late-breaking data from the 24-week results
of the double-blind, randomized, placebo-controlled, 48-week,
Phase II study of evobrutinib in patients with RMS were presented
at ECTRIMS. The study met its primary endpoint, with evobrutinib
75mg QD (once daily) and 75mg BID (twice daily) significantly reduc-
ing the number of gadolinium-enhancing T1 (T1 Gd+) lesions mea-
sured at weeks 12, 16, 20 and 24 in comparison to patients receiv-
ing placebo.
Fertility
M7824 (anti-PD-L1/TGF-ẞ trap)
as of December 31, 2018
Compound
Registration¹
Phase II
Multiple sclerosis
Relapsing multiple sclerosis
Status
Indication
Avelumab (anti-PD-L1 mAb)
Avelumab (anti-PD-L1 mAb)
Immuno-Oncology
M7583 (BTK inhibitor)
Therapeutic area
M8891 (MetAP2 inhibitor)
M6620 (VX-970, ATR inhibitor)
M3814 (DNA-PK inhibitor)
M2698 (p70S6K and Akt inhibitor)
Tepotinib (MET kinase inhibitor)
Tepotinib (MET kinase inhibitor)
Oncology
Cladribine tablets (lymphocyte-targeting agent)
Evobrutinib (BTK inhibitor)
Neurology
M4344 (VX-803, ATR inhibitor)
Responsibility for society
Indirect CO2eq emissions
_ Corporate Responsibility
7,708
7,621
7,898
8,035
Direct energy consumption
4,835
4,788
4,748
2018
4,759
4,320
4,536
4,514
4,522
Liquid fossil fuels³
396
130
115
Natural gas
2017
2016
2015
146
149
Total energy sold
0.3
0.3
0.1
0.0
Electricity
Steam, heat, cold
0.3
0.3
0.1
0.0
0.0
0.0
0.0
0.0
In terajoules
Total energy consumption
115
Biomass and self-generated renewable energy
119
122
1.1
0.4
0.0
Steam, heat, cold
0.0
0.0
0.0
0.0
¹In line with the Greenhouse Gas Protocol, for all previous years (up to the 2006 baseline) the energy consumption has been calculated based on the corporate structure as of December 31 of
the reporting year and retroactively adjusted for acquisitions or divestments of (parts of) companies, or for changes in emission factors (portfolio-adjusted).
2 All reported environmental key figures do not include data on the Consumer Health business, since these operations were transferred to Procter & Gamble - effective December 1, 2018 - and
have been classified as discontinued operations within the meaning of IFRS 5 since April 2018.
3 Light and heavy fuel oil, liquefied petroleum gas (LPG), diesel and gasoline.
Combined Management Report
Fundamental Information about the Group Corporate Responsibility
80
TOTAL GREENHOUSE GAS EMISSIONS (SCOPE 1 AND 2 OF THE GHG PROTOCOL) 1, 2
In metric kilotons
Total CO₂eq emissions
thereof
direct CO2eq emissions
1.1
95
Electricity
0.4
119
122
Indirect energy consumption
2,873
2,833
3,150
3,276
Electricity
2,527
2,491
2,624
2,740
Steam, heat, cold
346
342
526
Total energy sold
1.1
1.1
0.0
96
536
761
In 2018, we successfully completed the third and final phase of
the REACH registration process by registering all substances annually
produced or imported in quantities ranging from one to 100 metric
tons with respect to the risks they pose in terms of their use, storage,
transport and disposal. All the chemical substances concerned in our
portfolio were registered on schedule. This process also includes
substances added to our portfolio from the Sigma-Aldrich acquisition.
Safety of our Healthcare products
Patient safety has a top priority in everything we do. During the entire
life cycle of our medicines, we provide patients and physicians with
up-to-date risk-benefit evaluations. To this end, company experts
process safety-relevant information from various sources such as
clinical trials, adverse reaction reports and scientific literature. Ulti-
mate responsibility for the safety of our biopharmaceuticals is borne
by our Global Chief Medical Officer, with support from the Medical
Safety and Ethics Board. Our Global Patient Safety unit continuously
monitors and evaluates the safety and risk-benefit ratio of our med-
icines worldwide (pharmacovigilance). For products in our Allergo-
pharma business, we have also developed comprehensive clinical
efficacy and safety profiles that we continuously update. For the
safety of patients, we have established a global pharmacovigilance
system that we are always working to enhance.
Quality of our products
Our goal is to provide customers and patients at all times with high-
quality original products. Through our quality vision - "Quality is
embedded in everything we do!" - we remind our employees of their
responsibility - across all business sectors, all Group functions and
all levels of the company.
Supplier management
We procure many raw materials, packaging materials, technical prod-
ucts, components and services worldwide. Our overarching goal is
to protect the stability of these supply chains and always provide our
customers with the best products and services, while offering them
optimal quality and service. Our supplier management focuses on
compliance with fundamental environmental and social standards,
in addition to high quality, delivery reliability and competitive prices.
They are primarily derived from the core labor standards of the ILO
(International Labour Organisation), from the UN Global Compact
and from the Code of Conduct of the BME (German Federal Associ-
ation for Materials Management, Purchasing and Logistics).
Numerous regulations are in place to ensure that chemicals pose no
risk to humans or the environment. Compliance with these regulatory
requirements is an important part of our work. Through a Group-wide
policy, we have established global processes for defining, directing
and implementing product safety, as well as the corresponding man-
agement structures. We incorporate all relevant national and inter-
national chemical regulations into our policies and guidelines, and
adhere to them. This includes the EU chemicals regulation REACH
(Registration, Evaluation, Authorisation and Restriction of Chemicals)
and CLP (Classification, Labelling and Packaging of Substances and
Mixtures, EU GHS). Furthermore, we are committed to transparency.
For instance, in line with the Global Product Strategy, an international
initiative of the chemical industry, we provide our customers with
product safety summaries for hazardous materials.
Our Group Procurement Policy and Responsible Sourcing Princi-
ples define our procurement practices. Due to the global focus of our
procurement, we are continuously working to ensure adherence to
our supply chain standards.
Responsibility for our employees
Our employees contribute to groundbreaking progress in science
and technology across the world. They are the basis of our success
and therefore play a central role for the success of our business. In
accordance with the Merck values, we live a culture of mutual esteem
and respect. To remain successful in the future we want to attract
people to our company who contribute their curiosity, their courage
and spirit of invention. We therefore place a strategic focus on
employee development, leadership and performance management.
Furthermore, we strive to foster diversity among our employees
(more information can be found under "People at Merck").
Combined Management Report
Fundamental Information about the Group _ Corporate Responsibility
79
Responsibility for the environment
We seek to impact the environment as little as possible while doing
business. This especially includes efficiently conserving resources
such as energy, water and raw materials while also continuously
reducing our emissions and waste.
Environmental management system
As a member of the industry initiative "Together for Sustainabil-
ity" (TFS), we are able to use the supplier self-assessments and audit
results shared among all member companies, who in turn abide by
all restrictions stipulated within competition law. Through the shared
platform approach, Merck has access to the sustainability assess-
ment scorecards of more than 10,700 companies as well as over
1,000 audits reports.
Safety of our chemical products
Fundamental Information about the Group Corporate Responsibility
Combined Management Report
Steam, heat, cold
Biogenic CO2 emissions
Combined Management Report
Fundamental Information about the Group
77
Strategic sphere of activity:
Broad Minds
The promotion of science, education and culture in an integrated
manner constitutes one of the central concerns of our engagement
in society. This is in line with our 350-year tradition of advancing art
and culture. In this way we champion characteristics that are indis-
pensable for our business activities as a high-tech company: crea-
tivity, the passion for new discoveries and curiosity, together with the
courage to transcend boundaries.
Boosting scientific education
We view education as a key component of culture - and vice versa.
Education can help us understand culture. But culture can also build
a bridge to education; it can stimulate curiosity and creativity. We
therefore support educational projects at many of our sites and grant
scholarships, for instance, or help define the curricula of selected
classes in schools. We want to spark an interest in science, particu-
larly among young people. This is why we have been supporting the
"Jugend forscht" (Young Researchers) competition for more than
35 years. Since 1996, we have been organizing the state-level com-
petition for the German Federal State of Hesse. In 2018, we hosted
the nationals for the third time.
Through our Junior Labs, we want young people to enjoy con-
ducting experiments. These learnings labs at the Technical University
of Darmstadt combine classroom instruction with trending topics and
modern research methods. In 2018, around 2,500 school students
used the chemistry laboratory and around 1,000 school students
experimented in the biology laboratory.
In 2017, we launched a pilot project for the continuing education
of teachers in order to transfer our commitment to STEM education
in an international context for the first time. We started in India,
followed by projects in Chile, Kenya and Tanzania in 2018. By the
end of the year, we had trained almost 100 teachers who act as
multipliers and will reach thousands of school students.
As part of SPARK, our global volunteer program, employees from
our Life Science business sector share their skills and experience
with students and support our local communities. The program is
intended to spark curiosity in science and inspire students to consider
a STEM-related career. In 2018, over 2,800 employees invested more
than 19,000 hours in the program, reaching over 66,000 young
people. As part of SPARK, in 2018 we once again sent our Curiosity
Cube™ on a journey through the United States and Canada. This is
a freight container that transforms into a mobile laboratory and is
equipped with state-of-the-art technology. Directed by our employ-
ees, school students can use it to carry out scientific experiments.
In 2018, the Cube traveled approximately 30,000 kilometers across
the United States and engaged students in 108 communities. 94%
of schools visited fall under the "Title 1" category, where students
mainly come from low-income backgrounds.
The Deutsche Philharmonie Merck
Promoting literature
Like music, literature is an important mediator between cultures.
That is why we support five literary prizes around the world. The
awards primarily recognize those authors who build bridges between
cultures, as well as between literature and science. We awarded four
of the prizes in 2018: The Johann Heinrich Merck Award for Literary
Critique and Essay in Germany went to author and translator Martin
Pollack. The Italian Premio Letterario Merck was awarded to natural
scientist, author and professor Carl Safina, and to physicist and
science historian Lucio Russo. The winners of the Japanese Merck-
Kakehashi Literature Award were author Clemens J. Setz and his
translator Ayano Inukai. The Merck Translation Award in Russia went
to authors Nina Federowa, Ekaterina Aralova, Natalia Stillmark and
Tatiana Zborovskaja. The Merck-Tagore Literature Award in India will
once again be offered in 2019.
Responsibility for our products
The safety of our products is at the core of our corporate responsi-
bility. When used properly, they must pose no risk to customers,
patients, consumers or the environment. Our goal is to ensure a
positive benefit/risk profile for our products, which is why we regu-
larly examine safety across their entire life cycle and continuously
take steps to minimize risks. We provide patients, consumers and
customers with extensive informational material so that they can use
our products in a safe, responsible and proper manner.
In our pharmaceutical marketing activities, the focus is always
on the health and well-being of patients because we want them to
receive effective and high-quality treatment. All guidelines pertaining
to marketing and advertising are part of our Group-wide compliance
program, which is complemented by our internal guidelines and
various voluntary commitments that, in many cases, far exceed the
applicable statutory regulations.
78
In our Corporate Environment, Health and Safety Policy, which is
applicable Group-wide, we have defined our principles and strategies
for environment, health and safety. It is an integral component of
our EHS management system, which is certified annually by external
auditors in accordance with the international standard ISO 14001.
At all our sites, local EHS managers oversee operational environmen-
tal protection measures. These employees continually receive train-
ing and obtain additional qualifications. Since our businesses are
constantly changing, our environmental management system is sub-
ject to internal and external audits on a regular basis to ensure that
the ISO 14001 requirements are still being met. In 2018, we obtained
an ISO 14001 group certificate for the tenth consecutive year. This
certificate covers 81 sites around the world.
The Deutsche Philharmonie Merck is our musical ambassador. We
consider classical music to be the universal language that brings
people together; as such, it is an important part of our culture. The
concerts of this professional ensemble represent an integral part of
the cultural life in the vicinity of our Group headquarters in Darmstadt
and remain highly popular, with around 31,000 people attending
them in 2018. In the orchestra workshop, children and young people
gained their first experience in a professional orchestra. We also
fostered enthusiasm for classical music among young people through
seat cushion concerts for children aged four years and above as well
as through youth concerts. In addition, the orchestra again toured
internationally. Concerts took place in Austria, the United States and
China in 2018. In Beijing, the musicians held an orchestra workshop
with music students at the local university. The subsequent concert
in front of an audience of around 1,700 was a huge joint success.
Focus areas: Energy efficiency, greenhouse gas emissions,
water, waste and recycling
Liquid fossil fuels³
110
36
32
32
Biomass and self-generated renewable energy
33
34
33
34
Indirect energy consumption
787
875
910
Electricity
702
692
All reported environmental key figures do not include data on the
Consumer Health business, since these operations were transferred
to Procter & Gamble - effective December 1, 2018 - and have been
classified as discontinued operations within the meaning of IFRS 5
since April 2018.
729
1,256
1,254
798
1,200
ENERGY CONSUMPTION 1, 2
Climate impact and resource scarcity are key challenges facing
society in the 21st century. As a responsible company, it is especially
important for us to do our part. We have therefore set ourselves the
goal of reducing total direct and indirect greenhouse gas emissions
by 20% by 2020 (2006 baseline), irrespective of production growth.
In 2018, the CDP (formerly the Carbon Disclosure Project) gave our
efforts for the sustainable use of energy a "C" rating (2017: B). The
CDP assesses companies in terms of their performance and trans-
parency in climate impact and water management.
1,260
In gigawatt hours
2015
2016
2018
Total energy consumption
2,141
2,117
2017
2,232
Direct energy consumption
Natural gas
1,343
1,330
1,319
1,322
2,194
MSCI European Pharma Index
⚫ Dow Jones European Chemical Index
• Merck
• DAX®
-10%
-5%
5%
0%
10%
15%
28.54%
25%
20%
30%
25.48%
July
17.08%
Jan.
Feb.
Mar.
Apr.
May
June
Aug.
Sept.
Oct.
Nov.
35%
Dec.
Source: Bloomberg (closing rates).
24.46%
in %
Marcus Kuhnert
MERCK SHARES
Stefan Kreman
To our Shareholders
Dr. Stefan Oschmann
Chairman of the Executive Board and CEO
7
To our Shareholders
The Executive Board
The Executive Board of Merck KGaA:
The Executive Board
8
Udit Batra
(CEO Life Science) (Chief Financial Officer)
Stefan Oschmann
(Chairman of the
Executive Board and CEO)
Short biographies
More information can be found at www.merckgroup.com
Company → Who We Are → Management
Belén Garijo
Kai Beckmann
(CEO Healthcare) (CEO Performance Materials)
Merck Shares
To our Shareholders
Merck Shares
6
At a glance
On the whole, the performance of Merck shares in 2019 was characterized by a strong increase in value. The shares started the
year with an uptrend but came under pressure during the second quarter. The turnaround began in the second half of the year,
when Merck shares caught up with the reference indices. However, at the end of the year, they fell short of these reference indices.
Merck shares ended the year with a closing price of € 105.35 and thus appreciated by 17% compared with the prior year.
At the end of the year, the shares underperformed the relevant reference indices, which all reported a strong upturn during the
same period. When compared with the DAX® reference index, which rose by around 25% during the overall period, the Merck
shares performed just under 8 percentage points below. Compared with the relevant reference index for the chemical industry,
which increased by 29% over the year, Merck shares were around 11 percentage points lower. The pharmaceutical industry index
gained around 24% in 2019, thus outperforming Merck shares by 7 percentage points in the same period.
In 2019, the Merck Executive Board and the Investor Relations team gave in-depth briefings to more than 1,000 investors at
investor conferences, as well as during roadshows and conference calls.
The average daily trading volume of our shares declined by around 13% year-on-year, from some 584,000 to a good 505,000 in
2019. North America's proportion of the free float remained the highest in 2019, although it fell to around 33% when compared to
the prior year (2018: 36%). By investor type, growth investors and value investors dominated, as in the previous year. In 2019,
the proportion of growth investors at Merck remained at last year's level of 34%. At the end of 2019, the top five investors held
around 24% of the free float (2018: 28%).
Share price development from January 1, 2019, to December 31, 2019
Merck Shares
German Retail/Undisclosed
MERCK SHARES
Key share price data¹
Based on the floor trading systems of all German exchanges and the regulated market on XetraⓇ
4 Based on the theoretical number of shares (434.8 million).
5 Based on the number of shares in free float (129.2 million). Source: Bloomberg, Thomson Reuters.
IDENTIFIED INVESTORS BY REGION AS OF NOVEMBER 2019
10.6%
Germany
19.5%
Europe (ex-Germany/UK)
20.7%
5.7%
Rest of World
Source: Nasdaq Shareholder Identification
Total Shares Outstanding: 129.2 million
32.6%
United States
3
10.9%
IDENTIFIED INVESTORS BY TYPE AS OF NOVEMBER 2019
3%
Hedge
22%
Index
24 %
Value
Source: Nasdaq Shareholder Identification
1 %
Others
34 %
Growth
16%
GARP (Growth At
Reasonable Price)
Capital Structure, Investments, and Financing
Activities
Sincerely,
United Kingdom
Share price-relevant figures relate to the closing price in Xetra® trading on the Frankfurt Stock Exchange.
2 2019 dividend subject to approval by the Annual General Meeting.
1
11,629
Dividend²
Share price high
Share price low
Year-end share price
Daily average number of Merck shares traded³
Market capitalization 4 (at year-end)
2019
2018
€
1.30
1.25
€
109.75
99.82
€
86.46
74.80
€
105.35
89.98
Number
504,934
583,653
€ million
45,804
39,121
Market value of authorized shares 5 (at year-end)
€ million
13,616
10
I truly appreciate your support and hope that you will continue to accompany us on our journey into the future.
Healthcare
Letter from Stefan Oschmann
2,508
2,732
Business free cash flow¹
0.46
5.10
5.56
Earnings per share pre (€)¹
-61.0%
-60.8%
-4.72
7.76
3.04
Earnings per share (in €)
-2,072
3,396
1,324
224
9.0%
8.9%
¹Not defined by International Financial Reporting Standards (IFRSS).
MERCK GROUP
2017
14,517
2017
3,800
2018
14,836
2018
Profit after tax
4,385
16,152
2019
€ million
EBITDA pre¹
MERCK GROUP
€ million
Net sales
2019
25.6%
27.1%
Margin (% of net sales)¹
Operating result (EBIT)¹
8.9%
1,315
14,836
16,152
Net sales
287 Other Disclosures
2,120
€ million
2019
€ million
Change
Key figures
MERCK GROUP
Key Figures for 2019
Merck
2018
4,246
1,727
22.8%
15.4%
585
3,800
4,385
EBITDA pre¹
23.8%
25.2%
393
Margin (% of net sales) 1
539
3,528
4,066
EBITDA¹
11.6%
13.1%
Margin (% of net sales) 1
15.3%
2016
15,024
2016
194
Report on Economic Position
64
Group Structure
185
General Disclosures
180
Performance Indicators
Notes
Consolidated Statement of Changes in Net Equity
Consolidated Cash Flow Statement
178
People at Merck
44 Research and Development
33 Corporate Responsibility
Internal Management System
180
56
64
200
87
All these examples show that science and technology are the key to progress that will benefit everyone: patients and customers,
employees, society as a whole, and of course you, our shareholders. That is what we mean when we talk about unlocking the
positive force of science and directing our actions toward human progress. I am convinced that our company has a strong future.
As a leader in science and technology. Successful in business. And always instilled with a strong spirit of responsible
entrepreneurship.
Merck Group
75
249
Course of Business and Economic Position
75
Macroeconomic and Sector-Specific
Operating Assets, Liabilities, and Contingent Liabilities
Employees
Developments
Review of Forecast against Actual Business
40
67
213
Environment
Operating Activities
240
2019
177
Strategy
Management Report
Combined
Merck Shares
The Executive Board
Letter from Stefan Oschmann
589
To Our Shareholders
Corporate Governance
Annual Report
Owing to the altered expectations in terms of the impact of the Covid-19 pandemic, some chapters of this Annual
Report were updated on May 12, 2020. The respective text passages are marked in magenta.
1 Not defined y International Financial Reporting Standards (IFRSS).
3,630
2015
12,845
2015
4,490
Table of Contents
27
136 Capital Structure and Corporate Bodies of Merck KGaA
Statement on Corporate Governance including
Compensation Report
167
20
Consolidated Balance Sheet
176
175 Consolidated Statement of Comprehensive Income
174 Consolidated Income Statement
Merck
Group
137
Fundamental Information about the
12
Financial Statements
Consolidated
Its Composition and Profile of Skills and Expertise
Objectives of the Supervisory Board with respect to
Report of the Supervisory Board
170
2223155
ANNUAL REPORT
%
Stefan Oschmann, Chairman of the Executive Board and CEO
From my perspective, the major topics of 2019 included the debate on the role of companies in society - in other words, their
purpose. I am very pleased to note that while economic growth and profitability are and will always remain important and, of
course, essential, more and more companies are realizing that these are not the only factors that matter. Companies must always
create value for society as well. This is crucial to long-term success, and in my view, a pivotal element of good corporate
citizenship.
In this Annual Report, you will find all the relevant information about Merck and its performance in fiscal 2019. For the first time,
we are publishing our Annual Report exclusively online and have streamlined it in comparison with previous years. As you can see,
we are focusing on the essentials here, too.
friends
Dear shareholders, dear
of Merch,
5
LO
Letter from Stefan Oschmann
To our Shareholders
Merck Shares
9
The Executive Board
8
Letter from Stefan Oschmann
We are curious minds dedicated to human progress. That is our purpose, and what drives us at Merck. And not only since the latest
debates on the role of companies in society. Everything at Merck revolves around science. For 352 years, it has been at the heart of
everything we do. Science enables us to develop new technologies needed, for instance, to treat serious diseases, to help
researchers worldwide develop new therapies, and to shape the digital revolution.
5
314 Business Development 2015 – 2019
315 Financial Calendar
307 Independent Auditor's Report
306 Responsibility Statement
127 Additional Information on Merck KGaA
in accordance with the German
Commercial Code (HGB)
125 Report in accordance with Section 315a
(1) of the German Commercial Code
(HGB)
104 Report on Risks and Opportunities
120 Report on Expected Developments
Corporate and Other
103
Performance Materials
98
Life Science
93
294 Scope of Consolidation
TO OUR SHAREHOLDERS
We have therefore clearly articulated our ambition in our Group strategy: We want to become the vibrant science and technology
company. In other words, we want to rank among the scientific and technological leaders in all three of our business sectors. We
also aim to outperform our competitors in terms of both sales growth and margin growth so as to continue to generate sustainable
value for our owners.
Overall, we are also keeping a close eye on the geopolitical and trade policy conflicts currently underway, as they are also likely to
influence our businesses. Yet, irrespective of this, Merck can achieve great things in 2020 and beyond. Many of the technologies we
are working on could help solve challenges facing humanity. I am thinking of novel cancer therapies, breakthrough technologies for
scientific research, and of new materials that permit not only more powerful, but also smaller and - most importantly - more
energy-efficient microchips and memory devices. This will be a major step forward, as data-based information technologies could
account for up to 20% of global energy consumption in 2030. In addition, I am thinking of technologies such as clean meat, in other
words the biotechnological production of real meat. Clean meat could help feed a growing population in an ecologically sustainable
manner. Not to mention the many exciting future topics such as DNA data storage, which could emerge at the interface of biology
and digital technologies.
• By acquiring Versum Materials and Intermolecular, we are now well-positioned to become a leading supplier in the electronic
materials market and to further drive future innovations in this field. It is clear that the global volume of data is going to grow
exponentially in the coming years. In 2018, it amounted to around 33 zettabytes - in megabytes, that is a number with 15 zeros.
By 2025, that figure could grow to 175 zettabytes. All these data must be generated, processed, transferred, and stored. This is
a veritable technological challenge and a major opportunity for Merck: We produce leading-edge materials used in almost all the
latest electronic devices.
To our Shareholders
Our agenda is ambitious and challenging, but it is also feasible. In 2019, we reached many milestones, as the following examples
show:
In our Healthcare business sector, we will continue to deliver profitable growth in our core business, especially in emerging
markets, with a special focus on China. We want to fully leverage the potential of our new medicines MavencladⓇ and BavencioⓇ
and to forge ahead with our promising pipeline projects. In Life Science, we are aiming to expand our leading positions in
bioprocessing and e-commerce. In addition, we will continue to unlock new growth opportunities through our Promise Ventures in
gene editing and novel modalities, end-to-end bioprocessing solutions, and connected labs. Within Performance Materials, we will
work to further reap the benefits of Bright Future, our five-year transformation program, as well as to successfully integrate Versum
Materials and Intermolecular. We see particularly attractive long-term growth potential for Performance Materials in the businesses
with materials and solutions for the semiconductor industry and OLEDs (organic light emitting diodes.
In 2020, we plan to build on the good development achieved in 2019 and to continue to grow profitably. We will move forward with
our strategy of profitable growth while focusing, as we always do, on reducing our debt, which rose significantly owing to our most
recent major acquisition of Versum Materials. As of the end of 2019, our net financial debt totaled € 12.4 billion. That is why we will
now be setting our sights on growing organically and generating high cash flow. At the same time, we will work to sustainably
strengthen a culture of cost awareness throughout Merck.
Our strong business development in 2019 was only possible thanks to the untiring engagement of our approximately 57,000
employees worldwide. On behalf of the entire Executive Board, I would like to warmly thank all our people for their tremendous
commitment.
As you can see, we made excellent progress in all three of our business sectors last year. And we grew profitably. At € 16.2 billion,
Group sales rose by 8.9% in comparison with 2018. EBITDA pre, the most important financial indicator we use to steer our
operating business, amounted to € 4.4 billion, a year-on-year increase of 15.4%. Earnings per share pre (EPS pre increased by 9%
to € 5.56.
020
As shareholders, you are benefiting from our good business performance in 2019. Last year, the Merck share price rose by 17%.
For fiscal 2019, we will propose to the Annual General Meeting the payment of a dividend of € 1.30 per share.
Letter from Stefan Oschmann
To our Shareholders
• We also made progress on our genome-editing technologies. Our portfolio for CRISPR (Clustered Regularly Interspaced Short
Palindromic Repeats) genome scissors is used to understand the functions of individual genes and their interaction in a cell. Last
year, we received further patents in this key area and now hold a total of 22 patents for CRISPR technology worldwide. In
addition, we entered into an agreement with the Broad Institute of MIT and Harvard in the United States to offer non-exclusive
licenses to CRISPR intellectual property under our respective control. Through this agreement, we are simplifying the path to
licensing CRISPR technology in order to make it more widely available to the global research and discovery community.
and we have a promising pipeline. The U.S. Food and Drug
Administration approved our medicine MavencladⓇ in the United States for the treatment of certain forms of multiple sclerosis -
a great achievement for Merck. BavencioⓇ, our immuno-oncology therapy, was approved in the United States, Europe, Japan
and other markets for the treatment of patients with advanced renal cell carcinoma in combination with another drug. In
addition, we formed a global strategic alliance with GlaxoSmithKline to further advance the development of our novel
investigational therapy, bintrafusp alfa, in the fight against hard-to-treat forms of cancer. Moreover, we presented positive
results for evobrutinib in relapsing multiple sclerosis (MS).
6
• Our research results in Healthcare are very encouraging
-
245
1,036
289
15.7%
31.0%
29.8%
1,375
23.6%
Business free cash flow¹
Margin (% of net sales) 1
18.7%
30.2%
2,070
1,755
315
17.9%
Margin (% of net sales) 1
28.4%
EBITDA pre¹
2,129
1,840
1,393
16.7%
-18
1 Not defined by International Financial Reporting Standards (IFRSS).
1,280
Research
Solutions
41%
2,543
18.1%
3.0%
2,176
15.1%
3,003
Share
2018
Total
change
effects Acquisitions/divestments
Exchange rate
44%
Organic
growth²
32%
2.4%
-2.3%
2.0%
2.6%
9.0%
100%
6,864
Life Science
3.9%
5.9%
1,685
Applied Solutions
Solutions
33%
2,046
6.3%
24%
-1.3%
Share
Process
1,783
1,715
1,705
Q4
Q3
Q2
2018
Q1
1,661
€ million/organic growth in %
Net sales and organic growth 1 by quarter 2
LIFE SCIENCE
The development of sales in the individual quarters in comparison with 2018 as well as the respective organic growth rates are
presented in the following graph:
In fiscal 2019, Life Science posted a strong organic sales growth of 9.0%, assisted by a favorable foreign exchange impact of 2.6%
and offset by a negative portfolio effect of -0.6%, resulting in a total growth of 11.0% compared to the previous year. All three
business units contributed to organic growth, with the largest contribution coming from Process Solutions, followed by Applied
Solutions. Taking these effects into account, Life Science net sales increased overall to € 6,864 million (2018: € 6,185 million).
Development of sales and results of operations
2019
2019
1,487
1,527
€ million
94
Report on Economic Position Life Science
Combined Management Report
Net sales by business unit 1
LIFE SCIENCE
1,543
7,8%
2 Quarterly breakdown unaudited.
1 Not defined by International Financial Reporting Standards (IFRSS).
9.0%
9.4%
%
1,628
10.0%
11.0%
24.9%
6,185
307
Operating result (EBIT)¹
-14.6%
-43
21
-64
-37
80
-116
Other operating income and expenses
on financial assets (net)
-1
-1
Impairment losses and reversals of impairment losses
-0.5%
-242
-242
-241
26
-267
Research and development costs
508
18.8%
Depreciation/amortization/impairment losses/reversals
Pre¹
3.1%
10.4%
7.0%
2,406
100%
1 Not defined by International Financial Reporting Standards (IFRSS).
Combined Management Report.
Report on Economic Position
Performance Materials
100
The following table presents the composition of EBITDA pre for 2019 in comparison with 2018. The IFRS figures have been modified
to reflect the elimination of adjustments included in the respective functional costs.
PERFORMANCE MATERIALS
Reconciliation EBITDA pre¹
2019
20182
Change
€ million
Net sales
Cost of sales
IFRSS
Elimination of
adjustments
IFRSS
-90
17
-107
2,574
2,574
Pre 1
Pre
Elimination of
adjustments
5.6%
Key figures
Combined Management Report
Report on Economic Position
Life Science
93
Change
€ million
Net sales
Operating result (EBIT) 1
Margin (% of net sales) 1
EBITDA1
2019
2018
€ million
%
6,864
2,406
2,406
7.0%
-1,437
-107
11
-118
Administration expenses
26.8%
-255
-255
-323
6
-329
679
Marketing and selling expenses
1,175
1,175
1,188
51
1,137
Gross profit
12.6%
-1,230
-1,231
51 -1,386
1.1%
1,596
-0.6%
-6.5%
-384
Investments in property, plant and equipment, software as well as advance payments for intangible
assets
15.7%
%
€ million
289
1,840
2,129
EBITDA pre¹
2018
2019
€ million
Change
-315
Business free cash flow 1
In 2019, business free cash flow amounted to € 1,375 million (2018: € 1,393 million). Higher EBITDA pre was primarily offset by
the build-up of inventories supporting the sales growth, increased capital spending, and an increase in trade accounts receivable
following the underlying sales development.
Development of business free cash flow
2 Quarterly breakdown unaudited.
1 Not defined by International Financial Reporting Standards (IFRSS).
96
15.9%
549
Q4
15.4%
18.0%
13.5%
%
LIFE SCIENCE
-69
21.8%
Changes in inventories
Research and development costs
-276
-276
-251
1
-249
10.7%
Impairment losses and reversals of impairment losses
-7
-7
-4
-4
on financial assets (net)
56.1%
Other operating income and expenses
-75
19
-56
-60
14
-46
21.8%
Operating result (EBIT)¹
1,280
1,036
Depreciation/amortization/impairment losses/reversals
789
474
8.9%
460
455
2
-2
2
Acquisition-related adjustments
8
-8
-9
9
Gains (-)/losses (+) on the divestment of businesses
-86
86
-36
-2
36
-3
3
-13
13
Restructuring expenses
1,755
2,070
EBITDA¹
13.3%
of impairment losses
696
-23
Integration expenses/IT expenses
Other adjustments
3
-3
2018
531
533
Q3
Q2
Q1
516
2019
€ million/change in %
EBITDA pre¹ and change by quarter²
LIFE SCIENCE
The development of EBITDA pre in the individual quarters in comparison with 2018 is presented in the following overview:
Combined Management Report Report on Economic Position Life Science
Adjusted gross profit increased by 11,6% to € 3,908 million (2018: € 3,500 million). The strong increase was driven by organic
sales growth across all business units and production capacity utilization. The gross margin of Life Science, i.e. gross profit as a
percentage of net sales, amounted to 56.9% (2018: 56.6%). Marketing and selling expenses increased by 8.3% to € 1,922 million
(2018: € 1,775 million) while research and development costs increased by 10.7% to € 276 million (2018: € 249 million). Other
operating expenses (net) increased by 21.8% to € 56 million (2018: € 46 million). After eliminating adjustments, amortization, and
depreciation, EBITDA pre rose by 15.7% to € 2,129 million (2018: € 1,840 million). This double-digit increase in the most
important key figure used to steer the operating business was mainly organic (14.4%) and included a positive earnings contribution
of € 59 million due to the first-time application of IFRS 16 "Leases." The result margin, i.e. EBITDA pre as a percentage of net
sales, increased in 2019 to 31.0% (2018: 29.8%). This reflects the strong performance of the combined Life Science businesses
along with continued focus on driving sales and managing costs.
the Consolidated Financial Statements.
2 Previous year's figures have been adjusted, see Note (45) "Effects from new accounting standards and other presentation changes" in the Notes to
1 Not defined by International Financial Reporting Standard (IFRSS).
-0.2%
1.5%
thereof: acquisitions/divestments
thereof: exchange rate effects
14.4%
thereof: organic growth¹
1,840 15.7%
1,840
2,129
2,129
EBITDA pre¹
452
-282
52
-335
8.9%
5.6%
-0.6%
13.8%
2,173
35%
Asia-Pacific (APAC)
1,743
26%
11.8%
2.7%
-0.7%
36%
13.8%
25%
Latin America
278
4%
13.6%
-4.9%
-0.2%
8.5%
256
4%
Middle East and Africa (MEA)
92
1,532
2,474
North America
35%
11.0%
6,185
100%
1 Previous year's figures have been adjusted due to an internal realignment.
2 Not defined by International Financial Reporting Standards (IFRSS).
The Process Solutions business unit, which markets products and services for the pharmaceutical production value chain, generated
organic sales growth of 15.1%, which was the highest rate within the Life Science business sector. Assisted by a favorable foreign
exchange effect of 3.0%, sales amounted to € 3,003 million in 2019 (2018: € 2,543 million). Therefore, Process Solutions
accounted for 44% of total net sales in the Life Science business sector. Nearly all businesses contributed to the sales increase with
double-digit growth rates. In regional terms, all regions except Middle East and Africa experienced double-digit growth within
Process Solutions.
The Research Solutions business unit, which provides products and services to support research for pharmaceutical, biotechnology,
and academic research laboratories, recorded an increase in organic sales of 3.9%. Supported by favorable exchange rate effects of
2.4%, sales totaled € 2,176 million in fiscal 2019 (2018: € 2,046 million). Organic growth was driven by all business fields.
Research Solutions thus accounted for 32% of Life Science net sales. In regional terms, Asia-Pacific was the strongest organic
growth driver for Research Solutions.
The Applied Solutions business unit, which accounted for a 24% share of Life Science net sales in 2019, delivered strong organic
sales growth of 5.9% with its broad range of products for researchers as well as scientific and industrial laboratories. The negative
portfolio impact was attributable to the divestment of the flow cytometry business. Assisted by favorable exchange rate effects of
2.0%, sales totaled € 1,685 million in 2019 (2018: € 1,596 million). The sales performance of Applied Solutions was driven by all
business fields and in all regions.
Net sales of the business sector by region developed as follows:
LIFE SCIENCE
Net sales by region
€ million
2019
Share
Organic
growth 1
Exchange
rate effects
Acquisitions/
divestments
Total change
2018
Share
Europe
2,277
33%
6.7%
0.4%
-0.5%
6.6%
2,136
1%
5.7%
-0.4%
-0.4%
6,864
6,185
-2,962
5 -2,957
-2,723
38
6,185
-2,685
Pre¹
11.0%
10.1%
Gross profit
3,903
5
3,908
3,463
38
3,500 11.6%
Marketing and selling expenses
-1,924
2 -1,922
-1,777
2
214
-1,775
8.3%
Administration expenses
-341
34
-307
6,864
26%
Pre
2018²
Elimination of
adjustments
4.9%
88
1%
Life Science
6,864
100%
9.0%
2.6%
-0.6%
11.0%
6,185
100%
1 Not defined by International Financial Reporting Standards (IFRSS).
Combined Management Report
Report on Economic Position Life Science
95
The following table presents the composition of EBITDA pre for 2019 in comparison with 2018. The International Financial Reporting
Standards (IFRS) figures have been modified to reflect the elimination of adjustments included in the respective functional costs.
LIFE SCIENCE
Reconciliation EBITDA pre¹
2019
€ million
Net sales
Cost of sales
IFRSS
Elimination of
adjustments
Pre¹
IFRSS
Change
100%
2,574
0%
2,574
2019
Change
1 Not defined by International Financial Reporting Standards (IFRSS).
Business free cash flow¹
Margin (% of net sales) 1
EBITDA pre¹
Margin (% of net sales) 1
EBITDA¹
Margin (% of net sales) 1
Operating result (EBIT) 1
Net sales
€ million
Key figures
PERFORMANCE MATERIALS
Performance Materials
98
Performance Materials
Report on Economic Position
Combined Management Report.
10.4%
-0.2%
338
373
Q4
2018
2,406
411
€ million
168
In 2019, net sales of the Performance Materials business sector rose by 7.0% to € 2,574 million (2018: € 2,406 million). This
growth was attributable to additional net sales from the acquisitions of Versum Materials and Intermolecular (10.4%) and positive
exchange rate effects of 3.1%. Both of these positive effects more than offset a decline in net sales in the original franchises.
The net sales in the individual quarters as well as the respective organic growth rates in 2019 are presented in the following graph:
Development of net sales and results of operations
9.1%
54
588
641
32.7%
31.2%
2.3%
18
786
803
32.0%
24.8%
-17.1%
-132
769
637
21.1%
-39.5%
-200
508
11.9%
307
7.0%
%
410
Q3
Quarterly breakdown unaudited.
-65 100.0%
-17
-81
Changes in trade accounts receivable as well as receivables from royalties and licenses
Lease payments²
-117 >100.0%
-116
-232
330
-7
323
261
-21
241
34.1%
of impairment losses
EBITDA¹
637
769
Restructuring expenses
61
-61
1
-1
Integration expenses/IT expenses
23
-56
Elimination first-time consolidation
1
1,375
2
1 Not defined by International Financial Reporting Standards (IFRSS).
20.3%
269
323
Q2
-28.5%
%
375
2018
268
2019
PERFORMANCE MATERIALS
Q1
Business free cash flow¹ and change by quarter²
LIFE SCIENCE
The development of business free cash flow items in the individual quarters in comparison with 2018 is presented in the following
overview:
97
Report on Economic Position Life Science
Combined Management Report
2 Excluding payments for low-value leases and interest components included in lease payments.
1 Not defined by International Financial Reporting Standards (IFRSS).
Business free cash flow¹
-1.3%
-18
1,393
€ million/change in %
-23
Net sales and organic growth¹ by quarters²
2019
PERFORMANCE MATERIALS
Net sales of the Performance Materials business sector by region developed as follows:
Not defined by International Financial Reporting Standards (IFRSS).
1
100%
2,406
7.0%
10.4%
3.1%
-6.5%
100%
2,574
Performance Materials
0%
1
11.1%
2.4%
8.7%
0%
2
Other
20%
476
-1.9%
2.3%
Net sales by region
-4.2%
€ million
North America
27.0%
4.9%
-7.0%
10%
267
9%
220
-1.2%
4.2%
0.1%
-5.5%
9%
217
Share
2018
Total
change
Exchange rate Acquisitions/
effects divestments
organic
growth¹
Share
2019
Performance Materials
(MEA)
Middle East and Africa
Latin America
Asia-Pacific (APAC)
Europe
18%
468
Surface Solutions
Following the acquisitions of Versum Materials and Intermolecular, the Semiconductor Solutions business unit has been structured
into two new franchises: Semiconductor Materials and Delivery Systems & Services. Semiconductor Materials will continue to
concentrate on the distribution and development of materials-based solutions for the semiconductor industry. Delivery Systems &
Services focuses on the development and use of delivery systems for semiconductor manufacturers. Furthermore, Delivery Systems
& Services will provide services for the installation of systems and safe handling of the specialist materials they process.
As expected, the Display Solutions business unit, consisting mainly of the business with liquid crystals, photoresists for display
applications, and OLED materials, recorded an organic decline in 2019. This organic decline of -8.6% was partly offset by positive
exchange rate effects of 2.8%. Capacity ramp-up projects for panel makers in China had shown a strong performance in the third
quarter of 2018, peaking in the fourth quarter of 2018. Although net sales in the first two quarters of 2019 continued to benefit
from this ramp-up of production capacity, they did so to a comparatively lesser extent.
99
Report on Economic Position Performance Materials
Combined Management Report.
Organic sales growth of the individual quarters developed from 3.2% in the first quarter of 2019 to -15.2% in the fourth quarter of
2019. The performance in the second half of 2019 was attributable, in particular, to the strong 2018 figures for Display Solutions.
-15.2%
-10.6%
2 Quarterly breakdown unaudited.
1 Not defined by International Financial Reporting Standards (IFRSS).
-2.0%
3.2%
%
629
626
587
564
2018
798
583
589
Q4
Q3
Q2
Q1
604
Overall, in 2019, customer silicon wafer processing remained below expectations against the backdrop of continued weakness in the
semiconductor market. Weighed down by weak market activity, net sales in the original Semiconductor Solutions business units
declined organically by -3.6%. However, this was more than offset by positive exchange rate effects of 4.1%.
Driven by the acquisitions of Versum Materials and Intermolecular, overall growth in Semiconductor Solutions was 42.5%. The
proportion of Performance Materials sales accounted for by this business unit thus rose from 25% to 33%.
Net sales of the Surface Solutions business unit in fiscal 2019 were down -1.9% overall. An organic decline of -4.2%, attributable to
weaker demand from the automotive segment in particular, was partly offset by positive exchange rate effects of 2.3%.
PERFORMANCE MATERIALS
25%
596
42.5%
42.0%
4.1%
-3.6%
33%
848
Semiconductor Solutions
55%
1,332
-5.7%
€ million/organic growth in %
2.8%
49%
1,256
Display Solutions
Share
2018
divestments Total change
Exchange rate effects
Share organic growth 1
2019
€ million
Acquisitions/
Net sales by business unit
-8.6%
719
789
379
-32
-395
-427
Investments in property, plant and equipment, software as well as advance payments for intangible
assets
23.5%
366
8.1%
1,556
EBITDA pre¹
%
€ million
2018
2019
€ million
1,922
Change
Changes in inventories
རྨ། ༈། ༈།
The development of business free cash flow items in the individual quarters in comparison with 2018 is presented in the following
overview:
2 Excluding payments for low-value leases and interest components included in lease payments.
1 Not defined by International Financial Reporting Standards (IFRSS).
Business free cash flow¹
22.1%
227
Changes in trade accounts receivable as well as receivables from royalties and licenses
Lease payments²
1,025
23.6%
-19
-81
69.3%
-38
-55
1,252
HEALTHCARE
Business free cash flow¹
Combined Management Report
39.5%
1 Not defined by International Financial Reporting Standards (IFRSS). L
2 Quarterly breakdown unaudited.
381
Q3
501
In 2019, the business free cash flow amounted to € 1,252 million (2018: € 1,025 million) and thus grew by 22.1%. This develop-
ment was primarily attributable to the higher EBITDA pre, which more than offset the inventory build-up and increase in receiv-
ables.
414
Q4
561
35.4%
Combined Management Report
Report on Economic Position
Healthcare
31.3%
HEALTHCARE
528
-13.0%
Report on Economic Position Healthcare
91
Gross profit of the Healthcare business sector after adjustments amounted to € 5,109 million and was 5.8% above the prior-year
period (2018: € 4,827 million). The increase is essentially attributable to the strong organic development of net sales. The resulting
gross margin declined slightly compared to the prior year, to 76.1% (2018: 77.2%). The 13.1% rise in the cost of sales also
includes higher license expenses for MavencladⓇ, which developed in line with the higher sales volume.
Marketing and selling expenses after adjustments amounted to € 2,303 million (2018: € 2,339 million) and showed a slight decline
(-1.5%). At € 1,663 million (2018: € 1,686 million), research and development costs also remained at a comparable level to the
prior year (-1.4%). This reflects continued investments in the development pipeline. The income balance of other operating
expenses and income rose by 17.8% to € 357 million after adjustments (2018: € 308 million). Various lump sums recognized in
fiscal 2019 made a material contribution to this increase. In connection with the sale of Palynziq™ rights to BioMarin Pharmaceutical
Inc., United States, in 2016, a milestone payment of € 75 million was recognized in 2019 (2018: € 50 million). Following the
extension of approval of Bavencio® for the treatment of advanced renal cell carcinoma in combination with axitinib in the United
States, the EU, and Japan, milestone payments of € 90 million were generated from the partnership with Pfizer.
The upfront cash payment of € 300 million from the alliance with GlaxoSmithKline plc., United Kingdom, for the joint development
and marketing of bintrafusp alfa is recognized in the income statement in accordance with the fulfillment of contractually promised
goods and services, and had a positive effect of € 92 million in fiscal 2019. The increase in income was also accompanied by higher
expenses. Among other things, an impairment loss was recognized in 2019 in connection with an intangible asset from the
collaboration with F-star Delta Ltd. in the field of immuno-oncology (see Note (6) "Collaborations" in the Notes to the Consolidated
Financial Statements).
EBITDA pre recorded a highly gratifying development in 2019, rising by 23.5% to € 1,922 million (2018: € 1,556 million). Organic
earnings growth was 19.5%; this figure includes the positive effects from the application of IFRS 16 "Leases" amounting
to € 52 million. Overall, the EBITDA pre margin also showed growth of more than 3 percentage points to 28.6% (2018: 24.9%).
The development of EBITDA pre in the individual quarters in comparison with 2018 is presented in the following overview:
Q2
HEALTHCARE
€ million/change in %
2019
Q1
332
2018
381
%
EBITDA pre¹ and change by quarter 2
Business free cash flow ¹ and change by quarter²
€ million/change in %
2019
9.2%
3.2%
-6.8%
79%
2,041
9%
5.6%
Gross profit of the Performance Materials business sector after adjustments rose by 1.1% to € 1,188 million in fiscal 2019
(2018: € 1,175 million). A key driver of this increase was the contribution provided by the Versum Materials acquisition, which more
than offset the lower absorption of fixed costs amid the organic decline in sales in the Semiconductor Solutions and Surface
Solutions business units. At 46.2% (2018: 48.9%), the gross margin in 2019 was below the previous year's level. Not including
adjustments, the operating result (EBIT) decreased by € 200 million to € 307 million in 2019 (2018: € 508 million). The main
drivers here were the restructuring expenses for the Bright Future transformation program, the acquisition and integration
expenses for Versum Materials and Intermolecular, and IT expenses for enterprise resource planning (ERP) systems. These effects
were only partly offset by the additional EBIT contribution from acquisitions. The rise in marketing and selling expenses and in
administrative expenses was due to the additional costs of the Versum Materials and Intermolecular organizations. The so far
successful implementation of the Bright Future transformation program more than offset the additional expenses of the Versum
Materials and Intermolecular organizations in the adjusted research and development costs. EBITDA pre of the business sector grew
by 2.3% to € 803 million (2018: € 786 million). The additional EBITDA pre from the acquisitions (8.5%) and positive foreign
exchange effects (6.1%) more than offset the expected decline in organic EBITDA pre (-12.3%). The organic EBITDA pre
development included favorable effects from the application of IFRS 16 "Leases" amounting to € 12 million. At 31.2%, the EBITDA
pre margin in 2019 was down on the prior-year figure (2018: 32.7%).
2 Previous year's figures have been adjusted; see Note (45) "Effects from new accounting standards and other presentation changes" in the Notes to
1 Not defined by International Financial Reporting Standard (IFRSS).
8.5%
thereof: acquisitions/divestments
།
2.3%
-12.3%
6.1%
the Consolidated Financial Statements.
786
1,932
32
8
> 100.0%
71.8%
2.0%
48.3%
1%
80%
17
32
-0.9%
0.9%
0.2%
-2.0%
1%
2%
thereof: exchange rate effects
thereof: organic growth 1
786
2 Quarterly breakdown unaudited.
1 Not defined by International Financial Reporting Standards (IFRSS).
49.3%
254
232
311
22.2%
Q3
Q2
-25.6%
%
299
2018
Q1
222
346
240
64
Q4
803
1
803
EBITDA pre¹
Other adjustments
-82
82
Acquisition-related adjustments
Gains (-)/losses (+) on the divestment of businesses
-15
15
LIFE SCIENCE
Life Science
55.3%
373
92
Development of business free cash flow
2 Quarterly breakdown unaudited.
EBITDA1
Business free cash flow 1
Change
€ million
2019
2018 € million
%
EBITDA pre¹
803
786
18
2.3%
Investments in property, plant and equipment, software as well as advance payments for intangible
assets
-158
-118
-40
33.9%
Changes in inventories
-251
-44
-207 > 100.0%
Changes in trade accounts receivable as well as receivables from royalties and licenses
Lease payments²
-88
-36
PERFORMANCE MATERIALS
The business free cash flow of the Performance Materials business sector rose by 9.1% to € 641 million in 2019
(2018: € 588 million). Higher EBITDA pre and the reduction in receivables in fiscal 2019 substantially offset higher investments.
Development of business free cash flow
27.3%
1 Not defined by International Financial Reporting Standards (IFRSS).
-2.8%
196
177
190
Q3
Q2
-1.6%
%
243
2018
-51 100.0%
Q1
193
€ million/change in %
EBITDA pre¹ and change by quarter²
PERFORMANCE MATERIALS
EBITDA pre developed roughly in line with net sales over the first three quarters of 2019. The highly positive development in the
fourth quarter of 2019 is attributable to additional EBITDA pre from the acquired businesses.
101
Performance Materials
Report on Economic Position
Combined Management Report.
203
191
-12.7%
2019
-11
Elimination first-time consolidations of Versum/Intermolecular
346
25.5%
7.5%
1 Not defined by International Financial Reporting Standards (IFRSS).
2 Quarterly breakdown unaudited.
-20.8%
25.6%
Corporate and Other
Combined Management Report
Report on Economic Position
Corporate and Other
103
%
Corporate and Other comprises Group administration expenses for central Group functions that cannot be directly allocated to the
business sectors, such as Finance, Procurement, Legal, Communications, and Human Resources. Corporate costs additionally
encompass expenses for central, non-allocated IT functions, including expenses related to the expansion and harmonization of IT
systems within the Merck Group as well as research and development costs spanning business sectors.
Key figures
Change
€ million
Operating result (EBIT) 1
2019
2018
€ million
%
-617
-548
-69
CORPORATE AND OTHER
Q4
155
143
Business free cash flow¹
641
588
54
9.1%
1 Not defined by International Financial Reporting Standards (IFRSS).
2 Excluding payments for low-value leases and interest components included in lease payments.
Combined Management Report. Report on Economic Position
Performance Materials
102
The development of business free cash flow items in the individual quarters in comparison with 2018 is presented in the following
overview:
152
PERFORMANCE MATERIALS
€ million/change in %
2019
Q1
172
Q2
૨૩
Q4
153
121
195
2018
137
Business free cash flow¹ and change by quarter²
196
The significance of risks is calculated on the basis of their potential negative impact on the forecast financial targets in conjunction
with the probability of occurrence of the respective risk. In line with these two factors, risks are classified as "high," "medium"
or "low."
€ 5 20 million
< € 5 million
Explanation
Critical negative impact on the net assets, financial position, and results of operations
Substantial negative impact on the net assets, financial position, and results of operations
Moderate negative impact on the net assets, financial position, and results of operations
Immaterial negative impact on the net assets, financial position and results of operations
Combined Management Report
Report on Risks and Opportunities
The combination of the two factors results in the risk matrix below, which shows the individual risks and their significance to
the Group.
RISK MATRIX
> € 50 million
€ 20 - 50 million
Opportunities from new active ingredients for cosmetics
< € 5 million
Impact
Medium
Medium
High
High
Medium
Medium
Medium
Low
Low
Medium
Low
€ 5 - < 20 million
€ 20 - 50 million
> € 50 million
Degree of impact
1 Owing to an altered risk assessment as regards the Covid-19 pandemic, the section entitled "Overall view of the risk and opportunity situation and management
assessment" of this Report on Risks and Opportunities was correspondingly supplemented on May 12, 2020.
Combined Management Report
Report on Risks and Opportunities
105
Within the scope of audits, Group Internal Auditing regularly reviews the performance of risk management processes within the
units and, at the same time, the communication of relevant risks from the operating businesses to Group Risk Management.
Opportunity management process
The risk management system described concentrates on business risks, and not on opportunities at the same time. The opportunity
management process is integrated into our internal controlling processes and carried out in the operating units on the basis of the
Group strategy. The businesses analyze and assess potential market opportunities as part of strategy and planning processes. In
this context, investment opportunities are examined and prioritized primarily in terms of their potential value proposition in order to
ensure an effective allocation of resources. We specifically invest in growth markets to leverage the opportunities of dynamic
development and customer proximity at a local level.
If the occurrence of the identified opportunities is rated as likely, they are incorporated into the business plans and the short-term
forecasts. Trends going beyond this, or events that could lead to a positive development in the net assets, financial position, and
results of operations, are presented in the following report as opportunities. These could have a positive effect on our medium-term
prospects.
Risk and opportunity assessment
Risks
Medium
Low
The underlying scales for measuring these factors are shown below:
Probability of occurrence
< 20%
20-50%
51-80%
> 80%
Explanation
Unlikely
Possible
Likely
Very likely
DEGREE OF IMPACT
PROBABILITY OF OCCURRENCE
For reporting risks with a potential negative impact on our EBIT, a minimum threshold is set at a value of € 5 million in the
standard process and at a value of € 25 million in the ad hoc process. Risks below these thresholds are steered independently
within the business sectors. The relevant timeframe for internal risk reporting is five years. The effects of risks described in this
report on risks and opportunities are presented as annual values. The assessment of the risks presented relates to December 31,
2019. There were no relevant changes after the balance sheet date that would have necessitated an amended presentation of the
risk situation of the Group.
High
Medium
Low
< 20%
Potential negative macroeconomic developments can also impact our business. To minimize these impacts, corresponding measures
pertaining to the sales strategy have been initiated in these countries.
The spread of the Corona virus since the beginning of 2020 is associated with risks in global macroeconomic developments, likewise
with the potential for negative effects on our businesses.
The United Kingdom's exit from the European Union ("Brexit") gives rise to risks for our existing business in that country, including
the devaluation of the pound sterling, a weakening of the United Kingdom's economy, regulatory changes, the creation of trade
barriers such as tariffs, and in particular operational risks due to, for example, delays in the supply chain that could have an impact
on our profitability. To analyze these risks and in order to counteract them early in a targeted manner, we established Group-
internal working groups that considered various scenarios. Mitigation measures exist for these scenarios, which shall ensure market
access and the stability of the supply chain in the best possible way. They also include, for example, a relocation of the marketing
Combined Management Report
Report on Risks and Opportunities
108
authorization holder for drugs currently registered via the United Kingdom; and changes to supply routes and the planned build-up
of inventories of critical products, which are also designed to cushion the risk of delays in cross-border traffic, which is difficult to
predict.
The net risk of negative political and macroeconomic developments is seen as possible and has critical negative effects on the net
assets, financial position, and results of operations. We thus rate this as a medium risk.
Market risks and opportunities
We compete with numerous companies in the pharmaceutical, chemical, and life science sectors. Rising competitive pressure can
have a significant impact on the quantities that can be sold and prices attainable for our products.
Opportunities due to new technologies in the manufacturing of displays
We see major opportunities in significant market growth of organic light-emitting diode (OLED) materials in high-quality display
applications. We are building on more than ten years of experience in manufacturing OLED materials as well as a strong portfolio of
worldwide patents in order to develop ultrapure and extremely stable materials that are precisely tailored to customer
requirements. Development in the OLED market is being driven by the diversification of applications for small and large-area OLED
displays.
According to industry estimates, the overall market volume for OLED materials will exceed that for liquid crystal materials as of
2022. In particular, the cooperation with Universal Display Corporation (UDC) announced in August will contribute to the joint
further development of OLED technology and the accelerated development of new products. To further strengthen our OLED
presence in Asia, we opened an OLED technology center in Shanghai in 2018 in addition to our existing centers in Southeast Asia.
As local partner, we want to work with our customers to advance innovations and bring them to market faster.
Opportunities due to new application possibilities for liquid crystals
We are pursuing a strategy of leveraging our expertise as the global market leader in liquid crystals in order to develop new fields
of application for innovative liquid crystal technologies. For instance, we are pressing ahead to capture the future markets for liquid
crystal windows (LCWs) and mobile antennas. Thanks to licrivision TM technology, LCWs create new architectural possibilities.
Through continuously variable brightness control, they can for example increase a building's energy efficiency. Moreover, the
dynamic solar shading product eyriseTM s350 launched in the EU and North America allows solar shading to be managed while the
windows remain transparent and color-neutral. Due to growing demand for dynamic glass, we see great potential for the new
eyrise™ product brand. Antennas that can receive signals transmitted in the high frequency range can also be realized with the aid
of corresponding liquid crystal mixtures. As a result, mobile data exchange could improve significantly in a wide variety of fields of
application. Since novel liquid crystal materials for antennas are currently being developed, the market launch of liquid crystal
antennas could take a few years.
Opportunities in the semiconductor industry
We see huge opportunities with our innovative Directed Self Assembly (DSA) technique for advanced lithography processing in
Semiconductor Solutions. As semiconductor manufacturers continue to advance their device technologies, the processing steps are
becoming more complex and significantly costlier to enable device performance. Our novel DSA platform and recent material
advancements enable improved device performance and reduce the cost of sales and operating costs for our customers. This has
resulted in Merck securing a leading position as qualified standard supplier with several key semiconductor customers. Adoption of
this disruptive lithography platform is expected to completely change how semiconductor manufacturing is conducted and could
lead to a market leadership position for advanced lithography over the next few years. We are developing new dielectric platforms
in cooperation with our key customers for 3D NAND applications. There has been a change in 3D NAND device architecture and
some of our customers are moving away from floating gate to replacement gate. Therefore, we are currently working with those
customers on this new device architecture.
In addition, we reached important milestones in our Bright Future transformation program in 2019 in the Performance Materials
business sector, through which we are focusing more strongly on the electronic materials market. These milestones include the
acquisitions of Versum Materials and Intermolecular in the area of semiconductor technologies. Intermolecular has application-
specific materials expertise and platforms for accelerated learning and experimentation with a powerful analytical infrastructure that
Combined Management Report
Report on Risks and Opportunities
109
The destabilization of political systems, and the possible establishment of trade barriers, sanctions, and foreign exchange policy
changes, can lead to declines in sales in certain countries and regions. These risks are taken into account as far as possible in the
business plans of the affected countries and regions, and mitigated through product, industry, and regional diversification.
Risk of negative political and macroeconomic developments
Likewise, in our Life Science and Performance Materials business sectors, we must adhere to a multitude of regulatory specifications
regarding the manufacturing, testing, and marketing of many of our products. Specifically in the European Union, we are subject to
the European chemicals regulation REACH. It demands comprehensive tests for chemical products. Moreover, the use of chemicals
in production could be restricted, which would make it impossible to continue manufacturing certain products. We are constantly
pursuing research and development in substance characterization and the possible substitution of critical substances so as to
reduce the occurrence of this risk, and therefore view it as unlikely. Nevertheless, it is classified as a medium risk given its critical
negative impact on the net assets, financial position, and results of operations.
Risk of stricter regulations for the manufacturing, testing, and marketing of products
20 - 50%
51 - 80%
> 80%
106
Opportunities
Opportunities are assessed in their respective specific business environment. General measures of the business functions are
quantified during operational planning, usually in relation to sales, EBITDA pre, and business free cash flow. Net present value,
internal rate of return, the return on capital employed (ROCE), and the amortization period of the investment are primarily used to
assess and prioritize investment opportunities. Similarly, scenarios are frequently set up to simulate the influence of possible
fluctuations and changes in the respective factors on results. There is no overarching, systematic classification of the probability of
occurrence and impact of opportunities.
Internal control system for the Group accounting process
The objective of the internal control system for the accounting process is to implement controls that provide assurance that the
financial statements are prepared in compliance with the relevant accounting laws and standards. This system covers measures
designed to ensure the complete, correct, and timely conveyance and presentation of information that is relevant for the
preparation of the Consolidated Financial Statements and the combined management report.
Key tools
The internal control system aims to ensure the accuracy of the consolidated accounting process through functioning internal
controls with reasonable assurance. The Group Accounting function centrally steers the preparation of the Consolidated Financial
Statements of Merck KGaA as the parent company of the Merck Group. This Group function defines the reporting requirements that
all Merck subsidiaries must meet. At the same time, this function steers and monitors the scheduling and process-related
requirements of the Consolidated Financial Statements. Group Accounting centrally manages all changes to the equity holding
structure and correspondingly adapts the Group's scope of consolidation. The proper elimination of intragroup transactions within
the scope of the consolidation process is ensured. Group-wide accounting guidelines form the basis for the preparation of the
statutory financial statements of the parent company and of the subsidiaries, which are reported to Group Accounting; the
guidelines are adapted in a timely manner to reflect changes in the financial regulatory environment, and are updated in
accordance with internal reporting requirements. For special issues, such as the accounting treatment of intangible assets within
the scope of company acquisitions or pension obligations, external experts are additionally involved where necessary.
Probability of occurrence
The individual companies have a local internal control system. Where financial processes are handled by a Shared Service Center,
the internal control system of the Shared Service Center is additionally applied. Both ensure that accounting complies with IFRSS
(International Financial Reporting Standards) and with the Group accounting guidelines.
For Group financial reporting purposes, most of our subsidiaries use standard SAP software. Consolidation software from SAP is also
used for the elimination of intragroup transactions. A detailed authorization concept ensures the separation of duties with respect to
both single-entity reporting and the Consolidated Financial Statements. In principle, the accounting process is designed to ensure
that all units involved adhere to the principle of dual control.
Combined Management Report Report on Risks and Opportunities
107
The effectiveness of Merck's internal control system with regard to accounting and the compliance with financial reporting by the
individual companies is confirmed by both the local managing director and the local chief financial officer by signing the single-
entity reporting. For the accounting treatment of balance sheet items, Group Accounting closely cooperates with Group Risk
Management in order to correctly present potential risks in the balance sheet. All the structures and processes described are
subject to regular review by Group Internal Auditing based on an annual audit plan set out by the Executive Board. The results of
these audits are dealt with by the Executive Board, the Supervisory Board, and the Finance Committee. The internal control system
at Merck makes it possible to lower the risk of material misstatements in accounting to a minimum. However, no internal control
system - regardless of its design - can entirely rule out a residual risk.
Business-related risks and opportunities
Political and regulatory risks and opportunities
As a global company, we face political and regulatory changes in a large number of countries and markets.
Risk of more restrictive regulatory requirements regarding drug pricing and reimbursement
In the Healthcare business sector, the known trend towards increasingly restrictive requirements in terms of drug pricing,
reimbursement, and expansion of high-rebate groups is continuing. An important example here is the volume-based procurement
initiative in the People's Republic of China. These requirements can negatively influence the profitability of our products, as can
market referencing between countries, and the success of market launches. Foreseeable effects are taken into account as far as
possible in the business sector's plans. Close communication with health and regulatory authorities serves as a preventive measure
to avert risks.
Remaining risks beyond the current plans resulting from restrictive regulatory requirements are classified as a medium risk owing
to the possible critical negative impact.
Group Accounting provides support to the local contacts and ensures a consistently high quality of reporting throughout the entire
reporting process.
Group Controlling & Risk Management forms the organizational framework for risk management and reports directly to the Group
Chief Financial Officer. Group Risk Management uses the information reported to determine the current risk portfolio for the Merck
Group, presenting this in a report to the Executive Board, the Supervisory Board, and the Finance Committee with detailed
explanations twice per year. This also encompasses a probability-weighted aggregation of risks at the Group level using a Monte
Carlo simulation. Furthermore, significant changes in the assessment of the risks already known and new significant risks can be
reported at any time, and are communicated to the Executive Board on an ad hoc basis.
The residual risk after the implementation of these measures is presented in the internal risk report as net risk.
Likewise, risk-mitigating measures are reported and assessed. The effectiveness of these measures and the planned
implementation time frame are monitored by Group Risk Management.
Partnerships with leading providers from growth markets beyond Europe and North America play an increasingly important role
when it comes to commercializing these products, which are offered for optimized management of the tanning or whitening of the
skin, among other things.
Opportunities from leveraging the e-commerce and distribution platform
With the acquisition of Sigma-Aldrich in 2015, we gained access to the leading e-commerce platform in life science,
www.sigmaaldrich.com. With this distribution platform, our customers continue to benefit from a portfolio of more than 300,000
products, including highly respected brands. We are further expanding this platform to continuously increase the number of
products available through e-commerce. Increasing speed and convenience during our customers' ordering processes as well as
offering support through individualized product recommendations can lead to higher sales volumes and the winning of new
customers. Consequently, this distribution channel can lead to an above-average development of sales in the medium term.
Risks due to increased competition and customer technology changes
In the Healthcare business sector, both our biopharmaceutical products and classic pharmaceutical business are exposed to
increased competition from rival products (in the form of biosimilars and generics). In the Life Science and Performance Materials
business sectors, risks are posed by not only cyclical business fluctuations, but also changes in the technologies used or customer
sourcing strategies, particularly with respect to liquid crystals. We use close customer relationships and in-house further
developments as well as market proximity, including precise market analyses, as mitigating measures. Overall, owing to its possible
occurrence with a critical negative impact, the market risk is classified as a medium risk.
Opportunities offered by digitalization and activities to boost innovative strength
Digital technologies are becoming increasingly important for our markets and our world of work. In 2015, we launched several
strategic digital initiatives geared toward improving the efficiency of our internal processes and toward evaluating the opportunities
of digitalization for our products and customers. We are also working on establishing new business outside our three business
sectors, with a focus on digitalization and our innovation fields of Clean Meat, Liquid Biopsy, and Biosensing and Interfaces. In
addition to collaborations with external partners such as the European Space Agency, the Accelerator program, which is being
driven by our Innovation Center, is one component of our innovation strategy.
Another innovation driver is the patent received in the United States in 2019 for a new way to connect physical objects with a
digital twin using artificial intelligence and blockchain technology. This novel technology allows physical objects to be securely
anchored in the digital world, thereby protecting the integrity of supply chains and preventing product counterfeiting. The three-
year collaboration launched in 2019 with the Karlsruhe start-up HQS Quantum Simulations also opens up revolutionary possibilities
Combined Management Report Report on Risks and Opportunities
110
In the current reporting year, Merck has systematically pushed ahead with the expansion of its research on cosmetic raw materials
and supplies according to the principles of pharmaceutical drug development. The synergies from the knowledge and technology
transfer from the Healthcare and Life Science business sector have substantially improved the development times and efficiencies of
new active ingredients for cosmetics. Combined with the establishment of advanced 3D skin models, this results in a range of
promising new cosmetic raw materials that are due to be launched over the coming quarters.
in the field of quantum computing. The collaboration between the start-up company and our Chief Digital Organization focuses on
the application and commercialization of quantum chemistry software on dedicated computers.
In November 2018, our Life Science business sector launched its new BioContinuum™ Platform to optimize biotherapeutic drug
manufacturing through improved efficiency, simplified plant operations, and greater quality and consistency. Continuing to drive
this innovation in 2019, Life Science launched the BioContinuum™ Buffer Delivery Platform. This integrated solution is tailored to
provide the highest possible levels of accuracy and precision in buffer preparation and management. It represents the next
advancement in drug manufacturing for the biopharmaceutical industry, elevating continuous process technology while
simultaneously working toward fully optimized, contiguous biotechnological process management of the future. This seamless
physical and digital integration of all components of the BioContinuum TM Platform makes process development more efficient, safer,
and less costly.
The 2019 acquisitions of FloDesign Sonics and BSSN Software contributed to the extension of Life Science's innovative strength.
With FloDesign Sonics, we receive access to a unique platform for industrial production of cell and gene therapies, which allows the
processing of cells by means of sound waves. Merck is the first company to use sound wave technology for the production of cell
therapies.
The acquisition of BSSN Software, a laboratory informatics provider in Darmstadt, contributed to an acceleration of the digital
transformation in customer laboratories. The solutions developed by BSSN Software equip Merck's customers with better and more
efficient access to their laboratory data. These acquisitions strengthen our business with digital solutions for laboratory productivity
and grant us a unique position in this extremely dynamic market. The 2019 performance enhancement of the Milli-QⓇ CLX 7000
clinical water purification systems with Milli-QⓇ Connect - a new cloud-based, remote monitoring and service capability - also
contributes to this purpose.
In the Performance Materials business sector, there are opportunities with regard to digitalization, in particular from our positioning
in the area of electronic materials for the semiconductor and display industries. These include in particular the acquisitions of
Versum Materials and Intermolecular mentioned above, which will enable us to offer our customers not only state-of-the-art
technological innovations, but an expanded product portfolio as well.
Opportunities provided by the CRISPR technology
A pioneer of genome-editing innovation for 15 years, Merck is leveraging CRISPR technology as a core competency of its business.
In 2019, we obtained multiple patent awards from the European Patent Office as well as from patent offices in the United Kingdom,
Israel, Korea, Canada, and the United States. In total, we have 22 existing CRISPR patents in nine regions.
CRISPR technologies open up promising new avenues for medical research and potential solutions to treat some of the most difficult
diseases, including cancer as well as hereditary and rare diseases. To simplify what has become a difficult-to-navigate CRISPR
patent landscape, we entered into an innovative CRISPR licensing agreement with the United States-based Broad Institute of MIT
and Harvard in 2019. This new framework eases and accelerates access to CRISPR intellectual property for research purposes.
Opportunities offered by customer proximity
In 2019, we opened another state-of-the-art site for customer collaboration, our new M Lab™ Collaboration Center in Molsheim,
France. The Center includes non-good manufacturing practice (GMP) pilot and bench scale labs for customers to engage in process
development support, troubleshooting, and hands-on training. It is one of nine such centers around the world, each of which allows
pharmaceutical manufacturers to explore new ways to increase productivity, improve processes, and mitigate risks. Other M Lab™
Collaboration Center are located in the United States, Singapore, Japan, Korea, India, France, Brazil, and China, where an
additional M LabTM Collaboration Center is planned to open in 2020.
complements Merck's Performance Materials business and technology portfolio. Intermolecular's manufacturing and testing
capabilities allow material combinations to be tested directly in the specific application environment. Compared to conventional
methods, this means enormous time savings in the development process, considerably faster learning cycles, and findings on new
material combinations, providing a unique service for customers. Versum Materials is a leading global provider of innovative, high-
purity process chemicals, gases, and equipment for semiconductor manufacturing. The expertise in our combined business will
enable us to offer our customers in the electronics industry state-of-the-art technological innovations. They also benefit from our
expanded portfolio of products and services as well as our broader global footprint. We are thus excellently positioned to benefit
from long-term growth trends in the electrical materials industry.
In the Healthcare business sector, we entered into a cooperation with Iktos in 2019, which gives us access to generative technology
based on Iktos' artificial intelligence (AI) for three drug discovery projects. This enables us to design new drugs quickly and cost-
effectively.
-537
Going forward, our offer for the semiconductor industry will consist of two specialized units: Semiconductor Materials and Delivery
Systems & Services. Semiconductor Materials will continue to concentrate on the distribution and development of materials-based
solutions. Delivery Systems & Services will focus on the development, distribution, installation, and safe operation of delivery
systems for chemicals and gases for the manufacture of semiconductors.
-48
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Risk management process
In our internal risk reporting, risks are defined as potential future events or developments that could lead to a negative deviation
from our (financial) targets. In parallel, opportunities are defined as potential events or developments that imply a positive
deviation from our planned (financial) targets. Identified future events and expected developments are taken into account in
internal planning, provided that it can be assumed that their occurrence is likely in the planning period. The risks and opportunities
presented in the following risk and opportunities report are those potential future events that could respectively lead to a negative
or positive deviation from the topics covered by planning.
Merck is part of a complex, global business world and is therefore exposed to a multitude of external and internal influences. Every
business decision is therefore based on the associated risks and opportunities.
Risk and opportunity management
Risks and opportunities are inherent to entrepreneurial activity. We have put systems and processes in place to identify risks at an
early stage and to counteract them by taking appropriate action. Within the company, opportunity management is an integral
component of internal decision-making processes such as short- and medium-term planning and intra-year business plans.
Report on Risks and Opportunities¹
104
Report on Risks and Opportunities
Combined Management Report
After eliminating adjustments, administrative costs declined to €302 million in fiscal 2019 (2018: €320 million). Cross-business
research and development costs amounting to €59 million (2018: €47 million), such as operating expenses for the Innovation
Center, were allocated to Corporate. Other operating expenses (net) rose to €-167 million (2018: € -90 million), due primarily to
the development of the foreign exchange result. A reversal of an impairment loss (€ 37 million) for receivables in connection with
contractual refund claims from the sale of the Generics business in 2007 had a positive effect on the operating result. After
eliminating depreciation, amortization, and adjustments, EBITDA pre amounted to € -469 million in 2019 (2018: € -381 million).
The increase in negative business free cash flow to € -536 million (2018: € -497 million) was largely the outcome of the
development of EBITDA pre as well as lower investments.
The objective of our risk management activities is to recognize, assess, and manage risks early on and to implement appropriate
measures to minimize them. The responsibilities, objectives, and processes of risk management are described in our internal risk
management guidelines. The business heads, managing directors of Merck subsidiaries, and the heads of Group functions are
specified as employees with responsibility for risks. The group of consolidated companies for risk reporting purposes is the same as
the group of consolidated companies for the Consolidated Financial Statements. Every six months, the risk owners assess their risk
status and report their risk portfolio to Risk Management. We use special risk management software in the context of these
activities.
7.9%
-39
-497
-536
Business free cash flow¹
23.0%
-88
-381
-469
EBITDA pre¹
12.6%
9.9%
1 Not defined by International Financial Reporting Standards (IFRSS).
On October 7, 2019, Merck completed the acquisition of Versum Materials, Inc. a supplier in the electronic materials segment for a
purchase price for the acquisition of 100% of the company's shares of € 5.3 billion. For this reason, the effect of the Versum
acquisition will be reported as a portfolio effect in the first three quarters of 2020. Likewise, the acquisition of Intermolecular Inc.
closed on September 20, 2019. The purchase price for the acquisition of 100% of the company's shares was € 56 million. This
transaction represents an equity value of approximately US$ 62 million. We do not expect it to have a material portfolio effect.
The following report provides a forecast for fiscal 2020 of the development of the Merck Group and its three business
sectors: Healthcare, Life Science and Performance Materials.
Report on Expected Developments¹
Report on Risks and Opportunities
Report on Expected Developments
Combined Management Report
We pursue the opportunities that arise and specify their expected effects in the forecast development of net sales, EBITDA pre, and
business free cash flow. Furthermore, we will actively seek new opportunities, examine their implementation and drive them
forward where appropriate. If opportunities arise in addition to the forecast developments, or these occur more quickly than
anticipated, this could have correspondingly positive effects on our net assets, financial position, and results of operations.
119
120
Forecast for the Merck Group
Key assumptions
Actual
€ million
results
2019
Forecast for 2020
•
• Solid organic growth
Organic growth driven by Healthcare and Life Science; Performance Materials
with slight organic growth
Net sales
16,152
Combined Management Report
Portfolio effect in the mid single-
digit percentage range
FORECAST FOR THE MERCK GROUP
In our view, business-related opportunities offer the greatest potential. An important element here is the continuous expansion of
our businesses. With the successful focusing and continued intensification of our research and development activities, we want to be
able to continue to offer our customers innovative products and help shape markets. Moreover, we also consolidate our expertise in
numerous alliances with industrial partners as well as various universities and international organizations. We are making targeted
investments in future-oriented companies and start-ups via our Merck Ventures Investment Fund and our Accelerator programs. The
topic of innovation is at the forefront of all our activities. Externally, this is becoming particularly apparent through our Innovation
Center at Group headquarters in Darmstadt, which is to develop into a nucleus of creativity at Merck. The activities listed hold
significant opportunities for us in the medium to long term, beyond the underlying forecast period.
Combined Management Report
With respect to high and medium risks, certain changes have occurred, as the assessment of the individual risks has of course
shifted over the fiscal year due to changing external and internal conditions while the overall risk profile remained stable. Thanks to
the risk reduction measures taken - such as the consistent implementation of management action (organizational responsibility and
process improvements), existing insurance coverage, and accounting precautions - we were able to take counteraction, in particular
against significant individual risks.
As a corporate group that operates internationally, and due to our presence in the capital market, we are exposed to various
financial risks and opportunities. Above all, these are liquidity and counterparty risks, financial market risks and opportunities, risks
of fluctuations in the market values of operational tangible and intangible assets, as well as risks and opportunities from pension
obligations.
Overall, we rate this as a low risk.
Nevertheless, reputational risks could result, for instance through public dialogues in social media.
The Merck company and its employees are active on numerous social media channels. The consistent and legally compliant use of
the channels and their content is important in terms of increasing awareness of our brand, among other things. Merck takes
precautions and implements processes to ensure awareness of the proper handling of social media, controlling publication, and
actively managing communication.
Risks and opportunities from the use of social media
For numerous markets in the emerging economies, we expect continuous above-average contributions to growth in the coming
years. In order to further expand this potential for our businesses, we have moved forward with several investment projects in
recent years. Following the investments already made in China in 2018, we have made further investments there of € 17 million in
2019 to expand the capacity of our pharmaceutical production facilities. In addition, the Life Science Nantong and Wuxi sites began
operation in 2019, improving our local capacities in China. We also launched a seed fund of RMB 100 million (€ 13 million in 2019,
which is specifically aimed at financing start-up companies in the Healthcare, Life Science, and Performance Materials business
units, as well as new businesses in China. This is intended to promote relevant innovations from China and bring Merck closer to the
Chinese start-up scene in view of the country's increased focus on innovation. The innovation hubs in Shanghai and Guangzhou will
also contribute to the nationwide acceleration of innovation development.
Opportunities due to expanding local presence in high-growth markets
Information technology risks
We use a variety of IT systems and processes in order to optimally support our globalization. Trends in information technology offer
various opportunities but also harbor risks.
Risks due to cybercrime and the failure of business-critical applications
Increasing international networking and the related possibility of IT system abuse are resulting in cybercrime risks for Merck, such
as the failure of central IT systems, the disclosure or loss of the data integrity of confidential data from research and business
activities, the manipulation of IT systems in process control, or an increased burden or adverse impact on IT systems as a result of
virus attacks.
The Merck Group operates an information protection management system based on ISO 27001 comprising security guidelines as
well as organizational and technical measures to prevent and address IT security incidents. Globally used IT applications form the
basis for the contractual delivery of products and solutions. The failure of business-critical IT applications could therefore have a
direct influence on our ability to deliver and the quality of our products. This also applies to the failure of a data center. To achieve
the required service quality, we use a quality management system certified to ISO 9001 that also applies to the provision of IT. In
addition, to reduce the risk of failure, we operate several redundantly designed data centers. Furthermore, insurance solutions for
cybercrime offenses are in place at Group level.
Likewise, complications with the changeover of IT systems could negatively impact the earnings situation. Close monitoring of
critical IT projects serves to mitigate this risk.
Report on Risks and Opportunities
118
Despite the mitigating measures taken and functional continuity plans, the effects of cybercrime or the failure of business-critical IT
applications and their influence on the net assets, financial position, and results of operations are considered high risks owing to
likely and potentially critical negative impacts.
Environmental and safety risks
As a company with global production operations, we are exposed to risks of possible damage to people, goods, and our reputation.
Audits, consulting and training on environmental protection, and occupational health and safety minimize these risks to people and
the environment. In order to ensure the continuity of plant and equipment, we monitor these risks both at our own sites as well as
at suppliers and contract manufacturers. By adhering to high technical standards, our rules of conduct, and all legal requirements in
environmental protection and occupational health and safety, we ensure the preservation of goods and assets. We have taken
sufficient appropriate accounting measures for the environmental risks known to us. Nevertheless, we classify these as a high risk
since a critical negative impact on the financial position cannot be ruled out.
Risks due to the divestment, acquisition, and integration of companies and
businesses
Irrespective of the fact that acquisitions made in the past have been successfully completed, the risk of conducting acquisition and
integration exists for future transactions and for the current integration of Versum Materials. This includes, among other things, the
inability to meet sales volume targets and higher integration costs than expected, as well as the failure to meet synergy goals. The
divestment of companies and businesses can lead to liability vis-à-vis the buyer, or additional expenses, for instance through
indemnity clauses and guarantee commitments or long-term supply contracts. Through strong due diligence processes and closely
managed integration processes, we seek to reduce the probability of occurrence of this risk. Therefore, we classify this as a medium
risk with an unlikely probability of occurrence and potentially critical negative effects on the net assets, financial position, and
results of operations.
Overall view of the risk and opportunity situation and management assessment
The material individual risks in the businesses have been named in the report above, with business-related risks being the most
significant alongside legal risks.
These risks include already the risks stemming from the recent developments regarding the Covid-19 pandemic. Most notably, the
pandemic increases existing risks related to more restrictive regulatory requirements regarding drug pricing and reimbursement, the
demand for our products, business interruptions at our production facilities, lack of availability of good quality materials or services,
risks related to research and development, and negative macroeconomic developments.
The overall risk of the Group, which is derived from the probability-weighted aggregation of the identified risks, leads to the
assessment that we are not exposed to risks of a nature to threaten the existence of the Group as a going concern, or for which
coverage and financing of the losses is questionable. We are confident that we will continue to successfully master the challenges
arising from the above risks in the future as well. Our company also benefits from diversification through our different products and
markets.
Financial risks and opportunities
REPORT ON RISKS AND OPPORTUNITIES
Risk and opportunity management in relation to the use of financial instruments
Generally, we strive to minimize and control our legal risks. To this end, we have taken the necessary precautions to identify
threats and defend our rights where necessary.
Nevertheless, we are still exposed to risks from litigation or legal proceedings. In particular, these include risks in the areas of
product liability, competition and antitrust law, pharmaceutical law, patent law, trademark law, data protection law, tax law, and
environmental protection. As a research-based company, we have a valuable portfolio of industrial property rights, patents, and
brands that could become the target of attacks and infringements. The outcome of future proceedings or those currently pending is
difficult to foresee.
For instance, we are currently involved in litigation with Merck & Co. Inc., Kenilworth, NJ, United States (outside the United States
and Canada: MSD), against whom we have filed lawsuits in various countries. This company has also sued us in the United States
for trademark infringement, among other things.
Combined Management Report
Report on Risks and Opportunities
116
Due to long statutes of limitations or in some cases the absence thereof, it is not possible to rule out that we will face third-party
claims arising from the same issue despite the conclusion of legal proceedings. Court or official rulings or settlements can lead to
expenses with a significant impact on our business and earnings.
Despite extensive precautionary measures, non-compliance with laws and regulations leading to related consequences can never be
completely excluded.
Tax risks are reviewed regularly and systematically by Group Tax. Corresponding standards and guidelines are used in order to
identify tax risks at an early stage as well as to review, evaluate, and correspondingly minimize them. Risk reduction measures are
coordinated by Group Tax together with the subsidiaries abroad.
In our opinion, the lawsuits described below constitute the most significant legal risks. This should not be seen as an exhaustive list
of all legal disputes currently ongoing.
Risks from product-related and patent law disputes
Merck is involved in a patent dispute with Biogen Inc., United States (Biogen), in the United States. Biogen claims that the sale of
RebifⓇ in the United States infringes on a Biogen patent. The disputed patent was granted to Biogen in the United States in 2009.
Subsequently, Biogen sued Merck and other pharmaceutical companies for infringement of this patent. Merck defended itself
against all allegations and brought a countersuit claiming that the patent is invalid and not infringed by our actions. In the first
instance, a jury recognized the invalidity of the patent. This jury verdict was overturned by the federal judge in the same instance
in September 2018. For the time being, the patent is thus deemed to be legally valid and to have been infringed. Merck filed a
complaint with the United States Court of Appeals for the Federal Circuit (second instance) against the first-instance ruling in
October 2018. A decision is expected in the first half of 2020. In this context, Merck recognized provisions in a three-digit million
euro amount. Cash outflow within the next twelve months is considered possible at present.
Nevertheless, potentially critical negative impacts of the litigation on the financial position cannot be ruled out.
In the Performance Materials business sector, Merck is involved in a legal dispute with JNC Corporation, Japan (JNC). JNC claims
that by manufacturing and marketing certain liquid crystals mixtures, Merck has infringed JNC patents. JNC asserts its claims in
court in two jurisdictions. Merck maintains that JNC's patent infringement assertion is invalid in three jurisdictions owing to relevant
prior art and has filed the corresponding nullity actions. No final decisions have so far been reached in two jurisdictions. In one
jurisdiction, the nullity action was concluded with legally binding effect in favor of Merck in 2019. In this jurisdiction, JNC refrained
from filing a patent infringement claim. In view of this development, the provision was reduced in 2019. After the adjustment, the
remaining provision for this matter amounts to a double-digit million euro amount. Cash outflow within the next twelve months is
considered possible at present.
Nevertheless a potentially considerable impact of the legal dispute on the financial position cannot be ruled out.
Legal risks
Risks due to antitrust and other government proceedings
2019
2017
A/A2
A-/A3
BBB+/Baa1
BBB/Baa2
• S&P
• Moody's
• Scope
2009
2010
2011
2012
2013
2014
2015
2016
2018
•
Ⓡ
On July 6, 2017, Merck received notice from the European Commission (EU Commission) in connection with the antitrust review
proceedings for the acquisition of Sigma-Aldrich, in which the EU Commission informed Merck of its preliminary conclusion that
Merck and Sigma-Aldrich allegedly transmitted incorrect and/or misleading information within the scope of the acquisition of Sigma-
Aldrich. The EU Commission received registration of the merger on April 21, 2015, and granted clearance on June 15, 2015, subject
to the condition that Merck and Sigma-Aldrich divest parts of the European solvents and inorganic chemicals businesses of Sigma-
Aldrich in order to resolve antitrust concerns. According to the preliminary viewpoint of the EU Commission, communicated in a
letter dated July 6, 2017, Merck and Sigma-Aldrich withheld related important information about an innovation project. According to
the EU Commission, the innovation project should have been included in the remedies package. At the present time, an EU
Risks of impairment of balance sheet items
Variable interest and current financial liabilities are exposed to the risks and opportunities of interest rate fluctuations. These are
also managed and reduced using derivatives. Interest rate risks have a potentially moderate negative impact, are considered
unlikely, and pose low risks overall.
As a result of our international business activities and global corporate structure, we are exposed to risks and opportunities from
fluctuations in exchange rates. These result from financial transactions, operating receivables and liabilities, as well as forecast
future cash flows from sales and costs in foreign currency. We use derivatives to manage and reduce the aforementioned risks and
opportunities (further information can be found in the note "Derivative financial instruments" in the Notes to the Consolidated
Financial Statements). Due to their possible occurrence with a potentially critical negative effect on the net assets, financial position,
and results of operations, foreign exchange rate risks are rated as medium risk.
Financial market opportunities and risks
Counterparty risk is classified as a medium risk overall owing to the unlikely probability of occurrence with a potential critical
negative effect.
The solvency and operational development of trading partners is regularly reviewed as part of the management of operational
counterparty risks. Sovereign risks are also analyzed. The volume of receivables of each customer is capped in line with their credit
ratings. Risk-mitigating measures, such as credit insurance, are utilized as appropriate. Nevertheless, defaults by isolated trading
partners, even those with outstanding credit ratings, cannot be entirely ruled out, although rated as unlikely (further information
can be found in "Credit risks" in the note "Management of financial risks" in the Notes to the Consolidated Financial Statements).
As for counterparty risks from financial transactions, we review all positions relating to trading partners and their credit ratings on a
daily basis. We manage financial risks of default by diversifying our financial positions and through the related active management
of our trading partners. Significant financial transactions involving credit risk are entered into with banks and industrial companies
that have a good credit rating. Moreover, our large banking syndicate - the multi-currency revolving credit facility of € 2 billion was
syndicated by 20 banks - reduces possible losses in the event of default.
Counterparty risks arise from the potential default by a partner in connection with financial investments, loans, and financing
commitments on the one hand and receivables in operating business on the other.
Counterparty risks
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Combined Management Report Report on Risks and Opportunities
Overall, the liquidity risk is unlikely and rated as low.
In order to ensure its continued existence, a company must be able to fulfill its commitments from operating and financial activities
at all times. Therefore, to reduce potential liquidity risks, we have a central Group-wide liquidity management system in place, and a
balanced maturity profile. The maturities of our financial liabilities are aligned with our planned free cash flow. Furthermore, we have
a multicurrency revolving credit facility of € 2 billion with a term until 2024, which ensures continuing solvency if any liquidity
bottlenecks occur. As our loan agreements do not contain any financial covenants, these agreed lines of credit can be accessed even
if Merck's credit rating should deteriorate. Additionally, we have a commercial paper program with a maximum volume of € 2 billion.
Liquidity risks
In the area of financial risks and opportunities, we use an active management strategy to reduce the effects of fluctuations in
exchange and interest rates. The management of financial risks and opportunities by using derivatives in particular is regulated by
extensive guidelines. Speculation is prohibited. Derivative transactions are subject to constant risk controls. A strict separation of
functions between trading, settlement, and control functions is ensured.
The carrying amounts of individual balance sheet items are subject to the risk of changing market and business conditions and thus
to changes in fair values as well. Necessary impairments could have a significant negative non-cash impact on earnings and affect
the accounting ratios. This applies in particular to the high level of intangible assets including goodwill, which mainly derive from the
purchase price allocations made in connection with past acquisitions (further information can be found in the note "Intangible
assets" in the Notes to the Consolidated Financial Statements). All relevant risks were assessed during the preparation of the
Consolidated Financial Statements and taken into account accordingly. We rate risks beyond this as unlikely with a critical negative
impact. Therefore, this is seen as a medium risk.
Raptiva : In December 2011, the federal state of São Paulo, Brazil, sued Merck for damages because of alleged collusion between
various pharmaceutical companies and an association of patients suffering from psoriasis and vitiligo. This collusion is alleged to
have been intended to increase sales of the medicines from the companies involved to the detriment of patients and state coffers.
Moreover, patients are also suing for damages in connection with the product RaptivaⓇ. Merck has taken appropriate accounting
measures for these issues, which relate to various legal cases. Risks in excess of this with a substantial negative effect on the net
assets, financial position, and results of operations cannot be ruled out, but are considered unlikely. This is rated as a medium risk.
Risks and opportunities from pension obligations
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Report on Risks and Opportunities
117
Commission administrative procedure is still pending that could lead to a fine being imposed by the EU Commission if the EU
Commission considers its view to be proven. Merck is entitled to legal recourse should a fine be imposed. The ongoing
investigations are limited to the examination of violations of EU merger control procedures and do not affect the validity of the EU
Commission's decision to approve the merger. As the risk is considered to have a potential critical negative impact on the net
assets and financial position, a provision has been set up.
Paroxetine: In connection with the divested generics business, Merck is subject to antitrust investigations by the British Competition
and Market Authority (CMA) in the United Kingdom. In March 2013, the authorities informed Merck of the assumption that a
settlement agreement entered into in 2002 between Generics (UK) Ltd. and several subsidiaries of GlaxoSmithKline plc, United
Kingdom, in connection with the antidepressant drug paroxetine, violates British and European competition law. Merck, the then-
owner of Generics (UK) Ltd., was allegedly involved in the negotiations for the settlement agreement and is therefore liable. The
investigations into Generics (UK) Ltd. started in 2011, without this being known to Merck. On February 11, 2016, the CMA imposed
a fine in this matter. Merck has taken legal action against this fine. Appropriate accounting measures have been taken. As things
stand at present, a decision and outflow of resources are not expected within the next 12 months because the Appeal Tribunal has
since submitted the relevant legal questions to the European Court of Justice (CJEU) for a preliminary ruling. This is currently
classified as a medium risk with a moderate negative impact on the financial position.
Human resources risks
Our future growth is highly dependent on our innovative strength. Therefore, the expertise and engagement of employees in all
sectors in which we operate are crucial to the success of the company. The markets relevant to the company are characterized by
intensive competition for qualified specialists and by the challenge of being perceived by the public as an attractive employer.
Fluctuation risks specific to countries and industries have to be identified ahead of time and specifically addressed in order to keep
the skills and expertise critical to success and business within the company.
S&P/Moody's / Scope
Overview of rating development
Recruiting and retaining specialists and talent is therefore one of the key priorities for the company and is managed through the
targeted use of, for instance, employer branding initiatives, global talent and succession management processes, as well as
competitive compensation packages. Nevertheless, employee-related risks that affect business activities are possible, even though
their impact is difficult to assess. We rate this as a medium risk.
The capital market uses the assessments published by rating agencies to help lenders assess the risks of a financial instrument
used by Merck. We are currently rated by Standard & Poor's, Moody's, and Scope. Standard & Poor's has issued a long-term credit
rating of A with a stable outlook, Moody's a rating of Baal with a stable outlook, and Scope a rating of A-, likewise with a stable
outlook. In line with market procedures, our financing conditions are closely tied to our rating. The better a rating, the more
favorably we can generally raise funds on the capital market or from banks.
Assessment by independent rating agencies
bearing securities, shares, real estate, and other financial assets, decreasing or negative returns on these assets can adversely
affect the fair value of plan assets and thus result in further additions to pension provisions. By contrast, rising returns increase the
value of plan assets, thereby resulting in excess cover of plan liabilities. We increase the opportunities of fluctuations in the market
value of plan assets on the one hand and reduce the risks on the other by using a diversified investment strategy. The unlikely risk
due to pension obligations could have moderate negative effects on the net assets, financial position, and results of operations, and
is classified as low.
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Report on Risks and Opportunities
We have commitments in connection with pension obligations. The present value of defined benefit obligations can be significantly
increased or reduced by changes in the relevant valuation parameters, for example the interest rate or future salary increases.
Pension obligations are regularly assessed as part of annual actuarial reports. The obligations are covered by the pension provisions
reported in the balance sheet based on the assumptions as of the balance sheet date. Some of these obligations are funded by plan
assets (further information can be found in the note "Provisions for pensions and other post-employment benefits" in the Notes to
the Consolidated Financial Statements). To the extent that pension obligations are covered by plan assets consisting of interest-
Positive portfolio effect in the mid single-digit percentage range, mainly
resulting from the acquisition of Versum Materials
was approved in 2017 by the European Commission. It is the first short-course oral treatment approved in Europe for
the treatment of relapsing multiple sclerosis in patients with high disease activity. In 2018, approvals were also granted in the
Middle East and Africa (United Arab Emirates) and Latin America (Argentina). With the approvals in the United States and
Switzerland in 2019, MavencladⓇ is currently approved in over 65 countries.
•
critical negative effects on the financial position and operating result, for example due to lower net sales or the non-occurrence of
milestone payments from collaboration agreements. Overall, these risks, with probabilities ranging from unlikely to possible, are
considered to be medium risks.
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Combined Management Report
Furthermore, there is the risk that regulatory authorities either do not grant or delay approval or grant only restricted approval.
Additionally, there is the risk that undesirable side effects of a pharmaceutical product could remain undetected until after approval
or registration, which could result in a restriction of approval or withdrawal from the market. Well-advanced programs in our
pipeline and those of our partners result in potential new approvals; on the other hand, missing targets in this area may have
Sometimes development projects are discontinued after high levels of investment at a late phase of clinical development. Decisions
such as those relating to the transition to the next clinical phase - are taken with a view to minimizing risk. We are currently not
aware of any risks beyond general development risks that could significantly affect the net assets, financial position, and results of
operations.
-
Risks of discontinuing development projects and regulatory approval of developed medicines
potential.
Investments made in 2019, for example to expand biopharmaceutical research in the United States, are intended to accelerate
scientific progress and the further development of our innovative clinical pipeline worldwide. The expenses currently being incurred,
especially in our Healthcare research and development, are already reflected in the current plans. The same applies to sales of
Bavencio Ⓡ and MavencladⓇ for approved indications in the respective markets. Further approvals may result in an increased sales
In addition to marketing already approved medicines, we are pushing ahead with research projects in other important therapeutic
areas. The portfolio of projects is evaluated on a regular basis. This may also lead to in-licensing or out-licensing, or further
strategic alliances.
The approval of Erbitux® (cetuximab) in combination with FOLFOX or FOLFIRI as a first-line therapy for patients with RAS wild-type
metastatic colorectal cancer (mCRC) in China is another important milestone in our claim to be a global specialty innovator.
Risks and opportunities related to the quality and availability of products
1 Owing to the altered expectations in terms of the impact of the Covid-19 pandemic, this Report on Expected Developments was updated accordingly
on May 12, 2020.
The strategic alliance concluded with Pfizer Inc. in 2014 enabled us to jointly develop BavencioⓇ. Following approvals for patients
with metastatic Merkel cell carcinoma and those with locally advanced or metastatic urothelial carcinoma in 2017, the United States
Food and Drug Administration (FDA), the European Commission, and the Japanese Ministry of Health, Labor and Welfare issued
approvals for BavencioⓇ (avelumab) plus InlytaⓇ (axitinib) for first-line treatment of patients with advanced renal cell carcinoma in
2019. Additional applications for these products have been submitted to regulatory authorities worldwide.
The global strategic alliance formed in early 2019 with GlaxoSmithKline plc (GSK) for the joint development and marketing of the
bintrafusp alfa (M7824) immunotherapy developed by Merck can be highlighted as an opportunity for research and development in
the Healthcare business sector. This novel immunotherapy is currently undergoing clinical trials and shows potential for new options
for several hard-to-treat cancers.
For us, innovation is a major element of the Group strategy. Research and development projects can experience delays, expected
budgets can be exceeded, or targets can remain unmet. Research and development activities are of special importance to the
Healthcare business sector. In the course of portfolio management, we regularly evaluate and, if necessary, refocus research areas
and all R&D pipeline projects. Alliances with external partners and the out-licensing of programs also form part of the catalog of
measures for the efficient allocation of resources. The conclusion and continuation of these partnerships and externalizations plays
an important role. A deviation from the strategic targets defined in this area could have a critical negative impact on net assets,
financial position, and results of operations. The occurrence of a risk of this magnitude is considered unlikely, which means that this
is a medium risk.
Risks and opportunities of research and development
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Report on Risks and Opportunities
Combined Management Report
Percentage growth in the mid
twenties range
Rise in EBITDA pre and positive effects from working capital; higher investments
in property, plant, and equipment
Net sales
For the Merck Group, in 2020 we expect solid organic net sales growth in comparison with the previous year, driven mainly by our
Healthcare and Life Science business sectors. We forecast slight organic growth for Performance Materials. In the first three
quarters, the effect of the acquisition of Versum Materials will be reported as a portfolio effect, which we expect to be in the mid-
single-digit percentage range. With regard to exchange rate developments, we continue to expect a volatile environment due to
political and macroeconomic developments. Overall, we forecast a slightly unfavorable foreign exchange development of 0% to -3%
⚫ Slightly negative foreign exchange
effect of 0% to -3%
MavencladⓇ
Risk of a temporary ban on products/production facilities or of non-registration of products due to non-compliance
with quality standards
After Japan granted "fast-track" regulatory designation to tepotinib in 2018, it was granted the "breakthrough therapy" designation
by the FDA in September 2019, and the "orphan drug" designation by the Japanese Ministry of Health, Labor and Welfare in
November 2019. The molecule may have the potential to treat patients with advanced non-small cell lung cancer (NSCLC)
harboring MET exon 14 skipping mutations.
Risks of production availability
Foreign exchange effect due to emerging market currencies and the U.S.
dollar
We are required to comply with the highest standards of quality in the manufacturing of pharmaceutical products (Good
Manufacturing Practice or official pharmacopoeia). In this regard, we are subject to the supervision of the regulatory authorities.
Conditions imposed by national regulatory authorities could result in a temporary ban on products/production facilities, and possibly
affect new registrations with the respective authority. We make the utmost effort to ensure compliance with regulations, regularly
perform our own internal inspections and also carry out external audits. Thanks to these quality assurance processes, the
occurrence of a risk with a critical negative impact is unlikely; however, it cannot be entirely ruled out. Depending on the product
concerned and the severity of the objection, such a risk can have a moderate negative impact on the net assets, financial position,
and results of operations. Therefore, we rate this as a medium risk.
• Strong organic growth
•
Strong organic growth in Life Science supported by solid organic growth in
Healthcare and Performance Materials with slight organic growth
EBITDA pre
4,385
• Positive portfolio effect in the mid
single-digit percentage range
Realization of synergies from the integration of Versum Materials in
Performance Materials as planned
• Slightly negative foreign exchange
effect of 0% to -3%
•
Foreign exchange effect due to emerging market currencies and the U.S.
dollar
Business
free cash
flow
•
Product liability risks
To combat product-related crime, an internal coordination network covering all functions and businesses ("Merck Anti-
Counterfeiting Operational Network" was set up several years ago. In addition, security measures are in use to protect products
against counterfeiting. Innovative technical security solutions and defined preventive approaches are used to ward off dangers
relating to cybercrime and espionage. Measures to prevent risks and to prosecute identified offenses are conducted in all the
relevant crime areas in close and trustworthy cooperation with the responsible authorities. The impact of these risks on business
operations depends on the respective individual case, product-specific factors, the value chain, and regional aspects in particular.
Our Corporate Security department is responsible for the overall coordination of all measures in this area. Overall, the threat
resulting from crime in general is seen as being possible and is classified as a medium risk.
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Report on Risks and Opportunities
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Further risks include operational failures due to fire or force majeure, for example natural disasters such as floods or earthquakes,
which could lead to a substantial interruption or restriction of business activities. Insofar as it is possible and economically viable,
the Group limits its damage risks with insurance coverage, the nature and extent of which is constantly adapted to current
requirements. Likewise, we are exposed to risks of production outages and the related supply bottlenecks that can be triggered by
technical problems in production facilities with very high capacity utilization. Furthermore, there are risks of supply bottlenecks due
to a lack or disappearance of capacity. We are working to continuously mitigate the risks by making regular investments, setting up
alternative sourcing options, and maintaining inventory levels.
Owing to our portfolio, we are exposed to a number of sector-specific crime risks. This relates primarily to products, including
among other things, counterfeiting, illegal channeling, and misuse, as well as all types of property crime, including attempts at
these crimes. Crime phenomena such as cybercrime and espionage could equally affect our innovations or innovation abilities as
such.
Risks due to product-related crime and espionage
Companies in the chemical and pharmaceutical industries are exposed to product liability risks in particular. Product liability risks
can lead to considerable claims for damages, loss of reputation, and costs to avert damages. We have taken out the liability
insurance that is standard in the industry for such risks. However, it could be that the insurance coverage available is insufficient
for individual cases. Although the probability of occurrence of product liability claims in excess of the existing insurance coverage is
considered unlikely, individual cases could still have a critical negative effect on the net assets, financial position, and results of
operations. We therefore rate a potential product liability risk as a medium risk.
Quality controls along the entire value chain reduce the risks related to product quality and availability. This starts with the
qualification of our suppliers. Quality controls also include comprehensive quality requirements for raw materials, purchased semi-
finished products, and plants. We are dependent on individual suppliers for a number of precursor products, packaging materials,
and finished goods. In the event that one of these suppliers curtails or discontinues production, or supply is disrupted, this could
potentially have a critical impact on the business concerned. With long-term strategic alliances for precursor products critical to
supply and price as well as alternative sourcing strategies, we reduce the probability of occurrence of these risks and rate them as
possible. Overall, these are classified as medium risks.
Risks of dependency on suppliers
2,732
Although the occurrence of these risks is considered unlikely, an individual event could have a critical negative effect on the net
assets, financial position, and results of operations, and they are therefore classified as a medium risk.
results
2019
2,574
Forecast for 2020
Actual
€ million
Key assumptions
Net sales
Strong growth momentum in the Semiconductor Solutions business unit
• Slight organic growth
•
FORECAST FOR THE PERFORMANCE MATERIALS BUSINESS SECTOR
•
Forecast for the Performance Materials business sector
• Organic earnings growth on account of the expected sales growth and slight
margin improvement
Business free cash flow
In 2020, the Life Science business sector is expected to show strong organic growth of EBITDA pre compared with the previous
year. The persistently dynamic demand trend and a slight margin increase will also contribute to the organic growth in earnings.
The foreign exchange impact on earnings in fiscal 2020 could be slightly negative, based on our estimates.
EBITDA pre
For the Life Science business sector, we expect strong organic sales growth in 2020 compared to the prior year. All business units
are forecast to make a contribution to the positive organic development. The Process Solutions business unit is again likely to
remain the strongest driver of organic growth in 2020, followed by Applied Solutions. Moderate growth in the Research Solutions
business unit should also contribute to the development of sales. We do not expect the acquisitions of FloDesign Sonics Inc. and
BSSN Software GmbH to have a material portfolio effect. Due to the development of currencies in various growth markets and of
the U.S. dollar, we project a slightly negative foreign exchange effect.
Net sales
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Combined Management Report Report on Expected Developments
• On the other hand, increase in capital spending on strategic projects
Improved management of working capital
⚫ Rise in EBITDA pre
Strong increase in the low to mid
twenties percentage range
• Negative foreign exchange effect due to the trend of exchange rates on
several growth markets
Negative foreign exchange effect on account of the U.S. dollar and foreign
exchange developments in several growth markets
Portfolio effect in the low to mid-
thirties percentage range
We expect business free cash flow of the Life Science business sector to see an increase in the low to mid-twenties percentage
range. Higher EBITDA pre and positive effects from the improved management of working capital will be mitigated by higher capital
spending on strategic projects.
EBITDA pre
For the year 2020 we are assuming moderate organic growth of EBITDA pre in the Performance Materials business sector. The price
decline in liquid crystals will be offset by anticipated growth in Semiconductor Solutions and by active cost management. We
estimate that the portfolio effect of Versum Materials will show total growth in the low to mid-thirties percentage range, which will
improve the margin of the business slightly. This forecast includes the planned realization of synergies in the amount of
around € 25 million. We expect a slightly negative foreign exchange effect that is attributable to the development of the U.S. dollar
and of individual growth/emerging? market currencies.
Business free
Updated forecast for the Merck Group dated May 12, 2020
We expect Corporate and Other to be below the prior year in fiscal 2020. This is mainly due to a substantially lower burden from
foreign currency hedging, which will partly offset opposing foreign exchange effects in the sectors.
Corporate and Other
For the Performance Materials business sector we forecast a rise in business free cash flow in the low thirties percentage range. The
main driver will be the increase in EBITDA pre, essentially owing to the contribution from Versum Materials.
Business free cash flow
Process Solutions remains the main driver of growth, followed by Applied
Solutions
EBITDA pre
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Report on Expected Developments
Combined Management Report
We forecast a slightly positive organic sales development for the Performance Materials business sector in fiscal 2020. In particular,
we expect to see a strong growth dynamic in the Semiconductor Materials. We also anticipate slight organic growth for Surface
Solutions compared to the previous year. The Liquid Crystals business will suffer from the continuing price decline due to the price
pressure prevailing within the industry. The reduced volume growth versus the prior year will only be able to offset the negative
price effects to a limited extent. For Versum Materials, we expect a portfolio effect in the low to mid-thirties percentage range in the
first three quarters of 2020. Moreover, the acquisition of Intermolecular closed on September 20, 2019. We do not consider the
resulting portfolio effect to be material. Due to the development of the U.S. dollar and of currencies in several growth markets, we
expect a slightly negative foreign exchange effect.
Net sales
Rise in EBITDA pre including the contribution from Versum Materials, reduced by
higher capital investments
Negative foreign exchange effect due to the foreign exchange developments
in several growth markets and of the U.S. dollar
• Planned realization of synergies of around € 25 million from the integration of
Versum Materials
• Versum Materials earnings contribution in the low to mid-thirties percentage
range leads to slight margin improvement
Growth in Semiconductor Solutions can offset price decline in Liquid Crystals
supported by active cost management
641
cash flow
•
Slightly negative foreign exchange
effect
• Slight organic growth
• Portfolio effects in the low to mid-
thirties percentage range
803
•
Increase with growth rates in the low
thirties percentage range
•
Continued price decline in Liquid Crystals business, slightly mitigated by a
volume increase
• Slight growth of Surface Solutions
• Portfolio effects due to Versum Materials in the low to mid-thirties percentage
range, no material portfolio effect from Intermolecular
• Negative foreign exchange effect due to the trend of exchange rates on
several growth markets and of the U.S. dollar
Slightly negative foreign exchange
effect
• All businesses contribute to growth
For the Healthcare business sector, we expect solid organic sales growth in 2020. We anticipate a stable development of base
business, reflecting the continued competitive pressure and the associated decline in RebifⓇ sales. However, the RebifⓇ decline will
be offset by continued positive growth contributions of products from the General Medicine & Endocrinology and Fertility franchises,
largely attributable to growth markets. New regulations in China (volume-based procurement) have a slightly mitigating effect on
Strong and profitable organic
earnings growth
Expected substantial earnings contributions from our new products, especially MavencladⓇ
offset negative mix effects associated with the projected decline in RebifⓇ sales
'
Moderate negative
foreign exchange effect
• Solid organic growth
1,922
EBITDA pre
• Substantial growth contribution by our newly approved products, particularly MavencladⓇ
Negative foreign exchange effect due to foreign exchange developments in several growth
markets and of the U.S. dollar
• Stable development of the base business in organic terms
Slightly negative foreign
exchange effect
•
6,714
Net sales
• Solid organic growth
Key assumptions
• Marketing and selling expenses as well as research and development costs decrease in
percent of sales due to systematic cost management and strict pipeline prioritization
Forecast for 2020
€ million
Actual
FORECAST FOR THE HEALTHCARE BUSINESS SECTOR
Forecast for the Healthcare business sector
For business free cash flow, we expect growth rates in the mid-twenties percentage range in 2020. The development is attributable
to the increase in EBITDA pre, which includes the contribution of Versum Materials, and positive effects from further improved
working capital management. Higher investments in property, plant, and equipment will lower business free cash flow.
Business free cash flow
The expected foreign exchange development is forecast to have a slightly negative effect in the percentage range of between 0%
and -3% on Group EBITDA pre; it will be seen particularly in the Performance Materials and Healthcare businesses. The
development of the U.S. dollar and of the currencies in several growth markets will have an adverse impact on earnings. These
foreign exchange effects will be partly mitigated by currency hedging, although we do not hedge all emerging market currencies.
EBITDA pre is our key financial indicator to steer operating business. We forecast strong organic growth for fiscal 2020. This organic
growth will be mainly attributable to the Healthcare and Life Science business sectors while also Performance Materials contributes
with slight organic growth. The portfolio effect from the acquisition of Versum Materials is expected to be in the mid-single-digit
percentage range and will lead to a slight improvement in the margin of the Merck Group.
EBITDA pre
that can be attributed to the currencies of several growth markets, including China, and the development of the U.S. dollar. Our
forecast for 2020 is based on an exchange rate of the euro against the U.S. dollar in the range of 1.11 to 1.16.
121
Report on Expected Developments
Combined Management Report
In the context of the global outbreak of the Covid-19 pandemic, in deviation from our previous forecast we assume a significant
burden on global economic growth, which will affect all our businesses, particularly however Healthcare and Performance Materials.
Due to the high level of uncertainty with respect to the further development of the Covid-19 pandemic, this outlook is being made
with a considerably higher degree of uncertainty than normally. Since the dynamics of the pandemic vary regionally, we are
presenting our assumptions in this respect as follows: For China, we assume that the Covid-19 pandemic reached its peak at the
end of the first quarter and that a significant easing of the situation will set in as of the second quarter of 2020. For Europe and the
United States, we do not expect the pandemic to peak until the second quarter, and currently expect that the outbreak will
normalize by the end of the third quarter. Moreover, the current forecast does not assume that a second disease wave will occur in
the named regions.
results
2019
Foreign exchange effect slightly
negative
Negative foreign exchange effect due to foreign exchange developments in several growth
markets and of the U.S. dollar
free cash
flow
•
•
• Strong organic growth
Slightly negative foreign exchange
effect
Key assumptions
1,375
cash flow
Business free
2,129
EBITDA pre
6,864
Net sales
Forecast for 2020
results
2019
€ million
Business
Actual
Forecast for the Life Science business sector
In 2020, we expect business free cash flow of the Healthcare business sector to show an increase in the low teens percentage
range. The main drivers will be the expected rise in EBITDA pre and improvement of working capital.
Business free cash flow
For 2020, we expect EBITDA pre of the Healthcare business sector to see solid organic growth. The negative earnings effects
resulting from the projected decline of RebifⓇ sales and the associated negative product mix effects in the base/core business
should be more than offset by substantial earnings contributions from our new products, particularly MavencladⓇ. In addition, we
will continue our systematic cost management and strict pipeline prioritization. We therefore expect marketing and selling expenses
as well as research and development costs to decline in percent of sales, with research and development costs remaining heavily
dependent on the development of clinical data and further expected study results. In 2020, the upfront cash payment from the
global strategic alliance with Pfizer for Bavencio® and Xalkori® and milestone payments will no longer be reflected in profit and
loss. However, the upfront cash payment in the context of the global strategic alliance with GlaxoSmithKline plc (GSK) for the joint
development and marketing of bintrafusp alfa will have a positive effect in the low triple digit Euro millions in fiscal 2020. The exact
amount is dependent on the cost evolution and on reaching development milestones and will be recognized in other operating
income. The forecast for Healthcare moreover continues to include effects from active portfolio management. But overall, the
earnings contribution attributable to these effects will be significantly below the prior-year figure. Furthermore, we expect EBITDA
pre to be moderately burdened by foreign exchange effects.
EBITDA pre
sales of products from the General Medicine & Endocrinology franchise, in particular. We expect our new products to contribute
significantly to organic sales. For 2020, we forecast Mavenclad ® and Bavencio Ⓡ sales to show further substantial increases.
Unfavorable foreign exchange developments in several growth markets and with respect to the U.S. dollar are expected to lead to a
slightly negative foreign exchange effect.
122
Report on Expected Developments
Combined Management Report
Net sales
• Improved management of working capital offsets higher investments in property, plant
and equipment
Rise in EBITDA pre
Increase in the low double-
digit teens percent range
1,252
FORECAST FOR THE LIFE SCIENCE BUSINESS SECTOR
In deviation from the Report on Expected Developments dated February 14, 2020, we now expect a euro-U.S. dollar exchange rate
in the range of 1.08 to 1.12. All further forecast assumptions - beyond the Covid-19 implications and the U.S. dollar exchange rate
- are identical to those made in our original Report on Expected Developments. Taking into account the present state of knowledge,
the forecast previously given is updated as follows:
A. Net equity
~4,350 to 4,850
293
3,645
-8.9
-123
26.5
207
780
1,386
1,263
987
-52.3
-1,208
%
€ million
309
4,785
2018
2,310
2019
Change
Other sales
Total
Performance Materials
Life Science
Healthcare
€ million
Merck KGaA's net sales decreased in 2019. The decline of € 1,140 million resulted primarily from the Healthcare and Performance
Materials business sectors. The Healthcare business sector has been held in a separate company, Merck Healthcare KGaA, since
April 1, 2019. On the other hand, net sales of the Life Science business sector rose, in particular.
Business development
130
Combined Management Report Additional Information on Merck KGaA in accordance with the German Commercial Code (HGB)
20,412.6
1,102
-16
-5.2
-1,140
Change
Total
Germany
Outside Germany
€ million
At 81.7% (2018: 86.7%), the share of exports in 2019 was below the previous year's level.
-23.8
-1,140
4,785
-5.8
-18
308
290
3,645
-25.1
-1,122
%
€ million
2018
4,477
3,355
2019
Change
Sales to third parties
Total
Group sales
€ million
The share of sales with other Group companies (Group sales) amounted to 92.0% in 2019 (2018: 93.6%).
Sales of the Healthcare sector include product sales generated until the termination of the business lease as well as sales from
intercompany cross-charges. Other sales mainly included intragroup cross-charging for IT services, trademarks, rent, and other
administrative services.
-23.8
14.2
20,635.1
16.4
12,357.8
14,131.2
2.0
1,111.6
105.7
702.4
18,654.5
18,654.5
237.0
885.5
17,532.0
17,532.0
885.5
237.0
Merck KGaA
April 1, 2019
Merck KGaA
March 31, 2019
Total EQUITY AND LIABILITIES
D. Deferred income
Other liabilities
Trade accounts payable
Financial liabilities
C. Liabilities
Other provisions
Provisions for pensions and other post-employment benefits
B. Provisions
Net retained profit: shareholders
Profit carried forward E. Merck KG
Retained earnings
Capital reserves
General partner's equity
Subscribed capital
1,921.7
2019
58.9
506.9
273.4
12,317.1
14,182.3
365.2
1,500.0
1,500.0
987.3
1,156.5
684.9
854.1
302.4
302.4
5,279.9
5,279.9
138.6
138.6
60.8
701.6
60.8
701.6
168.0
397.2
3,813.7
3,813.7
168.0
397.2
20,412.6
1,699.2
2.0
1,106.0
84.3
20,635.1
2,978
667
3,645
2018
4,148
637
•
Neutral to moderately adverse foreign
exchange effect
Increase in the low percentage teens range
Performance
Materials
Moderate to strong organic decline
• Portfolio effect in the low to mid-
thirties percentage range
Corporate and
Other
•
.
Slightly positive foreign exchange
effect
•
Organic decline in the low to mid-teens
percentage range
Portfolio effect in the low to mid-thirties
percentage range
Moderately positive foreign exchange
effect
Increase with growth rates in the low
twenties percentage range
Slightly higher than in 2019
Combined Management Report Report in accordance with Section 315a (1) of the German Commercial Code (HGB)
125
Report in accordance with Section 315a (1) of the
German Commercial Code (HGB)
The following information is provided in accordance with section 315a (1) of the German Commercial Code (HGB) and the
explanatory report pursuant to section 176 (1) sentence 1 of the German Stock Corporation Act (AktG).
As of the balance sheet date, the company's subscribed capital is divided into 129,242,251 no-par value bearer shares plus one
registered share. Each share therefore corresponds to € 1.30 of the share capital. The holder of the registered share is E. Merck
Beteiligungen KG. It is entitled and obliged to appoint one-third of the members of the Supervisory Board representing the limited
liability shareholders. If the holder of the registered share is a general partner, he or she has no such right of appointment. The
transfer of the registered share requires the company's approval. The approval is granted at the sole discretion of the personally
liable general partner with an equity interest, namely E. Merck KG.
Pursuant to the information on voting rights submitted to us in accordance with the German Securities Trading Act (WPHG), on
December 31, 2019, no shareholders owned direct or indirect investments exceeding 10% of the voting rights.
According to the Articles of Association of Merck, the general partners not holding an equity interest who form the Executive Board
are admitted by E. Merck KG with the consent of a simple majority of the other general partners. A person may be a general
partner not holding an equity interest only if he or she is also a general partner of E. Merck KG. In addition, at the proposal of
E. Merck KG and with the approval of all general partners not holding an equity interest, further persons who are not general
partners not holding an equity interest may be appointed to the Executive Board.
The Articles of Association can be amended by a resolution at the Annual Meeting that requires the approval of the general
partners. Notwithstanding any statutory provisions to the contrary, the resolutions of the General Meeting are adopted by a simple
majority of the votes cast. Where the law requires a capital majority in addition to the voting majority, resolutions are adopted by a
simple majority of the share capital represented in the vote. The Articles of Association of the company encompass authorized and
contingent capital.
The Executive Board is authorized to increase the company's share capital with the approval of the Supervisory Board and of
E. Merck KG once or repeatedly, up to and including April 27, 2022, by up to a total of € 56,521,124.19 by issuing new no-par
value bearer shares against cash and/or non-cash contributions (Authorized Capital 2017). Limited liability shareholders shall be
generally granted the statutory right to subscribe to the new shares. However, the Executive Board is authorized, with the approval
of the Supervisory Board, to exclude the limited liability shareholders' subscription right, in full or in part, in case of a capital
increase against cash contributions pursuant to or by analogous application of section 186 (3) sentence 4 AktG, if the issue price of
the new shares is not substantially lower than the stock exchange price of the company's shares already listed and if the new
shares which are issued under exclusion of the subscription right do not exceed a proportional amount of 10% of the share capital
either at the time of the Authorized Capital 2017 taking effect or at the time of the Authorized Capital 2017 being utilized. This
restriction to 10% of the share capital shall include the proportional amount of the share capital that is attributable to shares that
are issued under exclusion of the subscription right or sold during the term of the Authorized Capital 2017, based on an
authorization to issue new shares or sell own shares by direct or analogous application of section 186 (3) sentence 4 AktG. Further,
this restriction shall also include the proportional amount of the share capital that is attributable to shares which may or must be
issued in order to service bonds carrying a conversion or option right or a conversion or option obligation, if the bonds are issued
during the term of the Authorized Capital 2017 under exclusion of the limited liability shareholders' subscription right by analogous
application of section 186 (3) sentence 4 AktG.
• Neutral to slightly adverse foreign
exchange effect
It is likewise possible to exclude the subscription right of the limited liability shareholders with the approval of the Supervisory
Board in the case of capital increases through non-cash contributions, particularly for the purpose of acquiring enterprises, parts of
enterprises or interests in enterprises. In addition, with the approval of the Supervisory Board, the limited liability shareholders'
Life Science
•
• Stable organic development
Positive portfolio effect in the mid single-
digit percentage range
Slightly adverse foreign exchange effect
of 0% to -3%
€ million
Net sales
~ 16,800 to 17,800
• Slight to moderate organic growth
Merck Group
•
Portfolio effect in the mid single-digit
percentage range
•
•
Exchange rate effect -2% to +1%
•
Organic stable
Healthcare
Adverse portfolio effect in the mid
double-digit million range
• Neutral to moderately adverse foreign
exchange effect
Organic slightly negative
Business free cash flow
~2,650 to 3,250
Moderate decline
•
Slightly to moderately adverse foreign
exchange effect
•
Strong organic growth
Strong organic growth
EBITDA pre
Combined Management Report Report in accordance with Section 315a (1) of the German Commercial Code (HGB)
subscription rights can be excluded in order to enable E. Merck KG to exercise its right pursuant to article 32 (3) of the company's
Articles of Association to participate in a capital increase by issuing shares or freely transferable share subscription rights.
€ million
Combined Management Report Additional Information on Merck KGaA in accordance with the German Commercial Code (HGB)
129
ASSETS
A. Fixed assets
Intangible assets
Tangible assets
Financial assets
B. Current assets
Inventories
Trade accounts receivable
Other receivables and other assets
Cash and cash equivalents
C. Prepaid expenses
Total ASSETS
EQUITY AND LIABILITIES
Net sales of the Life Science business sector increased by a double-digit rate over the previous year's figure, mainly due to the
Process Solutions business unit (+21%). The Research Solutions (+6.0%) and Applied Solutions (+6.9%) business units also
posted higher sales year-on-year and contributed to growth. Sales growth was generated in the Europe, Asia-Pacific, and North
America regions. By contrast, a slight fall was recorded in the Middle East and Africa regions.
In the Performance Materials business sector, sales at the Display Solutions business unit declined year-on-year by -7.6%. Sales of
the Surface Solutions business unit also declined, by -1.1%. All in all, a sharp increase in sales at Cosmetics and OLED was not
enough to offset this decline. From a regional perspective, sales in Asia-Pacific and Europe fell.
The decline in net sales of the Healthcare business sector is attributable to the fact that its business has been continued in a
separate company, Merck Healthcare KGaA, since April 1, 2019.
-23.8
-1,140
4,785
4.7
-28.2
-1,170
30
%
€ million
The table below shows the assets and debt of Merck KGaA immediately before and after the end of the business lease and the
transfer of the assets and debt to Merck Healthcare KGaA. As a result of the termination of the business lease, there were mainly
lower sales, material, personnel and other operating expenses in fiscal year 2019.
126
The business leasing contract under which the Healthcare business sector was leased back to Merck KGaA was terminated with the
agreement dated January 11, 2019, with economic effect as of 24:00 hours on March 31, 2019. The sector-specific ERP system for
the Healthcare business sector was introduced as planned on April 1, 2019. As a result of the end of the business leasing contract,
the leased objects allocated to the Healthcare business sector at the end of the lease - comprising current assets as well as certain
liabilities and provisions, including the leased objects acquired or created by means of maintenance, replacement, and expansion
investments - were transferred to Merck Healthcare KGaA at their carrying amounts under German commercial law and in a
condition commensurate with their continued and proper operational use up to the date the business leasing contract ended. The
carrying amounts of the debt exceeded the carrying amounts of assets, and so Merck KGaA made a settlement payment to Merck
Healthcare KGaA. In addition, the licenses for the intangible assets and know-how leased to Merck KGaA came to an end.
Since the technical system requirements for the introduction of the sector-specific enterprise resource planning (ERP) systems as
regards the OpCos were not in place at the time of the spin-off, the business activities spun off to the OpCos have been temporarily
leased back by the relevant OpCos to Merck KGaA until sector-specific ERP systems have been introduced. For this purpose, also on
March 2, 2018, Merck KGaA entered into a business leasing contract with each respective OpCo with economic effect as of 0:00
hours on January 1, 2018, to lease back all the operating business previously spun off to the OpCo. Under the terms of the
respective business leasing contract, Merck KGaA leases the entire operation from the respective OpCo, as well as all fixed assets in
this context; it acquires the current assets as well as certain liabilities and provisions at their carrying amounts under German
commercial law. The business lease allowed the spin-off measures to be implemented for all OpCos with economic effect at a
uniform time, 0:00 hours on January 1, 2018, while retaining the flexibility of transitioning the management of the relevant
operating business in accordance with the sector-specific ERP introduction at an individual time to the OpCo in question in a
targeted manner. On the basis of the business leasing contract, Merck KGaA will temporarily continue to operate the spun-off
business as a leaseholder in its own name and for its own account. Once the relevant ERP systems have been introduced for the
respective OpCo, the business lease with this OpCo will be terminated and the business previously leased out will pass to the OpCo.
It is likewise possible to exclude, with the approval of the Supervisory Board, the subscription right of the limited liability
shareholders in order to enable E. Merck KG to exercise its right pursuant to article 33 of the Articles of Association to convert, in
full or in part, its equity interest into share capital.
Moreover, with the approval of the Supervisory Board, the subscription right of the limited liability shareholders can be excluded if
and to the extent this is necessary to grant the holders or creditors of conversion or option rights, and/or the holders or creditors of
financing instruments carrying conversion or option obligations, which were or are issued by the company or by a domestic or
foreign company in which the company directly or indirectly holds the majority of the votes and capital, a subscription right to the
extent to which they would be entitled after the exercise of the conversion or option rights or after the performance of a conversion
or option obligation.
Lastly, with the approval of the Supervisory Board, the subscription right of the limited liability shareholders can be excluded in
order to exclude fractional amounts from the subscription right.
The sum of shares issued on the basis of the Authorized Capital 2017 under exclusion of the limited liability shareholders'
subscription right must not exceed a proportional amount of 20% of the share capital, by taking into account other shares of the
company which, during the term of the Authorized Capital 2017, are sold or issued under exclusion of the subscription right or are
to be issued under bonds issued after April 28, 2017, under exclusion of the subscription right; this limitation shall apply both at the
time of this authorization taking effect and at the time of this authorization being exercised.
To the extent that the subscription right is not excluded under the above provisions, it may also be granted to the limited liability
shareholders by way of an indirect subscription right pursuant to section 186 (5) AktG or, in part, by way of a direct subscription
right, and otherwise by way of an indirect subscription right pursuant to section 186 (5) AktG.
Furthermore, the Executive Board is authorized, with the approval of the Supervisory Board, to determine the additional details of
the capital increase and its implementation, including the content of rights attached to the shares as well as the terms and
conditions of the share issue.
The Articles of Association also encompass contingent capital. The share capital is contingently increased by up to € 66,406,298.40
divided into 51,081,768 shares (Contingent Capital I). The contingent capital increase serves to grant exchange rights to
E. Merck KG in accordance with article 33 of the Articles of Association to enable the conversion of its equity interest. The shares
carry dividend rights from the beginning of the fiscal year following the year in which the conversion option is exercised.
Moreover, the share capital is contingently increased by up to € 16,801,491.20 composed of up to 12,924,224 no par value bearer
shares (Contingent Capital II). This increase in contingent capital is only to be implemented insofar as the bearers or creditors of
option or conversion rights, or with an obligation to convert or exercise options on warrant bonds, option participation certificates,
option participation bonds, convertible bonds, convertible participation certificates, or convertible participation bonds issued against
contributions that are issued or guaranteed by the company or a subordinate Group company on the basis of the authorization
resolution of the Annual General Meeting of April 27, 2018, to April 26, 2023, utilize their option or conversion rights, or to fulfill
their conversion obligation or obligation to exercise options insofar as they are obliged to fulfill their conversion or option exercise
obligation, or insofar as the company exercises an option, wholly or in part, of granting shares in the company instead of paying the
sum of money due, and to the extent that in each case a cash settlement is not granted, or own shares or other forms of fulfillment
are used. Each issue of new shares shall take place at the determined option or conversion price, pursuant to the aforementioned
authorization resolution. The new shares participate in the profit from the beginning of the fiscal year in which they are created;
insofar as this is legally permissible, the Executive Board may, with the approval of the Supervisory Board, and in deviation from
section 60 (2) AktG, stipulate that the new shares also participate in the profit for a past fiscal year. The Executive Board is
authorized, with the approval of the Supervisory Board and of E. Merck KG, to stipulate the further details of the implementation of
the increase in contingent capital.
The company is not authorized to acquire its own shares.
The company has not entered into any material agreements subject to a change of control pursuant to a takeover offer nor has it
entered into any compensation agreements with the members of the Executive Board or employees in the event of a takeover offer.
Combined Management Report Additional Information on Merck KGaA in accordance with the German Commercial Code (HGB)
127
Additional Information on Merck KGaA in
accordance with the German Commercial Code
(HGB)¹
The management report of Merck KGaA has been combined with the Group management report. The annual financial statements
and the combined management report of the Merck Group and Merck KGaA for 2019 are being filed with the electronic German
Federal Gazette (elektronischer Bundesanzeiger) and are available on the website of the German company register.
Merck KGaA, headquartered in Darmstadt, is the parent company of the Merck Group. In addition to its function as a holding
company, Merck KGaA generates sales in the Healthcare, Life Science, and Performance Materials business sectors. The Healthcare
business sector has been run in a separate company, Merck Healthcare KGaA, since April 1, 2019 (see "Effects of material company
agreements on the net assets, financial position, and results of operations"). Merck KGaA bears a significant portion of the Group-
wide research and development costs, and employs the majority of the 11,000-plus workforce in Darmstadt. Of that number, just
under 3,000 employees of the Healthcare business sector have been employed at a separate company, Merck Healthcare KGaA,
since April 1, 2019.
The financial statements of Merck KGaA have been prepared in accordance with the provisions of the German Commercial Code
(HGB), as amended by the German Accounting Directive Implementation Act (BilRUG), and the German Stock Corporation Act
(AktG). The full version of the annual financial statements of Merck KGaA together with the unqualified auditor's opinion has been
submitted to the operator of the electronic Federal Gazette (elektronischer Bundesanzeiger), where they are published and
forwarded to the company register.
Statement on Corporate Governance
The Statement of Corporate Governance according to section 289a of the German Commercial Code (HGB) is contained in the
"Corporate Governance" section.
Effects of material company agreements on the net assets, financial position, and
results of operations
End of the temporary business lease of the Healthcare business sector
As part of the strategic development of Merck KGaA, the existing operating activities of the Healthcare, Life Science, and
Performance Materials business sectors within Merck KGaA together with the relevant assets and liabilities (hereinafter: "operating
sectors") were spun off at their carrying values into three separate companies (hereinafter: "OpCo" or plural "OpCos") with the
legal form of a GmbH or German limited liability corporation (operating spin-off). This operating spin-off is based on the spin-off
and takeover agreement concluded between Merck KGaA and the OpCos in notarized form on March 2, 2018. Following approval by
the 2018 Annual General Meeting, the operating spin-off took place with economic effect as of 0:00 hours on January 1, 2018.
Immediately after the spin-off took effect, all shares held by Merck KGaA in the respective OpCos were transferred to holding
companies via a further spin-off (holding company spin-off), as a result of which the OpCos are each indirectly held by Merck KGaA
via an intermediate holding company. The acquiring legal entities within the scope of the holding company spin-off were Merck
Healthcare Holding GmbH for the business shares of Healthcare OpCo, Merck Life Science Holding GmbH for the business shares of
Life Science OpCo, and Merck Performance Materials Holding GmbH for the business shares of Performance Materials OpCo
1 Owing to the altered expectations as regards the impact of the Covid-19 pandemic, this 2020 forecast for Merck KGaA was updated accordingly on
May 12, 2020.
Combined Management Report
Additional Information on Merck KGaA in accordance with the German Commercial Code (HGB)
128
(referred to individually as "Hold Co", independently of the sector, and jointly as "HoldCos"). To this end, Merck KGaA and the
HoldCos signed a notarized spin-off and takeover agreement on March 2, 2018. The holding company spin-off took place with
economic effect as of 0:00 hours on January 1, 2018.
The aforementioned spin-off and business leasing contracts form part of an overall entrepreneurial concept. They were submitted to
the General Meeting of Merck KGaA for approval on April 27, 2018 (2018 Annual General Meeting) as a coherent restructuring
measure, and were approved by it. The gradual implementation of the measures is due to be completed in 2020. In 2018, the
Healthcare OpCo changed its legal form to that of a German corporation with general partners ("Kommanditgesellschaft auf
Aktien") and has since been trading under the name of Merck Healthcare KGaA, Darmstadt.
58.9
22.8
10,983
620
2,674
1,678
3,213
3,143
3,756
3,164
2018
2019
Risks and opportunities
Total
Other
Marketing and sales
Logistics
Research
Administration
Production
Average number of employees during the year
PERSONNEL
671
510
590
23
Capital Structure and Corporate Bodies of Merck KGaA
136
CORPORATE GOVERNANCE
All further forecast assumptions are identical to those made in our original forecast.
This combined management report was originally prepared on February 14, 2020 by the Executive Board of Merck KGaA.
Owing to the originally planned termination of the lease agreements with Merck Life Science Germany GmbH and Merck
Performance Materials GmbH in fiscal 2020 as well as the resulting transfer of the operating businesses, a significant decline in net
sales of Merck KGaA was forecast. As the project scheduling has meanwhile been updated, the successive implementation of the
measures in fiscal 2020 is not likely to be completed. Taking into account this present state of knowledge, while simultaneously
considering the development of the Covid-19 pandemic, the forecast previously given is updated as follows: Net sales for 2020 are
now expected to be at a level comparable to 2019.
Updated forecast for 2020 dated May 12, 2020
Currently no risks can be identified that may jeopardize the continued existence of the company.
Merck Financial Services GmbH, Darmstadt, will provide the company with sufficient financial resources and thus ensure liquidity.
As in 2018, the financing costs of the Sigma-Aldrich acquisition as well as the Versum acquisition in 2019 continue to adversely
affect net income. Nevertheless, net income for the year is expected to be at a comparable level to 2019 due to the positive
investment income and dividends from the subsidiaries.
The average number of employees by functional area is as follows:
For fiscal 2020, a significant decline in net sales is expected overall. This is due to the planned termination of the business leasing
contracts with Merck Life Science Germany GmbH and Merck Performance Materials Germany GmbH as well as the resulting
transfer of the Life Science and Performance Materials business sector's operating business.
The continuation of the Healthcare business sector in Merck Healthcare KGaA led to a fall in the associated net sales and cost of
materials and personnel, and other operating expenses at Merck KGaA as expected. Overall, the net income for the year was at a
comparable level to the previous year.
Net sales of the Life Science business sector increased by a double-digit rate over the previous year's figure and were thus above
our forecast from the management report 2018, mainly due to the Process Solutions business unit (+21%). The Research Solutions
(+6.0%) and Applied Solutions (+6.9%) business units also posted higher sales year-on-year and contributed to growth.
In the Performance Materials business sector, sales at the Display Solutions business unit declined year over year by -7.6% und
thus met the expectations from the management report 2018. Sales of the Surface Solutions business unit also declined, by -1.1%.
All in all, a sharp increase in sales at the Cosmetics and OLED business units was not enough to offset this decline.
The combined management report for 2018 forecast a decline in net sales at the Healthcare business sector in 2019 due to the fact
that the business lease would end and, related to that, its operating business would be continued in Merck Healthcare KGaA from
April 1, 2019. A slight increase in net sales was forecast for the Life Science business sector, whereas a slight drop in net sales was
expected for the Performance Materials business sector. A slight increase over the previous year was forecast for net income for the
year.
Deviations of actual business development in 2019 from the previously reported guidance
Forecast for Merck KGaA
Merck KGaA is largely subject to the same opportunities and risks as the Merck Group. More information can be found in the Report
on Risks and Opportunities.
9,138
79
Forecast 2020
134
Combined Management Report Additional Information on Merck KGaA in accordance with the German Commercial Code (HGB)
As of December 31, 2019, Merck KGaA had 8,474 employees, representing a decrease over the previous year (2018: 11,133). The
decline was mainly attributable to the fact that employees from the Healthcare business sector have been employed at a separate
company, Merck Healthcare KGaA.
%
€ million
2018
Life Science
Healthcare
€ million
2019
Change
RESEARCH AND DEVELOPMENT EXPENSES
132
In 2019, research and development spending on projects of Merck KGaA and of other Group companies totaled € 434 million
(2018: € 923 million). A large portion was also incurred by companies outside the Merck Group. The decline of € 489 million
(53.0%) was mainly attributable to the fact that the Healthcare business sector has been continued in a separate company, Merck
Healthcare KGaA, since April 1, 2019. Further information can be found in the section "Research and Development" in the
Management Report of the Group.
Additional Information on Merck KGaA in accordance with the German Commercial Code (HGB) 133
Combined Management Report
The rise in other liabilities resulted mainly from intragroup financing measures in the wake of the Versum acquisition.
The increase in financial liabilities was due to the issue of bonds as part of the Versum acquisition.
The drop in other provisions (€ -227 million) resulted primarily from the operating spin-off (see "Effects of material company
agreements on the net assets, financial position and results of operations").
Current assets (€ -610 million) decreased principally due to lower profit transfers compared with the previous year, mainly as a
result of a dividend received in the previous year from an intermediate holding company with a profit transfer agreement.
Moreover, inventories and trade accounts receivable fell in 2019 due to the continuation of the Healthcare business sector within
Merck Healthcare KGaA as of April 1, 2019.
Intragroup capital measures as part of the Versum acquisition resulted in an increase in financial assets.
The end of the business lease of the Healthcare business sector resulted in a decline in the assets and liabilities associated with this
business sector (see "Effects of material company agreements on the net assets, financial position and results of operations").
The change in net assets and in the financial position of Merck KGaA was mainly a result from capital and financing measures in
connection with the acquisition of Versum. With a 20.4% increase in total assets, the equity ratio amounted to 21.1%
(2018: 25.3%). The fall in the equity ratio is mainly attributable to the financing measures as part of the Versum acquisition.
Research and development
137
604
-78.1
Personnel
For 2019, we are proposing to the General Meeting the payment of a dividend of € 1.30 per share.
Dividend
The ratio of research and development spending to sales was 11.9% (2018: 19.3%). Overall, the average number of employees
working in research and development was 1,678. Merck KGaA is one of the main research sites of the Merck Group, accounting for
a share of 19.1% (2018: 41.6%) of total Group research and development spending. The decline is mainly attributable to the fact
that the R&D activities of the research-intensive Healthcare business sector have been continued at the operating company, Merck
Healthcare KGaA, since April 1, 2019.
-53.0
-489
923
434
-85.8
-472
13
Other R&D spending that cannot be allocated to individual business sectors
Total
-6.3
-16
260
244
Performance Materials
11
46
57
2
20.4
Statement on Corporate Governance including Compensation Report
Report of the Supervisory Board
• Structure and examination of the performance-independent and performance-related compensation elements
E. Merck KG that decides on the amount and composition of compensation received by our Executive Board members. The Board of
Partners has assigned this task to its Personnel Committee. The Personnel Committee is thus primarily responsible for the
followings topics as they relate to our Executive Board and the compensation of its members:
In our company, unlike publicly listed German stock corporations, it is not the Supervisory Board, but the Board of Partners of
140
Corporate Governance Statement on Corporate Governance including Compensation Report
The long-term interests of our shareholders are taken into account through a significantly high amount of variable, performance-
related compensation as a proportion of total compensation as well as the compensation system's strong focus on the share price.
The performance of the Executive Board members should be properly recognized, with the failure to meet targets leading to a
noticeable reduction in performance-related compensation.
Long-term interests of our shareholders
The execution of the long-term Group strategy is promoted through the selection of appropriate, ambitious key performance
indicators for performance-related compensation. Against this background, our performance-related compensation components
(profit sharing and Merck Long-Term Incentive Plan) orient toward the key performance indicators of the Group.
Long-term Group strategy
The structure of the compensation system and the assessment of individual compensation are guided by the German Stock
Corporation Act (AktG) and the German Corporate Governance Code in the version dated February 7, 2017. Within the regulatory
framework conditions, the objective is to offer the Executive Board members a competitive compensation package in line with
market practice.
Regulatory requirements and principles of good corporate governance
The following principles are followed or taken into account when it comes to the specific structure of the compensation, the setting
of individual compensation, the selection of the key performance indicators, and the structure of payout and allocation terms:
Furthermore, Executive Board compensation orients towards the external peer environment of Merck KGaA, meaning in comparison
with other German blue-chip companies as well as international competitors. The relationship between Executive Board
compensation and the compensation of top management and the workforce as a whole continues to be taken into account, also in a
multi-year assessment. The Personnel Committee regularly commissions an independent compensation consultant to review the
appropriateness of the compensation.
The compensation paid to the members of the Executive Board takes into account the responsibilities and duties of the individual
Executive Board members, their status as personally liable partners, their individual performance, and the economic situation, as
well as the performance and future prospects of the company.
As the world's oldest pharmaceutical and chemical company, Merck attaches great importance to responsible governance and
entrepreneurship. This is also reflected by the compensation of the members of the Executive Board of Merck KGaA. Unlike
management board members of stock corporations, they are not merely employed members of a corporate board. Rather, they are
personally liable general partners of both Merck KGaA and the general partner E. Merck KG, and in this capacity they receive profit
sharing from E. Merck KG. Owing to the legal form as a KGaA (corporation with general partners), the stipulations of the German
Corporate Governance Code concerning the compensation of management board members of publicly listed German stock
corporations as well as the individual disclosure thereof do not apply to the Executive Board members of Merck KGaA. Nevertheless,
we have decided to comply with the requirements of the German Corporate Governance Code in the version dated February 7,
2017.
Compensation philosophy
(The compensation report is part of the notes to the audited consolidated financial statements.)
Compensation report
139
• Contract terms of members of the Executive Board
•
Assumption of honorary offices, board positions, or other sideline activities
• Distribution of responsibilities among Executive Board members
1 Excluding additional benefits and company pension.
Fixed compensation
Performance-
independent
Individual absolute capped amount
• Consideration of individual performance via the performance factor in a range
from 0.7 to 1.3
• Key performance indicator: Three-year average of the profit after tax of the
E. Merck Group
Profit sharing
compensation
Performance-
related
Corporate Governance Statement on Corporate Governance including Compensation Report
(50%), EBITDA pre margin (25%), organic sales growth (25%)
Absolute capped amount totaling 250% of the individual grant
• Performance Share Plan based on virtual shares (Merck Share Units)
Merck Long-Term Incentive Plan
COMPENSATION ELEMENTS AND COMPENSATION STRUCTURE¹
The compensation system for the Executive Board basically comprises the three main components of fixed compensation, profit
sharing, and the Merck Long-Term Incentive Plan. It is complemented by contributions to the company pension plan as well as
additional benefits. The components of the compensation system are as follows:
Overview of the structure and the components of the compensation system
Our compensation system for the Executive Board will be revised again in 2020 in view of another round of regulatory changes
resulting from the entry into force of the German Act Implementing the Second Shareholder Rights Directive (ARUG II) and the
German Corporate Governance Code reform. The revised compensation system is expected to be submitted to the Annual General
Meeting for approval in 2021. All mentions of the German Corporate Governance Code in this Compensation Report refer to the
version dated February 7, 2017.
Taking the suggestions of our shareholders into account, the compensation system was further revised with the help of an
independent compensation consultant with effect from fiscal 2018, while taking account of the regulatory requirements and the
internal corporate strategy. In April 2018, the compensation system was submitted to the General Meeting for approval and
accepted by 98.9% of the votes cast.
Granting of loans and salary advances
•
• Key performance indicators: share price performance relative to the DAX®
s. Wolfgang Büchele
For the Supervisory Board
s. Stefan Oschmann
Board of Partners of
MONITORING
MONITORING
Supervisory
Board
Annual General
Meeting
€ 397,196,314.35
E. Merck KG holds equity
interest
General partner
€168,014,927.60
E. Merck KG
Shareholders hold
share capital
Executive Board of Merck KGaA
€ 565,211,241.95
Total capital of Merck KGaA
Capital Structure and Corporate Bodies of
Merck KGaA
136
Corporate Governance Capital Structure and Corporate Bodies of Merck KGaA
and Profile of Skills and Expertise
Objectives of the Supervisory Board with respect to Its Composition
170
General partners with no equity interest
167
Further information can be found under "Merck KGaA" in the "Statement on Corporate Governance"
137
For the Executive Board
Darmstadt, February 28, 2020
In view of future compliance with the current recommendations of the Government Commission of the German Corporate
Governance Code, the Executive Board and the Supervisory Board declare the following: With the exception of the aforementioned
deviations from sections 3.8 (2) and 3.8 (3) (D&O deductible) and 5.3.2 (audit committee), the company will comply with the
recommendations of the Code in the version dated February 7, 2017."
"Declaration of the Executive Board and the Supervisory Board of Merck KGaA on the recommendations of the Government
Commission of the German Corporate Governance Code pursuant to section 161 of the German Stock Corporation Act (AktG). Since
the last Declaration of Conformity on February 26, 2019, we have complied with the recommendations of the Government
Commission of the German Corporate Governance Code in the version dated February 7, 2017, published in the official section of
the German Federal Gazette, with the following exception: Merck KGaA had a D&O insurance policy for the members of its
Supervisory Board that did not include a deductible in the amount recommended in accordance with section 3.8 (2) and 3.8 (3) of
the German Corporate Governance Code. The powers of the Supervisory Board of Merck KGaA are more restricted than those of the
supervisory board of a German stock corporation. Accordingly, the steering effect of a deductible that section 3.8 (2) and 3.8 (3) of
the German Corporate Governance Code seeks to achieve is not obtained in the case of the Supervisory Board of Merck KGaA to the
sought-for extent. Contrary to section 5.3.2 of the German Corporate Governance Code, the Supervisory Board has not established
an audit committee. However, an audit committee does exist in the form of the Finance Committee of the Board of Partners of
E. Merck KG, which to a large extent exercises the duties described in section 5.3.2 of the Code. Due to the relatively limited
authority of the supervisory board of a KGaA in comparison with that of an AG, this therefore satisfies the requirements of the
German Corporate Governance Code.
In accordance with section 161 AktG, applying the provisions of the German Corporate Governance Code correspondingly, the
Executive Board and the Supervisory Board issued the following Declaration of Conformity with the recommendations of the
Government Commission of the German Corporate Governance Code:
Declaration of Conformity
In particular, the Annual General Meeting passes resolutions concerning the approval of the annual financial statements, the
appropriation of net retained profit, the approval of the actions of the Executive Board members and the Supervisory Board
members, as well as the election of the auditor. Changes to the Articles of Association likewise require the adoption of a resolution
by the General Meeting. The shareholders of Merck KGaA exercise their rights at the General Meeting. They may exercise their
voting rights personally, through an authorized representative or through a proxy appointed by the company. The proxy is in
attendance throughout the duration of the General Meeting. All the documents and information concerning upcoming General
Meetings (including a summary explanation of shareholder rights) are also posted on our website. Moreover, the General Meeting is
webcast live on the internet from its commencement until the end of the speech by the Chairman of the Executive Board. The
introductory speeches by the Chairman of the Executive Board and the Chairman of the Supervisory Board are recorded in order to
make them available to interested members of the public at any time after the meeting. In this way, we are satisfying the high
transparency requirements of the Merck Group.
The 24th General Meeting of Merck KGaA was held on April 26, 2019, in Frankfurt am Main, Germany. At 66.96%, the proportion of
share capital represented at the meeting was higher than in the previous year. In 2018, the proportion of share capital represented
was 59.25%.
The General Meeting of Merck KGaA
Corporate Governance Statement on Corporate Governance including Compensation Report
Based on the provisions of the German Stock Corporation Act, the Articles of Association of Merck KGaA and the rules of procedure
of the various committees, Merck KGaA has a set of rules for the Executive Board and its supervision that meet the requirements of
the German Corporate Governance Code. The investors, who bear the entrepreneurial risk, are protected as provided for by the
German Corporate Governance Code.
Corporate Governance Statement on Corporate Governance including Compensation Report
The general partner E. Merck KG holds around 70% of the total capital of Merck KGaA (equity interest); the shareholders hold the
remainder, which is divided into shares (share capital). E. Merck KG is excluded from the management of business activities. The
general partners with no equity interest (Executive Board) manage the business activities. Nevertheless, due to its substantial
capital investment and unlimited personal liability, E. Merck KG has a strong interest in the businesses of Merck KGaA operating
efficiently in compliance with procedures. Merck KGaA's participation in the profit/loss of E. Merck KG in accordance with
articles 26 et seq. of the Articles of Association further harmonizes the interests of the shareholders and of E. Merck KG.
E. Merck KG appoints and dismisses the Executive Board. In addition, E. Merck KG has created bodies - complementing the
expertise and activities of the Supervisory Board - to monitor and advise the Executive Board. This task applies primarily to the
Board of Partners of E. Merck KG.
Merck KGaA
For a clearer understanding, the following gives a general explanation of the application of German company law at Merck KGaA
with additional references to the General Meeting and shareholder rights.
Merck KGaA applies the German Corporate Governance Code analogously where these regulations are compatible with the legal
form of a KGaA. In order to enable shareholders to compare the situation at other companies more easily, to a broad extent we
base corporate governance on the conduct recommendations made by the Government Commission of the German Corporate
Governance Code and forego having our own, equally permissible, code. The recommendations of the Code in the version dated
February 7, 2017, the intent and meaning of which are applied, were complied with in the period between the last Declaration of
Conformity issued on February 22, 2019, with two exceptions. In future, we aim to comply with the recommendations of the Code
with two exceptions.
The German Corporate Governance Code is geared toward the conditions found in a German stock corporation ("Aktiengesellschaft"
or "AG") and does not take into consideration the special characteristics of a corporation with general partners
("Kommanditgesellschaft auf Aktien" or "KGaA") such as Merck KGaA. Given the structural differences between an AG and a KGaA,
several recommendations of the German Corporate Governance Code are to be applied to a KGaA only in a modified form. Major
differences between the two legal forms exist in terms of liability and management. While, in the case of an AG, only the AG is
liable as a legal entity, the general partners of a KGaA also have unlimited personal liability for the company's obligations
(section 278 (1) of the German Stock Corporation Act (AktG)). At Merck KGaA, this pertains to both E. Merck KG - which pursuant
to article 8 (5) of the Articles of Association is excluded from management and representation - as well as to the managing general
partners, who together make up the Executive Board of Merck KGaA. The members of the Executive Board of Merck KGaA are
therefore subject to unlimited personal liability. Unlike an AG, their executive authority is not conferred by the Supervisory Board,
but rather by their status as general partners. Consequently, in addition to other responsibilities typical of the supervisory board of
an AG (see description of the procedures of the Supervisory Board), the supervisory board of a KGaA does not have the authority to
appoint the management board, draw up management board contracts, or specify compensation of the management board. This
legal form also involves special features with regard to the General Meeting. For example, in a KGaA, many of the resolutions made
require the consent of the general partners (section 285 (2) AktG), including in particular the adoption of the annual financial
statements (section 286 (1) AktG).
Joint report of the Executive Board and the Supervisory Board including Declaration
of Conformity
The Statement on Corporate Governance contains the Declaration of Conformity, relevant information on practices
within the company, and a description of the procedures of the corporate bodies, as well as targets for the percentage
of positions held by women and the diversity policy.
Statement on Corporate Governance including
Compensation Report
138
-17.2
-11
21,040
7
162
169
Profit after profit transfers and taxes
-150.0
-48
32
-16
Taxes
4.3
0.4
-454
-456
Profit transfers
9.6
56
584
641
Profit before profit transfers and taxes
-13.0
-3
4,283
34
The increase in other income primarily resulted from cross-charges within the scope of the business lease. This was offset by
lower income from the reversal of provisions and lower exchange rate gains.
The decline in personnel expenses was mainly attributable to the business transfer of about 3,000 employees from the
Healthcare business sector to a separate company, the Merck Healthcare KGaA, since April 1, 2019.
LIABILITIES
Prepaid expenses
Cash and cash equivalents
Other receivables and other assets
Trade accounts receivable
Inventories
Current assets
Financial assets
Tangible assets
The cost of materials fell overall, due to fact that the Healthcare business has been continued in a separate company, Merck
Healthcare KGaA, since April 1, 2019. Owing to higher sales volume with declining prices in some cases, the cost of materials in
relation to sales rose to 40.0% (2018: 37.1%).
Intangible assets
€ million
ASSETS
Net assets and financial position
132
Combined Management Report Additional Information on Merck KGaA in accordance with the German Commercial Code (HGB)
The financial result increased mainly due to higher fair values of plan assets. This was offset by higher interest expense resulting
from the financing for Versum, see Note (5) "Acquisitions and divestments" in the Notes to the Consolidated Financial Statements.
Investment income fell essentially on account of lower dividend payments in the Merck group. The profit transfers from
subsidiaries decreased mainly due to a dividend received in the previous year from an intermediate holding company with a profit
transfer agreement. In addition, one-off effects in one subsidiary further reduced the profit transfer. This was offset by higher profit
transfers from other subsidiaries, particularly Merck Healthcare KGaA; see section "Effects of material company agreements on the
net assets, financial position, and results of operations".
The continuation of the Healthcare business sector in a separate company since April 1, 2019, led to a fall in other operating
expenses, mainly in marketing, research and other external services and remuneration.
Depreciation, amortization, and write-downs rose as a result of the investments made in 2018 and 2019.
Fixed assets
€ million
-262
Financial result
43
172
215
-23.9
-1,140
4,785
3,645
%
€ million
25.0
2018
Personnel expenses
Cost of materials
Other income
Net sales
€ million
Change
RESULTS OF OPERATIONS
131
Combined Management Report Additional Information on Merck KGaA in accordance with the German Commercial Code (HGB)
2019
-228
-1,459
317
-10.9
-135
1,234
1,099
Investment income/write-downs of financial assets
-35.8
770
-2,152
-1,382
-1,776
Other operating expenses
-10
-112
-122
Depreciation, amortization, and write-downs
-13.6
177
-1,305
-1,128
-17.8
8.9
Net equity
-2
Provisions for pensions and other post-employment benefits
379
-12.1
-136
0.2
9
5,329
1,119
983
5,338
%
288
€ million
Dec. 31, 2019
Change
20.4
4,283
21,040
25,323
36.6
13
34
Dec. 31, 2018
47
92
605
25,323
17
23.6
2,976
-14.0
-62
446
12,629
14
15,605
31.9
Provisions
1,500
3,000
384
30.3
4,413
14,575
18,988
-27.3
-227
832
1,500
-66.7
100.0
3
899
860
-2.8
-7
239
26.1
4,880
18,670
23,550
232
-39
%
Dec. 31, 2018
Dec. 31, 2019
Change
Other liabilities
Trade accounts payable
Financial liabilities
Liabilities
Other provisions
-2
€ million
-4.3
Deferred income
17,532
22,458
-24.8
-320
1,293
1
-41.0
-129
315
186
-21.8
973
725
567
-26.1
-610
2,336
1,726
28.1
-158
4,926
Through their status as personally liable general partners of Merck KGaA and E. Merck KG, the Executive Board members bear a
unique entrepreneurial responsibility. This is also reflected by the penalty criteria set forth in profit sharing and by the German
statutory regulations on liability for damages stipulated in section 93 AktG.
In order to take even greater account of the prominent position of entrepreneurial responsibility in compensation, a clawback
provision was included in the Long-Term Incentive Plan, effective January 1, 2018, allowing amounts allocated from the Long-Term
Incentive Plan but not yet paid out to be retained. Cases in which the clawback provision may be applied include violations of
internal rules and regulations (Merck Code of Conduct), legislation, other binding external requirements in the area of responsibility,
significant breaches of duty of care within the meaning of section 93 AktG, and other grossly non-compliant or unethical behavior or
actions that are contradictory to our company values.
To further increase the transparency of the Executive Board compensation system, the performance corridor for the key
performance indicators used in the Merck Long-Term Incentive Plan will subsequently be disclosed. However, the company will
Corporate Governance Statement on Corporate Governance including Compensation Report
144
continue to refrain from publishing this performance corridor in advance as this could permit market-related and competitively
relevant conclusions to be drawn about strategic objectives.
Share Ownership Guideline
Fixed
Overall compensation limit
Compensation is capped with respect to its performance-related compensation elements of profit sharing and the Merck Long-Term
Incentive Plan, as well as having an overall cap. The maximum limits are presented in the following table.
Maximum profit-sharing
€ thousand
Maximum limit Merck Long-Term
Incentive Plan
compensation
limit
A Share Ownership Guideline was introduced in 2017. This obligates the Executive Board members, for the duration of their
employment relationship, to permanently hold Merck shares in an amount equal to 100% of their annual gross fixed compensation.
Owing to his position as Chairman of the Executive Board, Stefan Oschmann is obligated to hold a higher amount, that is at least
200% of his annual gross fixed compensation, in Merck shares. The duty to provide evidence of the complete number of shares
must be met no later than on expiration of four years after having joined the Executive Board or after the introduction of the rule.
The Share Ownership Guideline promotes even stronger alignment between the interests of the Executive Board members and
those of our shareholders, and it additionally raises the entrepreneurial responsibility of the Executive Board members. Moreover,
the introduction of the Share Ownership Guideline takes into account the widespread practice of share ownership among
management and executive board members in international peer comparisons.
Clawback provision
Reference
Merck share
The Merck Long-Term Incentive Plan thus links two key performance indicators derived from the strategy with an external, relative
key performance indicator. On the one hand, this creates an incentive to achieve strategic objectives. On the other hand, the strong
share price orientation takes into account the company's long-term development prospects and the expectations of our
shareholders. To prevent distortions as a result of exceptional factors as well as to directly reflect the performance of the Executive
Board members, the EBITDA pre margin is used.
Performance cycle
GJ 2020
Maximum limit overall
GJ 2021
Performance
of the Merck
share price
vs. the DAX®Ⓡ
EBITDA
pre margin
Organic
sales
growth
Depending on the performance of the key performance indicators, after the three-year performance cycle, between 0% and 150%
of the provisionally promised MSUs are finally allocated. The value of these MSUS is paid out to the Executive Board in the year
after the three-year performance cycle has ended. For this, the final allocated number of MSUS is multiplied by the definitive
reference share price at the end of the performance cycle. The maximum increase in the share price is limited to 200% of the
reference price at the beginning of the performance cycle, thus limiting participation in external effects that contribute to share
price increases. Apart from setting a limit on the final number of allocated MSUs and on the applicable share price increase, the
overall Merck Long-Term Incentive Plan payment is limited to 250% of the individual grant. If targets are clearly missed, it is also
possible that absolutely no payment is made from the Merck Long-Term Incentive Plan (0%).
Number
of MSUS
actually
achieved
0%-150%
Amount paid
out in € (0%
price at
the end
0%-200%
250% of the
grant in €)
Weighting: 50%
Weighting: 25%
Weighting: 25%
X
compensation¹
8,000
Board
942
3,120
3,300
8,000
1 Excluding additional benefits and company pension.
Pension entitlements
Effective January 1, 2017, for the Executive Board members Kai Beckmann, Belén Garijo and Marcus Kuhnert, the individual
contractual pension agreements were changed from defined-benefit to defined-contribution pension obligations, maintaining the
direct commitment modality ¹. A defined-contribution pension agreement is also in place with Udit Batra. Within the scope of these
defined-contribution pension obligations, every year an amount of € 400,000 is paid into a benefit account and interest is paid on
this at standard market interest rates. Once the respective Executive Board members reach the contractually agreed age limit and
are no longer employed by E. Merck KG, the amount in the benefit account is paid out either in ten annual installments or as a one-
time payment. The balance in the benefit account is disbursed as a one-time payment, possibly topped up by additional
contributions (maximally ten contributions, up to the age of 60) in the event of permanent disability, or in the event of death to
surviving dependents. The vested amount from the former defined-benefit pension agreement was credited to the benefit account
when the changeover took place.
Walter Galinat received a performance-related pension entitlement until his departure on September 30, 2018. Stefan Oschmann
continues to receive such a pension provision. The old-age pension is determined in accordance with a certain percentage of
pensionable compensation. The percentages can be found in the table below. The individual contractual pension obligations grant
Stefan Oschmann and Walter Galinat entitlement to a lifelong old-age pension or surviving dependents' pension in the event of
reaching the individual contractually agreed age limit, permanent disability, or death. As an alternative to an old-age pension, the
promised pension may be paid out as a one-time amount calculated on the basis of actuarial principles once the age limit stipulated
in the relevant contract has been reached.
1 For accounting purposes, this corresponds to a defined-benefit obligation within the meaning of International Accounting Standard (IAS) 19.8.
Corporate Governance Statement on Corporate Governance including Compensation Report
145
Moreover, surviving dependents of the two Executive Board members receive a surviving dependents' pension. For spouses, this
amounts to 60% of the pension entitlement. Dependent children are entitled to either a half-orphan's or an orphan's pension
maximally until the age of 25.
The contribution amounts or pensionable compensation and the percentage obligation as well as the pension provisions and service
costs, are listed in the following tables:
DEFINED-CONTRIBUTION OBLIGATIONS
the grant
Marcus Kuhnert
4,675
3,900
1,100
Stefan Oschmann
1,400
4,810
5,638
9,800
Udit Batra
1,100
Member of the Executive
3,640
8,000
Kai Beckmann
1,100
3,120
3,825
8,000
Belén Garijo
4,263
MSUs for
1,382
beginning
X
Adjustment
factor for
individual
performance
0.7-1.3
Payout 2019
(€)
Profit after tax
Profit after tax
Profit after tax
FY 2017
FY 2018
FY 2019
3
Corporate Governance Statement on Corporate Governance including Compensation Report
142
Effective fiscal year 2018, the Personnel Committee abolished one-time payments to members of the Executive Board as part of
performance-related compensation. This adjustment measure serves primarily to take into account our international shareholder
structure.
Three-year average of the profit after tax
of the E. Merck Group
X
Individual
rate in %
As part of profit sharing, at the end of a fiscal year the members of the Executive Board receive an individual per mille rate of the
three-year average of profit after tax of the E. Merck Group. The current and the two preceding fiscal years are included in the
calculation. The use of profit after tax as the key performance indicator, which also serves as the basis for dividend payments,
ensures very close alignment with the shareholder interests. The amount of the individual per mille profit-sharing rate is staggered
at intervals. Through staggering, the achievement of an average profit after tax of more than € 1 billion is more strongly
incentivized than amounts below € 1 billion. However, insofar as the average profit after tax is more than € 1.5 billion, the amount
greater than € 1.5 billion is not taken into account when determining the profit-sharing payment. To appropriately take into account
the individual performance of the Executive Board members, since fiscal 2017 the Personnel Committee has been able to adjust the
payment by applying a factor ranging from 0.7 to 1.3. The performance factor makes it possible to recognize superb performance of
a member of the Executive Board by multiplying profit sharing by a value greater than 1.0 up to 1.3. Similarly, multiplying by a
value less than 1.0 down to 0.7 can lower profit sharing if the case calls for it. The maximum profit-sharing payment is capped
individually.
€ thousand
Corporate Governance Statement on Corporate Governance including Compensation Report
141
Performance-independent compensation and additional benefits
Fixed compensation
The fixed compensation received by the members of the Executive Board comprises fixed and non-performance related amounts
that are paid in the form of 12 equivalent monthly installments.
Additional benefits
Moreover, the Personnel Committee resolved to define criteria applicable to the adjustment of profit sharing, for applying the factor
in a range of between 0.7 and 1.3. Insofar as the adjustment increases or decreases the profit sharing of a member of the
Executive Board, this is to be published in the Compensation Report.
In addition, the members of the Executive Board receive non-performance-related additional benefits. These consist mainly of
contributions to insurance policies, personal security expenses, and a company car, which they may use privately.
Performance-related compensation comprises profit sharing as well as the Merck Long-Term Incentive Plan. Both performance-
related compensation components are based on multi-year steering parameters. The regulatory requirements of the German Stock
Corporation Act and the German Corporate Governance Code are taken into account, and particular recognition is given for
sustainable corporate development.
PROFIT SHARING
Key performance indicator
Cycle
Limit
Three-year average of the profit after tax of the E. Merck Group
Three years
Individual absolute capped amount
Performance-related compensation
number of
Adjustment criteria for increasing profit sharing could include the following:
Extraordinary success in connection with M&A activities of the Merck Group;
Organic sales growth (25% weighting)
Three years
Absolute capped amount totaling 250% of the individual grant
Average closing price of Merck shares in Xetra® trading during the last 60 trading days prior to the
beginning or the end of the performance cycle
The Long-Term Incentive Plan is based on a three-year future-oriented performance cycle. As part of the Long-Term Incentive Plan,
the members of the Executive Board are eligible to receive a certain number of virtual shares - Merck Share Units (MSUs). The
number of MSUS is calculated as follows:
Corporate Governance Statement on Corporate Governance including Compensation Report
143
At the beginning of the performance cycle, for each Executive Board member the Personnel Committee sets an individual grant in
euros. This grant is then divided by the definitive reference share price at the beginning of the performance cycle, resulting in the
number of MSUS they could be eligible to receive. The final number of MSUs that are actually allocated to the Executive Board
members after the performance cycle has expired depends on the development of three weighted key performance indicators over
the three-year performance cycle:
a) the performance of the Merck share price compared with the performance of the DAX® with a weighting of 50%,
b) EBITDA pre margin, as a proportion of a defined target value with a weighting of 25%, and
c) the organic sales growth of the Merck Group as a proportion of a defined target value with a weighting of 25%.
GJ 2018
GJ 2019
Grant in €
Reference
Merck share
price at the
EBITDA pre margin (25% weighting)
•
Reference price (share price for conversion into
numbers or for payment)
Limit
•
•
Extraordinary success in the sustainable strategic, technical, product-related, or structural further development or reorganization
of the Merck Group;
Extraordinary performance in the execution of especially important projects or the achievement of other exceptionally important
objectives in the area of responsibility;
• Extraordinary performance leading to a clear over-achievement of targets for relevant key performance indicators in the area of
responsibility;
•
Extraordinary contributions to the aspirations and targets of the Merck Group's stakeholders (for example, employee satisfaction,
customer satisfaction, Corporate Social Responsibility, implementation of diversity requirements).
•
Adjustment criteria for lowering profit sharing could include the following:
• Significant breaches of duty of care within the meaning of section 93 AktG, or other grossly non-compliant or unethical behavior;
• Behaviors or actions that are contradictory to our company values;
• Failure to implement particularly important projects or to reach other exceptionally important targets in the area of
responsibility;
• Clear failure to achieve targets for relevant key performance indicators in the area of responsibility.
MERCK LONG-TERM INCENTIVE PLAN (LTIP)
Share price performance relative to the DAX® (50% weighting)
Key performance indicators
Cycle
• Violations of internal rules and guidelines (for example, the Merck Code of Conduct), legislation, or other binding external
requirements in the area of responsibility;
IFRSS
Contribution
level
7
7
7
38
721
721
2,121
2,121
1,486
Total
721
186
Additional benefits
1,100
1,100
2019 (max.)
2019 (min.)
2019
1,100
1,000
1,400
1,400
1,400
1,300
Fixed compensation
2018
2019 (max.)
2019 (min.)
2019
2018
Benefits granted (€ thousand)
2,121
Member of the Executive Board
1,038
1,107
1,372
1,369
Service cost
9,010
1,107
5,056
4,916
12,569
2,121
8,451
6,612
Total
4,263
1,149
5,638
1,520
LTI 2019 (2019 to 2021)
1,078
1,426
LTI 2018 (2018 to 2020)
Multi-year variable compensation
3,640
2,800
2,800
4,810
4,810
3,700
Profit sharing
1,107
1,107
Chairman of the Executive Board
Udit Batra
Stefan Oschmann
890
14,080
1,320
2,284
26
942
2019
Marcus
2,969
6,249
1,183
20,386
1,870
3,900
66
1,100
2018
Belén Garijo
1,541
5,409
1,260
19,947
1,870
3,000
49
1,100
2019
2018)
2,051
4,142
1,088
Kuhnert
2018
150
BENEFITS GRANTED FOR THE FISCAL YEAR
Corporate Governance Statement on Corporate Governance including Compensation Report
In accordance with the requirements of the German Corporate Governance Code, the following tables present the compensation
granted for 2018, including additional benefits, contributions to the company pension plan, and the achievable minimum and
maximum values of the variable compensation components, as well as the allocation of the respective compensation components
for the fiscal year.
Information in accordance with the requirements of the German Corporate Governance Code
In accordance with IFRSS, the expense recorded for 2019 includes the values for the 2017, 2018, and 2019 LTIP tranches. In accordance with IFRSS,
the expense recorded for 2018 includes the values for the 2016, 2017, and 2018 LTIP tranches.
3
2 Time value on the date of the grant (date of the legally binding entitlement). The amount of a payment is thus not predefined. Payment is subject to
target achievement and is made on a specified date after the expiration of the three-year performance cycle. The time value of the obligations was
calculated using a Monte Carlo simulation based on the previously described KPIs. The expected volatilities are based on the implicit volatility of Merck
shares and the DAX® in accordance with the remaining term of the LTIP tranche. The dividend payments incorporated into the valuation model are
based on medium-term dividend expectations.
1 Number of potential MSUs subject to target achievement. The actual number of MSUs to be granted after the expiration of the three-year
performance cycle may deviate from this.
15,937
29,784
6,261
7,058
27,619
1,372
5,850
3,961
835
1,320 14,391
8,680 92,588
9,900 107,930
15,294
17,200
423
5,900
2018
Total
833
5,642
2019
2,200
26
900
2,203
1,372
400
Total compensation
968
968
968
926
1,149
1,149
1,149
1,166
Total
942
26
26
26
26
49
49
49
66
Additional benefits
942
942
900
1,100
1,100
1,100
1,100
Fixed compensation
2019 (max.)
2019 (min.)
2019
Profit sharing
3,900
3,000
3,900
4,556
414
414
414
7,388
968
4,142
3,961
421
4,382
10,115
3,300
890
4,675
9,724
391
1,149
391
1,540
5,800
2018
391
Total compensation
Service cost
5,409
6,249
Total
1,260
LTI 2019 (2019 to 2021)
835
1,183
LTI 2018 (2018 to 2020)
Multi-year variable compensation
3,120
2,284
2,200
394
6,643
3,661
2019 (max.)
2019
1,130
1,081
Total
26
30
600
2018
2019 (max.)
1,100
2019 (min.)
1,100
30
30
81
Additional benefits
2019
1,100
1,000
Fixed compensation
2018
Benefits granted (Є thousand)
Member of the Executive Board
Kai Beckmann
9,403
1,500
393
393
393
5,449
5,316
13,941
3,493
9,823
7,981
1,130
1,130
626
Profit sharing
2018
Benefits granted (€ thousand)
Member of the Executive Board
Marcus Kuhnert
2019 (min.) 2019 (max.)
Member of the Executive Board
(left on: September 30, 2018)
2019
Walter Galinat
Member of the Executive Board
Belén Garijo
3,661
166
3,827
392
8,467
392
1,522
392
4,953
395
4,780
2019 (min.)
Total compensation
3,825
8,075
1,130
1,031
4,561
4,385
Total
LTI 2019 (2019 to 2021)
835
904
LTI 2018 (2018 to 2020)
Multi-year variable compensation
2,200
3,120
2,400
2,400
Service cost
835
1,320 14,391
2,200
Corporate Governance Statement on Corporate Governance including Compensation Report
2,376
2,477
1,255
3,324
2,549
1,559
2019
2018
2017
2016
Three-year average profit after tax of the E. Merck Group (2016-2018)
Three-year average profit after tax of the E. Merck Group (2017-2019)
Profit after tax of the E. Merck Group
(€ million)
Key performance indicator
As part of profit sharing, at the end of a fiscal year the members of the Executive Board receive an individual per mille rate of the
three-year average of profit after tax of the E. Merck Group. The current and the two preceding years are relevant here.
Profit sharing
The compensation system for our Executive Board is geared to suitably rewarding the performance of Executive Board members in
terms of sustainable corporate development and the creation of shareholder value, whereas the failure to meet targets leads to a
noticeable decrease in performancerelated compensation. In response to the suggestions from our shareholders and to further
increase the transparency of the Executive Board compensation system, the following tables present the average individual profit-
sharing rates and the performance corridors for the key performance indicators used in the Merck Long Term Incentive Plan.
Performance-related compensation in 2019
The total compensation of the Executive Board of Merck KGaA includes both the compensation received from E. Merck KG as well as
possibly also from subsidiaries consolidated in the Group financial statements. Should members of the Executive Board be held
liable for financial losses while executing their duties, under certain circumstances this liability risk is covered by a D&O insurance
policy from Merck KGaA. The D&O insurance policy has a deductible in accordance with the legal requirements and the
recommendations of the German Corporate Governance Code.
Miscellaneous
Payments to former members of the Executive Board or their surviving dependents are made for a limited period of time and
represent continued payment of fixed compensation in the event of death, as well as pension payments. In fiscal 2019, these
amounted to € 13,448 thousand (2018: € 13,763 thousand). Pension provisions for 2019 come to € 163,617 thousand
(2018: € 155,950 thousand).
Payments to former Executive Board members and their surviving dependents
The members of the Executive Board did not receive any advances or loans in fiscal 2019.
Loans and advances
be credited against this compensation. Within certain time limits, E. Merck KG has the possibility to dispense with adherence to the
noncompetition clause with the consequence that the obligation to make the compensation payments shall no longer exist. The
contracts of the Executive Board members further provide for the continued payment of fixed compensation to surviving
dependents for a limited period of time in the event of death. Above and beyond existing pension obligations, no further obligations
exist in the event of the termination of the contractual relationships of the Executive Board members.
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Corporate Governance Statement on Corporate Governance including Compensation Report
The employment contracts of Stefan Oschmann, Kai Beckmann, and Udit Batra each contain a postcontractual noncompetition
clause. During a twoyear period, an amount totaling 50% of the contractual average benefits received by the Executive Board
member in question within the last twelve months prior to their departure is provided as compensation for each year of the period
of the noncompetition clause. During the period of the noncompetition clause, other employment income and pension payments will
147
The amount of the individual per mille profit-sharing rates is staggered at intervals. This staggering incentivizes the achievement of
an average profit after tax of more than € 1 billion more strongly than amounts below € 1 billion. However, insofar as the average
profit after tax is more than € 1.5 billion, the amount greater than € 1.5 billion is not taken into account when determining the
profit-sharing payment. The average profit-sharing rates in per mille for the members of the Executive Board in 2019 were as
follows:
Member of the Executive Board
Average profit-sharing rate in per mill in 2019
Merck Long-Term Incentive Plan
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Corporate Governance Statement on Corporate Governance including Compensation Report
• Role as messenger for acceptance of the two companies and intercultural integration subsequent to the acquisition.
Strategic and tactical decision-maker and active negotiation partner in the acquisition process; crucial responsibility for the
success of the acquisition through the strategic transformation of a hostile into a friendly takeover process in an international
context.
•
• Portfolio was supplemented by complementary product groups and services and sustained safeguarding of competitiveness
through innovative materials.
• The takeover should make Merck into a leading provider of electronic materials for the semiconductor and display industries.
• Strategic decision and capital allocation in favor of the acquisition of Versum Materials to strengthen business diversity at Merck
and the future viability of the Performance Materials business sector:
Stefan Oschmann met these positive criteria in fiscal 2019 on account of the following achievements:
• Extraordinary success in the sustainable strategic, technical, product-related, and structural further development of the Merck
Group.
Extraordinary success in connection with M&A activities of the Merck Group;
•
The amount of profit-sharing for Stefan Oschmann was increased by a factor of 1.3. The following positive criterion was used to
justify the increase in profit participation:
In the event of the early termination of the employment relationship, without notice for good cause, the employment contracts of
the Executive Board members stipulate a cap on severance pay in accordance with the recommendations of the German Corporate
Governance Code. Pursuant to this, payments in connection with the termination of an Executive Board member's duties shall not
exceed twice the annual total compensation, or constitute compensation for more than the remaining term of the employment
contract (severance cap). If an Executive Board member's duties prematurely end due to the termination of the employment
contract either by the company or the Executive Board member before the performance cycle of an open tranche in the Merck
Long Term Incentive Plan expires, the obligations resulting from the plan are no longer applicable.
1
1
1.84
1
1.47
Marcus Kuhnert
Belén Garijo
Kai Beckmann
1
1.72
Udit Batra
1.3
2.96
Stefan Oschmann
Performance factor for individual performance 2019
1.40
Until the beginning of fiscal 2017, payment from the Merck Long-Term Incentive Plan was based on the achievement of specific
targets with respect to the development of the Merck share price compared with the DAX® as well as the development of the
EBITDA pre margin during the three-year performance cycle. Since fiscal year 2017, organic sales growth of the Merck Group has
been included as an additional key performance indicator. The tables below show the target values that lead to 100% target
achievement relative to the respective key performance indicator. Below the lower target corridor limit, target achievement for the
respective key performance indicator is 0%. Above the upper target corridor limit, target achievement no longer increases.
Benefits in the event of termination of duties as an Executive Board member
7,025
421
400
Marcus Kuhnert
5,119
4,637
391
394
400
Belén Garijo
4,867
4,402
392
395
400
Kai Beckmann
1,406
990
393
400
400
Udit Batra
Executive Board
Member of the
2019
2018
2019
2018
Present value of the defined-contribution pension
obligation as of Dec. 31
Service cost of pension obligations earned in
the current year
414
2,958
3,419
Total
166
65
490
14,524
10,955
1,372
1,369
66
800
2019
2018
2019
2018
Present value of the defined-benefit
pension obligation as of Dec. 31
1 The percentage entitlement increases until retirement by two percentage points per year of service up to 70%.
Service cost of pension obligations
earned in the current year
Pensionable
compensation
IFRSS
September 30, 2018)
Walter Galinat (left on:
Stefan Oschmann¹
Board
Member of the Executive
€ thousand
DEFINED-BENEFIT OBLIGATIONS
14,811
12,987
1,590
1,610
1,600
Percentage
entitlement
7,802
Key performance indicator1
(external key performance indicator)
Udit Batra
1,368
5,056
1,149
18,187
1,705
2,800
7
1,100
2019
3,536
6,612
1,426
2,255 24,584
3,700
186
1,300
2018
Oschmann
1,859
8,451
1,520
24,054
2,255
4,810
721
1,400
2019
Stefan
2018
1,000
38
2,800
26
600
2018
September 30,
(left on:
2019
Walter Galinat
2,387
4,385
904
1,430 15,590
2,400
81
1,000
Board
2018
1,202
4,561
1,031
16,320
1,530
2,400
30
1,100
2019
2,791
4,916
1,078
18,588
1,705
Kai Beckmann
Share price performance relative to the
DAX®
(€ thousand)
value² (€
thousand)
Share price performance relative to the
DAX®
tranche 2016
Target achievement Merck LTIP
LTIP
tranche 2016
target Actually achieved value Merck
corridor
limit
limit Target
Upper
Lower
target
corridor
116.7%
19.5%
Key performance indicator1
1 The key performance indicator organic sales growth became a component of the Merck Long-Term Incentive Plan in 2017 and is therefore not
relevant for target achievement of the tranche in fiscal 2015.
29%
-16.1%
31%
25% 28%
50%
0%
-20%
2015
LTIP Target achievement Merck LTIP tranche
tranche 2015
limit
limit Target
corridor
target Actually achieved value Merck
Upper
Lower
target
corridor
(internal key performance indicator)
EBITDA pre margin
-20%
0%
50%
(external key performance indicator)
Time
Number
of
MSUS¹
Grant
value (€
thousand)
(€ thousand)
(€
(€
thousand) thousand)
Merck Long-Term Incentive Plan
(with long-term incentive effect)
Profit sharing
(without long-term
incentive effect)
Fixed
Additional
compensation benefits
compensation³
Expense recorded
for the period for
share-based
Total
Performance-related components
Performance-independent
components
Executive
(€
thousand)
Member of the
Total compensation
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Corporate Governance Statement on Corporate Governance including Compensation Report
118.4%
100.7%
The key performance indicator organic sales growth became a component of the Merck Long-Term Incentive Plan in 2017 and is therefore not
relevant for target achievement of the tranche in fiscal 2016.
1
28.1%
0.7%
(internal key performance indicator)
30%
27%
24%
EBITDA pre margin
According to the German Commercial Code (HGB), the total compensation of the members of the Executive Board of Merck KGaA,
broken down by performance-related and performance-independent compensation components, is as follows:
Potential
ALLOCATION FOR THE FISCAL YEAR
Memberships of
Wolfgang Büchele
Member
The Supervisory Board has 16 members. In fiscal 2019 up to the end of the Annual General Meeting on April 26, 2019, the
Supervisory Board was composed as follows:
Supervisory Board
Corporate Governance Statement on Corporate Governance including Compensation Report
The Executive Board passes its resolutions in meetings that are normally held once a month.
The Executive Board informs the Board of Partners and the Supervisory Board at least quarterly of the progress of business and the
situation of the company. In addition, the Executive Board informs the aforementioned boards at least annually of the company's
annual plans and strategic considerations.
The Executive Board provides the Supervisory Board with regular, up-to-date, and comprehensive reports about all company-
relevant issues concerning strategy, planning, business developments, the risk situation, risk management, and compliance. The
rules of procedure of the Executive Board and of the Supervisory Board, as well as a Supervisory Board resolution, regulate further
details on the information and reporting duties of the Executive Board vis-à-vis the Supervisory Board.
The general partners with no equity interest (Executive Board) manage the business activities in accordance with the laws, the
Articles of Association, and the rules of procedure. They are appointed by E. Merck KG in accordance with the consent of a simple
majority of the other general partners. The members of the Executive Board are jointly responsible for the entire management of
the company. Certain tasks are assigned to individual Executive Board members based on a responsibility distribution plan. Each
Executive Board member promptly informs the other members of any important actions or operations in his or her respective
business area. Among other things, the Executive Board is responsible for preparing the annual financial statements of Merck KGaA
and of the Merck Group as well as for approving the quarterly and half-year financial statements of the Merck Group. In addition,
the Executive Board ensures that all legal provisions, official regulations, and the company's internal policies are abided by, and
works to achieve compliance with them by all the companies of the Merck Group. A Group-wide guideline defines in detail which
transactions require prior approval by the Executive Board.
(b) Banco Bilbao Vizcaya Argentaria S. A., Bilbao, Spain
- L'Oréal S. A., Clichy, France
No board positions
(a) Bundesdruckerei GmbH, Berlin
(b) EMD Millipore Corporation, Billerica, Massachusetts, United States (President)
(b) comparable German and foreign supervisory bodies of corporations
No board positions
(a) statutory supervisory boards and
Memberships of
Königstein, Chief Financial Officer
Marcus Kuhnert
Frankfurt am Main, CEO Healthcare
Belén Garijo
Darmstadt, CEO Performance Materials
Kai Beckmann
Wellesley (Massachusetts, United States), CEO Life Science
Udit Batra
Munich, Chairman
Stefan Oschmann
Member
Information on memberships of statutory supervisory boards and comparable German and foreign supervisory bodies
(section 285 No. 10 HGB in conjunction with section 125 (1) sentence 5 AktG).
Römerberg, Chairman of Exyte AG, Stuttgart
Members of the Executive Board of Merck KGaA
Michael Fletterich
Crocifissa Attardo
E. Merck KG, Darmstadt¹
Gelita AG, Eberbach (Chairman)
(b)
(a)
(b) comparable German and foreign supervisory bodies of
corporations
(a) further statutory supervisory boards and
Theo Siegert
Umkirch, pediatrician
Gregor Schulz
Langenburg, Chairperson of the Advisory Board of AiCuris Antiinfective Cures GmbH,
Wuppertal
Helga Rübsamen-Schaeff
Michelstadt, full-time member of the Merck Joint Works Council
Alexander Putz
Seeheim-Jugenheim, Vice President Corporate Quality Assurance
Schriesheim, Commercial Director of the Castel Peter Winery, Bad Dürkheim
Albrecht Merck
Darmstadt, physician
Siegfried Karjetta 2
Zurich, retired teacher
Michaela Freifrau von Glenck
Hanover, Vice Chairperson of IG Bergbau, Chemie, Energie (IG BCE), Hanover
Edeltraud Glänzer
Seeheim-Jugenheim, Senior Product Manager
Gabriele Eismann
Wehrheim, full-time member of the Merck Joint Works Council
Mechthild Auge
Darmstadt, full-time member of the Merck Joint Works Council
Gernsheim, Chairman of the Merck Joint Works Council
Kemira Oyj, Helsinki, Finland
Procedures of the Executive Board, Supervisory Board, Board of Partners, and its
Committees
157
Values and compliance
The combined management report of Merck KGaA and the Merck Group does not contain a non-financial declaration. Instead, we
issue a separate combined non-financial (Group) report in accordance with sections 289b-289e and 315b-315c HGB. This is
available effective April 14, 2020, as an online version on our website at www.merckgroup.com/en/cr-report/2019. It is integrated
into the 2019 Corporate Responsibility Report in accordance with DRS 20 subsection 252 (b). We have compiled an overview of the
information contained in the combined non-financial (Group) declaration at www.merckgroup.com/nfr19.
Further reports
Due to the requirement to change auditors at regular intervals, Merck KGaA must appoint a new auditor (different than the current
one) no later than for fiscal 2024. In fiscal 2019, the Supervisory Board of Merck KGaA therefore decided to prepare a public
request for tender for the audit of the annual financial statements and consolidated financial statements of Merck KGaA and to
voluntarily change auditors for the fiscal 2023 audit, earlier than required.
Since 1995, KPMG AG Wirtschaftsprüfungsgesellschaft, Berlin, has been the audit firm for the statutory audit of the annual financial
statements and consolidated financial statements of Merck KGaA. The auditor responsible for auditing the consolidated financial
statements changes regularly in accordance with the statutory requirements. Bodo Rackwitz is currently leading the audit
engagement and has been the auditor in charge of the engagement since fiscal 2015. The Supervisory Board had KPMG AG
Wirtschaftsprüfungsgesellschaft, Berlin, provide a statement regarding the scope of the business, financial, personal, and other
relationships between KPMG AG Wirtschaftsprüfungsgesellschaft, Berlin, its bodies and head auditors, and Merck KGaA, its Group
companies and the members of their bodies (independence declaration). The statement also covers the scope of the services
provided by KPMG AG Wirtschaftsprüfungsgesellschaft, Berlin, in the previous fiscal year as well as the services (other than auditing
services) that are contracted for the upcoming year (especially consultancy services) for Merck KGaA and its subsidiaries. Having
examined the declaration, the Supervisory Board has found no grounds to doubt the independence of KPMG AG
Wirtschaftsprüfungsgesellschaft, Berlin. Neither party identified any conflicts of interest.
Wirtschaftsprüfungsgesellschaft, Berlin, that the auditor shall inform the Supervisory Board without delay of any grounds for
disqualification or bias occurring during the audit if these cannot be immediately rectified. Additionally, the auditor shall
immediately report to the Supervisory Board any findings and issues which emerge during the audit that have a direct bearing upon
the tasks of the Supervisory Board. The auditor shall inform the Supervisory Board or note in the audit report any circumstances
determined during the audit that would render inaccurate the Declaration of Conformity made by the Executive Board and the
Supervisory Board. It has also been agreed with the auditor that in order to assess whether the Executive Board has fulfilled its
obligations in accordance with section 91 (2) of the German Stock Corporation Act (AktG), the audit will also cover the company's
early warning risk identification system. Moreover, the auditor is required to examine and evaluate the accounting-relevant internal
control system insofar as this is necessary and appropriate for assessing the accuracy of financial reporting.
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Corporate Governance Statement on Corporate Governance including Compensation Report
The Supervisory Board commissioned KPMG AG Wirtschaftsprüfungsgesellschaft, Berlin, to audit the consolidated financial
statements and the combined management report for 2019. Moreover, the Supervisory Board agreed with KPMG AG
Merck KGaA prepares its consolidated financial statements and combined management report in accordance with International
Financial Reporting Standards (IFRSS), as applicable in the EU, as well as the supplementary rules applicable under section 315e
(1) of the German Commercial Code (HGB) and as stipulated by our Articles of Association. The consolidated financial statements
and the combined management report are prepared by the Executive Board and examined by an auditor, taking into account the
generally accepted standards for the audit of financial statements promulgated by the Institute of Public Auditors in Germany
(Institut der Wirtschaftsprüfer, IDW).
Accounting and audits of financial statements
In order to ensure a high level of protection for insider information, the Executive Board issued internal insider guidelines applicable
throughout the Merck Group worldwide. The guidelines inform employees about their responsibilities under insider trading laws and
give clear instructions for compliant behavior. In addition, they describe the function of the Insider Committee in detail. Moreover,
our Code of Conduct, which is binding on all employees, also contains an explicit, detailed reference to the ban on using insider
information. Within the scope of obligatory training courses on the Code of Conduct as well as specific training courses on insider
law, all employees are instructed on the stipulations of insider trading.
Dealing properly with insider information is very important to us. Our Insider Committee examines the existence of insider
information, ensures compliance with legal obligations, and prepares any necessary measures. The members of the Insider
Committee are appointed by the Executive Board; at least two members work in Group Legal & Compliance. The Insider Committee
meets at regular intervals, yet also meets when circumstances require. The Chief Financial Officer is vested with the authority to
make the final decision on handling potential insider information.
Dealing with insider information
Regular press conferences, investor meetings on the occasion of investor conferences, and road shows offer another platform for
dialogue. The company presentations prepared for this purpose are also available on the Merck KGaA website. In addition, the
Investor Relations team is always available to private and institutional investors who wish to receive further information. To ensure
the greatest possible transparency, all documents concerning the General Meeting are available on the company website.
Additionally, some parts of the General Meeting are webcast live on the internet.
Information subject to disclosure requirements, as well as information that is not, can be accessed worldwide on the Merck KGaA
website (www.merckgroup.com), which is the company's most important publication platform. Apart from a detailed financial
calendar, quarterly statements and/or quarterly and half-year financial reports covering the past three years are available here in
German and English. In addition, in line with the legal requirements, ad hoc announcements are published on the website. These
contain information on circumstances and facts that could impact the Merck share price.
It is Merck KGaA's objective to provide the latest information to all shareholders, media, financial analysts, and interested members
of the public, while creating the greatest possible transparency. For this reason, Merck uses a wide range of communication
platforms to engage in a timely dialogue with all interested parties about the situation of the company and business changes.
Merck's principles include providing factually correct, comprehensive, and fair information.
Reporting
Information on corporate governance practices
As of December 31, 2019, the members of the Executive Board and of the Supervisory Board held less than 1% of the issued
shares of Merck KGaA. Transactions executed by members of the Executive Board and of the Supervisory Board are disclosed on
the Merck website at www.merckgroup.com/en/investors/corporate-governance/directors-dealings.html.
Ownership, purchase, or sale of shares in the company by members of the Executive Board and the
Supervisory Board
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Corporate Governance Statement on Corporate Governance including Compensation Report
As a member of the corporate bodies of E. Merck KG, Supervisory Board member Simon Thelen received an additional payment of € 100,000 for performing this
function in 2019.
As a member of the corporate bodies of E. Merck KG, Supervisory Board member Daniel Thelen received an additional payment of € 130,246 for performing this
function in 2019.
As a member of the corporate bodies of E. Merck KG, Supervisory Board member Peter Emanuel Merck received an additional payment of € 80,000 for performing this
function in 2019.
As a member of the corporate bodies of E. Merck KG, Supervisory Board member Tobias Thelen received an additional payment of € 84,438 for performing this function
in 2019 (2018: € 140,000).
Based on a corporate culture that places the fundamental company values - courage, achievement, responsibility, respect,
integrity, and transparency - at the center of our entrepreneurial actions, the Code of Conduct
Many guidelines specify how the sites and employees of the Merck Group are to observe the principles in their daily work. The
Group function Environment, Health, Safety, Security, Quality steers these global activities and ensures compliance with statutory
requirements, internal standards, and business needs throughout the entire Group. In this way, Group-wide risks are minimized
and continuous improvement is promoted in the areas of environment, health, safety, security, and quality. Corporate
Responsibility reports are also published at regular intervals.
(www.merckgroup.com/company/responsibility/en/regulations-and-guidelines/code-of-conduct.pdf) helps those involved in the
With its Code of Conduct, a revised version of which was issued in mid-2017, Merck has established a set of rules and regulations
intended to help our employees to act responsibly and to make the right decisions in their daily work.
Corporate Governance Statement on Corporate Governance including Compensation Report
At Merck, closed-loop thinking guides the way in which we address environmental protection issues. To this end, we integrate
precautionary measures into our process, procedural, and product development planning. Our Environment, Health and Safety
Policy, with its principles and strategies, implements the guidelines formulated by the national and international associations of the
chemical industry in the Responsible Care guidelines. The Responsible Care Global Charter, developed by the International Council
of Chemical Associations (ICCA) in 2014, puts even more emphasis than before on overall responsibility for products, supply chains,
and the community. Merck signed this expanded version of Responsible Care Global Charter for the entire Group in the same year.
It is currently being implemented by Merck at an international level. We report our ecological, economic and social performance
transparently in accordance with the internationally recognized principles of the Global Reporting Initiative (GRI), taking into
account the requirements of the German Sustainability Code and the principles of the UN Global Compact. One of our major climate
protection objectives is to achieve a 20% reduction in our greenhouse gas emissions by 2020, measured against the 2006 baseline.
Adherence to environmental and safety standards
In its report to the General Meeting, the Supervisory Board discloses any conflicts of interest involving its members and how they
were dealt with. Consultancy agreements as well as other service and work contracts of a Supervisory Board member with Merck
require the approval of the Supervisory Board. In fiscal 2019, there were neither conflicts of interest, nor consultancy agreements
or other service or work contracts, with Merck KGaA involving Supervisory Board members.
Before an Executive Board member takes on honorary offices, board positions, or other sideline activities, this must be approved by
the Personnel Committee of the Board of Partners of E. Merck KG. The Chairman of the Executive Board, Stefan Oschmann, and the
Chief Financial Officer, Marcus Kuhnert, are both members of the Executive Board of E. Merck KG. This does not, however, create
conflicts of interest.
Within the framework of their work, all Executive Board and Supervisory Board members of Merck KGaA are exclusively committed
to the interests of the company and neither pursue personal interests nor grant unjustified advantages to third parties.
Avoidance of conflicts of interest
The Executive Board, the Supervisory Board, and the Finance Committee are regularly informed about the current risk portfolio of
the Group and the individual companies. More detailed information can be found in the Report on Risks and Opportunities.
Risk and opportunity management
Specific guidelines have been put in place to ensure that data protection processes comply with the relevant regulations. The "Policy
for Data Protection and Personal Data Privacy" defines the standards according to which data is processed, stored, used, and
transmitted at Merck. This enables us to provide a high level of protection for the data of our employees, contract partners,
customers, and suppliers as well as the data of patients and participants in clinical trials. A central IT tool was also installed that
establishes a common source for data protection processes at Merck. For instance, these include questions regarding data
protection, the documentation of data processing activities, and reports of possible violations of data protection guidelines. Our
understanding of data protection throughout the Group is based on European legislation, including the provisions of the EU's
General Data Protection Regulation (EU GDPR) in force since May 2018. We also comply with local data protection regulations.
The Data Protection team at Merck is integrated into the Group's Compliance organization. As required by law, this department
operates independently. The department regularly prepares data protection updates and produces a comprehensive data protection
report at regular intervals as part of our broader compliance reporting efforts. In addition to the Group's central Data Protection
Officer, many sites worldwide also have local Data Protection Officers.
Data protection
The Executive Board informs the supervisory bodies at least once a year about the key compliance issues.
The Compliance Office reports regularly to the Executive Board and the Supervisory Board, informing them of the status of
compliance activities (including training status), compliance risks, and serious compliance violations.
regularly focus on the local compliance structure, the compliance measures taken, and the existence of corresponding compliance
guidelines and processes.
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Corporate Governance Statement on Corporate Governance including Compensation Report
Further significant elements of the Compliance program include requirements on locally identifying and assessing risks as well as
reporting these, both within the subsidiary and to the Group functions. In 2019, we introduced a revised compliance risk
management system for this purpose and supplemented it with a control component. The Compliance Office regularly reviews and
assesses the implementation status of the Compliance program at the subsidiaries. In cooperation with Group Internal Auditing, the
Compliance Office regularly reviews the implementation of Group-wide compliance measures at the subsidiaries. The audits
Newcomer training seminars were introduced in 2010 for newly appointed compliance officers. These seminars serve to build up
compliance expertise and strengthen cooperation within the Compliance organization. This Group-wide network is used to steer the
global compliance program. Within the Group Compliance function in Darmstadt, a team is occupied with continuously further
developing the compliance program and shaping company-internal compliance guidelines. The Compliance organization is also
involved in the relevant due diligence processes for the incorporation of new business units as well as possible divestments and
acquisitions, and the subsequent integration of companies. Within the scope of the global compliance program, a high degree of
importance is attached to regular compliance seminars of the Merck Compliance Training Plan, which are conducted as web-based
training courses and classroom sessions. By presenting various training topics, particularly on the Code of Conduct, corruption,
antitrust and competition law, as well as healthcare compliance and data privacy, they serve to sensitize employees and
management to the consequences of compliance violations and to show ways of avoiding them. Since Merck set up a central
SpeakUp line, our employees and individuals outside of our company have been able to report compliance violations by telephone
or via a web-based application in their respective language. The SpeakUp line is available 24 hours a day, free of charge. Case
numbers enable anonymous, two-way communication. The reports received are individually reviewed. If a compliance violation
exists, corresponding corrective action is taken based on concrete action plans. If necessary, disciplinary measures are taken.
These can range from a simple warning up to the dismissal of the employee who violated a compliance rule. In 2010, Merck set up
a Compliance Case Committee to guide these processes. The Compliance Case Committee consists of senior members from various
Group governance functions; they are involved in reviewing compliance violations and introducing countermeasures. The joint work
in the Compliance Case Committee enables processes between the various Group functions to be optimally coordinated and
designed efficiently.
The role of the Group Compliance Officer is reflected in the subsidiaries, which ensure via country representatives that compliance
measures are implemented in the countries. Since 2013, Compliance tasks in the countries and on a regional basis have largely
been performed by full-time compliance officers. As a result, a higher level of compliance expertise is based locally and the
increasing tasks in all business sectors are taken into account. At the same time, the management structure was streamlined and
the reporting lines for the countries were consolidated regionally. Since the end of 2016, the compliance officers in the countries
have been reporting to the dedicated compliance officers for the respective business sectors (Healthcare, Life Science, and
Performance Materials). A separate responsibility was also created for Group functions. Regular regional compliance meetings are
held to promote the exchange of information within the Compliance organization.
A further focal area of the Compliance program is ensuring legally and ethically correct dealings with medical professionals and
adhering to the transparency requirements. Since October 2013, the Group Compliance Officer has agreed on extensive measures
with the affected areas of the company in order to establish an internal framework of rules as well as the corresponding processes
for approving and documenting interactions with experts that ensure correct publication. We of course also ensure compliance with
the respectively valid data protection regulations.
In 2014, we began appointing compliance officers for the various business sectors. In particular, they are responsible for business-
specific compliance input, and they evaluate sector-specific risks that are incorporated in the design of the Compliance program.
The Compliance department monitors observance of the Code of Conduct with support from corresponding monitoring and training
programs throughout the Group. All employees are called upon to report potential compliance violations to their supervisor, Legal,
HR, or other relevant departments. Merck created the position of Group Compliance Officer in 2002. This employee is responsible
for setting up, maintaining, and further developing our global compliance program. By taking appropriate measures, the Group
Compliance Officer and his team, including regional compliance officers, help to lower the risk of serious legal violations of, for
instance, antitrust law, anticorruption rules, or legal regulations and requirements of industry codes in the healthcare sector.
Responsibility for money laundering prevention was added in 2018, with Compliance coordinating the necessary organizational
measures, including training.
comparable principles. While supplier management ensures compliant behavior of suppliers, global business partner risk
management encompasses the relations with sales-related business associates such as distributors and wholesalers.
155
Corporate Governance Statement on Corporate Governance including Compensation Report
The Code of Conduct explains the company principles for dealings with business associates, shareholders, colleagues, and
employees, and within the scope of our responsibility for society. Therefore, it supports all employees in acting ethically - not only
in their dealings with one another, but also outside the company. The Code of Conduct is thus the main set of rules of our
compliance program. In the newly published version, Merck has aligned its Code of Conduct even more closely with the Merck
values. Additionally, it has expanded the Code of Conduct to include further important topics such as data privacy, healthcare
compliance, and bioethics. To Merck, compliance means observing legal and company-internal regulations and the basic ethical
principles anchored in the company values. With the Code of Conduct and the various unit-specific ethical compliance rules, the
values are integrated into daily work and business practice. The Code of Conduct is binding on all employees, both at headquarters
and in the subsidiaries. We also expect our business associates worldwide to accept these principles or to have their own
business process to implement the values when dealing with one another on a daily basis.
No board positions
(b) Merck BKK (rotating chairperson)
No board positions
Frankfurt am Main, Member of the Executive Board (CFO) of Vonovia SE,
Bochum
Helene von Roeder
April 26, 2019
No board positions
Höchst, IT Business Partner
Christian Raabe
Seeheim-Jugenheim, Vice President Corporate Quality Assurance
May 9, 2014
No board positions
Dietmar Oeter
Hamburg, Managing Partner of Golf-Lounge GmbH, Hamburg
April 26, 2019
No board positions
Peter Emanuel Merck²
Riedstadt, full-time member of the Merck Joint Works Council
April 26, 2019
No board positions
Anne Lange
April 26, 2019
No board positions
Darmstadt, pharmacist and Manager of Engel-Apotheke pharmacy,
Darmstadt
April 26, 2019
April 26, 2019
(b) E. Merck KG, Darmstadt¹
No board positions
March 28, 2008
- Evonik Industries AG, Essen (Vice
Chairperson)
Helga Rübsamen-Schaeff
(a) B. Braun Melsungen AG, Melsungen
(b) E. Merck KG, Darmstadt¹
- AVW Versicherungsmakler GmbH,
Hamburg
Corporate Governance Statement on Corporate Governance including Compensation Report
The German Stock Corporation Act prescribes that the Supervisory Board of a publicly listed company must have at least one
member who has professional expertise in accounting or auditing. Helene von Roeder satisfies these requirements and is
furthermore the Chairperson of the Finance Committee of the Board of Partners of E. Merck KG. A further provision of the German
Stock Corporation Act requires that the members of the Supervisory Board be collectively familiar with the sector in which their
company operates. This requirement is specifically addressed in the Supervisory Board's profile of skills and expertise, which
stipulates that the Supervisory Board have at least four members that possess such knowledge of the sector. We currently meet
this requirement (see also "Objectives of the Supervisory Board with respect to Its Composition and Profile of Skills and Expertise").
The rules of procedure prescribe that the Supervisory Board may form committees. The Supervisory Board has formed a
Nomination Committee comprising three shareholder representatives. Its members are Wolfgang Büchele, Helga Rübsamen-
Schaeff, and Simon Thelen. The Nomination Committee is responsible for proposing to the Supervisory Board suitable candidates
for its proposal to the Annual General Meeting. Apart from legal requirements and the recommendations of the German Corporate
Governance Code, the "Objectives of the Supervisory Board with respect to its composition," "Profile of skills and expertise," and
the "Diversity Policy" are to be taken into consideration as well. Owing to the aforementioned limited authority, and since a
corresponding need has not yet arisen, the Supervisory Board currently has no further committees.
The members of the Board of Partners of E. Merck KG and of the Supervisory Board may be convened to a joint meeting if so
agreed by the chairpersons of the two boards.
The Supervisory Board examines the annual financial statements as well as the consolidated financial statements and the combined
management report, taking into account in each case the reports of the auditor. Moreover, the Supervisory Board discusses the
quarterly statements and the half-year financial report, taking into account in the latter case the report of the auditor on the audit
review of the abridged financial statements and the interim management report of the Group. The adoption of the annual financial
statements is not the responsibility of the Supervisory Board, but of the General Meeting. The Supervisory Board normally meets
four times a year. Further meetings may be convened if requested by a member of either the Supervisory Board or the Executive
Board. As a rule, resolutions of the Supervisory Board are passed at meetings. At the instruction of the chairman, in exceptional
cases a resolution may be passed by other means, details of which are given in the rules of procedure.
However, the fact that the Supervisory Board has no possibilities to directly influence the Executive Board restricts neither its
information rights nor audit duties. The Supervisory Board must monitor the Executive Board in terms of legality, regularity,
usefulness, and economic efficiency. In particular, the Supervisory Board has the duty to examine the reports provided by the
Executive Board. This includes regular reports on the intended business policy, as well as other fundamental issues pertaining to
corporate planning, especially financial, investment and HR planning; the profitability of the Merck Group; the progress of business;
the risk situation; risk management (including compliance); and the internal auditing system. In addition, by means of consultation
with the Executive Board, it creates the basis for supervision of the management of the company by the Supervisory Board in
accordance with section 111 (1) AktG.
The Supervisory Board performs a monitoring function. It supervises the Executive Board's management of the company. In
comparison with the supervisory board of a German stock corporation, the role of the supervisory board of a corporation with
general partners (KGaA) is limited. This is due to the fact that the members of the Executive Board are personally liable partners
and therefore are themselves responsible for the management of the company. In particular, the Supervisory Board is not
responsible for appointing and dismissing general partners or for regulating the terms and conditions of their contracts. This is the
responsibility of E. Merck KG. Nor does the Supervisory Board have the authority to issue rules of procedure for the Executive
Board, or a catalog of business transactions requiring approval. This authority likewise belongs to E. Merck KG (article 13 (3)
sentence 1 and (4) sentence 1 of the Articles of Association).
160
Corporate Governance Statement on Corporate Governance including Compensation Report
2 Members appointed according to article 6 (5) of the Articles of Association.
1 Internal board position.
April 26, 2019
- Merck Healthcare KGaA¹
(b) E. Merck KG, Darmstadt¹
Cologne, Chief Physician for Hand Surgery at the Clinic for Trauma and
Hand Surgery, University Hospital Düsseldorf
(a)
Simon Thelen²
April 26, 2019
(b) E. Merck KG, Darmstadt¹
Cologne, Head of Infrastructure Development for western region at DB
Netz AG, Frankfurt am Main/Duisburg
Daniel Thelen
May 9, 2014
- Bonn University Hospital, Bonn
(b) E. Merck KG, Darmstadt¹
Langenburg, Chairperson of the Advisory Board of AiCuris Antiinfective
Cures GmbH, Wuppertal
April 26, 2019
(a) 4SC AG, Martinsried
- Hembla AB, Stockholm, Sweden
- Victoria Park AB, Malmö, Sweden
- Vonovia Finance B.V., Amsterdam,
Netherlands
(b) Merck BKK
(Vice Chairman)
April 26, 2019
Member
159
As of the end of the Annual General Meeting on April 26, 2019, the composition of the Supervisory Board is now as follows:
Corporate Governance Statement on Corporate Governance including Compensation Report
158
No board positions
(b) E. Merck KG, Darmstadt¹
DKSH Holding Ltd., Zurich, Switzerland
2 Members appointed according to article 6 (5) of the Articles of Association.
1 Internal board position.
Sachsenheim, Global Head of Research and Bioinformatics
Munich, Managing Partner of Altmann Analytik GmbH & Co. KG, Munich
Veit Ulshöfer
Tobias Thelen²
(b)
Düsseldorf, Managing Partner of de Haen Carstanjen & Söhne KG, Düsseldorf
(a) - Henkel AG & Co. KGaA, Düsseldorf
E. Merck KG, Darmstadt¹
(b) E. Merck KG, Darmstadt¹
- Bonn University Hospital, Bonn
(b) E. Merck KG, Darmstadt¹
(a) 4SC AG, Martinsried
No board positions
No board positions
(b) E. Merck KG, Darmstadt¹
(b) E. Merck KG, Darmstadt¹
No board positions
- Evonik Industries AG, Essen (Vice Chairperson)
(a) B. Braun Melsungen AG, Melsungen
No board positions
Wolfgang Büchele
Römerberg, Chairman of Exyte AG, Stuttgart
Michael Fletterich
Gernsheim, Chairman of the Merck Joint Works Council
- HFC Prestige Service Germany GmbH
- SIRONA Dental Systems GmbH
(a)
May 9, 2014
July 1, 1998
No board positions
No board positions
- Kemira Oyj, Helsinki, Finland
July 1, 2009
Wegmann Unternehmens-Holding GmbH &
Member of the
Supervisory Board since
Co. KG, Fürstenfeldbruck
(b) E. Merck KG, Darmstadt¹
As a member of the corporate bodies of E. Merck KG, Supervisory Board member Theo Siegert received an additional payment of € 11,096. for performing this function
in 2019 (2018: € 150,000).
(a) - Gelita AG, Eberbach (Chairman)
Memberships of
Renate Koehler
Heidelberg, Member of the Executive Board of SAP SE, Walldorf, SAP
Digital Business Services
Michael Kleinemeier
Riedstadt, full-time member of the Merck Joint Works Council
Sascha Held
Hanover, Chairperson of the Board of Directors at the August-Schmitt-
Stiftung, Bochum
Edeltraud Glänzer
Chemical, and Energy Industrial Union (IG BCE), Darmstadt
Bingen, Regional Director of the German Mining,
Jürgen Glaser
Seeheim-Jugenheim, Senior Product Manager
Gabriele Eismann
(a) further statutory supervisory boards and
(b) comparable German and foreign
supervisory bodies of corporations
As a member of the corporate bodies of E. Merck KG, Supervisory Board member Gregor Schulz received an additional payment of € 10,356 for performing this function
in 2019 (2018: € 140,000).
Dietmar Oeter
As a member of the corporate bodies of E. Merck KG, Supervisory Board member Albrecht Merck received an additional payment of € 82,959 for performing this
function in 2019 (2018: € 120,000).
2,200
626
26
2019
2018
600
Member of the Executive Board
Member of the Executive Board
Member of the Executive Board
(left on: September 30, 2018)
Marcus Kuhnert
Belén Garijo
Walter Galinat
Total compensation
Service cost
Total
LTI 2016 (2016 to 2018)
LTI 2015 (2015 to 2017)
Multi-year variable compensation
Profit sharing
Total
Fixed compensation
Additional benefits
Allocation (€ thousand)
5,539
392
395
4,475
393
6,008
4,564
10,564
2018
7,154
2019
2019
1,492
4,744
3,725
6,071
5,665
1,192
2,931
1,922
1,192
599
599
105
2,284
2,200
3,000
3,900
968
926
1,149
1,166
26
26
49
66
942
900
1,100
1,100
2018
400
1,372
1,369
30
81
7
38
721
186
Additional benefits
1,100
2019
2018
1,000
As a member of the corporate bodies of E. Merck KG, Supervisory Board member Helga Rübsamen-Schaeff received an additional payment of € 150,000 for performing
this function in 2019 (2018: € 150,000).
1,000
1,400
1,300
Fixed compensation
2019
2018
2019
2018
Member of the Executive Board
Member of the Executive Board
Chairman of the Executive Board
Allocation (€ thousand)
Kai Beckmann
Udit Batra
Stefan Oschmann
151
Total
1,486
2,121
1,038
5,147
4,080
5,615
4,164
9,192
5,785
1,617
1,708
2,261
599
326
599
Total compensation
166
Service cost
LTI 2016 (2016 to 2018)
LTI 2015 (2015 to 2017)
Multi-year variable compensation
2,400
2,400
2,800
2,800
4,810
3,700
Profit sharing
1,130
1,081
1,107
Total
394
1,100
421
3,000.00
750.00
14,936.99 47,000.00
Helene von Roeder (since April 26, 2019)
Alexander Putz (until April 26, 2019)
Christian Raabe (since April 26, 2019)
3,000.00 50,750.00 50,000.00
3,750.00
47,000.00 47,000.00
Dietmar Oeter
35,191.78
3,000.00
32,191.78
Peter Emanuel Merck (since April 26, 2019)
15,686.99 50,000.00
3,000.00
750.00
14,936.99 47,000.00
34,441.78
2,250.00
32,191.78
35,191.78
3,000.00
32,191.78
Renate Koehler (since April 26, 2019)
Anne Lange (since April 26, 2019)
Albrecht Merck (until April 26, 2019)
34,441.78
2,250.00
32,191.78
32,191.78
3,000.00
15,686.99 50,000.00
35,191.78
32,191.78
As a member of the corporate bodies of E. Merck KG, Supervisory Board member Siegfried Karjetta received an additional payment of € 10,137 for performing this
function in 2019 (2018: € 140,000).
391
As a member of the corporate bodies of E. Merck KG, Supervisory Board member Michaela Freifrau von Glenck received an additional payment of € 5,699. for
performing this function in 2019 (2018: € 80,000).
As a member of the corporate bodies of E. Merck KG, Supervisory Board member Wolfgang Büchele received an additional payment of € 140,000 for performing this
function in 2019 (2018: € 140,000).
50,000.00
869,000.00
15,686.99
880,787.70
3,000.00
46,500.00
15,686.99... 50,000.00
3,000.00
35,191.78
3,000.00
750.00
750.00
57,000.00
14,936.99 47,000.00
14,936.99 47,000.00
823,787.70 822,500.00
Michael Kleinemann (since April 26, 2019)
3000.00
50,000.00 50,000.00
3,000.00 15,686.99 50,000.00
2,250.00 15,686,99 49,250.00
750.00
14,936,99 47,000.00
Theo Siegert (until April 26, 2019)
Daniel Thelen (since April 26, 2019)
Simon Thelen (since April 26, 2019)
Tobias Thelen (until April 26, 2019)
Veit Ulshöfer (until April 26, 2019)
Total
750.00
14,936.99 47,000.00
Gregor Schulz (until April 26, 2019)
3,000.00
3,000.00
47,000.00 47,000.00
Helga Rübsamen-Schaeff
35,191.78
3,000.00
32,191.78
32,191.78
50,000.00
35,191.78
3,000.00
3,000.00
3,750.00
94,000.00 94,000.00
2018
2019
2018
Total compensation
Compensation for meeting attendance
2019
2018
2019
Fixed compensation
(Vice Chairman)
97,750.00 97,000.00
Michael Fletterich
Wolfgang Büchele
€
The compensation of the Supervisory Board members is defined by article 20 of the Articles of Association of Merck KGaA. The
members of the Supervisory Board receive fixed compensation of € 47,000 per year. The Chairman receives double and the Vice
Chairman receives one and a half times this amount. Moreover, the members receive additional compensation of € 750 per
meeting. The individual values are presented in the following table:
Compensation for the Supervisory Board members of Merck KGaA
152
Corporate Governance Statement on Corporate Governance including Compensation Report
414
4,146
6,462
6,059
1,192
15,686.99
(Chairman)
70,500.00 70,500.00
5,158
2,250.00 74,250.00 72,750.00
750.00
3,750.00
14,936.99 47,000.00
Siegfried Karjetta (until April 26, 2019)
50,000.00
3,000.00 15,686.99
35,191.78
3,000.00
32,191.78
Sascha Held (since April 26, 2019)
750.00
47,000.00
14,936.99
Michaela Freifrau von Glenck (until April 26, 2019)
3,000.00 15,686.99 50,000.00
3,000.00 15,686.99 50,000.00
3,000.00 50,750.00 50,000.00
3,000.00 50,000.00 50,000.00
35,191.78
3,097
3,000.00
Gabriele Eismann
750.00
750.00
3,750.00
Edeltraud Glänzer
14,936.99 47,000.00
14,936.99 47,000.00
47,000.00 47,000.00
3,000.0
Jürgen Glaser (since April 26, 2019)
32,191.78
Crocifissa Attardo (until April 26, 2019)
47,000.00 47,000.00
Mechthild Auge (until April 26, 2019)
Internationality and global mindset
Industry experience
As a science and technology company with global operations and major markets on five continents with around 56,000 employees
at locations in 66 countries², internationality and the associated global mindset is one of our key success factors. According to our
diversity policy, the Executive Board's internationality derives from leadership experience or national origin, relative to our key sales
markets or those locations that are organizationally and culturally relevant to our employee development efforts. For both criteria,
Europe, North America, and Asia-Pacific are currently the key regions. The Executive Board meets this objective with management
experience in the named regions, for instance in the following countries: France, Spain, Switzerland, the United States, Singapore,
Malaysia, and Australia. More than one-third of the Executive Board members are not German citizens.
Management experience
The key prerequisites for high-performance leadership teams are both the diversity of the individual competency profiles and a
balance between a Group-internal and external management perspective. Therefore, as a whole the Executive Board must have in-
depth knowledge and experience in the following key areas of importance to the company: strategy and planning, finance and
accounting, sales and operations, human resources, and legal and compliance, as well as information technology. In addition, for
the composition of the Executive Board it is important to ensure a good balance of members from within and outside the company.
Our diversity policy seeks to derive inspiration and innovation from outside the company and to identify the latest trends of
relevance to the core businesses of the company, while ensuring sustainability and continuity in line with our corporate culture. We
have therefore set ourselves the global objective of filling two-thirds of our leadership positions with candidates from within the
company.
The current Executive Board fulfills both of the aforementioned objectives: all required aspects of the competency profile are
covered by at least one member of the Executive Board. Likewise, three members of the Executive Board possess multiple years of
experience working within the Merck Group prior to their appointment to the Executive Board.
1 Merck also has employees at sites that are not fully consolidated subsidiaries. These figures refer to all people directly employed by Merck and therefore may deviate
from figures in the financial section of this report.
2 Each country with at least one active employee is considered one country.
Corporate Governance Statement on Corporate Governance including Compensation Report
166
The members of the Executive Board contribute knowledge of various fields including veterinary medicine, economic sciences,
medicine (pharmacology), chemistry, and information technology. In addition, all members of the Executive Board hold a university
degree and a doctorate from a German or foreign university.
Currently, the Executive Board has the full breadth of the sector-specific experience required.
Educational background
In order to translate the tremendous innovative potential of a science and technology company into sustainable business success,
interdisciplinary educational backgrounds are a key element of our diversity policy both for the Executive Board and for the
Supervisory Board. The current composition of both boards illustrates this interdisciplinary aspect to a very high degree.
Additionally, Merck continues to pursue representation of both genders as an objective for the Executive Board. With Ms. Belén
Garijo as CEO Healthcare, a woman is currently responsible for a business sector at Merck that contributed 42% to our Group sales
in 2019. The statutory target of 30% pursuant to section 96 (2) AktG is already applied to the Supervisory Board of Merck KGaA.
We consider further targets to be dispensable here.
Moreover, the members of the Supervisory Board have a background in one or more of the following fields of
specialization: chemistry, biochemistry, pharmaceutics, mathematics, law, human medicine, business administration and
economics, physics, education, and computer sciences, among others.
Seven Supervisory Board members are university graduates and hold doctorates.
Corporate Governance
Report of the Supervisory Board
To efficiently lead and manage the Group, the Executive Board must have in-depth knowledge of the key industries and business
sectors that the company operates in. In accordance with the diversity policy, there should be at least one member of the Executive
Board with in-depth expertise of Healthcare, Life Science, or Performance Materials, respectively.
Gender diversity also plays a crucial role since it enables us to benefit from a larger talent pool, and allows us as a company to
develop a better understanding of important customer groups. We have set ourselves the (global) strategic objective of maintaining
the proportion of women in leadership positions (managers, experts, and project managers in role 4 and higher) 1 at a stable level
of 30% by 2021 (please also refer to the description under "Diversity and Management").
165
In their current composition, both boards meet this objective. The age range of the Executive Board is 15 years; that of the
Supervisory Board is 30 years. In addition, maximum age limits apply to both boards: for the Supervisory Board please see the
information regarding the "Objectives of the Supervisory Board with respect to its composition, and profile of skills and expertise";
for Executive Board members, a maximum age of 70 applies.
• Second management level of Merck KGaA below the Executive Board: 26% of positions held by women
The deadline set for reaching the new targets is December 31, 2021. The first management level comprises all managers of Merck
KGaA with a direct reporting line to the Executive Board of Merck KGaA or who belong to the global executive group. The second
Corporate Governance Statement on Corporate Governance including Compensation Report
164
management level comprises all managers of Merck KGaA who report to managers with a direct reporting line to the Executive
Board of Merck KGaA or the global executive group. In addition, as a global company with correspondingly aligned global
(leadership) structures, Merck continues to pursue a (voluntary) global target of maintaining the proportion of leadership positions
held by women (managers, experts, and project managers in roles 4 and above) 1 at a stable level of 30% in the period until 2021.
Stipulations pursuant to section 111 (5) AktG (target for the percentage of positions on the
Supervisory Board held by women)
Pursuant to section 111 (5) AktG, the Supervisory Board of companies that are listed or subject to co-determination stipulates
binding targets for the percentage of positions on the Supervisory Board and on the Management Board held by women. However,
for Merck KGaA, stipulations pursuant to section 111 (5) AktG need not be set for the following reasons: the statutory target of
30% pursuant to section 96 (2) AktG is already applied to the Supervisory Board of Merck KGaA; this eliminates the obligation to
stipulate a further target for the percentage of positions held by women on the Supervisory Board (see section 111 (5) sentence 5
AktG). The obligation to stipulate a target for the percentage of positions held by women on the Management Board pursuant to
section 111 (5) AktG is not applicable to the legal form of a corporation with general partners (Kommanditgesellschaft auf Aktien),
as a corporation with general partners neither has a management board comparable to that of a stock corporation, nor does the
Supervisory Board have personnel authority over the Executive Board. Instead, the Executive Board of Merck KGaA consists of
personally liable general partners (see also the description of Supervisory Board procedures).
Diversity policy pursuant to section 289f (2) No. 6 of the German Commercial Code
(HGB)
Merck is pursuing a Group-wide, global diversity program. At Merck, diversity stands for a culture of inclusion, mutual esteem, and
respect. To demonstrate this open and dynamic company culture, we promote diversity throughout the Group - and do so at all
levels, including the Executive Board and Supervisory Board.
We believe that a diverse workforce boosts the innovative strength of the Merck Group and contributes materially to our business
success. That is why we are furthering a culture of diversity independent of age, gender, disability, ethnic or cultural background,
religion, industry experience, and educational background. The diversity policy to strategically steer the topics of diversity and
inclusion at Merck thus focuses on the following key criteria:
Gender
Age
Industry
knowledge
Internationality,
global mindset
Educational
background
Our Group-wide diversity policy encompasses both voluntary as well as legally defined objectives that we continuously and
sustainably work to achieve. In this context, it should be noted that with respect to the Executive Board of Merck KGaA, many rules
can only be applied correspondingly. This is because the Executive Board comprises personally liable general partners of Merck
KGaA and is not a management board with employed members of a corporate body (for details, please also see the "Joint Report of
the Executive Board and the Supervisory Board").
In addition to the aspects presented in the following, reference is made to the objectives of the Supervisory Board with respect to
its composition and the profile of skills and expertise of the Supervisory Board (see the information on the "Objectives of the
Supervisory Board with respect to its composition and profile of skills and expertise"). The statements made there are part of the
diversity policy for the Supervisory Board presented here.
Corporate Governance Statement on Corporate Governance including Compensation Report
• First management level of Merck KGaA below the Executive Board: 21% of positions held by women
Age
Our boards are to have a balanced age structure. This permits future-oriented and consistent succession planning and is a key
element of sustainable company management and monitoring. Our diversity policy aims for an age range of at least ten years
between the youngest and the oldest member of the respective board.
Gender
Management
experience
Corporate Governance
Report of the Supervisory Board
169
Corporate governance and Declaration of Conformity
Corporate governance is a topic of high priority for the Supervisory Board. In its own estimation, the Supervisory Board has an
adequate number of independent members. There were no conflicts of interest, as defined by the German Corporate Governance
Code, involving Supervisory Board members during the year under review. In fiscal 2019, the Chairman of the Supervisory Board
was prepared to hold talks with investors on topics pertaining to the Supervisory Board as appropriate, and remains willing to do
so. The Supervisory Board will carry out its next self-assessment in fiscal 2020 on account of this year's election and resulting new
composition of the Supervisory Board.
After discussing corporate governance issues in detail, the Executive Board and the Supervisory Board on February 3, 2020 adopted
the updated Declaration of Conformity and issued it jointly on February 3, 2020, in accordance with section 161 AktG. The
statement is permanently available on the website of Merck KGaA (www.merckgroup.com/en/investors/corporate-
governance/reports.html). More information about corporate governance at Merck KGaA, including the compensation of the
Executive Board and Supervisory Board, is given in the Statement on Corporate Governance of the Annual Report.
Committees
Apart from the Nomination Committee, the Supervisory Board of Merck KGaA currently has no further committees on account of the
special features that apply to the Supervisory Board of a corporation with general partners (KGaA) under German company law,
and because a corresponding need for this has not emerged to date. The members of the Nomination Committee, which existed
until April 26, 2019, did not convene in fiscal 2019. No report is required on the work of other committees.
Personnel matters
With the exception of Helga Rübsamen-Schaeff, who was excused and absent from the meeting on May 9, 2019; Michael
Kleinemeier, who was excused and absent from the meeting on May 9, 2019; and Anne Lange, who was excused and absent from
the meeting on July 31, 2019, all Supervisory Board members attended all meetings of the Supervisory Board. The composition of
the Supervisory Board changed as follows in 2019: Wolfgang Büchele, Michael Kleinemeier, Renate Koehler, Helene von Roeder,
Helga Rübsamen-Schaeff, and Daniel Thelen were elected to the Supervisory Board as representatives of the limited liability
shareholders by the Annual General Meeting on April 26, 2019. Peter Emanuel Merck and Simon Thelen were appointed to the
Supervisory Board. Furthermore, Gabriele Eismann, Michael Fletterich, Edeltraud Glänzer, Jürgen Glaser, Sascha Held, Anne Lange,
Dietmar Oeter, and Christian Raabe were elected to the Supervisory Board as employee representatives at the Delegates' Meeting
on April 11, 2019, for a term starting at the end of the Annual General Meeting on April 26, 2019. The members of the Supervisory
Board were inducted by Merck KGaA with onboarding activities and continuing education on topics such as corporate governance,
the internal organization, and applicable regulations and legal requirements.
Darmstadt, February 28, 2020 / May 13, 2020
The Supervisory Board of Merck KGaA
Report of the Supervisory Board
Wolfgang Büchele
Corporate Governance Objectives of the Supervisory Board with respect to its Composition and Profile of Skills and Expertise
Objectives of the Supervisory Board with respect
to its Composition and Profile of Skills and
Expertise
170
Initial situation
According to section 5.4.1 of the German Corporate Governance Code in the version dated February 7, 2017, the Supervisory Board
shall specify concrete objectives regarding its composition as well as prepare a profile of skills and expertise for the entire board.
Within the scope of the company-specific situation, the composition of the Supervisory Board shall appropriately reflect the
international activities of the enterprise, potential conflicts of interest, the number of independent Supervisory Board members, an
age limit to be specified for the members of the Supervisory Board, a regular limit to be specified for the length of Supervisory
Board membership, and diversity.
General notes on the composition of the Supervisory Board
For the Supervisory Board of Merck KGaA, professional qualifications and personal expertise are the two most important
prerequisites for appointments to seats on the Supervisory Board. When proposing Supervisory Board candidates for election or
delegation, the Supervisory Board will always give top priority to these prerequisites, which are essential for fulfilling its legal
duties. Overall, the Supervisory Board's policy is to optimally meet its monitoring and advisory duties by having diversity among its
members. Diversity includes, in particular, internationality as well as different experience backgrounds and career paths. The
proportion of women on the Supervisory Board is also considered to be an aspect of diversity. When preparing proposals for
election or delegation to the Supervisory Board, the Supervisory Board shall consider in each case to what extent different,
complementary specialist skills; professional and life experience; and an appropriate representation of both genders benefits the
work of the Supervisory Board. Additionally, the Supervisory Board shall support the Executive Board in its efforts to increase
diversity within the company.
We foster diversity within the company, which also includes ensuring a balance of genders in management. To this end, we pursue
both voluntary and statutory objectives, and we work continuously and sustainably on achieving them. On December 15, 2016, the
Executive Board of Merck KGaA set the new targets for the percentage of positions held by women on the two management levels
of Merck KGaA below the Executive Board as follows:
The Supervisory Board of Merck KGaA currently comprises 16 members, eight of whom represent the shareholders and a further
eight who represent the employees. The eight employee representative members are elected by employee delegates pursuant to
the provisions of the German Co-determination Act (Mitbestimmungsgesetz, MitbestG). These consist of six company employees,
including a senior executive, as well as two union representatives. The Supervisory Board has no statutory proposal right with
respect to electing the delegates or employee representatives. Two of the eight shareholder representatives are specified by a
delegation right of E. Merck Beteiligungen KG. The Supervisory Board likewise has no statutory proposal right with respect to
exercising this delegation right. The other six shareholder representatives are elected by the General Meeting. In accordance with
section 124 (3) sentence 1 AktG, the Supervisory Board shall propose to the General Meeting Supervisory Board members for
election. These proposals require a majority of the votes of the shareholder representative members of the Supervisory Board. The
next scheduled election to the Supervisory Board shall take place at the 2024 Annual General Meeting. The General Meeting is not
required to follow the election proposals. The appointment objectives and competency requirements that the Supervisory Board
sets forth below therefore do not represent requirements to be met by those eligible to elect or to delegate members. Instead, they
are intended to express the objectives pursued by the Supervisory Board in office with regard to its advisory and monitoring
functions.
Chairman
167
It also examined the consolidated financial statements of the Merck Group as well as the combined management report for
Merck KGaA and the Merck Group, and took note of the auditor's report of KPMG AG Wirtschaftsprüfungsgesellschaft, Berlin. It
focused particularly on the aforementioned key audit matters of particular importance in the audit opinion, on the resulting risks for
the financial statements, the approach adopted during the audit as described, and the conclusions drawn by the auditor.
Furthermore, the Supervisory Board also examined the separate combined non-financial (Group) report and the memorandum on a
limited assurance engagement prepared by the auditor on behalf of the Supervisory Board. The discussion of the relevant agenda
item at the Supervisory Board's meeting on February 28, 2020, as well as at the meeting on May 13, 2020 to approve the financial
statements was also attended by the auditors who sign the audit opinion on the annual financial statements of Merck KGaA and the
consolidated financial statements of the Merck Group as well as the separate combined non-financial (Group) report. Furthermore,
at this meeting, the auditors reported on their audit. The Supervisory Board took note of and approved the results of the audit. On
completion of its examination, the Supervisory Board raised no objections and thus approved the annual financial statements for
Merck KGaA, the consolidated financial statements of the Merck Group, the combined management report of Merck KGaA and the
Merck Group prepared by the Executive Board, the report presented by the auditor in accordance with article 27 (2) of the Articles of
Association, and the separate non-financial (Group) report. The Supervisory Board gave its consent to the proposal of the Executive
Board for the appropriation of net retained profit after conducting its own review.
In addition, the auditor audited the calculation of Merck KGaA's participation in the profit of E. Merck KG in accordance with
article 27 (2) of the Articles of Association, as well as the separate combined non-financial (Group) report. The annual financial
statements of Merck KGaA, the consolidated financial statements of the Merck Group, the combined management report for
Merck KGaA and the Merck Group, the proposal of the Executive Board for the appropriation of net retained profit, and the separate
combined non-financial (Group) report were submitted to the Supervisory Board together with the auditor's report.
The Supervisory Board again properly executed its duties in 2019 in accordance with the law as well as the company's Articles of
Association and rules of procedure. In particular, the Supervisory Board monitored the work of the Executive Board diligently and
regularly.
Cooperation with the Executive Board
The cooperation with the Executive Board was characterized by intensive, trustworthy exchange. During fiscal 2019, the Executive
Board provided the Supervisory Board with regular written and verbal reports on the business development of Merck KGaA and the
Merck Group. In particular, the Supervisory Board was informed about the market and sales situation of the company against the
background of macroeconomic development, and the financial position of the company and its subsidiaries, along with their
earnings development and corporate planning. Within the scope of quarterly reporting, the sales and operating results were
presented for the Merck Group as a whole, and broken down by business sector. Aside from the Supervisory Board meetings, the
Chairman of the Supervisory Board also maintained, and continues to maintain, a regular exchange of information with the
Chairman of the Executive Board.
Key topics of the Supervisory Board meetings
Four Supervisory Board meetings were held in fiscal 2019. At these meetings, the Supervisory Board intensely discussed the
reports of the Executive Board as well as, together with the Executive Board, company developments and strategic issues.
At the meeting held on February 26, 2019, the Executive Board first intensively addressed the annual financial statements and
consolidated financial statements for 2018, the combined management report, the audit report of the auditor on the separate non-
financial (Group) report for fiscal 2018, and the proposal for the appropriation of the net retained profit. The auditor explained the
audit reports including the focus areas of the audit. The Executive Board and the Head of Accounting reported on the financial
statements. Furthermore, the Supervisory Board resolved upon the report and the objectives of the Supervisory Board with respect
to its composition and the profile of skills and expertise, the Declaration of Conformity with the German Corporate Governance
Code, and the Statement on Corporate Governance, which simultaneously includes the joint report on Corporate Governance of the
Executive Board and Supervisory Board. The Supervisory Board also approved the proposals to be made to the Annual General
Meeting including the proposals for electing new Supervisory Board members. The Executive Board reported on business
performance in 2018 and presented the plans for fiscal 2019.
The Supervisory Board also took note of the written risk report as well as the report from Group Internal Auditing for 2018. In
addition, the Supervisory Board discussed the mandatory change of auditor and resolved to prepare the public request for tender.
The meeting held on May 9, 2019, focused on current business developments in the first quarter of 2019 and the acquisition of
Versum Materials. The report of the Research and Development Committee of the Board of Partners of E. Merck KG for
Life Science/Performance Materials was a further focus of the meeting. The Supervisory Board also dealt with the Compliance and
Data Protection Report for 2018.
At its meeting on July 31, 2019, the Supervisory Board focused intensively on the report of the Executive Board on business
performance in the second quarter of 2019. In addition, the auditor explained the half-year financial report. Risk management
within the company was a further topic. The Head of Risk Management presented the status report for the first half of 2019. No
risks that could threaten the continued existence of the company were identified. Moreover, the list of permitted non-audit services
was updated and an external audit of the non-financial declaration was resolved upon. The Executive Board also reported on the
status of the "Tolso" project, a restructuring project in the Life Science business sector.
At its fourth meeting on November 8, 2019, the Supervisory Board dealt with the report of the Executive Board on the third quarter
of 2019. Additional topics of focus were the 2019 status reports of Group Internal Auditing, status reports on compliance and data
Corporate Governance Report of the Supervisory Board
In accordance with article 14 (2) of the Articles of Association, the Supervisory Board also examined the annual financial statements
of Merck KGaA, the proposal for the appropriation of net retained profit, and the auditor's report presented in accordance with
article 27 (2) of the Articles of Association.
protection, and the report of the Research and Development Committee for Healthcare. Furthermore, the Group Executive
Conference and the strategy of the Performance Materials business sector were discussed. A resolution on preparing for the
mandatory change of auditor for Merck KGaA for fiscal 2023 audit was adopted.
Annual financial statements
The annual financial statements of Merck KGaA, the consolidated financial statements of the Merck Group, and the combined
management report for Merck KGaA and the Merck Group, including the accounts, were audited by KPMG AG
Wirtschaftsprüfungsgesellschaft, Berlin.
The auditors issued an unqualified audit opinion on the annual financial statements of Merck KGaA in accordance with German
Auditing Standards. The audit opinion for the annual financial statements contained the following key audit matters, i.e. those
matters that, in the professional judgment of the auditor, were of most significance in the audit of the annual financial statements:
• Impairment testing of interests in associates
• Recognition and measurement of provisions for tax liabilities
• Balance sheet effects of the termination of the business lease agreement with Merck Healthcare KGaA
For the consolidated financial statements prepared in accordance with International Financial Reporting Standards and for the
combined management report, the auditors issued the unqualified auditor's report reproduced in the Annual Report of the Merck
Group. The audit opinion for the consolidated financial statements contained the following audit topics of special importance:
• The acquisition of Versum Materials Inc.
• Recognition and measurement of income tax liabilities and deferred tax liabilities
• Goodwill impairment tests
168
Stipulations pursuant to section 76 (4) AktG (target for the percentage of positions held by women on
the two upper management levels below the Executive Board)
162
The Research and Development Committee has four members: Helga RübsamenSchaeff (Chair), Johannes Baillou, Katharina Kraft,
and Simon Thelen. The Research and Development Committee is convened as and when necessary, but holds at least two meetings
a year. Meetings of the Research and Development Committee are attended by members of the Executive Board of Merck KGaA
upon request of the Committee. These meetings regularly include the Chairman of the Executive Board as well as the CEO
Healthcare, the CEO Life Science, and the CEO Performance Materials. The Research and Development Committee is responsible,
among other things, for reviewing and discussing the research activities of the Healthcare and Life Science/Performance Materials
business sectors. It passes its resolutions with a simple majority. The Chairperson of the Committee reports to the Board of
Partners on the insights gained from the meetings held.
- Gelita AG, Eberbach (Chairman)
(b) - Kemira Oyj, Helsinki, Finland
(a) Merck KGaA, Darmstadt
Albrecht Merck
Schriesheim, Commercial Director of the Castel Peter Winery, Bad Dürkheim
Helga Rübsamen-Schaeff
Langenburg, Chairperson of the Advisory Board of AiCuris Antiinfective Cures GmbH,
Wuppertal
Gregor Schulz
Umkirch, pediatrician
Theo Siegert
Düsseldorf, Managing Partner of de Haen Carstanjen & Söhne KG, Düsseldorf
Tobias Thelen
Munich, Managing Partner of Altmann Analytik GmbH & Co. KG, Munich
(a) - Merck KGaA, Darmstadt
(a) - Merck KGaA, Darmstadt
- 4SC AG, Martinsried
Stipulations to promote the percentage of management positions held by women
pursuant to section 76 (4) and section 111 (5) of the German Stock Corporation Act
(AktG)
(a) Merck KGaA, Darmstadt
(a) - Merck KGaA, Darmstadt
- Henkel AG & Co. KGaA, Düsseldorf
(b) DKSH Holding Ltd., Zurich, Switzerland
(a) Merck KGaA, Darmstadt
Corporate Governance Statement on Corporate Governance including Compensation Report
(a) - Merck KGaA, Darmstadt
(Chairman)
- Travel Asset Group Ltd., London, United Kingdom
- Oras Invest Ltd, Helsinki, Finland
Corporate Governance
Statement on Corporate Governance including Compensation Report
161
Board of Partners of E. Merck KG
Some of the responsibilities that lie with the supervisory board of a German stock corporation are fulfilled at Merck by E. Merck KG.
This applies primarily to the Board of Partners of E. Merck KG. Therefore, the Board of Partners as well as the composition and
procedures of its committees are described in the following.
The Board of Partners has nine members. In fiscal 2019 up to January 27, 2019, the Board of Partners was composed as follows:
Member
Johannes Baillou
Vienna, Austria, Vice Chairman of the Executive Board and General Partner of
E. Merck KG, Chairman
Frank Stangenberg-Haverkamp
On January 27, 2019, a new election of the Board of Partners was held. Its composition is now as follows:
Darmstadt, Chairman of the Executive Board and General Partner of E. Merck KG, Vice
Chairman
Römerberg, Chairman of Exyte AG, Stuttgart
Siegfried Karjetta
Darmstadt, physician
Memberships of
(a) statutory supervisory boards and
(b) comparable German and foreign supervisory bodies of
corporations
No board positions
(b)
- Fortas GmbH, Rösrath (Chairman)
Wolfgang Büchele
Member
- Bonn University Hospital, Bonn
Memberships of
No board positions
(b) - AVW Versicherungsmakler GmbH, Hamburg
- Vonovia Finance B.V., Amsterdam, Netherlands
- Victoria Park AB, Malmö, Sweden
Daniel Thelen
Johannes Baillou
Simon Thelen
Cologne, Chief Physician for Hand Surgery at the Clinic for Trauma and Hand Surgery,
University Hospital Düsseldorf
- Hembla AB, Stockholm, Sweden
No board positions
(a) Merck Healthcare KGaA
The Board of Partners supervises the Executive Board in its management of the company. It informs itself about the business
matters of Merck KGaA and may inspect and examine the company's accounts, other business documents, and assets for this
purpose. According to article 13 (4) of the Articles of Association of Merck KGaA, the Executive Board requires the approval of
E. Merck KG for transactions that are beyond the scope of the Group's ordinary business activities. For such transactions, approval
must first be obtained from the Board of Partners of E. Merck KG. The Board of Partners convenes as and when necessary;
however, it normally meets four times a year. The members of the Executive Board of Merck KGaA are invited to all meetings of the
Board of Partners, unless the Board of Partners resolves otherwise in individual cases. The members of the Board of Partners may
convene a joint meeting with the Supervisory Board of Merck KGaA if so agreed by the chairpersons of the two boards.
The Board of Partners may delegate the performance of individual duties to committees. Currently, the Board of Partners has three
committees in place: the Personnel Committee, the Finance Committee, and the Research and Development Committee.
Personnel Committee
The Personnel Committee has four members: Johannes Baillou (Chair), Wolfgang Büchele, Michael Kleinemeier, and Frank
StangenbergHaverkamp. The Personnel Committee meets at least twice a year. Further meetings are convened as and when
necessary. Meetings of the Personnel Committee are attended by the Chairman of the Executive Board of Merck KGaA unless the
Committee decides otherwise. The Personnel Committee is responsible for, among other things, the following decisions concerning
members and former members of the Executive Board: contents of and entry into employment contracts and pension contracts;
granting of loans and advance payments; changes to the compensation structure and adaptation of compensation; approval for
taking on honorary offices, board positions, and other sideline activities; and division of responsibilities within the Executive Board
Corporate Governance Statement on Corporate Governance including Compensation Report
163
of Merck KGaA. The Personnel Committee passes its resolutions by a simple majority; in matters concerning the Chairman of the
Executive Board, unanimity is required. The Chairman of the Committee regularly informs the Board of Partners of its activities.
Finance Committee
The Finance Committee has four members: Helene von Roeder (Chair), Johannes Baillou, Wolfgang Büchele, and Daniel Thelen. The
Finance Committee holds at least four meetings a year, at least one of which is a joint meeting with the auditor of Merck KGaA.
Further meetings are convened as and when necessary. Meetings of the Finance Committee are attended by the Chief Financial
Officer of Merck KGaA. Other members of the Executive Board of Merck KGaA may attend the meetings upon request of the Finance
Committee. These meetings regularly include the Chairman of the Executive Board. The Finance Committee is responsible for,
among other things, analyzing and discussing the annual financial statements, the consolidated financial statements, and the
respective reports of the auditor, as well as the half-year financial report (including the report of the auditors for the audit review of
the abridged financial statements and interim management report contained in the half-year report) and the quarterly statements.
The Finance Committee also reviews the performance of the auditing firm, particularly the auditor in charge of the engagement.
Moreover, the Finance Committee recommends to the Chairman of the Supervisory Board annual audit focuses for the auditors of
the annual financial statements. It also recommends to the Supervisory Board an auditor for the annual financial statements as well
as auditors for the audit review of the abridged financial statements and interim management report contained in the half-year
financial report for the Supervisory Board's corresponding suggestion to the General Meeting. In addition, the Finance Committee is
concerned with the net assets, financial position, results of operations, and liquidity of Merck, as well as accounting, internal
auditing, risk management, and compliance issues. Upon request of the Board of Partners, the Finance Committee examines
investment projects that must be approved by the Board of Partners and provides recommendations pertaining thereto. It passes
its resolutions with a simple majority. The Committee Chairman regularly informs the Board of Partners of the activities of the
Finance Committee.
Research and Development Committee
No board positions
- Bonn University Hospital, Bonn
Cologne, Head of Infrastructure Development for western region at DB Netz AG, Frankfurt
am Main
(a) - Merck KGaA, Darmstadt
(a) statutory supervisory boards and
(b) comparable German and foreign supervisory bodies of
corporations
Vienna, Austria, Vice Chairman of the Executive Board and General Partner of E. Merck KG, No board positions
Chairman
- 4SC AG, Martinsried
Darmstadt, Chairman of the Executive Board and General Partner of E. Merck KG, Vice
Chairman
Wolfgang Büchele
Römerberg, Chairman of Exyte AG, Stuttgart
Helga Rübsamen-Schaeff
Langenburg, Chairperson of the Advisory Board of AiCuris Antiinfective Cures GmbH,
Wuppertal
Michael Kleinemeier
Heidelberg, Member of the Executive Board of SAP SE, Walldorf
Frank Stangenberg-Haverkamp
Mannheim, Senior Strategy Manager at BASF SE, Ludwigshafen
Katharina Kraft
- Kemira Oyj, Helsinki, Finland
- Gelita AG, Eberbach (Chairman)
(a) - Merck KGaA, Darmstadt
(b) Wegmann Unternehmens-Holding GmbH & Co. KG,
Fürstenfeldbruck
- Oras Invest Ltd, Helsinki, Finland
(b) Fortas GmbH, Rösrath (Chairman)
Frankfurt am Main, Member of the Executive Board of Vonovia SE, Bochum
Helene von Roeder
- Travel Asset Group Ltd., London, United Kingdom
(Chairman)
-515
General Disclosures
Notes
Consolidated Financial Statements
17,233
-96
-175
interests
3,396
14,055
Total equity
33
-93
180
568
Notes to the Consolidated Financial Statements¹
Deferred tax liabilities
(1) Company information
55
1 Owing to the impact of the Covid-19 pandemic, Note (4) Subsequent Events and Note (50) Information on preparation and approval
have been supplemented accordingly.
The first-time application of IFRIC 23 did not have an impact on the consolidated financial statements because the accounting of
uncertainties over income tax already corresponded to this provision in terms of both measurement and presentation.
Please refer to Note (45) "Effects from new accounting standards and other presentation changes" for further details on first-time
application effects of IFRS 16. Other presentation changes affecting the presentation of functional costs in the consolidated income
statement and the consolidated balance sheet classification are described there.
• Annual Improvements to IFRSS 2015-2017 Cycle
• Amendment to IFRS 9 "Financial Instruments"
• Amendment to IAS 28 "Investments in Associates and Joint Ventures"
• Amendment to IAS 19 "Employee Benefits"
• IFRIC 23 "Uncertainty over Income Tax Treatments"
• IFRS 16 "Leases"
The following regulations are binding as of fiscal 2019:
Regulations binding for the first time as of fiscal 2019 and other presentation changes
These consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards
(IFRS and IAS) in force on the reporting date as issued by the International Accounting Standards Board (IASB) and
announcements by the IFRS Interpretations Committee (IFRIC and SIC) and as adopted by the European Union, as well as the
additionally applicable provisions of section 315e of the German Commercial Code (HGB). The fiscal year corresponds to the
calendar year. These financial statements have been prepared in euros, the reporting currency. The figures reported in the
consolidated financial statements have been rounded, which may lead to individual values not adding up to the totals presented.
The accounting and measurement policies used in the consolidated financial statements are presented in the following Notes and
are marked there.
(2) Reporting principles
The accompanying consolidated financial statements for the year ended December 31, 2019, were prepared for MERCK
Kommanditgesellschaft auf Aktien (Merck KGaA), Darmstadt, registered under HRB 6164 with the Commercial Register of
Darmstadt. The ultimate parent company of the Group is the parent company of Merck KGaA, E. Merck Kommanditgesellschaft
(E. Merck KG), Darmstadt. The consolidated financial statements of E. Merck KG can be accessed at www.bundesanzeiger.de.
General Disclosures
-13
-1
22
1,296
-368
1,093
Profit after tax from discontinued operation
5
28
2,303
Profit after tax
1,324
Profit after tax from continuing operations
3,396
1,320
3,374
thereof: attributable to non-controlling interests
34
3
22
Earnings per share (in €)
8
thereof: attributable to Merck KGaA shareholders (net income)
-440
17
Income tax
42
-8
27
15
715
627
16
-735
-575
2,120
1,727
40
97
77
40
-481
-343
1,735
1,461
Basic
from continuing operations
from discontinued operation
3.04
3,396
Profit after tax
Items of other comprehensive income that will not be reclassified to profit or loss in subsequent periods
Net defined benefit liability
32
-488
-34
100
-7
-388
-41
Changes in remeasurement
Tax effect
Changes recognized in equity
Equity instruments
Fair value adjustments
Tax effect
Changes recognized in equity
Items of other comprehensive income that may be reclassified to profit or loss in subsequent periods
Debt instruments
Fair value adjustments
1,324
-2,227
2018
Note
7.76
2.97
2.51
0.07
5.25
Diluted
from continuing operations
3.04
7.76
2.97
2.51
from discontinued operation
0.07
5.25
1 Previous year's figures have been adjusted, see Note (45) "Effects from new accounting standards and other presentation changes".
2 Not defined by International Financial Reporting Standards (IFRSS).
Consolidated Financial Statements Consolidated Statement of Comprehensive Income
175
Consolidated Statement of Comprehensive Income
€ million
2019
-2,268
14
-1,183
Consolidated Statement of Comprehensive
Income
176
Consolidated Balance Sheet
177
194
Performance Indicators
200
Operating Activities
213
Operating Assets, Liabilities, and Contingent
Liabilities
240
$1
Consolidated Cash Flow Statement
178
Consolidated Statement of Changes in Net
Equity
180
175
Notes
Consolidated Income Statement
FINANCIAL STATEMENTS
The Supervisory Board shall have an appropriate number of independent shareholder representatives as members. Assuming that
the status of being an employee representative per se does not justify doubts with respect to the independence criteria within the
meaning of section 5.4.2 of the German Corporate Governance Code, as a rule all employee representatives shall be independent
within the meaning of the Code. In any case, at least four of the shareholder representatives on the Supervisory Board shall be
independent. According to the Articles of Association of Merck KGaA, six members representing the shareholders are to be elected
by the General Meeting, and two members are to be delegated. Taking this and the special ownership structure of Merck KGaA into
account, the Supervisory Board considers four shareholder representatives to be an appropriate number of independent members.
In the Supervisory Board's estimation, the objectives concerning independent members are met at the present time. The
Supervisory Board considers the following members to be independent: Wolfgang Büchele, Michael Kleinemeier, Renate Koehler,
Peter Emanuel Merck, Helene von Roeder, Helga Rübsamen-Schaeff, Daniel Thelen, Simon Thelen, Micheal Fletterich, Gabriele
Eismann, Jürgen Glaser, Edeltraud Glänzer, Sascha Held, Anne Lange, Dietmar Oeter and Christian Raabe. In particular, the
Supervisory Board does not believe that membership of the Board of Partners of E. Merck KG conflicts with independence. The
Board of Partners exists complementary to the competencies and the activities of the Supervisory Board. It is not to be expected
that this will lead to material and not merely temporary conflicts of interest. It should also be taken into account that due to its
substantial capital investment and unlimited personal liability, E. Merck KG has a strong interest in the businesses of Merck KGaA
operating efficiently and in compliance with procedures, counteracting from the outset conflicts of interest between E. Merck KG and
Merck KGaA and thus also corresponding conflicts of interest between the members of the respective corporate boards. Moreover,
no one shall be proposed for election to the Supervisory Board who simultaneously serves on a board of or advises a major
competitor of the company, or who, owing to another function, such as advisor to major contract partners of the company, could
potentially become involved in a conflict of interest. No Supervisory Board member serves on a board of or advises a major
competitor. No Supervisory Board member performs a function that could lead to a lasting conflict of interest.
Age limit
As a rule, the members of the Supervisory Board shall not exceed the age of 75. This objective is met at the present time.
Regular limit on the length of Supervisory Board membership
The objective of the Supervisory Board regarding its composition is that, as a rule, all members belong to the board for an
uninterrupted period of no more than 15 years (corresponding to three regular terms of office). With one exception, this objective is
also met at the present time.
Corporate Governance
Objectives of the Supervisory Board with respect to its Composition and Profile of Skills and Expertise
172
Profile of skills and expertise
Additionally, in accordance with section 5.4.1 (2) of the German Corporate Governance Code, the Supervisory Board has prepared a
profile of skills and expertise and reports on the status of implementation below.
In-depth knowledge of the fields relevant to the company
The Supervisory Board shall have at least four members with in-depth knowledge of and experience in fields that are important to
the company, including at least one expert for the Healthcare and Life Science/Performance Materials sectors, respectively. This
requirement is met at the present time. At present, the Supervisory Board has more than four members who have in-depth
knowledge of and experience in the Healthcare and Life Science/Performance Materials sectors. More than four Supervisory Board
members also have executive experience in companies that also or specifically operate in the Healthcare and/or Life
Science/Performance Materials sectors.
Management experience
The Supervisory Board shall have at least three members who have experience in managing or supervising a medium- or large-
sized company. The Supervisory Board has more than three members who have the corresponding experience. They include
supervisory board members who were or still are members of the management or executive board at relevant companies, as well
as supervisory board members who have gained experience in supervisory bodies of German or foreign companies of this size.
Knowledge of business administration
The Supervisory Board shall have at least four members who have in-depth knowledge of business administration. This requirement
is met at the present time.
Experience in other supervisory or control bodies
Lastly, the Supervisory Board shall have at least four members who have experience as members of other supervisory or control
bodies (whereby possible membership of the Board of Partners of E. Merck KG is not taken into account). This requirement is also
met at the present time.
CONSOLIDATED
174
76
180
185
Operating result (EBIT)²
Finance income
Finance costs
Profit before income tax
Note
2019
2018
11
16,152
14,836
12
-6,006
-5,382
10,145
9,454
13
-4,576
-4,396
-1,154
Other operating expenses
General Disclosures
Other operating income
Research and development costs
Group Structure
Employees
249
Capital Structure, Investments, and Financing
Activities
287
Other Disclosures
294
Scope of Consolidation
Consolidated Financial Statements
Consolidated Income Statement
174
Consolidated Income Statement¹
€ million
Net sales
Cost of sales
Gross profit
Marketing and selling expenses
Administration expenses
Impairment losses and reversals of impairment losses on financial assets (net)
Number of independent members, no material conflicts of interest
29
76
3,488
3,226
Contract assets
25
156
52
Other current financial assets
36
24
57
Other current non-financial assets
22
591
536
Income tax receivables
17
589
460
29
2,764
3,342
23
6,213
4,811
36
738
656
24
22
17
22
97
76
17
1,421
1,091
34,808
27,652
Current assets
Inventories
Trade and other current receivables
Cash and cash equivalents
35
781
2,170
32
2,957
2,336
Other non-current provisions
26
490
780
Non-current financial debt
37
8,644
6,681
Other non-current financial liabilities
38
43
33
Other non-current non-financial liabilities
28
93
19
Provisions for pensions and other post-employment benefits
20
Non-current liabilities
17,914
9,003
Total assets
43,811
9,236
36,888
Total Equity
Equity capital
Capital reserves
Retained earnings
Gains/losses recognized in equity
Equity attributable to Merck KGaA shareholders
Non-controlling interests
34
565
3,814
565
3,814
11,507
11,192
1,980
17,865
1,629
17,200
48
33
17,233
7,237
9,175
19
Comprehensive income
thereof: attributable to Merck KGaA shareholders
thereof: attributable to non-controlling interests
Comprehensive income
thereof: from continuing operations
thereof: from discontinued operation
1
39
-15
-71
-20
52
60
-16
12
9
-7
39
11
Other comprehensive income
-47
Changes recognized in equity
Changes taken directly to equity
29
-312
-13
Reclassification to profit or loss
Tax effect
Changes recognized in equity
Cash flow hedge reserve
Fair value adjustments
Reclassification to profit or loss
Reclassification to assets
Tax effect
Changes recognized in equity
Cost of cash flow hedge reserve
Fair value adjustments
Reclassification to profit or loss
Reclassification to assets
Tax effect
Changes recognized in equity
Currency translation difference
Reclassification to profit or loss
-1
-8
21
Consolidated Financial Statements
Consolidated Balance Sheet
176
Consolidated Balance Sheet¹
€ million
Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Other non-current financial assets
Other non-current receivables
Other non-current non-financial assets
Deferred tax assets
Note
Dec. 31, 2019
Dec. 31, 2018
18
17,141
13,764
2,330
5
1,634
1,365
1,337
28
-24
10
-32
349
626
-6
-7
344
619
353
581
41
568
1,365
3,964
34
1,359
6
3,943
22
3,964
17
Six women are currently members of the Supervisory Board of Merck KGaA. Accordingly, women make up 37.5% of the
Supervisory Board. When nominating candidates for election to the Supervisory Board or making proposals for delegations, the
Supervisory Board shall examine whether the percentage of women can be increased by suitable candidates. The Supervisory Board
considers the 37.5% share of female members to be satisfactory at the present time. This is due to the percentage of women in
leadership positions at Merck and in consideration of the composition of the supervisory boards of other companies of comparable
size.
The Supervisory Board shall have at least three members with business experience in the main sales markets of Merck KGaA.
Currently, the main sales markets of Merck KGaA are Europe, America, and Asia-Pacific. The present composition of the Supervisory
Board satisfies this objective. More than three Supervisory Board members have entrepreneurial experience in a wide range of
European countries. More than three Supervisory Board members have experience in management positions in companies that
operate globally.
-162
39
1,320
17,200
to Merck KGaA
Equity attributable
2,131
341
-510
1,790
hedge reserve
-33
-33
Cost of cash flow
reserve
-118
9
-128
Currency translation
difference
-21
17,865
shareholders
income
Comprehensive
179
Consolidated Financial Statements Consolidated Statement of Changes in Net Equity
17,914
-510
-173
41
1,324
17,233
Total equity
interests
48
21
-12
2
3
33
Non-controlling
Cash flow hedge
debt instruments
-1
-1
net retained profit
Retained earnings/
11,507
-21
-510
-162
-312
1,320
11,192
Retained earnings
3,814
3,814
Capital reserves
168
168
Subscribed capital
equity
397
397
12,525
Gains/losses
1,320
-510
Fair value reserve for
recognized in equity
1,980
350
1,629
Gains/losses
79
-4
76
7
Fair value reserve for
equity instruments
defined benefit plans
-1,729
-2
-388
-1,340
Remeasurement of
13,158
-16
-162
Jan. 1,
Profit
€ million
reserve
-128
-7
-121
Cash flow hedge
debt instruments
-1
-1
Fair value reserve for
recognized in equity
1,629
581
1,048
Gains/losses
equity instruments
7
-16
29
-6
Cost of cash flow
Fair value reserve for
-1
-33
63
Non-controlling
shareholders
17,200
-3
-55
-515
-162
569
3,374
13,992
to Merck KGaA
Equity attributable
difference
1,790
619
1,171
Currency translation
hedge reserve
-32
General partner's
defined benefit plans
59
Capital reserves
168
168
Subscribed capital
equity
397
397
General partner's
565
565
Equity capital
consolidation/other
of Dec. 31,
2018
Transactions
with no change
of control
Profit transfer to/from
E. Merck KG including
changes in reserves
recognized in Dividend
equity payments
after tax
2018
3,814
-1,340
3,814
8,566
-41
-1,358
Remeasurement of
retained profit
12,525
-46
-55
-515
-162
3,374
9,930
Retained earnings/net
11,192
-3
-55
-515
-162
-12
3,374
Retained earnings
Women on the Supervisory Board
565
Equity capital
Payments for acquisitions less acquired cash and cash equivalents (net)
Payments for investments in financial assets
Proceeds from the disposal of property, plant and equipment
Payments for investments in property, plant and equipment
Proceeds from the disposal of intangible assets
Payments for investments in intangible assets
thereof: from discontinued operation
Net cash flows from operating activities
Proceeds from the disposal of other financial assets
Other non-cash income and expenses
Changes in other assets and liabilities
Changes in provisions
Changes in trade accounts payable/refund liabilities
Changes in trade accounts receivable
Changes in inventories
Depreciation/amortization/impairment losses/reversals of impairment losses
Profit after tax
€ million
Neutralization of gains/losses on disposal of fixed assets and other disposals
Payments for the acquisition of non-financial assets
Proceeds from the disposal of non-financial assets
Payments for the disposal of assets held for sale
3,396
1,324
2018
2019
Note
thereof: from discontinued operation
Net cash flows from financing activities
Repayment of other current and non-current financial debt
Payments from new borrowings of other current and non-current financial debt
Proceeds from the issuance of bonds
Repayment of bonds
Repayment of financial debt to E. Merck KG
Proceeds from new borrowings of financial debt from E. Merck KG
Profit withdrawal by E. Merck KG
Dividend payments to non-controlling interests
Dividend payments to Merck KGaA shareholders
thereof: from discontinued operation
Net cash flows from investing activities
Proceeds from the disposal of assets held for sale less transferred cash and cash equivalents
Consolidated Cash Flow Statement
177
Consolidated Cash Flow Statement
Consolidated Financial Statements
1,127
38
2,215
4,550
37
600
933
26
Other current financial liabilities
Current financial debt
Current provisions
Current liabilities
11,138
14,056
Corporate Governance Objectives of the Supervisory Board with respect to its Composition and Profile of Skills and Expertise
171
Objectives of the Supervisory Board with respect to its composition
According to section 5.4.1 (2) of the German Corporate Governance Code in the version dated February 7, 2017, the Supervisory
Board specified the following objectives regarding its composition, and reports below on their status of implementation.
Internationality
1,077
1,944
Trade and other current payables
Income tax liabilities
1 Previous year's figures have been adjusted, see Note (45) "Effects from new accounting standards and other presentation changes".
36,888
43,811
Total equity and liabilities
8,517
11,842
1,211
1,211
28
1,176
1,402
17
472
565
11
1,766
2,054
29
Other current non-financial liabilities
Refund liabilities
1,812
-324
-172
5
Changes in cash and cash equivalents due to currency translation
1,586
-1,395
Changes in cash and cash equivalents
5
5
-2,825
1,902
41
-1,821
-782
32
1,193
3,482
-323
-1,290
-319
-418
Cash and cash equivalents as of January 1
375
2,170
Cash and cash equivalents as of December 31 (consolidated balance sheet)
2019
in scope of Dec. 31,
Change
Transactions
with no change
of control consolidation/Other
Profit transfer to/from
E. Merck KG including
changes in reserves
recognized in Dividend
equity payments
Profit
after tax
2019
€ million
Jan. 1,
Gains/losses
Comprehensive
income
For details see Note (34) "Equity."
Consolidated Statement of Changes in Equity
178
Consolidated Financial Statements Consolidated Statement of Changes in Net Equity
2,170
781
35
-5
589
565
406
-515
67
-106
-208
23
24
2,219
2,856
9
11
53
-2,733
-57
-288
-391
199
153
104
201
-109
-47
-813
-593
-910
31
-13
-12
-162
-162
3,042
-129
5
3,129
2,191
-6,153
10
20
-130
501
-500
55
140
-5,020
-75
-196
31
Changes in scope
1,288
1,828
1,294.331
IFRS 9
medium
Other financial assets
yes
36,43
Determination of fair values of contingent
considerations
Determination of fair values of equity instruments
258
IFRS 13
high
399 IFRS 9, IFRS 13
medium
Provisions for pensions and other post-
employment benefits
yes
32
Determination of present value of defined-benefit
obligations
-5,644
IAS 19
medium
-1,424
Other provisions and contingent liabilities
no
Determination of loss allowance
24, 42
yes
3,488
Determination of depreciation
IAS 16
medium
Identification of impairments or reversal of
impairments
IAS 36
medium
Leases
21
Recognition and measurement of lease
557
arrangements
IFRS 16
medium
yes
Inventories
3,342
no
23
Identification of impairments or reversal of
impairments
IAS 2
medium
Trade and other receivables
26, 27,
33
high
Determination of fair values of share-based payment
programs
Collaboration agreements
IAS 12
medium
27
IAS 12
Assets held for sale
high
no
5
Date on which assets and liabilities are classified as
"held for sale"
IFRS 5
medium
Consolidated Financial Statements
Notes
General Disclosures
184
(4) Subsequent events
Subsequent to the balance sheet date, no events of special importance occurred that could have a material impact on the net
assets, financial position or results of operations.
Addendum dated May 12, 2020
These consolidated financial statements were originally prepared on February 14, 2020 by the Executive Board of Merck
KGaA. The rapid development of Covid-19 into a global pandemic implies the following consequences for the net assets,
financial position and results of operations of the Merck Group, which were not expected based on the information available
on the date of preparation, namely February 14, 2020.
As a result of the Covid-19 pandemic, the net assets, financial position and results of operations could be lowered in the
remainder of fiscal 2020 particularly as a result of the absence of customer orders, temporary plant closures and supply chain
restrictions. In addition, deteriorations in the credit ratings of customers triggered by the Covid-19 pandemic could make it
necessary to increase the allowances for trade receivables. Additional burdens stemming from the Covid-19 pandemic could
also result from necessary impairments of non-financial assets as well as the deterioration of refinancing conditions in the
capital market.
The aforementioned developments presented as an addendum to the financial statements prepared on February 14, 2020
have led to corresponding changes to the Report on Risks and Opportunities as well as on the Report on Expected
Development that were made in the relevant chapters of the combined management report and accordingly identified as
subsequent changes. The annual financial statements of Merck KGaA were changed on May 12, 2020 owing to the
aforementioned impacts of the Covid-19 pandemic since these developments represent a transaction of particular significance
which is to be classified as a value-relevant event within the meaning of section 285 No. 33 of the German Commercial Code
(HGB). The adaptation of the combined management report gave rise to these consolidated financial statements.
Group Structure
Recognition of deferred tax assets from tax loss
carryforwards
from temporary differences
Recognition and measurement of deferred taxes
high
IAS 37
IFRS 2
medium
yes
6
IFRS 11
medium
Classification of joint arrangements
Revenue recognition for upfront and milestone
payments in collaboration agreements
Revenue recognition
20
medium
11
Measurement of sales deductions and refund
liabilities
-565
IFRS 15
medium
Income tax
no
17
Recognition and measurement of income tax
liabilities
-1,402
IAS 12
no
no
6,213
Property, plant and equipment
The preparation of the consolidated financial statements requires Merck to make discretionary decisions and assumptions as well as
estimates to a certain extent. The discretionary scope and estimation uncertainty are assessed in a Merck-specific manner. For
example, significant discretion exists if extensive assumptions have to be made as part of the recognition or measurement of
accounting matters. Estimation uncertainty is measured by the reliability and availability of historical experience and external data.
The accounting matters with the most significant discretionary decisions, and the most comprehensive assumptions relating to the
future and sources of estimation uncertainty, are described below:
(3) Discretionary decisions and sources of estimation uncertainty
183
General Disclosures
Notes
Consolidated Financial Statements
1.144
34.958
1,271.164
1.121
33.608
35.544
1.181
34.578
1.121
U.S. dollar (USD)
Taiwan dollar (TWD)
1,295.177
1,300.959
South Korean won (KRW)
1.128
1.086
1.153
1.112
Swiss franc (CHF)
Accounting matter
126.131
Goodwill
IFRSS
medium
IAS 38
Determination of amortization
medium
IAS 38
yes
high
IFRS 3
5, 19
yes
9,175
In-licensing of intangible assets
within the scope of business combinations
Identification and measurement of intangible assets
Other intangible assets
high
IAS 36
Determination of recoverable amount
18
yes
17,141
Note
Discretionary
scope/estimation Sensitivity
uncertainty analysis
Carrying amount as of
Dec. 31, 2019 in € million
7.869
7.803
121.765
130.372
Notes
Consolidated Financial Statements
• Amendment to IFRS 3 "Business Combinations"
• IFRS 17 "Insurance Contracts"
As of the balance sheet date, the following standards were published by the International Accounting Standards Board, but not yet
endorsed by the European Union:
Standards published but not yet endorsed by the European Union
We did not opt for early application of any of these standards. These regulations are not expected to have a material effect on the
consolidated financial statements.
• Amendments to References in the Conceptual Framework in International Financial Reporting Standards
• Amendment to IFRS 9 "Financial Instruments"
• Amendment to IFRS 7 "Financial Instruments: Disclosures"
• Amendment to IAS 39 "Financial Instruments: Recognition and Measurement"
• Amendment to IAS 8 "Accounting Policies, Changes in Accounting Estimates and Errors"
• Amendment to IAS 1 "Presentation of Financial Statements"
The following regulations are binding as of fiscal 2020:
Regulations binding as of fiscal 2020
The other new regulations applicable for the first time in fiscal 2019 did not have a material impact on the consolidated financial
statements.
181
General Disclosures
Notes
Consolidated Financial Statements
Identification of impairments or reversal of
impairments
IAS 36
medium
General Disclosures
182
From today's perspective, the new rules, if endorsed, are not expected to have any material effects on the consolidated financial
statements.
122.314
Japanese yen (JPY)
7.815
7.740
Chinese renminbi (CNY)
Dec. 31, 2018
Dec. 31, 2019
2018
Closing rate
Average rate
2019
€1 =
Consolidated Financial Statements
The exchange rates of the most significant currencies in these consolidated financial statements were as follows:
Argentina's economy has been classified as hyperinflationary in accordance with IAS 29 "Financial Reporting in
Hyperinflationary Economies". Accordingly, Merck's business activities in Argentina are no longer disclosed at historical cost
but are presented adjusted for inflation. For this purpose, Merck uses a combination of the wholesale index IPIM (Índice de
precios internos al por mayor) and the consumer price index IPC (Índice de precios al consumidor). The index applied as of
the balance sheet date stood at 3,722.0 (December 31, 2018: 2,462.1 / January 1, 2018: 1,656.6).
Hyperinflation
The financial statements of consolidated companies prepared in foreign currencies are translated into the reporting
currency, euros. In this process, assets and liabilities are measured at the closing rate, and income and expenses are
measured at average rates. Any currency translation differences arising during consolidation of Group companies are
recognized in equity.
Translation of financial statements into the reporting currency (euro)
When the financial statements of consolidated companies are prepared, business transactions that are conducted in
currencies other than the functional currency are translated using the exchange rate on the date of the transaction.
Transactions in non-functional currency
Some subsidiaries, particularly in the Performance Materials business sector, use the U.S. dollar as a functional currency in
deviation from the local currency.
To a predominant extent, the subsidiaries of Merck KGaA conduct their business independently so that the functional
currency is normally the respective local currency.
Functional currency
currency translation
Accounting and measurement policies
Exchange rates of most significant currencies
Notes
Recognition and measurement of other provisions
and contingent liabilities
185
62
56
5,198
Purchase price for acquiring the shares
Positive difference (goodwill)
2,115
22
39
2,054
Net assets acquired
2,156
7
22
2,127
Total liabilities
351
1
5
345
166
4
161
Other current liabilities and provisions
122
Furthermore, collaboration agreements in the Healthcare business sector typically allocate the sales generated in specific
markets, or with specific products, to the respective collaboration partners in the event of a successful approval; in turn,
specific income and expense items are carried by the collaboration partners according to predefined allocation ratios. Under
these circumstances, Merck recognizes the sales from the commercialization of products to third-party customers, if Merck
takes on the role of a principal within the meaning of IFRS 15. Expenses resulting from payments made to collaboration
partners in connection with profit share agreements are recognized in other operating expenses.
122
5,316
17
Total
2,848
20
26
2,895
In addition to traditional agreements for buying or selling intellectual property, Merck enters into collaboration agreements
in which the Group works with partners to develop pharmaceutical drug candidates and, if regulatory approval is granted,
to commercialize them. Because the partner companies do not have customer characteristics, these collaboration
agreements do not fall directly within the scope of IFRS 15 and the associated income from upfront payments, milestone
payments, and royalties is shown under other operating income. Reimbursements of research and development costs made
between the collaboration partners are recognized on a net basis in research and development costs. The two most
significant collaborations are the agreements with Pfizer Inc., United States, (Pfizer) and with GlaxoSmithKline plc, United
Kingdom, (GSK) in the field of immuno-oncology.
Collaboration agreements in the Healthcare business sector
Accounting and measurement policies
(6 Collaboration agreements
On October 18, 2018, Merck signed an agreement with Luminex Corporation, United States, concerning the divestment of the flow
cytometry business. These business activities comprised the flow cytometry platforms AmnisⓇ and GuavaⓇ as well as the associated
reagents under these brands. The disposal proceeds amounted to € 66 million, of which € 61 million were paid in fiscal 2018. The
remaining € 5 million were paid in fiscal 2019. The transaction was completed on December 31, 2018. This divestment generated a
disposal gain of € 9 million which was recognized in other operating income in fiscal 2018. Adjustments to the disposal gain of
€ -8 million were recognized in 2019.
Divestment of the flow cytometry business
In accordance with IFRS 5, the financial figures disclosed in these consolidated financial statements relate exclusively to continuing
operations unless expressly stated otherwise. Earnings contributions from supplies and services provided by Merck after the
conclusion of the sale transaction according to contractual agreements were presented in the profit from continuing operations both
for 2018 and for 2019.
On April 19, 2018, Merck signed an agreement on the divestment of its global Consumer Health business to The Procter & Gamble
Company, United States. The transaction was completed on December 1, 2018. The selling price was € 3.4 billion in cash and
included purchase price adjustments for transferred operating assets, cash on hand, and borrowed capital, among other things.
Final determination of these purchase price adjustments was made in the first half of 2019. In the process, Merck was able to
collect an additional € 52 million. The income and costs connected with the sale came to € 28 million and were reported under profit
after tax from discontinued operation. The payments from discontinued operations of € 129 million shown in the consolidated cash
flow statement in net cash flows from investing activities were mainly attributable to tax payments related to the divestment of the
Consumer Health business, and to the cash inflows for the purchase price adjustment.
Divestment of the Consumer Health business
190
Group Structure
Notes
Consolidated Financial Statements
The assessment as to when a non-current asset, disposal group, or discontinued operation meets the prerequisites of
IFRS 5 for classification as "held for sale" is subject to discretionary judgment. Even in the case of an existing management
decision to review a disposal, an uncertain assessment has to be made as to the probability of whether a corresponding
disposal will occur during the year.
SIGNIFICANT DISCRETIONARY DECISIONS AND SOURCES OF ESTIMATION
Divestitures in 2018
3,201
40
3,144
Income tax liabilities
63
1
18
1
755
4,180
61
29
4,270
Non-current liabilities
Non-current financial debt
938
11
949
Other non-current provisions and liabilities
81
81
-
Deferred tax liabilities
763
5
6
774
1,782
16
737
95
8
87
Group Structure
61
Trade payables and other liabilities
Current liabilities
534
19
553
62
4
2
68
Other acquisitions
3,444
28
3,515
224
1
226
155
2
157
270
7
277
43
6
Intermolecular
Fair value at the acquisition date (preliminary)
Purchase price for 100% of the shares at the closing rate on October 7, 2019
Reclassification of income from hedging transactions from other comprehensive income to assets
Purchase price in accordance with IFRS 3
Cash and cash equivalents acquired
Payments for 100% of shares less acquired cash and cash equivalents
€ million
5,279
-81
5,198
270
4,928
As part of the acquisition the parties did not agree on any contingent consideration to be provided by Merck in the future. The
majority of the currency risk arising from payment of the purchase price for Versum in U.S. dollars was hedged as part of a hedging
strategy using derivative financial instruments (forward exchange contracts and currency options) in accordance with the
regulations for cash flow hedge accounting. The resulting income of € 81 million was taken into consideration in determining the
purchase price in accordance with IFRS 3.
Consolidated Financial Statements
Notes
Group Structure
187
The preliminary fair values at the acquisition date are presented in the "Overview of preliminary fair values of acquisitions in 2019"
section.
Material contingent liabilities were not identified as part of the preliminary purchase price allocation. The following overview shows
the intangible assets identified within the scope of the preliminary purchase price allocation and recognized at the acquisition date:
€ million years(preliminary)
Customer relationships
Technology (patented and unpatented)
Trademark
Total
Goodwill
Total
As control over Versum was obtained on October 7, 2019, and essential information for determining the purchase price allocation
could only be obtained after that date for legal reasons, the purchase price allocation was only completed for some assets and
liabilities such as cash and cash equivalents, trade payables, and financial debt as of December 31, 2019.
The purchase price for the acquisition of Versum was fully paid in cash. The payments were as follows:
Purchase price allocation
Versum is one of the world's leading providers of process chemicals, gases, and equipment for semiconductor manufacturing. In
fiscal 2018, the company generated annual sales of around € 1.2 billion in accordance with U.S. GAAP. Versum has around 2,300
employees and operates 14 production sites and seven research and development facilities in Asia and North America. The former
Versum business will be integrated into the Semiconductor Solutions business unit, which is part of the Performance Materials
business sector. The objective of the transaction is to create a leading player in the field of electronic materials specializing in the
semiconductor and display industries.
Versum's business activities
(5) Acquisitions and divestments
ACCOUNTING AND MEASUREMENT POLICIES
BUSINESS COMBINATIONS
The balance sheet items intangible assets and deferred taxes are significantly influenced by purchase price allocations
within the scope of business combinations. Because prices observable on the market are mostly not available for the
acquired intangible assets, a valuation using inputs observable in the market is usually performed. For all material
company acquisitions, Merck relies on the expertise of external professionals. The following overview shows the
methods routinely used to measure intangible assets within the scope of purchase price allocations:
Customer relationships
Technology
Trademark
Measurement method for determining fair value
Multi period excess earnings method
Relief from royalty method
Relief from royalty method
Results from foreign currency hedging of expected business combinations, if they meet the requirements for hedge
accounting, are offset against the carrying value of the net assets acquired.
SIGNIFICANT DISCRETIONARY DECISIONS AND SOURCES OF ESTIMATION UNCERTAINTY -
BUSINESS COMBINATIONS
The recognition and measurement of assets, liabilities, and contingent liabilities at fair value within the context of purchase
price allocations are associated with significant estimation uncertainty.
Fair value at the acquisition date
In particular, estimation uncertainty and discretionary decisions exist regarding:
⚫ the license rate for technologies, which estimates royalty savings on the basis of comparable transactions of similar
technologies,
⚫ the discount factor, which is applied for maturity- and risk-based discounting of expected cash inflows,
⚫ the useful life and the degree of technical obsolescence which depend, among other things, on assumptions about
technological trends.
The most important acquisition in fiscal 2019 was Versum Materials, Inc., United States, (Versum). Customer relationships
represent the largest intangible asset in terms of value. For their measurement, assumptions, particularly concerning the
customer attrition rate and thus their useful life, had to be made. If the customer retention period were one year longer,
the fair value of customer relationships recognized as part of intangible assets would be € 44 million higher on the date of
their acquisition. A shortening of the retention period by one year would reduce the fair value of customer relationships by
€ 46 million.
Consolidated Financial Statements
Notes
Group Structure
186
Acquisitions in 2019
Acquisition of Versum Materials, Inc., United States
On April 12, 2019, Merck announced the conclusion of a final agreement to acquire all issued and outstanding shares of Versum for
US$53 per share in cash. The transaction closed on October 7, 2019. Its completion followed previous approvals issued by the
relevant authorities, the approval of the shareholders of Versum and the fulfillment of other customary closing conditions.
⚫ the customer churn rate, which indicates how existing customer relationships will change in the future,
Versum
Useful life
7-19
To a predominant extent, the intangible assets identified within the scope of the purchase price allocation and recognized as of the
initial consolidation date were attributable to intangible assets related to technology. The preliminary assets and liabilities
recognized as of the acquisition date are presented in the section "Overview of preliminary fair values of acquisitions in 2019". The
purchase price allocation for Intermolecular was still incomplete as of December 31, 2019, in respect to the intangible assets and
deferred taxes.
Since the company was included in September, the former Intermolecular business contributed € 3 million to Group net sales
and € 4 million to net income after tax. The impact of a notional consolidation of Intermolecular as of January 1, 2019, on the
Group's net assets, financial position, and results of operations is immaterial. Costs of € 2 million associated with the company's
acquisition were recognized in other operating expenses.
Additional acquisitions in 2019
On June 17, 2019, Merck acquired the laboratory informatics provider BSSN Software GmbH, Darmstadt, (BSSN). BSSN develops
and markets software for managing and integrating data, which unifies data from laboratory instruments and data systems and
makes them available for analyzing, processing, and sharing. The business was integrated into the Life Science business sector. The
purchase price amounted to € 16 million including milestone payments amounting to € 6 million for reaching technological
development targets. As of December 31, 2019, the purchase price allocation had not yet been completed.
The closing of the acquisition of FloDesign Sonics, Inc., United States, (FloDesign) was announced on October 10, 2019. The
company developed a platform for industrial manufacturing of cell and gene therapies that allows cells to be manipulated using
ultrasonic waves. It forms part of the Life Science business sector.
The purchase price included fixed compensation of € 32 million. Future milestone payments of up to € 30 million for the
achievement of technological development targets and a further, sales-independent milestone payment were agreed as further
elements of the purchase price. Valuation of the contingent purchase price payments resulted in a purchase price of € 46 million in
accordance with IFRS 3. The intangible assets identified within the scope of the preliminary purchase price allocation and recognized
as of the initial consolidation date were attributable to technology-related intangible assets.
Costs of € 1 million associated with the acquisitions of BSSN and FloDesign were recognized in other operating expenses.
Consolidated Financial Statements
Notes
Group Structure
189
Overview of Preliminary Fair Values of Acquisitions in 2019
€ million
Non-current assets
Intangible assets (excluding goodwill)
Property, plant, and equipment
Other non-current assets
Current assets
Inventories
Trade receivables and other current receivables
Cash and cash equivalents
Other current assets
Total assets
In fiscal 2018, Intermolecular generated sales of US$ 34 million and had around 90 employees.
Intermolecular possesses application-specific materials expertise and platforms for accelerated learning and experimentation with a
powerful analysis infrastructure that complements Merck's business and technology portfolio in the semiconductor business, part of
the Performance Materials business sector.
Merck completed the acquisition of Intermolecular, Inc., United States, on September 20, 2019, for US$ 1.20 per share in cash (the
equivalent of € 56 million for 100% of shares). The transaction followed the approval of the authorities and fulfillment of other
customary closing conditions.
Acquisition of Intermolecular, Inc., United States
Merck recognizes the consideration received in the course of collaboration agreements for bundled obligations arising from
granting rights to intellectual property as well as other goods and services promised as income over a period of time, in
line with industry practice. Income is caught up cumulatively upon receipt of uncertain future milestone payments
attributable to contractual obligations which have already been fulfilled. This refers especially to milestone payments
subsequent to regulatory approval.
476
45
5-15
12
2,848
3,144
5,992
indefinite
The preliminary positive difference of € 3,144 million was recognized as goodwill. It includes expected synergies resulting from the
integration of Versum into the Merck Group, expected revenues from technical innovations and developments that go beyond the
current product, development, and customer portfolios, and unrecognized intangible assets such as the expertise of the workforce.
The goodwill was allocated in full to the Performance Materials business sector. The goodwill is expected to be non-tax deductible.
The change in goodwill valued in foreign currency between initial recognition and December 31, 2019 is broken down as follows:
€ million
Goodwill on October 7, 2019
2,326
Exchange rate effects
Financing the acquisition
Change in goodwill
3,144
-64
3,080
To finance the purchase price, Merck issued a hybrid bond in two tranches on June 18, 2019, with a volume of € 1.5 billion and on
July 1, 2019, bonds with a volume of € 2 billion. The hybrid bond comprises two tranches with maturities of 60 years each. Each
tranche includes a redemption option for Merck after 5.5 and ten years.
Sales and earnings contribution from Versum
For the 86 calendar days to the end of the year 2019, the former Versum business contributed € 247 million to Group net sales
and € -49 million to net income after taxes. This result reflects the higher cost of sales resulting from adjusting acquired
inventories to their preliminary fair values and amortization of revalued assets.
Assuming that Versum had already been initially consolidated as of January 1, 2019, the Merck Group would have
generated € 17,040 million in net sales (compared to reported net sales of € 16,152 million) and net income after taxes
of € 1,365 million (compared to reported net earnings of € 1,324 million) for the period of January 1 to December 31, 2019. When
calculating these figures it was assumed that the adjustments to carrying amounts resulting from the purchase price allocation
had been identical and would have been taken into account in accordance with their useful life in terms of their effects on the
consolidated income statement. Furthermore, it was assumed that the financing of the acquisition had already taken place as of
January 1, 2019. There were only immaterial business relationships between Merck and Versum in 2019 up to the acquisition date
(sales volume of less than € 10 million). Costs of € 44 million associated with the company's acquisition were recognized in other
operating expenses.
Consolidated Financial Statements
Notes
Group Structure
188
Goodwill on December 31, 2019
1,805
In August, we acquired all ownership rights to the ProcessPad™ platform from Simplyfeye Softwares Private Limited. Adding to our
biopharmaceutical product portfolio, the web-based platform provides easy, on-demand access to data for aggregation, analysis,
visualization, and management. It advances our BioContinuum™ Platform by adding a building block that connects across functions
and with suppliers to deliver continuous manufacturing.
On the occasion of the annual meeting of the European Society of Human Reproduction and Embryology (ESHRE), we launched the
Medical Innovation Program (MIP) for human reproduction. This initiative strives to support early stage innovation in key areas
highlighting our continued commitment to open innovation. The MIP will support collaboration and co-development, bringing
together internal and external expertise, and serves as a platform for interdisciplinary, conceptual, and methodological debate on
how to provide new solutions to boost innovation in human reproduction.
-
Every day, more than 72 million patients around the world use our trusted general medicine and endocrinology (GM&E)
medications. Concor®, Euthyrox®, Glucophage®, and SaizenⓇ are highly valued brands and market leaders in many key markets
worldwide. As a result, GM&E is the largest business franchise of the Healthcare business sector in terms of sales, with strong
growth in all major therapeutic areas of focus, contributing significantly to the overall profitability of Biopharma and Merck.
Although no longer patent-protected, the brand equity of our products, built up over decades, makes them cornerstones for the
treatment of chronic cardiovascular, metabolic, and endocrine diseases.
The PergoverisⓇ Pen is the first product with a combination of recombinant follicle-stimulating hormone (FSH) and recombinant
luteinizing hormone (LH) in a ready-to-use liquid version, eliminating the need for mixing. It thus provides an improved and
convenient treatment option for women with severe deficiency of both FSH and LH, a group of patients that is difficult to treat.
Launches will continue. The PergoverisⓇ Pen has now been launched in 23 countries and we will continue to provide patients with
access to this innovative therapeutic.
specialized market, the focus lies on quality, standardization, outcome improvements, and patient convenience. With our portfolio,
we are well equipped to be the Fertility partner of choice for our customers and to further improve assisted reproductive
technologies (ART) through innovative solutions across therapeutics, lab technologies, services, and digital health solutions.
14
Combined Management Report Fundamental Information about the Group Fundamental Information about the Group
Being the global market leader in fertility drugs and treatments, with a unique and broad portfolio from therapeutics to lab
technologies, our Fertility franchise is an important growth driver for our Biopharma business. Infertility represents an increasing
challenge globally due to demographic changes and growing lifestyle adjustments like delayed childbearing. In this highly
In February 2019, we entered a global strategic alliance with GlaxoSmithKline (GSK) to jointly develop and commercialize the
investigational bifunctional fusion protein immunotherapy bintrafusp alfa, discovered as a result of our own research. In 2019, we
achieved our alliance objective of eight trials ongoing or with protocol under development, including our most recent clinical trial
initiations in October in 1L biliary tract cancer (BTC) (for further details see "Research & Development").
Other highlights from our development pipeline included the presentation of new data for our investigational oral MET inhibitor,
tepotinib, in advanced solid tumors. In September, we shared important milestones for two combination studies of tepotinib in
locally advanced or metastatic non-small cell lung cancer (NSCLC) with epidermal growth factor receptor (EGFR) mutation and
select MET dysregulations. In September, we announced that the FDA granted Breakthrough Therapy Designation (BTD) for
tepotinib in patients with metastatic NSCLC harboring MET exon 14 skipping alterations who progressed following platinum-based
cancer therapy. In November, we reported that the Japanese Ministry of Health, Labour and Welfare (MHLW) granted orphan drug
designation (ODD) for tepotinib for patients with NSCLC-harboring MET gene alterations.
We are continuing to explore all potential options and have entered into a number of strategic collaborations to evaluate avelumab
in combination with a range of complementary oncology medicines (for further details see "Research & Development"). Key data
from the JAVELIN program was presented at major medical congresses in 2019, including the European Society for Medical
Oncology Congress (ESMO), where we shared new results from the Phase III JAVELIN Renal 101 study evaluating the efficacy of
first-line treatment with avelumab in combination with axitinib compared with sunitinib in two clinically relevant subgroups of
patients with advanced RCC.
The BavencioⓇ approvals were based on data from our comprehensive clinical development program JAVELIN, which currently
involves at least 30 clinical programs and more than 10,000 patients evaluated across more than 15 different tumor types.
BavencioⓇ was initially granted two approvals in 2017 by the FDA for the treatment of adults and pediatric patients 12 years and
older with metastatic Merkel cell carcinoma (mMCC) and previously treated patients with locally advanced or metastatic urothelial
carcinoma (UC). These indications were granted accelerated approval based on tumor response rate and duration of response.
Continued approval for these indications may be contingent upon verification and description of clinical benefit in confirmatory
trials. The prognosis for both patient groups is very poor, so avelumab may represent a welcome new treatment option.
Together with Pfizer Inc., we are developing much-needed new treatment options for patients with hard-to-treat cancers. We have
made key progress in this area, with regulatory approvals in more than 50 countries for our anti-PD-L1 antibody avelumab under
the brand name BavencioⓇ. In May, we and our alliance partner Pfizer announced that the FDA had approved BavencioⓇ in
combination with axitinib for the first-line treatment of patients with advanced renal cell carcinoma (RCC). In October, we and Pfizer
reported that the European Commission (EC) had also approved BavencioⓇ in combination with axitinib for the first-line treatment
of adult patients with advanced RCC.
(cetuximab) remains the second best-selling drug in terms of revenue in the portfolio of our Biopharma business and is
our flagship product in oncology. Treating more than 900,000 patients since authorization, the product is a standard of care for
patients with epidermal growth factor receptor (EGFR)-expressing, RAS wildtype metastatic colorectal cancer (mCRC), as well as
both recurrent and/or metastatic and locally advanced squamous cell carcinoma of the head and neck (SCCHN). We continue to
invest in cetuximab and are committed to making it available to those patients it will benefit most. In September, ErbituxⓇ
obtained the approval of the National Medical Products Administration of China in mCRC.
Erbitux Ⓡ
In September, we initiated two global pivotal Phase III trials of evobrutinib, an oral, highly selective Bruton's tyrosine kinase (BTK)
inhibitor in adult patients with RMS. Evobrutinib was developed within our own laboratories and further demonstrates our
commitment to improving the lives of people with MS and other chronic progressive diseases (for further details see "Research &
Development").
We view Mavenclad Ⓡ as a complementary oral treatment option in our MS product portfolio. Rebif® (interferon beta-1a), a
disease-modifying drug used to treat relapsing forms of MS (RMS), is and remains a well-established therapy. Rebif® is registered
in more than 90 countries worldwide. Interferon beta-1a has been proven to delay the progression of disability, reduce the
frequency of relapses, and reduce magnetic resonance imaging (MRI) lesion activity and area.
13
Combined Management Report Fundamental Information about the Group Fundamental Information about the Group
* The contents of this chapter or section are voluntary and therefore not audited. However, our auditor has read the text critically.
1 Merck also has employees at sites that are not fully consolidated subsidiaries. These figures refer to all people directly employed by Merck and therefore may deviate
from figures in the financial section of this report.
At the end of March 2019, MavencladⓇ (cladribine tablets) was approved in the United States, the market with the greatest number
of people living with MS. MavencladⓇ was approved for the treatment of adults with relapsing-remitting MS (RRMS) and active
secondary progressive MS (SPMS). Our cladribine tablets have been approved by the FDA as a treatment for RRMS and SPMS that
provides two years of proven efficacy, with a maximum of 20 days of oral treatment during a two-year period. With U.S. approval,
MavencladⓇ is now approved in more than 70 countries, including those of the European Union, Australia, Canada, and Switzerland.
Our Biopharma business discovers, develops, manufactures and markets innovative pharmaceutical and biological prescription drugs
to treat cancer, MS, infertility, growth disorders, and certain cardiovascular and metabolic diseases. Biopharma is the larger of our
Healthcare businesses and operates in four franchises: Oncology, Neurology & Immunology, Fertility, and General Medicine &
Endocrinology. Our R&D pipeline positions us with a clear focus on becoming a global specialty innovator in oncology, immuno-
oncology, and immunology including multiple sclerosis (MS).
Biopharma*
ConcorⓇ, containing bisoprolol, is the leading beta-blocker for chronic cardiovascular diseases such as hypertension, coronary
artery disease, and chronic heart failure. EuthyroxⓇ, with the active ingredient levothyroxine, is the worldwide market leader with
a market share of 28% in volume for the treatment of hypothyroidism, a disease with high prevalence but still low diagnosis rates
in most emerging markets. Glucophage®, containing the active ingredient metformin, is the drug of choice for first-line treatment
of type 2 diabetes. During 2019, multiple health authorities worldwide continued to approve GlucophageⓇ in prediabetes when
intensive lifestyle changes have failed. This indication for Glucophage® is now registered in 53 countries. Overall, considering the
high prevalence of prediabetes and diabetes, we see great potential for GlucophageⓇ.
We help to raise awareness and education in the areas we operate in, such as thyroid diseases and diabetes. This is well
demonstrated by our active role in International Thyroid Awareness Week and our partnership with the International Diabetes
Federation (IDF), which serves as a basis for implementation of education and communication activities that emphasize the
importance of type 2 diabetes prevention.
SaizenⓇ, with its active ingredient somatropin, is our main endocrinology product and is indicated for the treatment of growth
hormone deficiency in children and adults. SaizenⓇ is delivered with the Easypod® electromechanical injection device, the only
growth hormone injection device of its kind. Easypod® is able to wirelessly transfer data such as injection times, dates, and doses
to the web-based software system Easypod® connect, making it easier for healthcare practitioners and patients to ensure
adherence and reach their treatment goals.
In endocrinology, we differentiate ourselves from competitors through leadership in the eHealth space, both by building evidence
and by expanding our offerings with new services for patient engagement, partnership with healthcare practitioners, and better
payer value proposition. In 2019, Aluetta® (the new Saizen Ⓡ pen) was launched with the objective of expanding the reach of
SaizenⓇ by tapping strategic segments and expanding our devices portfolio.
-
Our CRISPR Core Partnership Program continues to add more members each year. The program, which started in 2014, accelerates
collaboration on cutting-edge, gene-editing techniques with diverse and advanced CRISPR workflow solutions. In March, we
announced the addition of China's Zhejiang University to our Core Partnership Program, which will utilize our Arrayed CRISPR
Library to assist in discovering the relevance of specific genes in biological functions. With more than 80 core partners in our global
network, this addition demonstrates our dedicated collaboration to promote ethical scientific exploration in genome editing.
In July, we simplified the path to licensing CRISPR technology for commercial research and product development through an
agreement with the Broad Institute of MIT and Harvard in Massachusetts, United States. With this unique offering, Life Science
collaborates to ease navigation of the complex intellectual property landscape of CRISPR patents, encouraging participation and
innovation in this area. Additionally, in November, we licensed our foundational CRISPR intellectual property to Evotec SE, an
international biotechnology company headquartered in Hamburg, Germany, again demonstrating our promise to accelerate
discovery and research that may lead to new therapies.
Our portfolio now includes 22 patents for CRISPR technology granted worldwide, including 10 additions throughout 2019 in Canada,
Europe, Israel, South Korea, the United Kingdom, Japan, and Singapore.
16
Combined Management Report Fundamental Information about the Group Fundamental Information about the Group
* The contents of this chapter or section are voluntary and therefore not audited. However, our auditor has read the text critically.
DNA.
In February 2019, Life Science made the first of several announcements regarding our CRISPR intellectual property portfolio for
genome editing. CRISPR functions as a core competency for our business sector and we support research with genome editing
under careful consideration of ethical and legal standards. In February, we received our first United States patent for proxy-CRISPR
technology. This specific technique makes CRISPR more efficient, flexible, and specific by opening the genome for modification of
Additionally, our Life Science business sector has built the expertise to further develop BrightLab™, our digital ecosystem for
complete lab management.
Another example is our BioReliance® End-to-End Solutions, a service offering for process development and manufacturing for
emerging biotech companies. In 2019, Life Science agreed to provide Phanes Therapeutics Inc. of China with this full suite of
products and services to accelerate the development and manufacturing of a bispecific antibody for the treatment of solid tumors.
Responding to an increased demand for these process solutions, this collaboration represents our dedication to delivering innovative
advancements for global clinical drug development and scaling processes. We also launched the new integrated Plug & Play
Upstream Development Service to help emerging biotech and start-up companies optimize the cost and speed of advancing their
molecules to the clinical stage.
In March, we took a further step with regard to our Life Science expansion plans by opening a new M LabTM Collaboration Center in
Molsheim, France, to serve customers in Europe, the Middle East, and Africa. With 4,000 square meters of space, this M Lab™
Collaboration Center is the first in Europe representing a € 10 million investment in the region and ninth worldwide. It includes
non-GMP pilot and bench scale labs. This allows our customers to engage in process development support, troubleshooting,
demonstrations, and hands-on training to explore new ways of increasing productivity, improving processes, and mitigating risks.
We announced continued expansion in May with our approximately € 3.1 million (£ 2.7 million) investment in our biopharmaceutical
production facility in Irvine, United Kingdom. The is our only location where we manufacture both liquid and powder cell culture
media. As a result of its expansion, we will be able to supply an additional two million liters of specialized medicine to the global
healthcare industry. Additionally, in November, we announced the completion of a 5,250-square meter expansion to our site in
Gillingham, United Kingdom, which serves as the primary distribution center for the region in our global supply chain. The addition,
valued at approximately € 10.5 million (£ 9 million), supplies the pharmaceutical industry, biotechnology companies, research
institutes, and academic centers with biochemical and chemical reagents, laboratory supplies, and testing services. Both expansions
demonstrate our commitment to the United Kingdom and to growing our global presence while providing employment opportunities.
In addition to the new expansion of these facilities, Life Science announced new product platforms for our biopharmaceutical
customers in 2019. In April, we launched the BioContinuum TM Buffer Delivery Platform. A building block of our BioContinuum™
Platform, which addresses intensified bioprocessing and continuous manufacturing, this integrated solution is tailored to provide the
highest levels of accuracy and precision in buffer preparation and management. The configurable platform supplies process buffers
at a fraction of the resources and facility space, resulting in a more streamlined buffer suite and a more efficient manufacturing
process. Its launch marked a key step in our strategy to deliver "contiguous" bioprocessing, which goes beyond connecting the
individual unit operations to include the orchestration and management of all the processing steps materials, production, testing,
and analytics ― with an industry-leading, streamlined, and optimized approach. Pilot studies suggest that conversion to such a
manufacturing method may reduce manufacturing costs by up to 50%.
Our e-commerce platform, www.sigmaaldrich.com, continues to grow and connect customers globally with the products needed to
advance their research, development, and production efforts. To expand our e-commerce reach, in 2019, Life Science became the
first in the industry to launch an official flagship store on Alibaba's 1688.com in China, providing easy access to high-quality
products and solutions for our customers in that country. The launch reinforced our commitment to the scientific community in
China and to enhancing e-commerce capabilities.
Portfolio at a glance*
In 2019, the Life Science business sector generated 42% of Group sales as well as 44% of EBITDA pre (excluding Corporate and
Other).
Since acquiring the chemical and technology company Sigma-Aldrich in 2015, our strategy includes strengthening our core business
by delivering a broad and relevant portfolio as well as establishing new pillars of growth in scientific areas, such as cell and gene
therapy and continuous bioprocessing. As determined by sales, the Life Science business sector of Merck has achieved a top-three
ranking in the global life science industry.
Our purpose is to solve the toughest challenges in the life science industry in collaboration with the global scientific community.
With our Research Solutions, Process Solutions, and Applied Solutions business units, we are a leading worldwide supplier of tools,
high-grade chemicals, and equipment for academic labs, biotech, and biopharmaceutical manufacturers, as well as the industrial
sector. Research Solutions provides our academic customers with the chemicals and tools needed to make scientific discovery
easier and faster. Process Solutions provides drug manufacturers with process development expertise and technologies, such as
continuous bioprocessing. Applied Solutions offers both testing kits and services to ensure that our food is safe to eat and our water
is clean to drink.
Life Science
We offer high dosage, hypoallergenic, standardized preparations for allergen-specific immunotherapy for pollen and house dust mite
allergies, as well as a wide range of diagnostic allergy tests. Based on long-standing expertise, scientific excellence, and
entrepreneurial responsibility, we provide physicians with first-class therapy options and help people with allergies lead more
fulfilled lives. Products of Allergopharma are available in more than a dozen countries worldwide.
15
Combined Management Report Fundamental Information about the Group Fundamental Information about the Group
* The contents of this chapter or section are voluntary and therefore not audited. However, our auditor has read the text critically.
Our allergy business Allergopharma is a leading company in the field of allergy immunotherapy (AIT) in Europe. In 2019, we
celebrated our 50th anniversary. For high-precision, effective allergy therapy, we offer comprehensive diagnosis solutions as a basis
for individual treatment concepts. Our AIT products concentrate on causal treatment of type 1 allergies such as allergic rhinitis and
allergic asthma to meet patients' needs. For AIT, strong evidence of efficacy and an acceptable safety profile have been well-
documented in allergy-induced allergic rhino-conjunctivitis in numerous clinical trials. Furthermore, there is a potential positive
effect on the long-term course of the allergic disease. AIT is designed to induce tolerance in the immune system of the allergy
patient to the allergy-triggering allergen, thus potentially inducing an immune modification.
Allergopharma*
Our portfolio comprises more than 300,000 products, ranging from lab water systems to genome-editing tools, antibodies, and cell
lines, as well as end-to-end bioprocessing systems to support the manufacturing needs of both emerging biotech and large pharma
companies. For example, our ZooMAbⓇ recombinant antibodies bring the next generation of polyclonal and monoclonal antibody
technology and production to the industry, specifically engineered for greater specificity, higher consistency, and maximum
stability.
A key goal for our Life Science business sector is to help our customers that manufacture drugs, from small to large innovator
companies, bring life-enhancing medicines and therapies to market - and to patients ― faster. To facilitate reaching this target, in
October, we became the first to make acoustic technology available for cell therapy manufacturing with the acquisition of FloDesign
Sonics of Massachusetts, United States. The unique acoustic cell processing platform will industrialize the manufacturing of
autologous cell therapy and provide revolutionary cancer treatment by way of chimeric antigen receptor T (CAR-T) cell therapies. A
strategic fit with our goal of advancing cell-based therapies to patients, the acquisition will allow further advancement toward
potentially life-saving treatments.
Working toward that same goal, we aim to optimize digitalization across Life Science to increase lab productivity, efficiency, and
safety. In March, we announced the Milli-QⓇ Connect online service portal as a cloud-based, remote lab water service and
monitoring capability. Available on all Milli-Q® CLX 7000 clinical water purification systems, this technology streamlines quality
report production, allowing increased productivity, maximal uptime, easier data traceability, and saved time.
Combined Management Report Fundamental Information about the Group
In the Surface Solutions business unit, we provide our customers with solutions that help them to create innovative surfaces of all
kinds. Our materials enable more beautiful, more resistant, and more effective products. Our pearlescent pigments allow striking
automotive coatings, fascinating cosmetics, extraordinary packaging, innovative product design, and even unique food creations.
With a broad portfolio of active ingredients, we enable cosmetics manufacturers to enrich their skin care products with moisturizing,
protecting, or anti-aging effects. Moreover, with our functional solutions we serve a large number of innovative applications, from
dirt-repellent and easy-care surfaces to laser markings of plastic parts and cables. We continue to invest in our pigment production
capabilities. In August 2019, we celebrated the topping-out ceremony for new production facilities for silica flakes in Gernsheim,
Germany. This investment will significantly increase production capacities for this special substrate, which is the basis for a whole
range of unique effect pigments. In February 2019, we implemented a new structure as announced in October 2018 to align even
more closely with the needs of our customers. We strengthened our key account approach as well as our regional setup to even
better serve the diverse needs of our regional markets. Furthermore, we are implementing measures to stabilize our business in a
market environment that has become challenging, mainly due to weaker demand from the automotive industry.
* The contents of this chapter or section are voluntary and therefore not audited. However, our auditor has read the text critically.
Strategy*
Combined Management Report Fundamental Information about the Group
Strategy
20
Purpose and Values
We are Merck, a vibrant science and technology company. Science is at the heart of everything we do. It drives the discoveries we
make and the technologies we create. Our work makes a positive difference to millions of people's lives every day.
In Healthcare, we discover unique ways to treat the most challenging diseases such as multiple sclerosis and cancer. Our Life
Science experts empower scientists by developing tools and solutions that help them to deliver breakthroughs more quickly. And
the science of our Performance Materials business sector sits inside technologies that are changing the way we access and display
information.
Everything we do is fueled by a belief in science and technology as a force for good. A belief that has driven our work since 1668,
and will continue to inspire us to find more joyful and sustainable ways to live.
We are curious minds dedicated to human progress. We believe that scientific exploration and responsible entrepreneurship are key
to technological advances that benefit us all. Our values - courage, achievement, responsibility, respect, integrity and transparency
- guide us in every step we take and in every decision we make.
Strategy Fundamentals
As a company, we have a strong foundation. These fundamentals have been defined by the Merck Family. We always take them
into consideration when discussing and deciding on our Group strategy.
• We follow a risk diversification strategy with three distinct business sectors, and we avoid overexposure to any single customer,
industry, or geography.
• With our science and technology focus, we want to be leaders in our fields of expertise and markets, always pushing the
boundaries to find new solutions and drive innovation.
• We continue to operate under our current ownership with the Merck Family as majority owner.
• We continue to deliver sustainable value, and we want to maintain an attractive financial profile (for example, a strong
credit rating).
•
Mergers and acquisitions (M&A) are an important driver of our long-term value creation strategy with a focus on innovation-
driven technology.
Group Strategy
Our transformational journey since 2007
Over the past years, Merck has grown significantly through a series of strategic moves that have enabled us to develop into a
vibrant science and technology company. We have systematically and continuously strengthened and focused our portfolio of
innovative science and technology throughout our business sectors.
In Healthcare, we divested our Generics business in 2007 to focus on highly specialized products and acquired Serono, also in 2007,
to expand our pipeline. This focused approach has continued with the divestments of our Biosimilars business in 2017 and our
Consumer Health business in 2018. We are now focusing our R&D efforts on the fields of oncology, immuno-oncology, and
immunology (including multiple sclerosis).
* The contents of this chapter or section are voluntary and therefore not audited. However, our auditor has read the text critically.
Our Healthcare business sector comprises the two businesses Biopharma and Allergopharma. In 2019, Healthcare generated 42% of
Group sales and 40% of EBITDA pre (excluding Corporate and Other). Europe and North America generated 55% of Healthcare's net
sales in 2019. In recent years, we have steadily expanded our presence in growth markets. In 2019, Asia-Pacific and Latin America
accounted for 38% of sales.
Surface Solutions*
In October, we launched our ADC ExpressTM services to accelerate pre-clinical conjugation candidate selection. The portfolio addition
uses established platform technology to reliably scale target molecules, providing rapid production of antibody drug conjugates
Our Display Solutions business unit comprises the liquid crystals, OLED (organic light-emitting diodes), photoresists, and liquid
crystal windows businesses. Even though competition continues to intensify, we defended our position as the global market and
technology leader in the display materials business in 2019. Modern, energy-efficient technologies such as UB-FFS (ultra-brightness
fringe-field-switching) have further established themselves on the market. With our XtraBrightTM, XtraBrilliant™, and Xtra Boost™
products, we secured new projects for large-area displays as well as high-resolution mobile devices. The OLED business continued
to develop favorably and experience a high demand due to the increased production capacities of display customers. Our constantly
enhanced OLED material portfolio secured successful qualifications in a number of upcoming technical devices. For liquid crystal
window modules, four projects are in the installation phase. These innovative solar shading solution projects demonstrate superior
design aesthetics. The ramp up of commercial manufacturing at our Veldhoven site is running as planned, with the integration of a
new lamination unit further optimizing overall production yield. Our photoresists business for displays continued to perform well,
thanks to proven technical success in high-performance product lines. This is evidenced by a strong position in new display
production lines in the growing Chinese market.
Display Solutions*
Fundamental Information about the Group
17
(ADCs). Aligning with our goal to accelerate access to health, this innovation reduces time to clinic through comprehensive services
spanning pre-clinical to commercial from a single source.
The
In August, we announced the acquisition of BSSN Software, a Darmstadt, Germany-based laboratory informatics company.
acquisition continues the acceleration of customers' digital transformation in the lab by giving scientists better, more efficient
access to their lab data. We remain committed to building this ecosystem based on the AnIML standard and Standardization in Lab
Automation, which the acquisition promotes by boosting our digital lab productivity business and commercial growth for Life
Science.
Earlier this year, we completed the divesture of our flow cytometry business to Luminex Corporation of Texas, United States. A
process begun in 2018, this included the portfolio's combined stock, asset, and inventory purchases.
Collaboration remains an important focus for Life Science as we work to drive innovation and solve the industry's toughest
problems. While developing our own portfolio and capabilities, we also seek to unite with other key players in the industry to work
toward our shared goal of bettering and increasing access to health globally. To extend the reach and accessibility of our work, we
developed a fully-equipped Center for Microbiological Analysis Training (C-MAT) in Ghaziabad, India, and, in April, announced its
handover to the Food Safety and Standards Authority of India (FSSAI). The C-MAT lab provides training to food safety scientists
from government and FSSAI-ratified private laboratories on the latest technology in microbiological testing.
In November, we announced our intent to participate in a consortium comprised of academic healthcare, biotech, and biopharma
industry leaders across Massachusetts, United States, that will come together and establish a new center for advanced biological
innovation and manufacturing. Pooling our resources with industry partners like Harvard University and Massachusetts Institute of
Technology (MIT), among others, the central facility will develop next-generation medicines and regenerative therapies. The
purpose of the US$ 50 million investment is to explore and cultivate innovations in cell and gene therapy, advance biologic
innovation and manufacturing, as well as advance developments in immunotherapy, cell therapies, gene editing, and other
technologies. It is expected that the center will operate as an independent, non-profit organization. By fostering collaboration, this
center holds the promise of speeding innovation and broadening the universe of patients that can be served by these emerging
therapies.
Since 2018, 63% of drugs in the pipeline were being developed by biotech start-ups focused on innovative therapies, including
those intended to treat niche diseases with small patient populations. Our global health commitment focuses on these companies
and supports bringing their drugs to market through our grant programs. Grants provide selected companies with access to Merck
products and services to help accelerate market entry for new therapies. Through our Advance Biotech Grant Program, which we
run in North America, Europe, and Asia, we announced 12 grant recipients for 2019, selected based on the scientific and societal
merit of their respective therapies in development, as well as process challenges and expertise gaps.
In addition to these grants, in May, we announced three winners of our new Retrosynthetic Reaction Prediction Contest.
Retrosynthetic analysis plays a critical role in the development of new drugs, and its application has broad prospects in accelerating
the speed of drug research and development, improving efficiency, and reducing costs. The contest, open to anyone in China,
included a free training camp, online knowledge sharing, workshops, lab tours, and mentorship for participants. It attracted 1,150
contestants, including students, researchers, and practitioners from leading institutions.
Along with promoting scientific engagement and STEM disciplines within schools and universities, our business sector extends to the
wider community through SPARK, our global volunteer program. In 2019, through this initiative, just under 2,300 employees
volunteered nearly 19,400 hours to host thousands of events in 20 countries and engaged some 66,500 young minds. For the third
year, our Curiosity Cube™ mobile science lab toured North America, celebrating the 150th anniversary of the Periodic Table of
Elements and igniting youth interest in science. In 2019, the mobile lab traveled 48,000 kilometers (30,000 miles) and engaged
with students at schools and city centers in 99 communities. 94% of the schools visited were classified as Title 1, indicating under-
resourced areas.
Combined Management Report Fundamental Information about the Group Fundamental Information about the Group
18
Related to our work in the Asia-Pacific region, in June, Life Science held a national campus tour of our new mobile lab to promote
protein research across China. Proteins are the fundamental building block in our research, and revealing the structure and function
of thousands of proteins in organisms remains one of the industry's most challenging areas. The tour offered engaging learning
experiences and scientific discovery through product displays, live demonstrations, speeches, online games, and digital interaction.
It covered 20 colleges and biotech campuses in 13 cities across China.
Performance Materials
Our Performance Materials business sector comprises the specialty chemicals business of Merck and consits of three business
units: Semiconductor Solutions, Display Solutions, and Surface Solutions. Comparing Performance Materials with a smartphone,
Display Solutions represents the user interface, Semiconductor Solutions the intelligence, and Surface Solutions the aesthetics. In
Performance Materials, we offer innovative solutions especially for the electronics industry - for microchips and displays - and for
surfaces of every kind.
We are well on track in the execution of our five-year Bright Future transformation program announced in 2018, with which we are
adapting to new market realities and customer requirements. Bright Future lays the foundation for returning to sustainable growth,
attractive margins, and remaining competitive. Throughout 2019, we further streamlined our cost-base and processes. This
included the reallocation of R&D resources. In this context, we closed our main R&D site in Chilworth, United Kingdom, in
September 2019. The closure of our Atsugi site in Japan will follow by mid-2021. In addition, as announced in 2018, we will
downsize by 400 positions in Germany by 2022.
With the completion of the acquisition of Intermolecular on September 20, 2019, and Versum Materials on October 7, 2019, we
reached two major milestones on our Bright Future journey to transform Performance Materials into a strong solutions provider and
leading player in the electronic materials market. Intermolecular has application-specific materials expertise and platforms for
accelerated learning and experimentation with a powerful analytical infrastructure, all of which perfectly complement our portfolio.
Together, we are well-positioned to deliver next-generation digital devices for a smarter, safer, and more connected world. Versum
Materials is a leading global provider of innovative, high-purity process chemicals, gases, and equipment for semiconductor
manufacturing. The merger should transform Merck into a leading provider of electronic materials for the semiconductor and display
industries. The Intermolecular and Versum Materials businesses are being integrated into the Semiconductor Solutions business
unit. We are making good progress with the integration, ensuring a seamless transition and business continuity.
Performance Materials accounted for 16% of Group sales in 2019 and its share of EBITDA pre (excluding Corporate and Other) was
16%. The EBITDA pre margin was 31.2% of net sales.
Semiconductor Solutions*
With the acquisition of Versum Materials and Intermolecular, Semiconductor Solutions is now the largest business unit within
Performance Materials. It consists of two dedicated units: Semiconductor Materials and Delivery Systems & Services. Our
Semiconductor Materials unit supplies products for every major step in the wafer manufacturing process, including doping,
lithography, patterning, deposition, planarization, etching, and cleaning. Specialty cleaners and conductive pastes for
semiconductor packaging round off the portfolio. The Delivery Systems & Services (DS&S) business enables the safe and
responsible handling of gases and liquid chemicals for electronic manufacturers. It focuses on the development and deployment of
safe and reliable delivery equipment. This allows our materials to be handled with the highest quality and safety standards for our
customers.
In the area of deposition materials, we are continuously looking for both new organosilanes and organometallic materials as well as
liquid phase silicon formulations for processes with low resistance and various dielectric characteristics for faster and better
processors, as well as higher data storage density. Our photoresists business is growing rapidly; throughout the year we have
developed new photoresists to address the needs of the markets, for example, for 3D NAND memory, sensors, and radio frequency
(RF) filters. Furthermore, interest in Directed Self Assembly (DSA) technology continues among our customers. Our advances in
DSA technology have enabled customers to begin planning high volume manufacturing (HVM) qualifications. We have responded by
developing exceedingly pure, high volume synthesis capabilities, which are key to meeting our customers performance and quality
targets. In the 5G space, our transient liquid phase sintering (TLPS) conductive pastes are enabling highly efficient production of
modern antenna applications. Our mid- to back-end photolithography resist materials used in electronic packaging applications
continue to drive miniaturization and heterogeneous integration for small form factor devices.
* The contents of this chapter or section are voluntary and therefore not audited. However, our auditor has read the text critically.
Combined Management Report Fundamental Information about the Group Fundamental Information about the Group
19
Healthcare
Additional Information on Merck KGaA
in accordance with the German
Commercial Code (HGB)
103
Macroeconomic and Sector-Specific
Environment
67
Review of Forecast against Actual Business
Developments
87
Healthcare
93
Life Science
98
Performance Materials
Corporate and Other
104
Report on Risks and Opportunities
120
Report on Expected Developments
125
Report in accordance with Section 315a
(1) of the German Commercial Code (HGB)
Apart from our three business sectors, our financial reporting presents five regions: Europe, North America, Asia-Pacific, Latin
America, and the Middle East and Africa. As of December 31, 2019, we had 57,071 employees worldwide¹, which compares with
51,749 employees on December 31, 2018.
We hold the global rights to the Merck name and brand. The only exceptions are Canada and the United States. In these countries,
we operate as EMD Serono in the biopharmaceutical business, as MilliporeSigma in the life science business, and as EMD
Performance Materials in the high-tech materials business.
In Healthcare, we discover unique ways to treat some of the most challenging diseases, such as multiple sclerosis (MS) and cancer.
Our Life Science experts develop tools and solutions, which are aimed at enabling scientists achieve breakthroughs even faster. And
in Performance Materials, we develop science that sits inside technologies and changes the way we access and display information.
Everything we do is fueled by our belief in science and technology as a force for good. A belief that has driven our work since 1668,
and will continue to inspire us to find more joyful and sustainable ways to live. We are curious minds dedicated to human progress.
We are Merck, a vibrant science and technology company. Science is at the heart of everything we do. It drives the discoveries we
make and the technologies we create. We make a positive difference in the lives of millions of people every day.
12
Merck
64
Fundamental Information about the Group
For reasons of better readability, we do not use gender-specific formulations in this annual report. The chosen male form represents
all genders.
The separate, combined non-financial (Group) report of Merck KGaA, which we issue pursuant to sections 289b-289e and 315b-315c
HGB, is available as online version on our website as of April 14, 2020 at www.merckgroup.com/en/cr-report/2019/. It is integrated
into the 2019 Corporate Responsibility Report in accordance with DRS 20 subsection 252 (b). We have prepared an overview of the
information contained in the combined non-financial (Group) declaration at www.merckgroup.com/nfr19.
The figures presented in this combined management report have been rounded. This may lead to individual values not adding up to
the totals presented.
This combined management report contains certain financial indicators such as operating result (EBIT), EBITDA, EBITDA pre, business
free cash flow (BFCF), free cash flow, net financial debt and earnings per share pre, which are not defined by International Financial
Reporting Standards (IFRSS). These financial indicators should not be taken into account in order to assess the performance of Merck
in isolation or used as an alternative to the financial indicators presented in the consolidated financial statements and determined in
accordance with IFRSS.
* The management report for Merck KGaA has been combined with the Group management report and published in the 2019 Merck
Annual Report as well as in the annual financial statements of Merck KGaA. The annual financial statements and the combined ma-
nagement report of the Merck Group and Merck KGaA for 2019 are filed with the electronic German Federal Gazette (elektronischer
Bundesanzeiger) and are available on the website of the German company register.
127
Combined Management Report Fundamental Information about the Group Fundamental Information about the Group
64
Report on Economic Position
56
COMBINED
MANAGEMENT REPORT
75
12
Fundamental Information about the Group Course of Business and Economic Position
75
12
People at Merck
Merck
Merck Group
Strategy
27
Internal Management System
33
Corporate Responsibility
44
Research and Development
20
1
thereof:
-70
-10
-40
other operating
-20
-29
income and
Acquisition-related adjustments
Total
-22
-120
-35
-25
-95
-6
-6
-49
expenses
-84
Impairment losses
-13
Property, plant and
3,031
1,503
647
1,024
1,020
585
266
127
Other adjustments
43
equipment
Research and
development costs²
-1,938
Adjustments before impairment losses/reversals
of impairment losses¹
and
develop-
expenses ment costs
-921
intangible assets
-13
4,811
Reversals of impairment losses
marketing and administration
selling expenses
thereof:
-1,801
-1,946
Depreciation/amortization/impairment losses/reversals of impairment losses
3,800
4,385
EBITDA pre of the Merck Group¹
-381
-469
Corporate and Other
Adjustments1
4,181
EBITDA pre of the operating businesses¹
2018
2019
€ million
No single customer accounted for more than 10% of Group sales in fiscal 2019 or 2018. Transfer prices for intragroup net sales
were determined on an arm's-length basis. The intersegment sales reported in the above table are valued at group production cost.
The following table presents the reconciliation of Segment results of all operating businesses to the profit before income tax of the
Merck Group:
The Merck Group is divided into three business sectors: The Healthcare business sector includes the businesses with prescription
pharmaceuticals, biopharmaceuticals, allergy products, and medical devices. The customers mainly comprise wholesalers, hospitals,
and pharmacies. The Life Science business sector comprises products for scientific institutions and research and analytical
laboratories in the pharmaceutical/biotechnology industry and applications for customers manufacturing chemical and biological
pharmaceuticals. In accordance with the product portfolio, the customers of this business sector primarily include companies of the
pharmaceuticals and biotech sector as well as retailers and universities. The Performance Materials business sector consists of the
entire specialty chemicals business and primarily services industrial companies. The fields of activity of the individual segments are
described in detail in the sections on the business sectors in the combined management report.
2 Previous year's figures have been adjusted, see Note (45) "Effects from new accounting standards and other presentation changes".
1 Excluding intersegment sales.
51,713
4,854
-318
-272
Operating result (EBIT) 1
Adjustments before impairment losses/reversals of impairment losses¹
Other adjustments
Acquisition-related adjustments
Gains (+)/losses (-) on the divestment of businesses
Integration expenses/IT expenses
Restructuring expenses
€ million
The adjustments comprised the following:
197
Performance Indicators
Notes
Consolidated Financial Statements
1,461
1,735
1 Not defined by International Financial Reporting Standards (IFRSS).
Profit before income tax
-266
-385
Financial result
1,727
2,120
1,121
3,337
3,550
10,486
-2
-13
-58
-318
-272
-9
-55
-328
-327
Restructuring expenses in the amount of € 120 million (2018: € 46 million) resulted mainly from the Bright Future transformation
program of the Performance Materials business sector (2019: € 50 million/2018: €0 million) and the relocation of various tasks to
the shared service organization (2019: € 26 million/2018: € 25 million), which were reported under Corporate and Other.
Integration and IT expenses in the amount of € 95 million (2018: € 142 million) resulted substantially from the introduction of new
ERP systems (2019: € 54 million/2018: € 50 million) and the integration of Versum Materials, Inc., United States
(2019: € 12 million/2018: €0 million). The acquisition-related adjustments resulting from the takeover of Versum Materials, Inc.,
United States, amounted to € 80 million (2018: €0 million).
These adjustments were disclosed in the consolidated income statement as part of the respective functional costs and allocated to
them as follows:
2019
€ million
Restructuring expenses
Integration expenses/IT expenses
Gains (+)/losses (-) on the divestment of businesses
thereof:
research
thereof:
cost of
thereof:
-84
sales
-25
-142
10,800
10,978
2,234
13,513
25,791
Number of employees
-2,227
-14
-17
-30
-69
-185
-186
-902
Adjustments in the operating result (total) 1
1 Not defined by International Financial Reporting Standards (IFRSS).
2019
2018
-120
-46
-95
-6
21,001
1,830
32
20,697
intangible assets
20,708
1,682
1,643
5,112
494
Goodwill and other
373
965
2,048
5,298
4,101
4,283
16,152
389
32
26,316
development costs²
Research and
equipment
6,213
57
159
2
352
1,630
1,638
746
1,590
3,386
Property, plant and
973
1,475
5,233
location¹
North
America
Europe Germany Switzerland
€ million
thereof:
thereof:
2019
thereof:
United States
-
2 Not defined by International Financial Reporting Standards (IFRSS).
3 According to the consolidated cash flow statement.
1 Excluding intersegment sales.
2,508
-497
-56
588
INFORMATION BY COUNTRY AND REGION
Asia-
Pacific
thereof:
Latin
China America
Net sales by company
16,152
591
1,012
2,275
5,599
4,011
4,214
212
1,010
4,735
location 1
Net sales by customer
Group
Middle East
and Africa
-1,997
2
-923
-164
Net sales by company
14,836
544
950
1,869
4,965
5,012
3,627
location¹
211
1,002
4,559
Group
Middle East
and Africa
3,818
Latin
America
1,407
location¹
570
14,857
14,868
2,124
575
5,562
390
Goodwill and other
357
879
1,659
4,718
3,704
3,871
14,836
China
Pacific
United States
4,110
12,728
12,648
12,829
2,337
13,806
3,430
26,714
-2,268
-11
-18
-34
-79
-160
Number of employees
1,335
57,036
1 Excluding intersegment sales.
Asia- thereof:
thereof:
North
America
thereof:
Switzerland
Europe Germany
€ million
thereof:
2018
-
INFORMATION BY COUNTRY AND REGION
196
Performance Indicators
Notes
Consolidated Financial Statements
2 Previous year's figures have been adjusted, see Note (45) "Effects from new accounting standards and other presentation changes".
-945
-10
On November 17, 2014, Merck formed a global strategic alliance with Pfizer to co-develop and co-commerzialize the anti-PD-L1
antibody avelumab. Avelumab received its first regulatory approvals in 2017 under the trade name BavencioⓇ. This antibody is also
being studied in multiple broad-based clinical trials as a potential treatment for further tumor types as a single agent as well as in
combination with a wide array of approved or still investigational active ingredients. The overriding objective of the strategic
alliance is to share the development risks and to expand the two companies' presence in immuno-oncology.
-29
On March 30, 2017, Merck announced an agreement with a subsidiary of Avillion LLP, United Kingdom, (Avillion) to develop the
anti-IL-17-A/F NanobodyⓇ M1095. As part of this collaboration, Avillion will be responsible for developing the anti-IL-17-A/F
Nanobody in plaque psoriasis. Avillion will also finance the clinical program. During the development phase, Merck recognizes a
financial liability for potential repayment obligations to Avillion and records the corresponding expense as research and
development costs and as finance costs. Research and development costs in the double-digit million euro range were recorded in
fiscal 2019 (2018: low single-digit million-euro range).
Agreement with Avillion LLP, United Kingdom, to develop Merck's anti-IL-17-A/F NanobodyⓇ
193
Group Structure
Notes
Consolidated Financial Statements
Restructuring of the collaboration with F-star Delta Ltd., United Kingdom, in the field of immuno-
oncology
Effective December 28, 2018, Merck transferred the above-mentioned exclusive rights back to Intrexon on the basis of a
contractual agreement. At the time the contract was signed, Merck was entitled to receive Intrexon common stock worth
US$ 150 million in return for the assignment of rights. Furthermore, the agreement contained another investment by Merck,
amounting to US$ 25 million, in Intrexon's subsidiary Precigen, Inc., United States, (Precigen) which is involved in the development
of T-cell cancer therapies. In return, Merck received a convertible note in the amount of US$ 25 million, with the option, under
certain conditions, to acquire shares in either Intrexon or Precigen. The transaction led to the disposal of the intangible asset in the
amount of € 104 million in 2018 and to the recognition of a disposal gain, which was reported under other operating income. As of
December 31, 2019, the carrying amount of the equity interest amounted to € 101 million (December 31, 2018: € 118 million).
Restructuring the agreement with Intrexon Corporation, United States, to co-develop and co-
commercialize of CAR-T cancer therapies in 2018
Both the upfront payment as well as the value of the right to co-promote XalkoriⓇ were recognized as income on a pro rata basis
over the period during which the major part of the initially decided clinical development programs was conducted. Moreover, in
2019, Merck recognized income from reaching three approval milestones and, in 2018, income amounting to a mid double-
digit million-euro figure in return for waiving rights to Pfizer's anti-PD-1 antibody. This had previously been included in the
collaboration agreement. For further information, please refer to Note (15) "Other operating income". As in 2018, Merck recognized
research and development costs in a low three-digit million euro amount in 2019.
Upon entry into the agreement in 2014, Pfizer made an upfront cash payment of US$ 850 million (€ 678 million) to Merck. Pfizer
also committed to making further payments of up to US$ 2 billion to Merck subject to the achievement of defined development and
commercial milestones. Based on the collaboration agreement, Merck was also granted the right to co-promote Xalkori® (crizotinib)
with Pfizer for multiple years. This is a kinase inhibitor indicated for the treatment of patients with metastatic non-small cell lung
cancer (NSCLC) whose tumors are anaplastic lymphoma kinase (ALK)-positive or whose tumors are metastatic ROS1-positive.
During the co-promotion of XalkoriⓇ, Merck receives a profit share from Pfizer, which is reported in net sales. In 2019, this profit
share income amounted to € 56 million (2018: € 58 million). The residual carrying amount of the co-promotion right recognized as
an intangible asset amounted to € 45 million as of December 31, 2019 (December 31, 2018: € 68 million).
According to the collaboration agreement, during the development period each company bears one half of the development
expenses. In the commercialization phase, Merck realizes the majority of sales from the commercialization of BavencioⓇ while
Merck and Pfizer evenly split the net amount of sales less defined expense components. The execution of the collaboration
agreement is not being structured through a separate vehicle.
1,393
Strategic alliance with Pfizer Inc., United States, to jointly co-develop and co-commercialize active
ingredients in immuno-oncology
In March 2015, Merck and Intrexon Corporation, United States, (Intrexon) entered into a strategic collaboration and license
agreement to develop and commercialize chimeric antigen receptor T-cell (CAR-T) cancer therapies. The agreement provided Merck
with exclusive access to Intrexon's proprietary and complementary suite of technologies to engineer T-cells with optimized and
inducible gene expression.
Merck and GSK are jointly responsible for the development and potential commercialization further down the line. According to the
collaboration agreement, during the development period each company bears one half of the development expenses. While Merck
will realize the net sales in the United States and GSK in all other countries in the event of regulatory approval, the collaboration
agreement provides for the partners to evenly split the net results of net sales less defined expense components. In fiscal 2019,
Merck recognized € 92 million of the upfront payment collected within other operating income. Merck furthermore recognized
research and development costs amounting to a double-digit million-euro figure.
In June of 2017, Merck announced a strategic collaboration with F-star Delta Ltd, United Kingdom, (F-star) for the development and
commercialization of bispecific immuno-oncology antibodies. In 2019, the existing licensing and collaboration agreement with F-star
was realigned due to the reprioritization of resources and programs. Based on this, all rights to FS118 reverted to F-star. The option
to acquire F-star Delta Ltd. was terminated. In the course of the realignment, Merck in-licensed an innovative bispecific antibody
and, in addition, holds an option to in-license a further bispecific antibody from F-star's antibody platform. Both bispecific antibodies
were handled under the previous collaboration.
Arrangements in the Performance Materials business sector
€ million
INFORMATION BY BUSINESS SECTOR - 2019
Apart from sales, the success of a segment is mainly determined by EBITDA pre (segment result) and business free cash
flow. EBITDA pre and business free cash flow are performance indicators not defined by International Financial Reporting
Standards (IFRSS). However, they represent important variables used to steer the Merck Group. To permit a better
understanding of operational performance, calculation of EBITDA pre excludes depreciation and amortization, impairment
losses and reversals of impairment losses, as well as the adjustments presented in the following.
Corporate and Other includes income and expenses, assets and liabilities, as well as cash flows that cannot be allocated to
the reportable segments presented. They originate mainly from the central Group functions. Moreover, the column serves
the reconciliation to the Group numbers. As these are managed at Group level, the expenses and income as well as cash
flows attributable to the financial result and income taxes are also disclosed under Corporate and Other.
The internal organizational and reporting structure of the Merck Group forms the basis of the segmentation of its business
operations. It is founded on the business models of the business sectors, which led to homogeneous risk structures within
the segments. Resource allocation and the assessment of the segments' business development are performed by the
Executive Board of Merck KGaA as the chief operating decision-maker.
Accounting and measurement policies
As a result of the abovementioned changes, impairment losses totaling € 72 million were recognized in fiscal 2019 for an intangible
asset and the reverted option, which were shown in other operating expenses and finance costs.
194
Notes
Consolidated Financial Statements
(7) Segment reporting
Performance Indicators
Even though both agreements are legally separate from the respective partner companies, each agreement was classified as a joint
operation since each contract partner is legally obligated to purchase the entire production result and each agreement is the sole
source of funding for settling liabilities.
Upon acquiring Versum Materials, Inc., United States, (Versum), Merck became an equal 50% partner in Hydrochlor, LLC, United
States, (Hydrochlor) under a joint arrangement with Linde plc. Hydrochlor was founded with the aim of supplying hydrogen chloride
exclusively to the two partner companies. Also upon acquiring Versum, Merck became a partner under an agreement with Showa
Denko K.K., Japan. The aim of the agreement is to manufacture a supplier product to supply to the two partner companies
exclusively.
Performance Indicators
192
Notes Group Structure
Consolidated Financial Statements
•
• past experience,
The measurement of sales deductions and refund liabilities resulting from expected rebates and discounts considers the
following:
Sales deductions provided on the invoice as price-reducing items, which will likely be applied by customers when making
the respective payments, are recognized as reductions of trade accounts receivable. Expected refunds, such as bonus
payments, reimbursements for rights of return, or rebates from health plans and programs, are recognized in the separate
item "refund liabilities" on the consolidated balance sheet.
Merck grants its customers various kinds of rebates and discounts. These, as well as anticipated customer refund claims,
state compulsory charges, and rebates from health plans and programs are deducted from sales. The most significant
portion of these deductions from sales is attributable to the Healthcare business sector.
Determining the transaction price
pricing information, and
Net sales from contracts comprising several separate performance obligations are recognized when the respective
performance obligation has been fulfilled. This affects, in particular, the sale of goods in combination with services.
Therefore, the transaction price is allocated beforehand to each performance obligation identified in the contract on a
relative standalone selling price basis. To a limited extent, there are multiple-element contracts in the Life Science business
sector.
For service contracts, and customer-specific contract manufacturing of goods and equipment, Merck recognizes revenue
over time based on the progress towards complete satisfaction of the performance obligation, if there is a contractual claim
for payment against the customer for the services already performed. The progress is mostly determined on the basis of
the costs incurred, the time elapsed, and the milestones achieved as of the reporting date.
Net sales are recognized when (or as) the customer obtains control of the asset. For sales of goods, the customer usually
obtains control as soon as delivery is made, given that the customer is generally not able to obtain any benefits from the
asset before that point in time. To a lesser extent, Merck generates net sales from the sale of goods based on bill-and-hold
arrangements. In these cases, net sales are recognized before the goods are delivered to the customer, as soon as Merck
has invoiced the products and the additional criteria laid out in IFRS 15.B81 are fulfilled. In the case of equipment sales,
the criteria for revenue recognition are only met after installation has been successfully completed - to the extent that the
installation requires specialized knowledge, does not represent a clear ancillary service and the relevant equipment can
only be used by the customer once successfully set up.
Nature and timing of revenue recognition
Accounting and measurement policies
200
Operting Activities
In the Healthcare and Life Science business sectors, a limited number of contracts provide for the out-licensing of
intellectual property. In the Healthcare business sector, out-licensing agreements are usually not part of ordinary activities,
meaning that the corresponding income is reported in other operating income (see Note (15) "Other operating income").
• expected product growth rates.
1,867
Consolidated Financial Statements
After fulfilling the agreed conditions, Merck received an upfront payment of € 300 million, which was recognized as deferred income
on the balance sheet and presented under other liabilities. Merck has a claim to further development milestone payments of up to
€ 500 million depending on clinical data. In addition, Merck can receive future payments of up to € 2.9 billion for achieving certain
milestones related to approval and commercialization. Merck recognizes the upfront payment as income, as well as any
developmental milestone payments potentially to be received in the future in accordance with the fulfillment of performance
obligations existing on the basis of contractual agreements. A cost-based method is used to recognize these payments. Income can
be caught up cumulatively when milestones are achieved.
On February 5, 2019, Merck entered into an agreement in the field of immuno-oncology with a subsidiary of GSK to co-develop and
co-commercialize the drug candidate Bintrafusp alfa (formerly known as M7824). The bifunctional fusion protein, Bintrafusp alfa, is
currently an investigational candidate for several types of cancer. The overriding objective of the strategic alliance is to share the
risks of development and commercialization. The execution of the collaboration agreement is not structured through a separate
vehicle.
Agreement with GlaxoSmithKline plc, United Kingdom, to co-develop and co-commercialize active
ingredients in immuno-oncology
If the consideration received and deferred as a liability in the case of the collaboration agreement with Pfizer had been
recognized in the income statement over a period extended by six months, in fiscal 2019 this would have reduced other
operating income, and therefore also profit before income tax, by € 64 million (2018: € 38 million). If the percentage of
completion of the collaboration agreement with GSK in 2019 had been 10% higher, this would have increased other
operating income and profit before tax by € 30 million (reduction by € 30 million at 10% lower percentage of completion).
Estimates are to be made especially when it comes to determining the transaction price and progress on the performance
obligation.
• Classification of joint arrangements as joint operations or joint ventures.
• Determination of the appropriate timing of income recognition and
• Identification of an appropriate type of income recognition,
As part of the accounting treatment of collaboration agreements, significant discretionary decisions have to be made in the
following areas:
SIGNIFICANT DISCRETIONARY DECISIONS AND SOURCES OF ESTIMATION UNCERTAINTY
Merck is a contract partner in two joint arrangements in the Performance Materials business sector. In both cases, Merck
has joint control with the respective partner. Although they are legally separate from the partners, these joint operations
are classified as joint activities in line with IFRS 11.B31. Merck and the contract partner ensure their contractually agreed
access to the production outputs by preventing third party access. Assets, liabilities, income, and expenses from these joint
arrangements allocated to Merck are accounted for in accordance with the IFRSS applicable to the respective assets,
liabilities, income and expenses.
Joint arrangements in the Performance Materials business sector
191
Group Structure
Notes
Net sales1
Notes
Intersegment sales
Depreciation
-3,055
Liabilities by business sector
10,784
21,600
7,560
Assets by business sector
-1,519
27.1%
31.0%
28.6%
EBITDA pre margin (in % of net sales) 2
4,385
318
68
-469
31.2%
803
-716
43,811
Net cash flows from operating activities
208
19
12
86
91
3,867
-20,608
Investments in intangible assets³
49
125
296
343
Investments in property, plant and equipment³
-25,897
813
2,129
1,922
EBITDA pre (segment result)²
-21
-617
307
1,280
1,149
21
16,152
2,120
Group
Performance Materials
2,574
6,864
6,714
Life Science
Healthcare
Impairment losses
Corporate and Other
713
34
784
328
166
59
25
Adjustments2
4,066
-537
637
2,070
1,896
EBITDA²
Reversals of impairment losses
1,905
42
2
6
80
Operating result (EBIT)²
-109
Consolidated Financial Statements
Operating Activities
2
-50
-3
-6
-2
-2
-58
-25
-142
-46
Total¹
expenses¹ ment costs¹ expenses¹
and
income
-25
and
develop-
Acquisition-related adjustments
Adjustments before impairment losses/reversals of impairment
losses²
Adjustments in the operating result (total)²
Reversals of impairment losses
-55
-3
-19
-14
Other adjustments
-18
-272
-23
-2
-190
-13
-45
Impairment losses
research operating
-99
-3
2018
1 Not defined by International Financial Reporting Standards (IFRSS).
-328
-123
-29
-109
Consolidated Financial Statements
-10
Adjustments in the operating result (total) 1
Reversals of impairment losses
-9
Impairment losses
-318
-114
-56
Notes
Performance Indicators
198
-39
-39
-6
-1
sales¹ expenses¹
thereof:
administration
cost of and selling
thereof:
marketing
thereof:
thereof:
other
thereof:
Gains (+)/losses (-) on the divestment of businesses
Integration expenses/IT expenses
Restructuring expenses
€ million
-63
(11) Net sales
-27
-2
Cash income from hedging transactions
Purchase price payment
€ million
The payments made and received from the sale of assets held for sale were primarily related to payments made in connection with
the Consumer Health business divested in 2018 (see Note (5) "Acquisitions and divestments").
Net cash outflows from investments in financial assets amounting to € 196 million (2018: € 75 million) mainly resulted from the
purchase of short-term investments in securities not classified as cash and cash equivalents. Net cash outflows from acquisitions
less cash and cash equivalents acquired is broken down as shown in the table below. Most of these outflows are attributable to
payments made for the acquisition of Versum Materials, Inc., United States (see Note (5) "Acquisitions and divestments").
The payments made and received from the acquisition and the disposal of other non-financial assets resulted from the short-term
application of available funds.
(10) Net cash flows from investing activities
Purchase price in accordance with IFRS 3
In 2019 as well as in 2018, the neutralization of the profits/losses from the disposal of assets and other disposals mainly comprised
the effects of the divestment of the Consumer Health business.
Tax refunds amounted to € 160 million (2018: € 65 million). Interest paid totaled € 316 million (2018: € 286 million). Interest
received amounted to € 60 million (2018: € 34 million).
In 2019, tax payments totaled € 1,018 million (2018: € 900 million). Of this amount, € 130 million (2018: € 125 million) were
attributed to cash flows from investing activities in connection to the divestment of the Consumer Health business.
Tax payments are generally presented in the cash flow from operating activities. Only significant transactions where the
associated tax payments can be practically calculated are recognized in the relevant item of the cash flow statement.
• The option to recognize interest received and interest payments made is exercised to the extent that such transactions
are recognized in cash flow from operating activities.
• The presentation of cash flows from operating activities is determined using the indirect method based on the profit
after taxes.
The calculation and presentation of cash flows from operating activities are based on the following principles:
The change of other assets and liabilities includes an advance payment of € 300 million received from GlaxoSmithKline plc, United
Kingdom, within the scope of an agreement for joint development and marketing in the field of immuno-oncology (see Note (6)
"Collaboration Agreements").
Accounting and measurement policies
Cash and cash equivalents acquired
Versum acquisitions
-5,279
-5,020
-91
-4,928
Payments for acquisitions less acquired cash and cash equivalents (net) in accordance with the
consolidated cash flow statement in 2019
277
-99 -5,297
Other
81
-99
Total
LE
270
-5,198
81
-5,378
(9) Net cash flows from operating activities
There were no changes to equity capital in 2019, as in 2018. The weighted average (basic) number of shares was 434,777,878
and thus corresponded to the number of theoretical shares outstanding. In fiscal 2019, there were no shares with a potential
diluting effect; as a result, the diluted earnings per share were equivalent to basic earnings per share. The earnings per share
attributable to discontinued operation resulted from the divestment of the Consumer Health business as of December 1, 2018.
199
-577
-932
-1,026
Investments in property, plant, and equipment as well as software and advance payments for intangible assets
Changes in inventories
3,800
4,385
-214
2018
EBITDA pre¹
€ million
Business free cash flow was determined as follows:
1 Previous year's figures have been adjusted, see Note (45) "Effects from new accounting standards and other presentation changes."
2 Not defined by International Financial Reporting Standards (IFRSS).
-327
-26
2019
Changes in trade accounts receivable as well as receivables from royalties and licenses
-259
-145
Performance Indicators
Notes
Consolidated Financial Statements
Basic earnings per share is calculated by dividing the profit after taxes attributable to the shareholders of Merck KGaA (net
income) by the weighted average number of theoretical shares outstanding. The calculation of the theoretical number of
shares is based on the fact that the general partner's equity is not represented by shares. Corresponding to the division of
the subscribed capital of € 168 million into 129,242,252 shares (see Note (34) "Equity"), the general partner's equity
of € 397 million equates to 305,535,626 theoretical shares. Overall, equity capital thus amounted to € 565 million or
434,777,878 theoretical shares outstanding.
Accounting and measurement policies
(8) Earnings per share
2 Excluding payments for low-value leases and for interest components included in lease payments.
1 Not defined by International Financial Reporting Standards (IFRSS).
Business free cash flow¹
2,508
2,732
346
Elimination of first-time consolidations
-136
Lease payments²
-209
1,025
Net sales by customer
2,219
Corporate and Other
Group
2,406
14,836
-20
-548
1,727
60
1,743
58
2018
Healthcare
Performance Materials
6,246
6,185
20
731
1,036
508
747
696
240
Life Science
-
EBITDA²
Reversals of impairment losses
Business free cash flow²
768
-1,609
2,856
Business free cash flow²
1,252
1,375
-536
2,732
1 Excluding intersegment sales.
2 Not defined by International Financial Reporting Standards (IFRSS).
3 According to the consolidated cash flow statement.
Consolidated Financial Statements
Notes
Performance Indicators
195
INFORMATION BY BUSINESS SECTOR
€ million
Net sales¹
Intersegment sales
Operating result (EBIT)²
Depreciation
Impairment losses
13
23
641
1,492
Liabilities by business sector
-2,893
-1,333
-489
-14,940
-19,655
Investments in property, plant and equipment³
379
313
119
100
910
Investments in intangible assets³
59
19
13
15
106
1,159
1,621
742
21
-1,303
36,888
4,414
Net cash flows from operating activities
20,860
4,046
1,755
-488
Adjustments²
63
85
17
107
272
EBITDA pre (segment result)2
1,556
3,528
786
7,568
Assets by business sector
1,840
25.6%
32.7%
769
24.9%
EBITDA pre margin (in % of net sales) 2
3,800
29.8%
-381
4,214
Net sales by region (customer location)
Europe
2,241
33%
2,277
33%
217
9%
29%
North America
1,474
2,474
36%
267
10%
26%
100%
4,735
22%
Income from co-commercialization agreements
Total
100%
7%
Asia-Pacific
25
1%
611
4%
License income
8
8
16,152
Commission income
21
58
1%
58
6,714
100%
6,864
100%
2,574
18
1,816
4%
1,743
100%
6,864
100%
2,574
100%
16,152
100%
2018
€ million/%
Net sales by product type
Healthcare
Life Science
Goods
6,085
98%
5,413
87%
Performance Materials
2,404
486
6,714
Total
591
1%
26%
2,041
79%
5,599
35%
Latin America
702
11%
278
27%
4%
1%
1,012
6%
Middle East and Africa
482
7%
92
1%
17
32
2%
Total
Services
6,185
100%
6,864
26%
1,596
24%
1,685
33%
2,046
32%
2,176
41%
2,543
44%
3,003
20181
2019
Group
Other
100%
2019
2018
1,256
Consolidated Financial Statements
Group net sales stood at € 16,152 million in fiscal 2019 (2018: € 14,836 million), out of which € 683 million (2018: € 557 million)
was recognized over time. This related mainly to net sales from services and from customer-specific equipment in the Life Science
business sector.
100%
2,406
100%
2,574
1
2
20%
Surface Solutions
476
468
Consolidated Financial Statements
25%
596
33%
848
55%
1,332
49%
18%
Semiconductor Solutions
Display Solutions
Notes
Life Science
Performance Materials
Group
Goods
6,531
97%
5,972
87%
2,497
Healthcare
97%
93%
Equipment
7
397
6%
50
2%
454
3%
15,000
100
Net sales by product type
€ million/%
Operting Activities
The measurement of sales deductions and refund liabilities resulting from rights of return considers the following:
⚫ historical return rates for individual product groups,
⚫ information from distributors on inventory levels, and
•
publicly available information on product sales from sector-specific service providers (Healthcare business sector).
201
Contractual payment terms
Given that the Merck Group generates the large majority of its sales through transactions with simple structures, the
company usually has an enforceable right to payment after the performance obligation has been fulfilled. The payment
targets contractually agreed between Merck Group and its customers usually range between 30 and 60 days. For some
service contracts, the company receives the contractually agreed consideration before the service is delivered; in such
cases, the consideration received is presented as a contract liability on the consolidated balance sheet until the revenue
has been recognized.
2019
Practical expedients
Significant discretionary decisions and sources of estimation uncertainty
Sales deductions
The measurement of sales deductions and the corresponding refund liabilities requires extensive estimates. Uncertainties
exist concerning the extent to which past experience serves as reliable basis for estimating expected refunds in particular,
such as bonus payments, reimbursements for rights of return, or rebates from health plans. External information from
distributors and industry services outside of Merck's control, which are also subject to uncertainty, are used to determine
sales deductions.
Due to a lack of past experience, the estimate uncertainty referenced above is particularly relevant for product launches in
the Healthcare business sector. Any changes in estimates of the parameters listed above have a cumulative impact on the
net sales recognized in the respective adjustment period.
Consolidated Financial Statements
Notes
Operting Activities
The following tables present a more detailed breakdown of net sales by business sector from contracts with customers.
202
Merck uses the practical expedient of IFRS 15 in which the promised amount of consideration is not adjusted for the effects
of a significant financing component if the period between the fulfillment of a performance obligation and the payment by
the customer amounts up to one year.
100%
35%
94%
1,529
24%
1,273
19%
1,438
23%
321
5%
90
1%
Fertility
1,247
19%
1,162
19%
thereof: Gonal-fⓇ
743
11%
708
24%
1,594
1%
69
€ million/%
2019
2018
Oncology
1,030
15%
944
15%
thereof: ErbituxⓇ
11%
Ⓡ
13%
816
13%
thereof: Bavencio'
Neurology & Immunology
thereof: RebifⓇ
thereof: MavencladⓇ
103
2%
871
HEALTHCARE
General Medicine & Endocrinology
38%
4%
Other
287
4%
270
4%
Total
6,714
100%
6,246
100%
LIFE SCIENCE
The increase in comparison with 2018 resulted, in particular, from additions due to the first-time consolidation of Versum Materials,
Inc., United States, and from the positive business performance in the Life Science business sector.
€ million/%
Process Solutions
Research Solutions
Applied Solutions
Total
1 Previous year's figures have been adjusted due to an internal realignment.
234
4%
238
Ⓡ
2,341
38%
thereof: Glucophage
Ⓡ
877
13%
733
12%
thereof: ConcorⓇ
2,557
530
475
8%
thereof: Euthyrox
Ⓡ
402
6%
363
6%
thereof: Saizen'
8%
13,902
The following tables present a breakdown of net sales by key product lines/products:
Operting Activities
58
Total
6,246
100%
6,185
100%
2,406
100%
14,836
100%
Net sales by region (customer location)
Europe
2,203
35%
2,136
35%
220
9%
4,559
1%
58
Income from co-commercialization agreements
15
Equipment
4
343
6%
347
2%
Services
84
1%
31%
424
2
510
4%
License income
4
4
Commission income
14
1
7%
203
North America
23%
Middle East and Africa
448
7%
88
1%
8
544
4%
Total
6,246
100%
6,185
100%
2,406
100%
14,836
100%
Consolidated Financial Statements
Notes
6%
950
2%
32
2,173
Notes
214
9%
3,818
26%
Asia-Pacific
1,501
24%
1,432
1,532
1,932
80%
4,965
33%
Latin America
661
11%
256
4%
25%
Operting Activities
-41
The table below shows future net sales from concluded contracts:
-112
20181
2019
Expenses for the revaluation of contingent considerations
Remaining other operating expenses
Expenses for disposal of businesses and non-current assets
Expenses for miscellaneous services
Restructuring expenses
Premiums, fees, and contributions
Impairment losses on non-financial assets
Non-income related taxes
Litigation
Profit share agreements
Currency differences from operating activities
Project expenses (including integration and IT projects)
€ million
The breakdown of other operating expenses was as follows:
208
Operting Activities
Notes
-25
-98
-62
-60
-735
Other operating expenses
-153
-212
-39
-8
-6
-14
-23
Consolidated Financial Statements
-16
-35
-33
-58
-42
-53
-55
-74
-60
-46
-24
-575
Other operating expenses comprise all expenses that cannot be reasonably allocated to a functional cost type or finance
costs.
(16) Other operating expenses
Income from the revaluation of contingent considerations
Reversal of provisions for litigation
Income from the disposal of businesses and non-current assets
Up-front payments, milestone payments, and royalties
€ million
Other operating income was broken down as follows:
207
Operting Activities
Notes
Consolidated Financial Statements
The accounting treatment of contingent consideration agreed at the sale of a business as defined in IFRS 3 is shown in
Note (36) "Other financial assets".
Income from the revaluation of contingent considerations
The granting of a license in most out-licensing agreements in the Healthcare business sector constitutes a distinct
performance obligation that must usually be recognized at a point in time. Due to the uncertainty of development results
and regulatory events, the recognition of contingent consideration usually does not take place until the result in question
has materialized. In principle, sales-based and usage-based royalties are recognized only after the contract partner makes
the corresponding sales or uses the intellectual property.
Considerations received within the scope of collaboration agreements are usually recognized over time in other operating
income.
Revenue from upfront and milestone payments, royalties, and license payments comprises considerations Merck receives
from companies that do not represent customers. This relates, in particular, to collaboration and out-licensing agreements
in the Healthcare business sector (see Note (6) "Collaboration agreements").
Income from up-front payments, milestone payments, and royalties
Other operating income comprises all income that cannot be allocated to net sales or finance income on account of its
character.
Accounting and measurement policies
(15) Other operating income
Income from miscellaneous services
Reversals of impairment losses on non-financial assets
Remaining other operating income
Other operating income
Other operating income resulted, among other things, from service contracts in connection to the divestment of the Consumer
Health business in 2018. Income in the previous year included a mid double-digit million euro amount in return for waiving rights to
an anti-PD-1 antibody, which had previously been included in the strategic alliance with Pfizer Inc., United States.
The income from the disposal of businesses and non-current assets was largely attributable to the sale of an office building in Latin
America and the sale of a drug candidate in the oncology business. The income in 2018 was related to the out-licensing of two
DNA-dependent protein kinase (DNA-PK) inhibitors and another preclinical compound used in gene editing for six defined genetic
diseases to Vertex Pharmaceuticals Incorporated, United States. Furthermore, in 2018 Merck recognized gains from the transfer of
exclusive rights regarding the development of T cell-based therapies using chimeric antigen receptors (CAR-T) to the Intrexon
Corporation, United States, and from the termination of a license agreement in China.
2018: € 191 million) and GlaxoSmithKline plc, United Kingdom (2019: € 92 million / 2018: €0 million). For further explanations see
Note (6) "Collaboration agreements". Furthermore, milestone payments of € 75 million were received for the regulatory approval of
the drug candidate Palynziq TM, which was sold to BioMarin Pharmaceutical Inc., United States, in 2016. License income was mainly
due to a license granted for interferon beta products (Biogen Inc., United States), which amounted to € 89 million
(2018: € 79 million).
Revenue from upfront and milestone payments, royalties, and license payments amounting to € 557 million (2018: € 368 million)
resulted, in particular, from the collaboration agreements with Pfizer Inc., United States, (2019: € 281 million /
627
715
138
84
15
Accounting and measurement policies
3
8
21
18
83
44
368
557
2018
2019
1
The net income from repayments of subsidies received and reimbursements recognized within research and development costs
came to € 99 million in 2019 (2018: net expenses of € 1 million). This income comprised reimbursements from governmental
institutions as well as repayments of previously recognized governmental subsidies. In total, this resulted in net income amounting
to € 5 million (2018: net expenses of € 4 million). The increase in reimbursements recognized was mainly due to the strategic
alliance with GlaxoSmithKline plc, United Kingdom, in the field of immuno-oncology (see Note (6) "Collaboration agreements").
1
Project expenses of € 112 million (2018: € 25 million) were primarily incurred on advisory services in the context of the acquisition
of Versum Materials, Inc. and on the global harmonization of the IT landscape.
192
Tax rate differences
-463
-550
Theoretical income tax expense
31.7%
31.7%
Corporate tax rate
1,461
1,735
2018
2019
Profit before income tax
€ million
The following table presents the reconciliation from the theoretical income tax expense to the income tax expense according to the
consolidated income statement. The theoretical income tax expense is determined by applying the statutory tax rate of a
corporation headquartered in Darmstadt of 31.7% (2018: 31.7%).
-368
-440
290
453
150
Tax effect of companies with a negative contribution to consolidated profit
-26
-37
Income taxes consisted of corporation and trade taxes for the companies domiciled in Germany as well as comparable income taxes
for foreign companies. Income taxes relating to other periods recognized in fiscal 2019 resulted mainly from completed tax audits
and mutual agreement procedures as well as from additions to liabilities for risks from tax audits.
25.2%
25.4%
Tax ratio according to consolidated income statement
-368
-440
Income tax expense according to consolidated income statement
tax-free income/other tax effects
-25
-79
4
34
16
Tax effect on tax loss carryforwards
52
-17
Tax credits
-79
-59
Income tax relating to other periods
Tax effect of non-deductible expenses/
Previous year's figures have been adjusted, see Note (45) "Effects from new accounting standards and other presentation changes".
-59
-834
Recognition of deferred tax assets requires an estimate of the probability of future use. The influencing factors considered
as part of this assessment include the following:
Deferred tax assets resulting from deductible temporary differences, tax credits, and tax loss (and interest) carryforwards
are recognized if it is considered likely that taxable profit will be available in the future to apply such tax assets.
Deferred taxes
Assessments relating to specific matters are made to calculate uncertain income tax claims and liabilities. If it is considered
likely that an uncertain income-tax treatment will be accepted by the tax authority, the matter will be taken into account
on the basis of the applied or planned income-tax treatment. If it is considered unlikely that the tax authority will accept a
past or planned income-tax treatment, the uncertain tax assets or uncertain tax liabilities in question are valued at the
most likely amount. Uncertain income tax liabilities are disclosed within income tax liabilities. Expected income-tax-related
penalties and interest that do not fall within the scope of IAS 12 are treated as provisions.
Uncertain income tax claims and liabilities
209
Operting Activities
Notes
Consolidated Financial Statements
Current income taxes for the reporting period and for prior periods are calculated in the amounts that the tax authorities
are expected to demand or reimburse. The calculation is based on the entity-specific tax rate applicable in the relevant
tax year.
Current income taxes
Accounting and measurement policies
(17) Income tax
Remaining other operating expenses included, among others, special environmental protection costs as well as personnel expenses
not allocated to the functional areas. This item also included the expense for donations of Cesol® 600 tablets containing the active
ingredient praziquantel to the World Health Organization (WHO) and expenses for insurance services.
The expenses for disposal of businesses amounting to € 14 million (2018: € 6 million) resulted primarily from the adjustment of the
result on disposal of the flow cytometry business sold in 2018 (see Note (5) "Acquisitions and divestments”).
Restructuring expenses amounting to € 24 million (2018: €0 million) included functionally unallocatable expenses in connection
with reorganizational measures in all three business sectors.
Impairments of non-financial assets in the amount of € 33 million (2018: € 40 million) were attributable to intangible assets (see
Note (19) "Other intangible assets") and in the amount of € 8 million (2018: € 18 million) to property, plant and equipment (see
Note (20) "Property plant and equipment").
Information on litigation expenses is included in Note (26) "Other provisions".
Profit share expenses amounting to € 60 million (2018: € 46 million) were essentially incurred in connection with collaboration
agreements in the field of immuno-oncology (see Note (6) "Collaboration agreements").
• temporary differences subject to taxation in the future,
⚫ results history,
⚫ results planning, and
• existing tax planning of the respective Group company.
2018
2019
Tax reconciliation
Income tax
Deferred taxes in the period
Income tax for previous periods
Current income taxes in the period
€ million
Income taxes in the consolidated income statement were as follows:
-579
210
Notes
Consolidated Financial Statements
Assessing the extent to which a subsidiary's planned dividend distribution is probable in the foreseeable future is
discretionary.
Assessing the recoverability, particularly of tax credits and tax loss and interest carryforwards, requires assumptions and
estimates concerning the future taxable income of the respective Group company.
Regarding deferred tax items, there were degrees of uncertainty concerning the date on which an asset is realized or a
liability settled and concerning the tax rate applicable on this date. This applies in particular to deferred taxes recognized in
the course of acquisitions.
When assessing income tax claims and liabilities, the interpretation of tax provisions may be subject to particular
uncertainty. The possibility that the relevant tax authorities will take a different view concerning the correct application and
interpretation of tax standards cannot be ruled out. Changes to the assumptions underlying the correct interpretation of tax
standards, for example as a result of changes in legislation, affect the accounting treatment of uncertain income tax assets
and liabilities in fiscal 2019.
The calculation of the reported assets and liabilities from current and deferred income taxes requires extensive discretionary
judgments, assumptions, and estimates.
Significant discretionary decisions and sources of estimation uncertainty
Deferred tax liabilities are recognized for projected dividend payments of subsidiaries. If no dividend payments are
projected in the foreseeable future, no deferred tax liability is recognized for the difference between proportional equity
and the investment value determined for tax purposes.
Operting Activities
204
Cost reimbursements for research and development are offset against research and development costs.
The item comprises the costs of the Group's own research and development departments, the expenses incurred as a
result of research and development collaborations as well as the costs of clinical trials in the Healthcare business sector
(both before and after approval is granted).
-9
Dec. 31, 2019
Changes in scope of consolidation/other
Reclassification to assets held for sale
6
8
Currency translation difference
-45
-2
-43
-43
thereof: attributable to performance obligations satisfied in prior
periods
-46
-2
-43
-44
Cumulative increase (-)/decrease (+) in net sales
-1,385
-25
-9
PERFORMANCE MATERIALS
522
43
Development costs are capitalized as soon as the relevant criteria in accordance with IAS 38 have been fulfilled (see
Note (19) "Other intangible assets").
431
32
52
244
379
Total
thereof: United
States
Total
thereof: United
States
Total
Additions
Jan. 1, 2018
€ million
Rights of return
Rebates/bonus payments
2018
565
29
315
-1,067
-1,344
Utilizations
174
1,605
Total
2020 or later fiscal years
2019
Year of expected revenue recognition
Dec. 31, 2018
As of
€ million
Dec. 31, 2019
2,163
145
2,018
As of
Total
2021 or later fiscal years
2020
€ million
Year of expected revenue recognition
1,779
The following table shows the change in refund liabilities:
2019
Rebates/bonus payments
1,524
23
36
1,145
1,488
472
31
49
274
951
423
States
Total
thereof: United
thereof: United
States
Total
Additions
Jan. 1, 2019
€ million
Rights of return
Total
44
1,273
1,317
-521
-808
-845
-913
-954
20181
2019
Royalty and license expenses
Amortization of intangible assets²
Logistics
Sales promotion
Internal sales services
Sales force
€ million
Marketing and selling expenses comprised the following items:
Amortization of the intangible assets under marketing and selling expenses is mainly attributable to customer relationships,
marketing authorizations, licenses and similar rights, brands, and trademarks, which can be functionally allocated to
Marketing and Selling.
Marketing and selling expenses within logistics costs also include expenses for transportation services performed on behalf
of customers. The corresponding income from these services is presented under net sales.
Accounting and measurement policies
(13) Marketing and selling expenses
-509
23
-794
-923
Accounting and measurement policies
(14) Research and development costs
206
Operting Activities
Notes
Consolidated Financial Statements
in Japan,
Of royalty and license expenses, € 41 million (2018: € 84 million) related to the commercialization of ErbituxⓇ
and € 68 million (2018: € 53 million) to the license expenses for GlucophageⓇ in China with the distribution partner Bristol-Myers
Squibb, Company, United States.
Previous year's figures have been adjusted, see Note (45) "Effects from new accounting standards and other presentation changes".
2 Excluding amortization of internally generated or separately acquired software.
1
-4,396
-4,576
Marketing and selling expenses
-276
-339
Other marketing and selling expenses
-213
-200
-975
-702
Cost comprises the following items: directly attributable costs, such as cost of materials, personnel, and energy costs,
depreciation and amortization, overheads attributable to the production process, inventory impairment losses and their
reversals.
Cost of sales included amortization of intangible assets (excluding amortization of internally generated or separately acquired
software) in the amount of € 188 million (2018: € 175 million). Material costs in 2019 amounted to € 2,743 million
(2018: € 2,598 million) and were largely reported under cost of sales.
Accounting and measurement policies
12
Currency translation difference
-28
-3
-3
-24
-25
thereof: attributable to performance obligations satisfied in prior
periods
-34
Cost of sales primarily includes the cost of manufactured products sold as well as the merchandise sold.
-3
-30
-31
Cumulative increase (-)/decrease (+) in net sales
-1,235
-22
-43
-902
-1,193
Utilizations
-3
12
€ million/%
1
205
Operting Activities
Notes
Consolidated Financial Statements
(12) Cost of sales
The development of contract assets and contract liabilities is shown in Note (25) "Contract assets" and in
Note (28) "Other non-financial liabilities".
472
31
49
274
1
423
-1
-1
Changes in scope of consolidation/other
-19
-3
-16
Reclassification to assets held for sale
13
Dec. 31, 2018
Currency translation difference
-3
-40
-61
Changes in scope of consolidation
Dec. 31, 2018
Accumulated depreciation and
129
22,992
883
1,101
11,143
9,865
impairment losses
5
34
94
Dec. 31, 2019
Currency translation difference
sale
Reclassification to assets held for
-4
-2,326
-9,195
-596
-33
-1
-33
-1,195
-75
Transfers
Disposals
Impairment losses
-654
-466
Depreciation
sale
as of Jan. 1, 2019
-12,544
-426
5
5
1
-1
10,739
7,402
Cost as of Jan. 1, 2019
Dec. 31, 2018
7,237
329
289
1,543
5,076
Net carrying amounts as of
-12,544
-426
-596
-9,195
-2,326
885
-104
755
Changes in scope of consolidation
Transfers
-26
-4
-19
-2
Disposals
208
122
40
46
Additions
2,895
181
342
2,372
19,780
65
2018
38
1,288
The rise in deferred tax liabilities is essentially attributable to the recognition of intangible assets originating from the purchase
price allocation in connection with the acquisition of Versum Materials, Inc., United States (see Note (5) "Acquisitions and
divestments"). Deferred tax assets in 2019 rose mainly as a result of the change in interim profits on inventories from Group-
internal transactions and higher temporary measurement differences for pension obligations.
Deferred tax liabilities from outside basis differences for planned dividend payouts were recorded in the amount of € 9 million
(December 31, 2018: € 30 million). Temporary differences relating to the retained earnings of subsidiaries, for which no deferred
taxes are recognized, amounted to € 10,238 million as of December 31, 2019 (December 31, 2018: € 9,934 million).
Income tax receivables and income tax liabilities
Income tax receivables amounted to € 600 million (December 31, 2018: € 460 million). Of this figure, € 11 million (December 31,
2018: €0 million) are disclosed in other non-current non-financial assets. Income tax receivables resulted primarily from tax
prepayments that exceeded the actual amount of tax payable for 2019 and prior fiscal years as well as from refund claims for prior
years. As of December 31, 2019, income tax liabilities, including liabilities for uncertain tax obligations, amounted to € 1,402 million
(December 31, 2018: € 1,187 million). The figure consists of current and non-current income tax liabilities. As of December 31,
2019, there were no non-current income tax liabilities (December 31, 2018: € 11 million).
Consolidated Financial Statements
Notes
Operating assets, Liabilities, and contingent liabilities
213
Operating Assets, Liabilities, and Contingent Liabilities
(18) Goodwill
Accounting and measurement policies
In the course of business combinations, goodwill is recognized on the acquisition date. The option to measure non-
controlling interests at fair value on the date of their acquisition (full goodwill method) is not utilized.
Method for impairment test
Goodwill impairment tests take place at the level of the business sectors because it is the lowest level at which goodwill at
Merck is monitored for internal management purposes. In 2019, the recoverable amount for the cash-generating units
Healthcare and Life Science was determined on the basis of the value in use (2018: value in use). The impairment test of
the cash-generating unit Performance Materials took place in 2019 on the basis of the fair value less costs of disposal
(2018: value in use). It was performed both including and excluding the acquired business of Versum Materials, Inc.,
United States, (Versum). The information below refers to the impairment test where the acquired Versum Materials
business was included on the basis of the preliminary purchase price allocation.
The methodology used in Performance Materials to calculate the fair value less costs of disposal took into account the
perspective of an independent market participant. The measurement took into consideration non-observable input factors
in the market pursuant to Level 3 in the fair value hierarchy of IFRS 13.
Moreover, the methodology used in the implementation of the impairment tests and the main assumptions for determining
value are shown below:
Measurement basis
Consolidated Financial Statements
Notes
Operating assets, Liabilities, and contingent liabilities
214
Measurement method
Planning basis
Detailed planning period
Determining the value of
the key assumptions
1,091
1,828
1,421
Deferred taxes according to consolidated balance sheet
24
236
66
Liabilities
93
6
67
12
Tax loss carryforwards
27
33
Tax credits/other
Net cash flows:
73
60
98
Deferred taxes (before offsetting)
1,811
2,217
1,606
1,803
Offset deferred tax assets and liabilities
-390
-390
-515
-515
71
•
Sales growth in the detailed
planning period
•
Long-term growth rate
Discount factor
Weighted cost of capital after tax
%
2019
2018
2019
2018
Weighted cost of capital before tax
2019
2018
Healthcare
0.00%
The additional significant assumptions for determining value underlying the goodwill impairment tests are quantified below:
0.00%
6.4%
7.8%
8.5%
Life Science
1.75%
1.75%
7.1%
7.2%
8.9%
8.8%
Performance Materials 1
1.00%
5.8%
212
215
Consolidated Financial Statements
Profit margins in the detailed
planning period
Value in use
Fair value less costs of disposal
Discounted cash flow method
Last medium-term plan approved by the Executive Board
4 years
Based on plan approved by
the Executive Board,
taking into consideration
internal past experience
and external market data
and market estimations,
for example regarding
market shares, and excluding
new products from the development
pipeline and other expansion
investments
Based on past experiences
and management estimates,
taking into consideration largely
non-observable input factors in
the market, for example regarding
future market shares, selling
prices and volumes
Based on past experiences, adjusted for expected cost developments
Long-term growth rate after
the detailed planning period
Taking into consideration expected long-term growth and long-term inflation expectations
Notes Operating assets, Liabilities, and contingent liabilities
Discount factor after tax
• Risk-free interest rate:
.
•
Beta factor:
Market risk premium:
Cost of debt and capital structure:
Derived from the returns of long-term government bonds
Derived from the respective peer group
Based on a combination of different estimating methods; e.g. historical and implied
stock yields
Derived from the market data of the respective peer group companies
Significant measurement assumptions
Expected average sales growth in the detailed planning period for Healthcare in 2019 was a low single-digit percentage
rate, as in the previous year. In line with the value-in-use concept, this did not include net sales from the launch of new
products. Expected average sales growth in the cash-generating unit Life Science in the detailed planning period totaled a
mid single-digit percentage rate, as in the previous year. The calculation of the fair value less costs of disposal of the cash-
generating unit Performance Materials included expected average sales growth in the detailed planning period amounting to
a mid single-digit percentage rate (2018: low single-digit percentage rate). The EBITDA pre margins used to calculate the
recoverable amounts of the cash-generating units Performance Materials and Life Science in the detailed planning period,
taking into account Group costs allocated on a pro rata basis, were around 30% each in 2019 as well as in 2018.
(weighted average cost of capital -
WACC)
Other provisions
37
454
€ million
Tax loss carryforwards
Germany
Dec. 31, 2019
Outside
Germany
Dec. 31, 2018
Total Germany
Outside
Germany
Total
57
1,168
1,225
118
Tax loss carryforwards were structured as follows:
1,069
198
198
59
152
211
Tax loss carryforwards for which a deferred tax asset is
recognized
Tax loss carryforwards for which no deferred tax asset is
recognized
57
970
1,027
59
917
1,187
976
Changes in tax loss carryforwards
290
2
Consolidated Financial Statements
Notes
Operting Activities
211
Deferred taxes according to consolidated income statement
The reconciliation between deferred taxes on the consolidated balance sheet and deferred taxes on the consolidated income
statement is presented in the following table:
€ million
Change in deferred tax assets (consolidated balance sheet)
Change in deferred tax liabilities (consolidated balance sheet)
Change from reclassification of the discontinued Consumer Health operation
Deferred taxes credited/debited to equity
The item "changes in scope of consolidation/currency translation/other" mainly includes deferred tax effects resulting from the
acquisition of Versum Materials, Inc., United States (see Note (5) "Acquisitions and divestments"). In the prior year, this item
essentially comprised exchange rate effects between the euro and the U.S. dollar.
Changes in scope of consolidation/currency translation/other
2019
2018
330
-15
-540
201
-30
-67
-2
730
135
453
Deferred taxes according to consolidated income statement
0.50%
Potential deferred tax assets for tax loss carryforwards
Recognized deferred tax assets on tax loss carryforwards
Not recognized deferred tax assets on tax loss carryforwards
270
Assets
Liabilities
141
1,968
119
1,479
25
119
34
84
6
1
Liabilities
12
657
17
564
18
Receivables/other assets
29
6
25
5
Provisions for pensions and other post-employment benefits
546
6
3
17
Dec. 31, 2018
Inventories
287
27
254
281
27
27
9
24
33
17
243
260
Dec. 31, 2019
Assets
18
248
The majority of the tax loss carryforwards either has no expiry date or can be utilized for up to 20 years. In 2019, the income tax
expense was reduced by € 16 million (2018: € 34 million) due to the utilization of tax loss carryforwards from prior years for which
no deferred tax asset had been recognized in previous periods.
Consolidated Financial Statements
Notes
Operting Activities
212
Deferred taxes according to consolidated balance sheet
Deferred tax assets and liabilities corresponded to the following balance sheet items:
€ million
Intangible assets
Property, plant and equipment
Financial assets
230
6.3%
5.8%
8.0%
Determination of the amortization amount
Substantial assumptions and estimates are required to determine the appropriate level of amortization of other intangible
assets. This is especially relevant for to the determination of the underlying remaining useful life.
If the amortization of intangible assets from customer relationships, brands, trademarks, marketing authorizations,
patents, licenses and similar rights and other had been 10% higher, for example due to shortened remaining useful lives,
profit before income tax would have been € 112 million lower in fiscal 2019 (2018: € 117 million).
In fiscal 2019, an extension of the useful life of the intangible asset reported in connection with the drug RebifⓇ by one
year would have raised profit before income tax by € 185 million (2018: € 123 million).
Identification of impairment loss and reversal of impairment losses
Discretionary decisions are required in the identification of objective evidence of impairment as well as in identifying the
need to reverse the impairment of other intangible assets.
€ million
Cost as of Jan. 1, 2018
Consolidated Financial Statements
Notes
Operating assets, Liabilities, and contingent liabilities
219
In connection with in-licensing agreements in the Healthcare business sector, Merck moreover has to make a discretionary
estimate of the extent to which up-front payments and milestone payments represent remuneration for services received
or whether such payments result in an in-licensing of an intangible asset that has to be capitalized.
Changes in scope of consolidation
Finite useful
life
Marketing authorizations, patents,
licenses, similar rights, and other
items
Not yet available for
Software and
software in Advance
development payments
use
7,171
10,685
1,017
705
Total
19,577
Additions
Customer relationships,
brands, and trademarks
1
Identification and measurement of intangible assets acquired in the course of business combinations are subject to
significant discretion and estimation uncertainty (for further details on measurement methods and on sensitivity analyses
regarding the acquisition of Versum Materials, Inc., United States, see Note (5) "Acquisitions and divestments").
Significant discretionary decisions and sources of estimation uncertainty
4,472
17,141
The changes in goodwill caused by foreign exchange rates resulted almost exclusively from translating the goodwill from
the acquisitions of the Sigma-Aldrich Corporation, the Versum Materials, Inc., the AZ Electronic Materials S.A., and the
Millipore Corporation, which were partially denominated in U.S. dollars, into the reporting currency.
Consolidated Financial Statements
Notes
Operating assets, Liabilities, and contingent liabilities
217
Changes in the scope of consolidation in fiscal 2019 mainly resulted from the acquisition of Versum Materials, Inc., United States.
See Note (5) "Acquisitions and divestments" for additional information on the acquisitions.
In the Healthcare business sector, the reclassification as assets held for sale in 2018 related to the sale of the Consumer Health
business to The Procter & Gamble Company, United States, while in the Life Science business sector it related to the sale of the flow
cytometry business to the Luminex Corporation, United States.
As in 2018, there was impairment loss recognized on goodwill in fiscal 2019.
(19) Other intangible assets
Accounting and measurement policies
Purchased intangible assets
Recognition and initial measurement of purchased intangible assets
Contingent consideration in the form of milestone payments in connection with the purchase of intangible assets outside of
a business combination is capitalized as an intangible asset and recognized as a financial liability once the milestone is
reached, since the consideration is contingent upon future events that are beyond Merck's control.
Intangible assets acquired in the course of business combinations are recognized at fair value on the acquisition date. This
also includes contingent considerations.
Capitalization of internally generated intangible assets
Owing to the high risks until pharmaceutical products are approved, the criteria for the capitalization of development costs
in accordance with IAS 38 are not met in the Healthcare business sector for the development of drug candidates. Costs
incurred after regulatory approval are insignificant and are therefore not recognized as intangible assets. In the Life
Science and Performance Materials business sectors, development expenses are capitalized as soon as the criteria have
been met. This includes expenses that arose as part of registration for REACH. Furthermore, development expenses for
internally developed software are capitalized provided that the relevant criteria have been fulfilled.
Subsequent measurement
In the course of subsequent measurement, the option to remeasure intangible assets at fair value is not exercised.
Intangible assets with a finite useful life are amortized using the straight-line method. The useful lives of customer
relationships, brand names, and trademarks as well as marketing authorizations, acquired patents, licenses and similar
rights, and software are between three and 24 years. In determining these useful lives, Merck considers factors including
the typical product life cycles for each asset and publicly available information about the estimated useful lives of similar
assets.
An impairment test is performed if there are indications of impairment. Such indications of impairment and the need to
reverse an impairment is determined during an annual process involving the responsible departments and considering
external and internal information. Impairment losses are reversed if the original reasons for impairment no longer apply.
Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment when
a triggering event arises or at least once a year. Amortization does not begin until the product is ready for commercial use
and is charged on a straight-line basis over the shorter of the patent or contract term and the estimated useful life.
Consolidated Financial Statements
Notes
Operating assets, Liabilities, and contingent liabilities
218
For intangible assets acquired in the course of in-licensing, the portion of the consideration paid by Merck to acquire
intellectual property is recognized as an intangible asset. If development services are also acquired from the selling
contract party, an appropriate portion of the consideration is allocated to research and development costs in line with the
service performance.
11,135
14
55
impairment losses as of Jan. 1,
-1,868
-8,438
-596
-357
-11,260
2018
Changes in scope of consolidation
Depreciation, amortization, and
write-downs
-427
-747
Impairment losses
Accumulated amortization and
-21
5
14
-57
-1,231
-19
-40
26
Transfers
-1
Reversals of impairment losses
Reclassification to assets held for
24
Disposals
35
19,780
885
106
Disposals
-6
-37
-111
-8
-162
Transfers
57
-56
4
4
755
Reclassification to assets held for
-51
-7
-87
sale
Currency translation difference
265
71
6
342
Dec. 31, 2018
7,402
10,739
-29
2
1,534
175
Performance Materials 1
> 10%
> 10%
> 2
> 2
> 1.5
> 2
1
In 2019 considering Versum Materials Inc., United States, on the basis of the preliminary purchase price allocation.
Consolidated Financial Statements
Notes
Operating assets, Liabilities, and contingent liabilities
0.9
216
€ million
Cost as of Jan. 1, 2018
Changes in scope of consolidation
Additions
Disposals
Transfers
Reclassification to assets held for sale
Currency translation difference
Dec. 31, 2018
Accumulated amortization and impairment losses as of Jan. 1, 2018
Changes in scope of consolidation
Impairment losses
Goodwill shown below was incurred mainly in the course of the acquisitions of the Versum Materials Inc., United States,
the Sigma-Aldrich Corporation, United States, the AZ Electronic Materials S.A., Luxembourg, the Millipore Corporation,
United States, and the Serono SA, Switzerland.
Disposals
> 1
> 1
7.4%
1 In 2019 considering Versum Materials Inc., United States, on the basis of the preliminary purchase price allocation.
Net cash flows were discounted using cost of capital after tax. The aforementioned cost of capital before tax was
subsequently derived iteratively. The first-time application of IFRS 16 had no material effect on the goodwill impairment
test.
Significant discretionary decisions and sources of estimation uncertainty
The determination of the recoverable amount is subject to discretion and significant estimation uncertainty. Assumptions
regarding the amount of net cash flows, long-term growth rates, and discount factors are considered a material source of
estimation uncertainty due to their inherent uncertainty.
In all the impairment tests performed, the recoverable amount in 2019 and in 2018 was more than 15% higher than the
carrying amount of the respective cash-generating unit or group of cash-generating units. Regardless of this, the planning
data used was checked for plausibility against external analyst forecasts and the recoverable amounts determined were
validated using validation multiples based on peer group information.
In addition, sensitivity analyses of the key assumptions were performed as part of the impairment tests. As a result, no
change of a significant assumption deemed possible by management would have resulted in an impairment. The following
table presents the amount by which key assumptions would have to change before the impairment test would trigger the
recognition of an impairment loss:
Reduction in net cash flows
%
Decrease in long-termgrowth rate
percentage points
Increase in cost of capital after tax
2019
> 1
2019
percentage points
2019
2018
Healthcare
> 10%
> 10%
> 2
> 2
> 2
> 2
Life Science
> 10%
> 10%
2018
17,141
Transfers
Reclassification to assets held for sale
Transfers
Reclassification to assets held for sale
Currency translation difference
Dec. 31, 2019
Accumulated depreciation and impairment losses
as of Jan. 1, 2019
Changes in scope of consolidation
Impairment losses
Disposals
Transfers
Reversals of impairment losses
Reclassification to assets held for sale
Disposals
Currency translation difference
Net carrying amounts as of Dec. 31, 2019
1,534
10,896
1,334
13,764
40
3,161
3,201
199
1,534
11,135
-23
4,472
Dec. 31, 2019
Reversals of impairment losses
Additions
Cost as of Jan. 1, 2019
Currency translation difference
Dec. 31, 2018
Goodwill
Healthcare
1,785
Life Science
Performance Materials
Total
10,519
1,278
13,582
-251
-1
Changes in scope of consolidation
-31
1,534
10,896
-282
57
464
1,334
13,764
Net carrying amounts as of Dec. 31, 2018
1,534
10,896
1,334
13,764
408
17
2019
23
500
58
58
1,543
1,290
856
314
120
thereof: from the acquisition of Versum Materials, Inc.
Not yet available for use
thereof: from the acquisition of AZ Electronic Materials S.A.
thereof: from the acquisition of Versum Materials, Inc.
Other
Patents, licenses, and similar rights
Other marketing authorizations
2.0
Saizen Ⓡ
XalkoriⓇ
Marketing authorizations
Finite useful life
Marketing authorizations, patents, licenses, similar
rights, and other items
655
563
563
7.9
thereof: from the acquisition of the Sigma-Aldrich
Corporation
813
774
49
725
RebifⓇ
45
45
68
4
177
177
289
467
184
14
269
77
78
11
5
62
277
277
4.8-6.8
616
516
516
1.3-13.3
966
1,154
845
309
0.5-13.3
32
13
31
369
3.5-7.9
Brands and trademarks
13
470
Impairment losses on market authorizations, patents, licenses, similar rights, and other items not yet available for use amounted
to € 33 million (2018: €0 million) and were accounted for by the Healthcare business sector. They were mostly attributable to the
restructuring of the collaboration with F-star Delta Ltd., United Kingdom (see Note (6) "Collaboration agreements"). These
impairment losses were recognized as impairment losses on non-financial assets under other operating expenses on the
consolidated income statement.
The additions to marketing authorizations, patents, licenses, similar rights, and other items not yet available for use amounted
to € 40 million in fiscal 2019 (2018: € 35 million) and were mostly attributable to the Healthcare business sector.
The additions to market authorizations, patents, licenses, similar rights, and other items with finite useful lives in the amount
of € 46 million (2018: € 14 million) were mainly attributable to the Life Science and Healthcare business sectors.
Changes in the scope of consolidation in fiscal 2019 mainly included additions to intangible assets from the acquisition of Versum
Materials, Inc., United States. This acquisition and the accompanying effects are described in detail in Note (5) "Acquisitions and
divestments."
220
Operating assets, Liabilities, and contingent liabilities
Notes
Consolidated Financial Statements
Dec. 31, 2019
9,175
382
467
1,290
7,036
-68
-13,817
-4
-501
-634
-9,853
-2,829
-26
-39
Dec. 31, 2019
Currency translation difference
sale
Reclassification to assets held for
Reversals of impairment losses
-5
569
6
The additions to software and software in development in the amount of € 122 million (2018: € 55 million) resulted mainly from
development costs in connection with new ERP programs.
The reclassifications in 2018 to assets held for sale were made in connection with the divestment of the Consumer Health business
and of the flow cytometry business (see Note (5) "Acquisitions and divestments").
Net carrying amounts as of
Remaining
useful life
1.5-7.5
The carrying amounts of customer relationships, brands, and trademarks as well as marketing authorizations, patents, licenses,
similar rights, and other items were attributable to the business sectors as follows:
470
thereof: from the acquisition of Millipore Corporation
2,238
2,238
6.8-18.8
thereof: from the acquisition of Versum Materials, Inc.
3,496
3,231
16.9-17.9
thereof: from the acquisition of the Sigma-Aldrich
Corporation
4,263
6,262
2,389
3,231
3,873
€ million
Customer relationships, brands, and trademarks
Customer relationships
in years Healthcare
Life
Science
Total
Dec. 31,
Total
Dec. 31,
Performance
Materials
4,598
2,438
7,036
5,076
1.5-17.9
2018
-713
-223
100
327
299
Transfers
-8
1,104
-88
-81
Disposals
812
57
14
-46
Reclassification to assets held for sale
Changes in scope of consolidation
Dec. 31, 2019
Transfers
45
Disposals
Impairment losses
Depreciation
Accumulated depreciation and impairment losses
as of Jan. 1, 20191
12,561
Currency translation difference
95
8
13
1,555
4,911
4,816
26
47
1,278
190
-5,740
553
4,313
3,837
Cost as of Dec. 31, 2018
4,811
1,092
328
1,163
2,228
Net carrying amounts as of Dec. 31, 2018
-4
-977
-3,150
-1,609
-44
Reversals of impairment losses
1,305
Additions
1,096
Adjustment on initial application of IFRS 16
84
58
271
139
Changes in scope of consolidation
11,019
1,096
1,372
4,330
4,222
Cost as of Jan. 1, 20191
467
67
17
384
10,551
Reclassification to assets held for sale
Switzerland
Dec. 31, 2019
Biotech development system
Filling and packaging center
Investment project
Performance Materials
Performance Materials
Life Science
Life Science
Life Science
Life Science
Life Science
Healthcare
Healthcare
Healthcare
Healthcare
Business sector
The largest individual additions to property, plant and equipment in fiscal 2019 were related to the investment projects shown
below:
Extention of research center
223
Logistics center
Filling plant
Production plant
China
Production plant
Research center
Production plant
Laboratory
Korea
Ireland
China
Switzerland
China
United States
-5
Switzerland
Country
Warehouse
Production plant
Operating assets, Liabilities, and contingent liabilities
Notes
Consolidated Financial Statements
-710
-21
1
41
85
48
-6
-153
-284
-273
-5,740
-4
-977
-3,150
-1,609
-8
176
-20
-14
Changes in the scope of consolidation in fiscal 2019 mainly included additions to property, plant and equipment from the acquisition
of Versum Materials, Inc., United States. A detailed account of the acquisition is included in Note (5) "Acquisitions and divestments”.
6,213
1 Values effective January 1, 2019, have been adjusted, see Note (45) "Effects from new accounting standards and other presentation changes".
1,274
456
1,521
2,962
Currency translation difference
Net carrying amounts as of Dec. 31, 2019
-4
-1,100
-3,390
-1,854
-44
-10
-19
-6,348
-23
and
66
Useful life
Operating and office equipment, other facilities
Plant and machinery
Administration buildings
Production buildings
Subsequent measurement is based on amortized cost. Property, plant and equipment is depreciated using the straight-line
method over the useful life of the asset concerned and depreciation expenses are allocated to the respective functional
costs. Depreciation of property, plant and equipment is based on the following useful lives:
Subsequent measurement
In the course of determining cost, government grants received are deducted from the asset's carrying amount within the
scope of IAS 20. Grants receivable for financial support that are not longer linked to future costs are recognized in profit or
loss.
Recognition and initial measurement
Accounting and measurement policies
(20) Property, plant and equipment
221
Operating assets, Liabilities, and contingent liabilities
Notes
Consolidated Financial Statements
No more than 33 years
No more than 40 years
6 to 25 years
Contract assets represent contractual claims to receive payment from customers for whom the contractual performance
obligation has already been fulfilled although an unconditional claim to payment has yet to arise.
3 to 10 years
An impairment test is performed if there are indications of impairment. External and internal information is used in this
context. In the event of impairment, an impairment loss is recorded under other operating expenses. Impairment losses
are reversed to the amortized cost and presented in other operating income if the original reasons for impairment no
longer apply.
Reclassification to assets held for sale
Transfers
Disposals
Additions
Changes in scope of consolidation
Cost as of Jan. 1, 2018
€ million
222
Operating assets, Liabilities, and contingent liabilities
Notes
Consolidated Financial Statements
Discretionary decisions are required in the identification of objective evidence of impairment as well as in identifying the
need to reverse impairment of property, plant and equipment.
Identification of a need to recognize impairment loss and reverse impairment loss
Assumptions and estimates are required to determine the appropriate level of amortization of property, plant and
equipment. This is related in particular to the determination of the underlying remaining useful life. In making these
estimates, Merck considers the useful lives of the property, plant and equipment derived from past experience.
SIGNIFICANT DISCRETIONARY DECISIONS AND SOURCES OF ESTIMATION UNCERTAINTY
Determination of the amotization amount
The useful lives of the assets are reviewed regularly and adjusted if necessary.
Accounting and measurement policies
3,004
3,251
Jan. 1
€ million
The following table provides details on the development of trade accounts receivable before loss allowances:
In fiscal 2019, trade accounts receivable in Italy with a nominal value of € 22 million (2018: € 28 million) were sold for € 22 million
(2018: € 28 million). These receivables did not involve any further rights of recovery against Merck.
17
3,226
21
3,243
21
-3
-73
3,319
21
314
3,004
Additions
thereof: attributable to performance obligations satisfied in prior periods
Customer payments/derecognition of uncollectable receivables
Effects of currency translation
3
152
-86
6
43
-16,590
-19,452
Currency translation difference
1
3,277
3,004
19,505
2018
2019
(25) Contract assets
Changes in scope of consolidation/other
Dec. 31
Reclassification to assets held for sale
16,395
-16
Dec. 31, 2018
as of Jan. 1, 2018
-517
-115
-246
-156
-5,343
-4
-887
-2,978
-1,474
10,551
1,096
1,305
4,313
3,837
90
-12
10
-3
-2
13
40
13
Dec. 31, 2018
Currency translation difference
Reclassification to assets held for sale
Reversals of impairment losses
-24
24
116
2
42
59
11
-18
-1
6
31
43
1,026
Total
advance payments to
vendors and contractors
Germany
Construction in progress
Other facilities,
operating and
office equipment
1,178
Plant
and
buildings machinery
4,136
3,517
land rights, and
Land,
Transfers
Disposals
Impairment losses
Depreciation, amortization, and write-downs
Changes in scope of consolidation
9,857
16
41
47
-134
-2
-20
-69
-43
-696
140
Accumulated depreciation and impairment losses
237
-152
-28
-46
-64
-14
890
786
319
Germany
Healthcare
accounts
2
10
58
557
The net carrying amounts of other facilities, operating and office equipment mainly include the right-of-use assets for vehicles.
The leases existing under IFRS 16 affected the consolidated income statement as follows:
€ million
13
Right-of-use assets
Impairment losses
Reversals of impairment losses
Expenses for leasing low-value assets
Expenses for leases with variable lease payments
Income from subleasing right-of-use assets
Income from sale-and-lease-back transactions
Depreciation
487
-1
9
5
42
175
2
24
200
-22
-2
-24
-100
-6
-39
-144
-1
-1
Interest expenses for lease liabilities
Total
Payments from leases are shown in the consolidated cash flow statement as follows:
€ million
€ million
Dec. 31, 2019
Future lease payments
Interest portion of future payments
Present value of future lease payments
(22) Other non-financial assets
Within 1 year
119
1-5 years
After more than 5 years
Total
319
189
627
-12
-30
The expected maturities of the lease liabilities were as follows:
1
227
Notes
Net cash flows from operating activities
Net cash flows from financing activities
Total
2019
-144
-1
-22
1
21
-14
-160
2019
-33
-136
-169
Consolidated Financial Statements
Operating assets, Liabilities, and contingent liabilities
-20
36
67
Separation of lease and non-lease components
For leases, Merck generally elects to exercise the option not to separate non-lease components from lease components.
Only leases for land, land rights, and buildings are separated into lease and non-lease components.
Depreciation of the right-of-use assets arising from leases
Basically, right-of-use assets are depreciated over the lease term. If it should be considered reasonably certain that an
existing purchase option will be exercised or ownership will be automatically transferred at the end of the lease term,
depreciation is applicable over the same period to corresponding assets under property, plant and equipment (see
Note (20) "Property, plant and equipment").
Determining the incremental borrowing rate
If the interest rate for the lease can not be determined, the incremental borrowing rate is applicable for measuring the
lease. At Merck, the incremental borrowing rate is determined on the basis of the risk-free interest rate of the currency of
the respective Group company over a similar term. This interest rate is adjusted using a risk surcharge specific to Merck.
Merck applies the repayment model to determine the current portion of the lease. The current portion of the lease
corresponds to the repayment share of the next 12 months.
Merck exercises the option of not recognizing leases of intangible and low-value underlying assets in the context of
IFRS 16. If the provision of company cars to employees qualifies as an employee benefit within the meaning of IAS 19,
IFRS 16 is not applied. In this case, its balance-sheet treatment is governed solely by IAS 19.
Determining the lease term
Consolidated Financial Statements
Notes
Operating assets, Liabilities, and contingent liabilities
225
SIGNIFICANT DISCRETIONARY DECISIONS AND SOURCES OF ESTIMATION UNCERTAINTY
Identification of a lease
Where renewal or termination options are available, their exercise is assessed on a case-by-case basis, considering factors
such as location strategies, leasehold improvements, and the degree of specificity.
IFRS 16 scope
For further information on the accounting and measurement policies applied in 2018 for existing leases (IAS 17), please
refer to the 2018 Annual Report.
Merck has applied the requirements of IFRS 16 "Leases" since January 1, 2019. The effects of the first-time application of
IFRS 16 are set out in Note (45) "Effects from new accounting standards and other presentation changes".
The carrying amounts of the right-of-use assets arising from leases for fiscal 2019 are shown separately in Note (21) "Leasing"
based on the requirements of IFRS 16 "Leases." The following table shows the carrying amounts of the assets classified as finance
leases in 2018 in accordance with the requirements of IAS 17 "Leases".
€ million
Land and buildings
Other property, plant, and equipment
Net carrying amount of assets classified as finance lease
Dec. 31, 2018
8
1
9
(21) Leasing
Consolidated Financial Statements
Notes
Operating assets, Liabilities, and contingent liabilities
224
Accounting and measurement policies
Discretionary decisions can arise during the identification of leases in answering the question of whether a lessor's right of
substitution is substantive. In cases of doubt, Merck classifies rights of substitution as not substantive if the facts and
circumstances of the case do not support a different assessment.
Measurement of lease and non-lease components
In the case of leases for land, land rights, and buildings, discretion and estimation uncertainty may occur in the course of
separating the lease into lease and non-lease components if observable prices are not available from the contract partner
or other potential lessors.
Determining the lease term
Net carrying amounts as of Jan. 1, 2019
Changes in scope of consolidation
Additions
Disposals
Depreciation
Impairment losses
Reversals of impairment losses
Other
Net carrying amounts as of Dec. 31,
2019
Right-of-use assets
Plant and
Land, land rights and buildings machinery Other facilities, operating and office equipment
Total
391
17
€ million
476
The reconciliation of net carrying amounts of right-of-use assets from leases was as follows:
Operating assets, Liabilities, and contingent liabilities
When determining the lease term, existing renewal and termination options must be evaluated to determine the probability
that such options will be exercised.
These assessments may be discretionary even though they rely on existing and material information on the general
economic context, such as location strategies, leasehold improvements, or the degree of specificity. If the available
information does not allow a reliable assessment, Merck uses historical experience for comparable situations.
The 20 largest leases accounted for around 50% of total lease liabilities. The subject matter of the leases essentially
comprised right-of-use assets for office, warehouse, and laboratory buildings. If options to renew these leases were
exercised in future, which is not yet considered likely, this would result in additional potential cash outflows of up
to € 279 million.
Where individual contracts included termination options, it was considered unlikely that these would be exercised so that
additional lease payments were already considered in the corresponding lease liability.
Determining the incremental borrowing rate
Determining the risk-free interest rate and determining the risk surcharge are both discretionary.
Initial measurement of the lease liability and the right-of-use asset
In measuring the lease liability Merck is subject to discretion and significant estimation uncertainty regarding:
• measuring any payments in the course of promised residual value guarantees, and
• assessing the probability that existing exercise options will be exercised.
In measuring right-of-use assets under leases, Merck is subject to estimation uncertainty regarding any demolition
obligations and their resulting payments.
Right-of-use assets under leases are reported in the balance sheet item "Property, plant and equipment"
(see Note (20) "Property, plant and equipment").
Consolidated Financial Statements
Notes
226
-61
107
289
Subsequently
measured at
amortized cost
3,227
Gross other
340
receivables
Gross trade and
receivable
3,567
Loss allowances on
trade accounts
-77
receivable
Loss allowances on
-4
other receivables
Gross trade
€ million
Trade and other receivables are measured as follows:
Operating assets, Liabilities, and contingent liabilities
229
In the Life Science business sector, the increase in inventories resulted in particular from the Process Solutions and Research
Solutions business units due to the good order situation. The increase in inventories in the Performance Materials business sector
resulted mainly from the first-time consolidation of Versum Materials, Inc., United States. Impairment losses on inventories in 2019
amounted to € 275 million (2018: € 183 million); reversals of impairment losses came to € 74 million (2018: € 77 million).
The rise in impairments compared to 2018 was predominantly attributable to the Healthcare and Life Science business sectors.
As of the balance sheet date, no inventories were pledged as security for liabilities.
(24) Trade and other receivables
Accounting and measurement policies
Trade accounts receivable without significant financing components that are not the subject of a factoring agreement are
measured at the amount of the unconditional claim for consideration on initial recognition. For additions to trade accounts
receivable, loss allowances are recognized based on individual transactions to allow for expected credit losses.
At initial recognition, other receivables are measured at fair value plus the direct transaction costs incurred upon
acquisition of the asset.
Trade accounts receivable that are potentially designated to be sold on account of a factoring agreement are measured at
fair value through other comprehensive income.
The accounting and measurement policies applied in determining loss allowances for trade and other receivables are shown
in Note (42) "Management of financial risks" in the "Credit risks" section.
Loss allowances and reversals of loss allowances are presented under the item "Impairment losses and reversals of
impairment losses on financial assets (net)" in the consolidated income statement if the asset can be characterized as
operational. If the asset can be characterized as financial, it is recognized in financial income or financial expenses.
Further information on the accounting and measurement policies governing financial assets can be found in Note (36)
"Other financial assets".
Consolidated Financial Statements
Notes
Operating assets, Liabilities, and contingent liabilities
230
other receivables
Net trade and
3,485
other receivables
3,297
-77
-73
-4
-3
24
3,510
3,222
24
3,488
3,205
22
17
Total
21
3,591
Notes
25
340
thereof: current
3,463
thereof: non-
current
22
Dec. 31, 2019
Subsequently measured at fair
Dec. 31, 2018
Subsequently Subsequently measured at fair
value through other
comprehensive income
Total
measured at
amortized cost
value through other
comprehensive income
25
3,251
2,983
314
Consolidated Financial Statements
The increase in inventories in 2019 was due to accelerating business volumes in all three business sectors. In the Healthcare
business sector the build-up occurred mainly due to the positive market development in China due to Erbitux® stocks and products
to treat infertility and diabetes.
2,764
8
326
Prepaid expenses
153
14
167
117
5
121
Assets from defined benefit plans
4
4
7
7
Other assets
318
94
344
340
169
565
Accounting and measurement policies
Other non-financial assets are carried at amortized cost. Impairments are recognized for any credit risks.
Other non-financial assets are broken down as follows:
Dec. 31, 2019
Dec. 31, 2018
€ million
Current
Non-current
Total
Current
Non-current
Total
Receivables from non-income related taxes
4
Impairment losses of € 8 million (2018: € 18 million) were recognized in fiscal 2019. They mainly referred to assets allocated to the
Performance Materials business sector and related essentially to a research center in the United Kingdom. Reclassifications to
assets held for sale in fiscal 2018 were mainly in connection with the divestment of the Consumer Health business.
79
94
Inventory prepayments are recognized under other non-financial assets.
Significant discretionary decisions and sources of estimation uncertainty
Identification of impairment losses or reversal of impairment losses
Discretionary decisions are required in the identification of impairment as well as in identifying the need to reverse
impairment of inventories. There are estimation uncertainties with respect to the calculation of the net realizable value.
In particular, changes in selling prices and expected costs of completion are considered in calculating this value.
Inventories consisted of the following:
€ million
Raw materials and supplies
Work in progress
Finished goods/merchandise sold
Inventories
Dec. 31, 2019
Dec. 31, 2018
622
943
510
834
1,420
Since inventories are for the most part not manufactured within the scope of long-term production processes, the
manufacturing costs exclude borrowing costs.
172
In addition to the impairment derived from the procurement and/or sales market, impairment losses may also be
necessary for quality reasons or due to a lack of usability of the items, or their shelf life. If the reason for impairment no
longer applies, the carrying amount is adjusted to the lower of cost and new net realizable value.
In addition to directly attributable unit costs, manufacturing costs also include overheads attributable to the production
process, which are determined on the basis of normal capacity utilization of the production facilities. Goods for resale are
recognized at cost. When determining amortized cost or manufacturing costs, the "first-in, first-out" (FIFO) and weighted
average cost formulas are used.
62
157
Other non-financial assets
591
97
688
536
76
611
Consolidated Financial Statements
Notes
Operating assets, Liabilities, and contingent liabilities
228
(23) Inventories
Accounting and measurement policies
Inventories are tested for impairment using a business sector-specific method. Under this method, cost is compared to the
net realizable values. The net realizable value corresponds to the expected sale proceeds less any costs for completing and
distributing the product. If the net realizable value is lower than the amortized cost, the asset is written down by a
corresponding amount which is recognized as an expense in the cost of sales for that period.
Germany
1,776
3,342
consolidation/other
207
Liabilities from non-income related taxes
336
4
332
379
87
291
Contract liabilities
687
687
681
681
Accruals for personnel expenses
Total
Non-current
Current
Total
Non-current
Current
€ million
5
Dec. 31, 2018
212
15
Total
Non-current
Current
€ million
2018
2019
The following table shows the development of contract liabilities in the period under review:
1,230
19
1,211
1,304
93
1,211
Other non-financial liabilities
22
21
33
1
32
Other accruals
186
171
Current
Dec. 31, 2019
Contract liabilities include payments received by Merck prior to completion of contractual performance. In addition to
consideration received within the scope of collaboration agreements, this applies particularly to service agreements.
To identify contingent liabilities from litigation and tax matters, Merck draws on the knowledge of the legal department and
the tax department as well as the opinions of external consultants and attorneys.
Accounting and measurement policies
(27) Contingent liabilities
237
Operating assets, Liabilities, and contingent liabilities
Notes
Consolidated Financial Statements
Miscellaneous other provisions mainly comprised provisions related to remaining risks from the divestment of the Consumer Health
business, for warranty obligations, and for uncertain commitments from contributions, fees, and other duties.
Miscellaneous other provisions
Provisions for interest and penalties related to income taxes mainly comprised interest payables associated with or resulting from
tax payables.
Interest and penalties related to income taxes
Provisions for acceptance and follow-on obligations primarily considered costs stemming from discontinued development projects as
well as obligation surpluses from onerous contracts. Utilizations and releases were mainly attributable to development projects
discontinued in previous years.
The uncertainties primarily involve assessing future events that will influence the obligation.
Estimation uncertainty regarding the provisions for acceptance and follow-on obligations primarily relates to determining
the amount of the expected outflow of resources.
Significant discretionary decisions and sources of estimation uncertainty - other provisions for
acceptance and follow-on obligations
⚫ the expectations concerning future events influencing the obligations.
⚫ the expected date or period of the outflow of resources, and
⚫ the number and duration of continued treatments of affected patients in clinical development programs,
⚫ the ability to use or potential for modification of secured manufacturing capacities at third-party providers, particularly
for pharmaceutical compounds,
The main parameters in determining the amount of the provision are
The assessment of the recognition obligation for provisions for acceptance and follow-on obligations and the quantification
of future outflows of resources is based on internal project plans as well as on the assessment of the respective matters by
in-house and external specialists.
The key factors in the assessment to identify contingent liabilities are:
Other non-financial liabilities comprise the following:
⚫ the validity of the arguments brought forward by the opposing party or the tax authority and
The amount of the contingent liability is based on the best possible estimate which in turn is based on likelihood of possible
outcomes of proceedings and on the applicable license rate in patent disputes.
Accruals for personnel expenses included in other non-financial liabilities comprise, in particular, liabilities resulting from
vacation entitlements, bonuses, and social security contributions.
Accounting and measurement policies
(28) Other non-financial liabilities
238
Operating assets, Liabilities, and contingent liabilities
Notes
Consolidated Financial Statements
Contingent liabilities from tax matters included various non-German income and non-income tax matters that were mainly
attributable to the determination of earnings under tax law, customs regulations, and excise tax matters.
In addition, there are contingent liabilities from various legal disputes with Merck & Co., Inc., United States, of the United States
(outside the United States and Canada: MSD), among other things due to breach of the co-existence agreement entered into
between the two companies and/or trademark/name right infringement regarding the use of the designation "Merck". In this
context, Merck has sued MSD in various countries and has been sued by MSD in the United States. An outflow of resources - except
costs for legal defense - was not deemed sufficiently probable as of the balance sheet date to justify the recognition of a provision.
Since the contingent liability from these legal disputes could not be reliably quantified as of the balance sheet date, this matter was
not considered in the table presented above.
Contingent liabilities from litigation mainly related to obligations under civil law, labor law, and antitrust law. The potential civil law
obligations primarily related to potential liabilities to pay damages due to a legal dispute under antitrust law. It is possible that
Merck would be subject to claims for compensation for damages asserted by health insurance companies due to excessively high
drug prices in case of a valid judgment under antitrust law.
1
1
47
128
Dec. 31, 2018
Dec. 31, 2019
Contingent liabilities from litigation and tax matters
Other contingent liabilities
€ million
This applies for assessing the likelihood of an outflow of resources and determining its amount for future and potential
obligations.
The identification and the measurement of contingent liabilities are both strongly associated with discretionary decisions
and estimation uncertainties.
Significant discretionary decisions and sources of estimation uncertainty
⚫ the legal situation and current court rulings in comparable proceedings in the jurisdiction in question.
Non-current
Total
Jan. 1
Personnel expenses comprised the following:
(31) Personnel expenses
Average number of employees
Other
Marketing and sales
Supply chain
Research and development
Administration
Production
As of December 31, 2019, the number of employees at Merck Group stood at 57,036 (December 31, 2018: 51,713 employees).
The following table provides the annual average number of employees by function. The 2018 figure also included the share of
employees at the Consumer Health business which was divested as of December 1, 2018.
(30) Number of employees
240
Employees
Notes
Consolidated Financial Statements
Employees
of € 673 million (December 31, 2018: € 622 million) from outstanding invoices.
Trade and other payables amounted to € 2,054 million (December 31, 2018: € 1,766 million). This item included accrued amounts
Trade and other payables are subsequently measured at amortized cost.
Accounting and measurement policies
(29) Trade and other payables
€ million
239
Wages and salaries
Pension expenses
Reclassification to
4,293
2018
2019
53,760
53,607
965
1,207
15,445
13,939
4,012
4,109
7,243
7,559
9,856
10,338
16,239
16,455
2018
2019
Personnel expenses
Compulsory social security contributions and other costs
Operating assets, Liabilities, and contingent liabilities
Notes
Consolidated Financial Statements
Cumulative catch-up adjustments to revenue
-564
-2
-563
-864
-3
-861
Recognition of income/reversal
393
2
391
902
209
693
Additions
506
194
311
336
4
332
Reclassification from non-current to current
122
-122
193
As of January 1, 2019, contract liabilities amounted to € 336 million (January 1, 2018: € 506 million), of which € 328 million
(2018: € 299 million) was recognized through profit or loss in fiscal 2019.
The increase in contract liabilities compared to the 2018 balance sheet date was mainly attributable to an accrued upfront payment
from the collaboration agreement with GlaxoSmithKline plc, United Kingdom (see Note (6) "Collaboration agreements").
336
4
631
332
379
87
291
2
Accounting and measurement policies other provisions for acceptance and follow-on
obligations
-2
3
2
2
2
2
Dec. 31
Changes in scope of consolidation/other
Currency translation difference
Reclassification to assets held for sale
-193
3
Acceptance and follow-on obligations
4,111
Operating assets, Liabilities, and contingent liabilities
-270
-188
10
53
156
52
Contract assets resulted in particular from rendering services and manufacturing of customer-specific equipment in the Life Science
and Performance Materials business sectors. In the reporting period, the changes in the scope of consolidation/other were mainly
attributable to the acquisition of Versum Materials, Inc., United States (see Note (5) "Acquisitions and divestments").
Other provisions developed as follows:
Acceptance and
Employee
€ million
Litigation Restructuring benefits
Environmental
protection
follow-on
obligations
Interest and penalties
related to income taxes
Other
Total
Jan. 1, 2019
551
90
7
316
205
35
5,024
5,281
319
357
594
Consolidated Financial Statements
Notes
Operating assets, Liabilities, and contingent liabilities
231
The following table shows the change in contract assets:
€ million
Jan. 1
Additions
thereof: attributable to performance obligations satisfied in prior periods
Reclassification to trade accounts receivable
Reclassification to assets held for sale
Effects of currency translation
Changes in scope of consolidation/other
Dec. 31
2019
2018
52
311
137
30
46
-20
-63
-274
14
1
11
26
3
2
6
Interest effect
Currency translation
difference
Changes in scope of
1
8
3
9
1
236
223
-14
-3
-68
-51
211
1,381
Additions
61
113
194
6
11
25
76
Personnel expenses comprised expenses of € 152 million (2018: € 130 million) for defined contribution plans which are funded
exclusively using external funds and therefore do not represent any obligation for Merck other than making contribution payments.
In addition, employer contributions amounting to € 86 million (2018: € 81 million) were transferred to the German statutory
pension insurance system and € 68 million (2018: € 65 million) to statutory pension insurance systems abroad.
485
Release
-24
-25
-101
-8
-6
-9
-48
-222
-55
Utilizations
assets held for sale
(26) Other provisions
548
235
Environmental protection
ACCOUNTING AND MEASUREMENT POLICIES - OTHER PROVISIONS FOR ENVIRONMENTAL
PROTECTION
To assess a recognition obligation in relation to provisions for environmental protection and to quantify future outflows of
resources, Merck draws on external appraisals and the knowledge of in-house and outside specialists.
The following are key parameters in calculating the present value of the future settlement amount of provisions for
environmental protection:
⚫ the future settlement date,
⚫ the actual extent of environmental damages,
⚫ the applicable remediation methods,
⚫ the associated future costs, and
⚫ the discount factor.
Measurement is carried out regularly in consultation with independent experts.
Significant discretionary decisions and sources of estimation uncertainty - other provisions for
environmental protection
The assessment of a recognition obligation as well as the measurement of the provisions for environmental protection are
subject to a degree of estimation uncertainty.
The uncertainty relates, in particular, to the assessment of the timing and likelihood of a future outflow of resources and
assessment of the extent of necessary remediation measures and the related calculation of the amount of present and
potential liabilities.
Provisions for environmental protection resulted in particular from obligations for soil remediation and groundwater protection in
connection with the crop protection business in Germany and Latin America that was discontinued in 1987.
Restructuring
In addition to provisions for the above-mentioned legal disputes, provisions existed as of the balance sheet date for various other
pending legal disputes.
Paroxetine: In connection with the divested generics business, Merck is subject to antitrust investigations by the British Competition
and Market Authority (CMA) in the United Kingdom. In March 2013, the authorities informed Merck of the assumption that a
settlement agreement entered into in 2002 between Generics (UK) Ltd. and several subsidiaries of GlaxoSmithKline plc, United
Kingdom, in connection with the antidepressant drug paroxetine violates British and European competition law. Merck, the then
owner of Generics (UK) Ltd., was allegedly involved in the negotiations for the settlement agreement and is therefore liable. The
investigations into Generics (UK) Ltd. started in 2011, without this being known to Merck. On February 11, 2016, the CMA imposed
a fine in this matter. Merck has taken legal action against this fine. The Appeals Tribunal has since submitted the relevant legal
questions to the European Court of Justice (CJEU) for a preliminary ruling. The CJEU confirmed in January 2020 that such
settlement agreements may breach European competition law. Appropriate accounting measures have been taken. A decision and
an outflow of resources within the next 12 months are considered possible. Merck recognized provisions in a low double-
digit million-euro amount for these proceedings.
Antitrust review proceedings for the acquisition of Sigma-Aldrich Corporation, United States, (Sigma-Aldrich): On July 6, 2017,
Merck received notice from the European Commission (EU Commission) in connection with the antitrust review proceedings for the
acquisition of Sigma-Aldrich, in which the EU Commission informed Merck of its preliminary conclusion that Merck and Sigma-
Aldrich allegedly transmitted incorrect and/or misleading information within the scope of the acquisition of Sigma-Aldrich. The EU
Commission received registration of the merger on April 21, 2015, and granted clearance on June 15, 2015, subject to the condition
that Merck and Sigma-Aldrich divest parts of the European solvents and inorganic chemicals businesses of Sigma-Aldrich in order to
resolve antitrust concerns. According to the preliminary viewpoint of the EU Commission communicated in a letter dated July 6,
2017, Merck and Sigma-Aldrich withheld related important information about an innovation project. According to the EU
Commission, the innovation project should have been included in the remedies package. At present, an administrative procedure is
carried out at the EU Commission which might result in the issuance of a fine. Merck is entitled to legal recourse should a fine be
imposed. The ongoing investigations are limited to the examination of violations of EU merger control procedures and do not affect
the validity of the EU Commission's decision to approve the merger. A provision in a fixed double-digit million-euro amount was still
in place for this issue. A potential outflow of resources is considered possible for 2020.
Antitrust and other proceedings
this jurisdiction, JNC refrained from filing a patent infringement claim. In view of this development, the provision was reduced in
2019. After the adjustment, the remaining provision for this matter amounts to a double-digit million euro sum. Cash outflow within
the next 12 months is considered possible at present.
Operating assets, Liabilities, and contingent liabilities
233
Notes
Notes
Significant discretionary decisions and sources of estimation uncertainty - other provisions for
restructuring projects
⚫ the anticipated expenses arising from the change in or termination of the working relationships of the affected
employees.
• the planned implementation date of the restructuring plan, and
⚫ the size of the affected business units,
The main parameters in determining the amount of the provisions are
Merck uses a formal restructuring plans to assess recognition obligation for provisions for restructuring projects and the
amount of the expected outflow of resources.
other provisions for restructuring projects
Accounting and measurement policies
234
Operating assets, Liabilities, and contingent liabilities
Notes
Consolidated Financial Statements
Restructuring provisions mainly included commitments to employees in connection with communicated restructuring projects and
provisions for related onerous contracts.
The additions to restructuring provisions in the amount of € 113 million were mainly attributable to reorganizational measures in
the Performance Materials business sector, as well as to the ongoing expansion of shared services activities and the related
relocation of activities. Outflows of resources are expected within the next five years.
In addition to the aforementioned programs, restructuring provisions also included obligations from the Life Science business
sector, which, will carry out relocations that have already been decided and communicated as well as the gradual closure of
operations at various German sites by 2022.
Dec. 31, 2019
Employee benefits
Provisions for employee benefits include obligations from long-term variable compensation programs. More information on these
compensation programs can be found in Note (33) "Share-based compensation".
Obligations for partial retirement programs and other severance payments that were not set up in connection with restructuring
programs as well as obligations in connection with long-term working hour accounts and anniversary bonuses are also included
under provisions for employee benefits.
With respect to provisions for pensions and other post-employment benefits, see Note (32) "Provisions for pensions and other
post-employment benefits".
Consolidated Financial Statements
Consolidated Financial Statements
Estimation uncertainty about the provisions for restructuring primarily relate to determining the amount of the expected
outflow of resources.
Operating assets, Liabilities, and contingent liabilities
Consolidated Financial Statements
11
117
237
73
17
thereof: non-current
933
144
51
10
35
25
62
531
thereof: current
1,424
179
51
21
143
347
135
110
490
Litigation
Consolidated Financial Statements
PS-VA liquid crystals mixtures: In the Performance Materials business sector, Merck is involved in a legal dispute with JNC
Corporation, Japan, (JNC). JNC claims that by manufacturing and marketing certain liquid crystals mixtures, Merck has infringed
JNC patents. JNC asserts its claims in court in two jurisdictions. Merck maintains that JNC's patent infringement assertion is invalid
in three jurisdictions owing to relevant prior art and has filed the relevant nullity actions. Two jurisdictions have yet to reach their
final decisions. In 2019, the nullity action was concluded in one jurisdiction with legally binding effect in favor of Merck in 2019. In
RebifⓇ: Merck is involved in a patent dispute with Biogen Inc., United States, (Biogen) in the United States. Biogen claims that the
sale of RebifⓇ in the United States infringes on a Biogen patent. The disputed patent was granted to Biogen in the United States in
2009. Subsequently, Biogen sued Merck and other pharmaceutical companies for infringement of this patent. Merck defended itself
against all allegations and brought a countersuit against Biogen claiming that the patent was invalid and not infringed by Merck's
actions. In the first instance, a jury recognized the invalidity of the patent. This jury verdict was overturned by the judge in the
same instance in September 2018. For the time being, the patent is thus deemed to be legally valid and to have been infringed.
Merck filed a complaint with the United States Court of Appeals for the Federal Circuit (second instance) against the first-instance
ruling in October 2018. A decision is expected in the first half of 2020. Merck recognized provisions in a three-digit million euro
amount for these proceedings. Cash outflow within the next 12 months is considered possible at present.
Product-related and patent disputes
The legal matters described below represented the most significant legal risks.
Like the measurement of provisions, the assessment of a recognition obligation for provisions for litigation is to a particular
extent subject to a degree of estimation uncertainty. The uncertainties relate, in particular, to the assessment of the
likelihood and the amount of an outflow of resources to cover probable obligations.
Significant discretionary decisions and sources of estimation uncertainty - other provisions for
litigation
⚫ the discount factor to be used.
⚫ the usual damages and fines for other legal disputes, and
⚫ the applicable license rate plus an expected infringement surcharge,
Notes
the duration of proceedings in pending legal disputes,
⚫ the legal situation and current court rulings in comparable proceedings in the jurisdiction in question.
⚫ the validity of the arguments brought forward by the opposing party and
Assessing the need for recognizing provisions for litigation is based on the likelihood of possible outcomes for proceedings.
In particular, the factors influencing this likelihood are:
To assess a recognition obligation in relation to provisions for litigation and to quantify future outflows of resources, Merck
draws on the knowledge of the legal department as well as outside counsel.
other provisions for litigation
Accounting and measurement policies
232
Operating assets, Liabilities, and contingent liabilities
Notes
In addition, the following factors are also relevant in measuring other provisions for litigation:
The uncertainty factors arise in particular from the change in or termination of the working relationships of the affected
employees.
Remeasurements of defined benefit obligations
-220
61
Payments made
5
-49
125
Payment transactions
Employee contributions
-488
199
-687
Employer contributions
-281
Actuarial gains (+)/losses (-)
199
199
Actuarial gains (+)/losses (-) arising from changes
in demographic assumptions
35
5
Actuarial gains (+)/losses (-)
Change in effects of the asset ceilings
experience adjustments
Actuarial gains (+)/losses (-) arising from
Remeasurement of plan assets
experience adjustments
35
Actuarial gains (+)/losses (-) arising from
in financial assumptions
-727
Actuarial gains (+)/losses (-) arising from changes
-727
-2
46
-4
Net defined
benefit liability
-1
2,391
-4,719
Effects of the
asset ceilings
Fair value of the
plan assets
-2,329
Present value of all defined
benefit obligations
€ million
The following table shows the development of the net defined benefit liability:
244
Employees
Notes
76
Jan. 1, 2019
Current service cost
Interest expense
Interest income
17
-21
Currency effects recognized through profit or loss
Other effects recognized through profit or loss
Items recognized through profit or loss
Gains (+) or losses (-) on settlement
-3
-2
-93
-162
-3
-2
46
-93
-162
Past service cost
Plan administration costs recognized in income
-2
37
14
-15
42
-85
-161
-2,256
Net defined
benefit liability
245
-2
4
42
-85
-161
-1
2,452
-4,707
-2
4
Gains (+) or losses (-) on settlement
Currency effects recognized through profit or loss
-40
Actuarial gains (+)/losses (-) arising from changes
in demographic assumptions
Remeasurements of defined benefit obligations
-5
2
-7
-202
54
-256
3
3
Other effects recognized through profit or loss
Items recognized through profit or loss
thereof: attributable to the divested Consumer
Health business
-3
Consolidated Financial Statements
-17
asset ceilings
Effects of the
Fair value of the
plan assets
Present value of all defined
benefit obligations
5
Other changes
-5
37
-42
Currency translation differences recognized in equity
Reclassification to liabilities directly related to assets
held for sale
-24
6
-30
Changes in scope of consolidation
113
3
110
15
-5
37
Other
38
Employees
Notes
Consolidated Financial Statements
Past service cost
Plan administration costs recognized in income
Interest income
Interest expense
Current service cost
Jan. 1, 2018
€ million
-2,953
2,692
-5,644
Dec. 31, 2019
-29
-67
Pension obligations in the United Kingdom resulted primarily from benefit plans which are based on years of service and final salary
and were closed to newly hired employees in 2006. The agreed benefits comprised old-age, disability, and surviving dependent
benefits. The employer and the employees made contributions to the plans. Merck had to observe the existing statutory minimum
funding obligations.
242
The vast majority of defined benefit obligations of German entities were attributable to plans that encompass old-age, disability,
and surviving dependent pensions. On the one hand, these obligations were based on benefit rules comprising benefit commitments
dependent upon years of service and final salary from which newly hired employees have been excluded. On the other hand, the
benefit rules applicable to employees newly hired since January 1, 2005, comprise a direct commitment that is not based on the
final salary. The benefit entitlement resulted from the cumulative total of annually determined pension components that were
calculated based on a defined benefit expense and an age-dependent annuity table. Statutory minimum funding obligations did not
exist.
Dec. 31, 2019
€ million
Actuarial gains (+)/losses (-) arising from changes
The following overview shows how the present value of all defined benefit obligations would have been impacted by
changes to relevant actuarial assumptions.
Notes Employees
Consolidated Financial Statements
Dec. 31, 2018
The determination of the present value of the obligation from defined benefit pension plans primarily requires discretionary
judgment as regards the selection of methods to determine the discount rate and to select suitable mortality tables, as well
as estimates of future salary and pension increases.
Significant discretionary decisions and sources of estimation uncertainty
These were average values weighted by the present value of the respective defined benefit obligation.
1.77%
1.56%
2.94%
2.65%
Determining the present value of the obligation
Increase (+)/decrease (-) in present value of all defined benefit obligations if
the discount rate were 50 basis points higher
the discount rate were 50 basis points lower
the expected rate of future salary increase were 50 basis points higher
the expected rate of future salary increase were 50 basis points lower
the expected rate of future pension increase were 50 basis points higher
the expected rate of future pension increase were 50 basis points lower
In order to limit the risks of changing capital market conditions and other developments, for the past number of years newly hired
employees have been offered plans that are not based on final salary.
Depending on the legal, economic, and fiscal circumstances prevailing in each country, different retirement benefit systems are
provided for the employees. Generally, these systems are based on the years of service and salaries of the employees. Pension
obligations comprise both obligations from current pensions and accrued benefits for pensions payable in the future.
Sensitivities are determined on the basis of the respective parameters in question, with all other measurement
assumptions remaining unchanged.
-196
-234
251
291
-130
-160
151
175
503
626
-435
-550
1.75%
The value recognized in the consolidated balance sheet for pensions and other post-employment benefits was derived as follows:
1.74%
3.21%
Discount rate
2018
2019
Switzerland
Germany
The calculation of the defined benefit obligations was based on the following actuarial parameters:
1.30%
Apart from the net balance of interest expense on the defined benefit obligations and interest income from the plan assets,
which is recorded under the financial result, the expenses for defined benefit pension systems are allocated to the
individual functional areas in the consolidated income statement.
The present value of the defined benefit obligation is determined by expert third parties who prepare actuarial appraisals
for this purpose.
Accounting and measurement policies
241
(32) Provisions for pensions and other post-employment benefits
Notes Employees
Consolidated Financial Statements
The actuarial assumptions which are used as the basis for the calculation of the defined benefit obligation, e.g. discount
rates, rates of salary increases, and pension trends, were determined on a country-by-country basis in line with the
economic conditions prevailing in each country. Furthermore, the latest country-specific mortality tables are used.
The respective discount rates are generally determined on the basis of the returns on high-quality corporate bonds issued
with adequate maturities and currencies. For euro-denominated obligations, bonds with ratings of at least "AA" or
comparable from one of the leading rating agencies as of the reporting date, and a euro swap rate of adequate duration
serve as the basis for the data.
1.97%
Future salary increases
2.50%
3.22%
2.00%
3.16%
2.36%
2.95%
2.06%
1.00%
1.74%
2018
2019
2018
Other countries
United Kingdom
2019
2018
2019
0.17%
1.74%
2.51%
Future pension increases
€ million
Present value of all defined benefit obligations
Fair value of the plan assets
44
38
6
1,704
85
942
Installments
677
3,711
139
139
99
1
Lump sum
Annuity
1
6
6
Other
2,692
174
518
778
5,644
400
536
943
3,765
1,222
Present value of defined benefit obligations
Fair value of the plan assets
29
29
Medical plan
10
10
Benefit not based on final salary
Installments
Lump sum
530
2,953
Provisions for pensions and other post-employment benefits
Assets from defined benefit plans
Net defined benefit liability
1
2,328
2,952
-2,391
-2,692
4,719
5,644
Dec. 31, 2018
Dec. 31, 2019
Effects of the asset ceilings
Funded status
4
Pension obligations in Switzerland mainly comprised old-age, disability, and surviving dependent benefits regulated by law. The
employer and the employees made contributions to the plans. Merck had to observe the existing statutory minimum funding
obligations.
2,957
2,329
3,081
Annuity
Benefit based on final salary
Total
Other countries
Dec. 31, 2019
United Kingdom
Switzerland
Germany
243
€ million
The defined benefit obligations were based on the following types of benefits provided by the respective plan:
Notes Employees
Consolidated Financial Statements
2,336
7
1
139
458
Actuarial gains (+)/losses (-) arising from
838,939
776,675
37,122
54,512
720,338
Dec. 31, 2019
Forfeited
The value of the provisions as of December 31, 2019, was € 113 million (December 31, 2018: € 114 million). Net expenses
of € 60 million were incurred in fiscal 2019 (2018: net expenses of € 92 million). The three-year tranche issued in 2016 ended at
the end of 2018; an amount of € 60 million was paid out in 2019. The three-year tranche issued in fiscal 2017 ended at the end of
2019; a payout of € 50 million is expected for 2020.
876,061
829,632
774,850
Dec. 31, 2018
23,760
39,889
Transferred as part of the divestment of the Consumer Health business
Potential number offered for the first time in 2019
Consolidated Financial Statements
Notes Capital Structure, Investments and Financing Activities
249
Notes
Consolidated Financial Statements
The allocation of net profit/loss is based on the net income of both E. Merck KG and Merck KGaA determined in accordance with the
provisions of the German Commercial Code. These results are adjusted for trade tax and/or corporation tax and create the basis for
the allocation of net profit/loss. The adjustment for corporation tax is made to compensate for the difference in the tax treatment
between the general partner and the limited liability shareholders. Corporation tax is only calculated on the income received by the
limited liability shareholders. Its equivalent is the income tax applicable to the partners of E. Merck KG which must be paid by them
directly. The adjustment thus ensures that the share in net profit corresponds to the respective interests held by the two
shareholder groups.
E. Merck KG and Merck KGaA engage in reciprocal net profit transfers. This makes it possible for E. Merck KG, the general partner
of Merck KGaA, and the shareholders to participate in the net profit/loss of Merck KGaA in accordance with the ratio of the general
partner's equity interest and the subscribed capital (70.274% or 29.726% of the equity capital).
E. Merck KG's share of net profit
The equity capital of the company consists of the subscribed capital composed of shares and the equity interest held by the general
partner E. Merck KG (general partner's equity). As of the balance sheet date, the company's subscribed capital amounting
to € 168 million was divided into 129,242,251 no-par value bearer shares plus one registered share. Each share therefore
corresponds to € 1.30 of the subscribed capital. The amount resulting from the issue of shares by Merck KGaA exceeding the
nominal amount was recognized in the capital reserves. The equity interest held by the general partner amounted to € 397 million.
As in 2018, the subscribed capital did not change in fiscal 2019.
Equity capital/capital reserves
In cases where a company was not acquired in full, non-controlling interests are measured using the fair value of the
proportionate share of net assets.
Measurement of non-controlling interests within the scope of a company acquisition
From an accounting perspective, the contributions both shareholder groups are treated as equity, regardless of the general
partner's option to terminate its capital share. For this to happen, the limited liability shareholders must be able to decide,
on the basis of the Articles of Association of Merck KGaA, on the conversion of the company into a stock corporation and
thus limit the general partner's settlement claim to fulfillment in equity instruments.
As a partnership limited by shares, Merck KGaA has two different shareholder groups who have contributed to the
company: The general partner E. Merck KG as the personally liable partner and the shareholders.
Accounting treatment of the general partner's equity
Accounting and measurement policies
(34) Equity
Capital Structure, Investments, and Financing Activities
37,953
Capital Structure, Investments and Financing Activities
13,988
891,345
2018 tranche
2017 tranche
DAX® value (60-day average of the DAX® prior to the start of the performance
cycle)
Reference price of Merck shares in € (60-day average Merck share price prior to
the start of the performance cycle)
Term
Performance cycle
Jan. 1, 2017 -
The following table presents the key parameters as well as the development of the potential number of Merck Share Units (MSUs)
for the individual tranches.
Employees
Notes
Consolidated Financial Statements
The Executive Board members have their own Long-Term Incentive Plan, the conditions of which largely correspond to the Long-
Term Incentive Plan described here. A description of the plan for the Executive Board can be found in the compensation report,
which is part of the Statement on Corporate Governance.
These KPIs are the performance of the Merck share price compared to the performance of the DAX® with a weighting of 50%, the
development of the EBITDA pre margin during the performance cycle as a proportion of a defined target value with a weighting of
25%, and the development of organic sales growth as a proportion of a defined target value, also with a weighting of 25%.
Depending on the development of the KPIs, at the end of the respective performance cycle the eligible participants are granted
between 0% and 150% of the MSUS they could be eligible to receive. Based on the MSUs granted, the eligible participants receive a
cash payment at a specified point in time in the year after the three-year performance cycle has ended. The value of a granted
MSU, which is relevant for payment, corresponds to the average closing price of Merck shares in Xetra® trading during the last 60
trading days prior to the end of the performance cycle. The payout amounts of the respective tranches are limited to two and a half
times the individual grant.
These share-based compensation programs with cash settlement in place at Merck are aligned not only with target achievement
based on key performance indicators, but above all with the long-term performance of Merck shares. Certain executives and
employees could be eligible to receive a certain number of virtual shares - Merck Share Units (MSUS) - at the end of a three-year
performance cycle. The number of MSUs that could be received depends on the individual grant defined for the respective person
and the average closing price of Merck shares in Xetra® trading during the last 60 trading days prior to January 1 of the respective
performance cycle (reference price). An obligatory personal investment is not a precondition to receive payments apart from
Executive Board members. When the three-year performance cycle ends, the number of MSUs to then be granted is determined
based on the development of defined key performance indicators (KPIs).
248
Dec. 31, 2019
3 years
Jan. 1, 2018 -
Dec. 31, 2020
3 years
Potential number offered for the first time in 2018
24,897
828,727
Dec. 31, 2017
853,624
Forfeited
Potential number offered for the first time in 2017
Potential number of MSUS
11,304.33
13,089.39
10,822.06
95.63
93.75
3 years
91.73
2019 tranche
Jan. 1, 2019 -
Dec. 31, 2021
Forfeited
Sensitivities were determined on the basis of the respective parameters in question, with all other measurement
assumptions remaining unchanged. The 2017 tranche reported under current provisions will not be subject to any value
fluctuations between December 31, 2019, and the payout date and was therefore excluded from the sensitivity analysis
(December 31, 2018: exclusion of 2016 tranche).
250
The profit distribution to be resolved upon by shareholders also defines the amount of that portion of net profit/loss freely available
to E. Merck KG. If the shareholders resolve to carry forward or to allocate to retained earnings a portion of Merck KGaA's net
retained profit to which they are entitled, E. Merck KG shall be obliged to allocate to the profit brought forward/retained earnings of
Merck KGaA a comparable sum determined according to the ratio of subscribed capital to general partner's equity. This ensures that
the retained earnings and the profit carried forward of Merck KGaA correspond to the ownership ratios of the shareholders on the
one hand, and E. Merck KG on the other hand. Consequently, for distributions to E. Merck KG, only the amount is available that
results after netting the profit transfer of Merck KGaA with the amount either allocated or withdrawn by E. Merck KG from retained
earnings/profit carried forward. This amount corresponds to the sum paid as a dividend to the shareholders and reflects their pro
rata shareholding in the company.
E. Merck KG
Merck KGaA
E. Merck KG
2018
2019
Profit carried forward
Merck KGaA
Dividend proposal
Retained earnings Merck KGaA
Transfer to revenue reserves
Withdrawal from revenue reserves
Profit carried forward from previous year
Net income
€ million
Withdrawal by E. Merck KG
431
169
430
A dividend of € 1.25 per share was distributed for fiscal 2018. The dividend proposal for fiscal 2019 will be € 1.30 per share. The
proposed dividend payment to shareholders amounts to € 168 million (2018: € 162 million). The amount withdrawn by E. Merck KG
would amount to € 430 million (2018: € 430 million).
26
61
-162
-168
26
63
-430
-430
187
194
25
60
26
61
162
The result of E. Merck KG on which the appropriation of profits adjusted for trade tax is based amounted to € -25 million
(2018: € -24 million). This resulted in a profit/loss transfer to Merck KGaA of € -7 million (2018: € -7 million). Merck KGaA's
net income adjusted for corporation tax, on which the appropriation of its profit is based, amounted to € 639 million
(2018: € 637 million). Merck KGaA transferred a profit/loss in the amount of € 449 million of its profit to E. Merck KG
(2018: € 447 million). In addition, an expense from corporation tax charges amounting to € 14 million resulted
(2018: expense of € 20 million).
Appropriation of profits
162
169
(100%)
20
14
616
625
-24
-25
-25
2018
2019
Basis for appropriation of profits
Result of E. Merck KG before reciprocal profit transfer, adjusted for trade tax
Net income of Merck KGaA before reciprocal profit transfer
Corporation tax
€ million
The reciprocal net profit/loss transfer between E. Merck KG and Merck KGaA as stipulated by the Articles of Association was as
follows:
E. Merck KG Merck KGaA E. Merck KG Merck KGaA
639
-24
637
431
Net income
-20
-14
-7
7
-7
7
Profit/loss transfer to Merck KGaA (ratio of subscribed capital to equity capital) (29.726%)
Corporation tax
-447
447
-449
449
(70.274%)
Profit transfer to E. Merck KG (ratio of general partner's equity to equity
capital)
430
8
9
-10
-1
2,391
-4,719
40
2
-5
-2,329
43
-13
53
Other
-13
15
Other changes
Dec. 31, 2018
The actual income from plan assets amounted to € 245 million (2018: loss of € 73 million).
Covering the benefit obligations with financial assets represents a means of providing for future cash outflows, which are required in
some countries (for example Switzerland and the United Kingdom) on the basis of legal requirements and in other countries (for
example Germany) on a voluntary basis.
Both the benefit obligations as well as the plan assets are subject to fluctuations over time. The reasons for such fluctuations could
include changes in market interest rates and thus the discount rate, as well as adjustments to other actuarial assumptions (such as
life expectancy or expected future increases in pension). This could lead to - or cause an increase in - underfunding. Depending on
statutory regulations, it could become necessary in some countries to reduce underfunding through additions of liquid assets.
Total
No quoted market price
in an active market
Quoted market price
in an active market
Total
No quoted market price
in an active market
an active market
Quoted market price in
Dec. 31, 2018
Dec. 31, 2019
The fair value of the plan assets can be allocated to the following categories:
In order to minimize fluctuations of the net defined benefit liability, in managing its plan assets, Merck also pays attention to
potential fluctuations in liabilities. The portfolio is structured in such a way that, in the ideal scenario, plan assets and defined
benefit obligations develop in opposing directions when exposed to exogenous factors. This applies in particular to interest rate
fluctuations - thus creating a natural defense against these factors.
246
Employees
Notes
Consolidated Financial Statements
5
€ million
-10
-5
-115
-18
139
-40
Employer contributions
Payments made
-115
Actuarial gains (+)/losses (-)
Change in effects of the asset ceilings
experience adjustments
Actuarial gains (+)/losses (-) arising from
Remeasurement of plan assets
experience adjustments
-18
Actuarial gains (+)/losses (-)
81
-115
-34
48
Reclassification to liabilities directly related to assets
held for sale
Changes in scope of consolidation
Payment transactions
Employee contributions
123
13
110
14
-14
48
48
75
-49
124
Currency translation differences recognized in equity
Cash and cash
equivalents
Equity instruments
Debt instruments
Changes to the intrinsic value of share-based compensation programs are allocated to the respective functional costs
according to the causation principle. Fair value changes are recognized in financial income or finance costs.
The expected volatilities are based on the implicit volatility of Merck shares and the DAX® in accordance with the
remaining term of the respective tranche. The dividend payments incorporated into the valuation model are based on
medium-term dividend expectations.
The fair value of the obligations is recalculated by an external expert using a Monte Carlo simulation on each balance sheet
date. The main parameters in the measurement of the share-based compensation programs with cash-settlement are long-
term indicators of company performance and the price movement of Merck shares in relation to the DAX®.
Corresponding provisions are recognized for the current share-based compensation program with cash settlement at Merck
(the Merck Long-Term Incentive Plan) and reported under employee benefits (see Note (26) "Other provisions").
Accounting and measurement policies
(33) Share-based payments
Consolidated Financial Statements
The weighted duration of defined benefit obligations amounted to 22 years.
Plan assets did not directly include financial instruments issued by Group companies or real estate used by Group companies.
2,391
182
2,209
2,692
205
Employer contributions to plan assets and direct payments to plan beneficiaries are expected to amount to € 37 million
and € 79 million, respectively, next year.
Notes
Employees
247
-9
-15
-16
14
16
Dec. 31, 2018
Increase (+)/decrease (-) of the provision
Dec. 31, 2019
10%
-10%
Change in the DAX®
-10%
Variation of Merck share price
10%
€ million
The measurement of long-term share-based compensation programs implies extensive estimation uncertainty. The
following overview shows the amounts by which the non-current provisions (carrying amount as of December 31, 2019: €
63 million / carrying amount as of December 31, 2018: € 54 million) would have been impacted by changes in the DAX®
or the closing price of the Merck share on the balance sheet date. The amounts stated would have led to a corresponding
reduction or increase in profit before income tax.
Significant discretionary decisions and sources of estimation uncertainty
2,487
Fair value of the
plan assets
19
19
121
121
Direct investments
993
993
1,273
592
592
609
147
147
191
1,273
609
191
105
in financial assumptions
105
Investment funds
25
6
19
Other
contracts
77
77
72
77
77
Insurance
458
396
1
395
in real estate
52,957
€
1,466
Equity instruments
385
369
16
342
322
20
Subsequent measurement at fair value through profit or loss
12
4
8
39
9
29
Debt instruments
274
274
Contingent considerations
258
258
259
7
7
45
45
Derivatives without a hedging relationship (operational)
Derivatives with a hedging relationship (operational)
Financial assets
30
14
16
399
33
20
Derivatives without a hedging relationship (financial transactions)
50
50
50
50
Other debt instruments
259
14
4
399
285
Total
Non-
current
Current
Dec. 31, 20181
Dec. 31, 2019
Loans against third parties
Subsequent measurement at amortized cost
€ million
255
Capital Structure, Investments and Financing Activities
Notes
Consolidated Financial Statements
result
income
Financial
Other
operating
Financial result
Other operating
income or other
operating expenses
Current
Non-
current
Total
1
278
8
438
408
29
Subsequent measurement at fair value through other comprehensive
income
Other
9
Equity instruments
9
9
8
1
10
9
1
9
8
1
1
4
57
824
809
Liabilities to related parties
370
1,337
Bank loans
113
205
Commercial paper
869
2,019
€
USD
750
1,350
4.500%
March 2020
1,350
Loans from third parties and other financial debt
53
20
Liabilities from derivatives (financial transactions)
4.500%
March 2020
1,348
USD
750
2.400%
March 2020
655
2.400%
USD bond 2015/2020
Eurobond 2010/2020
USD bond 2015/2022
Eurobond 2015/2022
4,550
109
Current financial debt
Lease liabilities (IFRS 16)
2
Liabilities from finance leases (IAS 17)
16
19
2,215
March 2020
669
Bonds (current)
Nominal value
The composition of financial debt as well as a reconciliation to net financial debt are presented in the following table:
256
Capital Structure, Investments and Financing Activities
Notes
Consolidated Financial Statements
The accounting and measurement policies of lease liabilities and derivatives are presented in Notes (21) "Leasing"
and (39) "Derivative financial instruments”.
Except for lease liabilities and derivatives with negative market values, all financial debt is subsequently measured at
amortized cost using the effective rate method.
Dec. 31, 2019
Accounting and measurement policies
The shares held in Progyny, Inc., United States, and in the Intrexon Corporation, United States, in particular, were disclosed in
equity instruments with subsequent measurement at fair value through other comprehensive income. Please refer to Note
(52) "List of shareholdings" for a detailed list of all investments made in equity instruments with subsequent measurement at fair
value through other comprehensive income.
As in 2018, contingent considerations included claims from the divestments of the Biosimilars and KuvanⓇ businesses.
1 Previous year's figures have been adjusted, see Note (45) "Effects from new accounting standards and other presentation changes".
685
656
29
795
738
(37) Financial debt/Capital management
in equity
Dec. 31, 2018
€ million
USD bond 2015/2020
€
70
4.250%
Dec. 2019
70
Eurobond 2009/2019
€
Interest rate
800
Sept. 2019
799
Eurobond 2015/2019
Currency
€ million
%
Maturity
€ million
0.750%
Financial
result
Foreign currency
gains and losses
recognized directly
Financial result
Cash and cash equivalents comprised the following items:
Cash and cash equivalents include short term investments with a maximum remaining term of up to three months which
can be readily converted to a determined amount of cash.
Accounting and measurement policies
(35) Cash and cash equivalents
252
Capital Structure, Investments and Financing Activities
Notes
Consolidated Financial Statements
The equity and the profit attributable to non-controlling interests mainly related to the minority interests in the publicly traded
company P.T. Merck Tbk., Indonesia, in Versum Materials Taiwan Co., Ltd., Taiwan, and in Merck Ltd., Thailand.
The calculation of non-controlling interests was based on the stated equity of the subsidiaries concerned after any adjustment
required to ensure compliance with the accounting policies of the Merck Group as well as pro rata consolidation entries.
Non-controlling interests
The proposed withdrawal of E. Merck KG in the amount of € 430 million (2018: € 430 million) results from the total amount of the
profit/loss transfer to E. Merck KG, including changes in reserves, and the profit/loss of E. Merck KG before reciprocal profit transfer.
Merck & Cie is a partnership under Swiss law that is controlled by Merck KGaA but distributes its operating result directly to
E. Merck KG. This distribution is a payment to shareholders and is therefore also presented under changes in equity.
Based on the assumed appropriation of profits, the profit/loss transfer to E. Merck KG for 2019, including changes in reserves,
amounted to € -510 million. This consisted of the profit transfer to E. Merck KG (€ -449 million), the profit/loss transfer to
Merck KGaA (€ -7 million), the change in profit carried forward of E. Merck KG (€ 2 million), as well as the profit transfer from
Merck & Cie to E. Merck KG (€ -56 million). For 2018, the profit/loss transfer to E. Merck KG including changes in reserves amounted
to € -515 million. This consisted of the profit transfer to E. Merck KG (€ -447 million), the profit/loss transfer from E. Merck KG to
Merck KGaA (€ -7 million), the change in profit carried forward of E. Merck KG (€ 1 million) as well as the profit transfer from
Merck & Cie to E. Merck KG (€ -62 million).
-430
-62
-430
€ million
Cash, bank balances, and checks
Short-term cash investments (up to 3 months)
Cash and cash equivalents
At initial recognition, financial assets are assigned to one of the following measurement categories which at Merck also
correspond to the financial instrument classes as defined in IFRS 9:
Classification and subsequent measurement
Detailed information on the measurement methods for financial assets measured at fair value are presented in Note (43)
"Information on fair value measurement".
Financial assets are initially measured at fair value and recognized as of the settlement date. For financial assets not
subsequently measured at fair value through profit or loss in subsequent periods, initial measurement also includes directly
attributable transaction costs.
Recognition and initial measurement
This section does not cover the accounting and measurement policies for derivative financial instruments. They are
presented in Note (39) "Derivative financial instruments".
Accounting and measurement policies
(36) Other financial assets
-56
The maximum default risk was equivalent to the carrying amount of cash and cash equivalents.
Changes in cash and cash equivalents as defined by IAS 7 are presented in the consolidated cash flow statement.
2,170
781
1,391
780
618
162
Dec. 31, 2018
Dec. 31, 2019
Cash and cash equivalents included restricted cash amounting to € 240 million (December 31, 2018: € 295 million). This related
mainly to cash and cash equivalents at subsidiaries to which the Group only had restricted access owing to foreign exchange
controls.
Profit transfer to E. Merck KG/withdrawal by E. Merck KG
-24
-25
Cie
Total
Merck KGaA
Total
Merck KGaA
Transfer to revenue reserves
Profit/loss transfer from E. Merck KG
Profit transfer to E. Merck KG
Cie
€ million
Merck &
2018
2019
Appropriation of profits and changes in reserves
251
Capital Structure, Investments and Financing Activities
Notes
Consolidated Financial Statements
Merck &
•
-56
-505
-515
-454
-62
-510
-455
-56
Profit transfer to E. Merck KG including changes in reserves
Result of E. Merck KG before reciprocal profit transfer, adjusted for
trade tax
1
-449
1
2
-7
-7
-7
-7
-509
-447
-62
2
1,350
Subsequent measurement at amortized cost
• Subsequent measurement at fair value through profit or loss
Subsequent measurement
Category
The following table provides details on the measurement effects of equity instruments on the consolidated balance sheet
and the consolidated income statement:
254
Capital Structure, Investments and Financing Activities
Notes
Consolidated Financial Statements
Financial result
operating
expenses
Financial result
Financial result
Financial
Other operating
income or other
Other operating income or other
operating expenses
Operational
Financial result
Group equity (upon
derecognition: reclassification to
financial result)
Financial result
at fair value through other
comprehensive income
Asset
type
Impairment
losses/reversals
of impairment
losses
Operational
Other operating income or other
operating expenses
when asset is disposed
Recycling of the cumulative results
previously recognized directly in
equity through retained earnings
Results recognized directly in equity
(value adjustments)
Recycling of the cumulative results
previously recognized directly in
equity through retained earnings
when asset is disposed
Other
operating
income
in equity
Foreign currency
gains and losses
recognized directly
Financial
Results recognized directly in equity
(value adjustments)
Foreign currency Dividend
gains or losses
Value adjustments
Financial
or loss
at fair value through profit
Operational
Subsequent measurement
Financial
income
measurement at fair
value through profit
or loss
Subsequent
Financial result
atamortized cost
measurement
Operational
Subsequent
Asset
type
Category
The following table provides details on the measurement effects of debt instruments on the consolidated balance sheet and
the consolidated income statement:
Recognition
Financial
Merck derecognizes financial assets if there is no reasonable expectation that the contract party will fulfill its contractual
obligations or if Merck transfers the contractual rights including all material risks and rewards of the financial asset to a
contract partner.
Financial assets are only reclassified in rare cases in which Merck changes its business model in managing financial assets.
Equity instruments not subject to mandatory subsequent measurement at fair value through profit or loss are consistently
measured at fair value through other comprehensive income in subsequent periods because they are intended to be held
for the longer term. Further details on the measurement of financial assets at fair value are presented in Note
(43) "Information on fair value measurement".
Except for derivative financial instruments with positive market value, Merck only applies subsequent measurement at fair
value through profit or loss for debt instruments with contractual properties resulting in cash flows that do not exclusively
represent principal repayments and interest payments on the outstanding capital amount. In particular, this includes
contingent consideration that was contractually agreed with the acquirer within the context of the disposal of businesses
within the meaning of IFRS 3 (see Note (43) "Information on fair value measurement"). Merck does not utilize the existing
option of the subsequent measurement of debt instruments at fair value through profit or loss.
This classification is based on the business model and the structure of contractual payment flows. Financial assets
subsequently measured at amortized cost are accounted for using the effective interest method and considering any
impairment losses. The calculation of impairment losses is described in Note (42) "Management of financial risks". These
financial assets are intended to collect contractual cash flows from the assets held which are exclusively principal
repayments and interest payments on the outstanding capital amount.
253
Capital Structure, Investments and Financing Activities
Notes
Consolidated Financial Statements
Derecognition
• Subsequent measurement at fair value through other comprehensive income
Subsequent
value
Financial result
(using the
effective interest
method)
Other operating
income or other
operating
expenses
operating
expenses
Financial result
Group equity (upon
derecognition: reclassification to
other operating income or other
operating expenses)
Impairment losses and
reversals of impairment
losseson financial assets
(net)
Operational
Financial result
Other operating income or other
operating expenses
measurementat fair
(or loss) on disposal/value
adjustments
Impairment
Other operating
income or other
Interest
income or
expenses
Foreign
currency
gains or losses
Net gain
income
comprehensive
through other
losses/reversals of
impairment losses
Impairment losses and
reversals of impairment
losseson financial assets
(net)
Financial result
€
Eurobond 2010/2020
872
Notes Capital Structure, Investments and Financing Activities
Consolidated Financial Statements
Reclassifications of the cash flow hedge reserve to profit or loss are recognized in the operating result, while
reclassifications of the cost of cash flow hedge reserve are recognized in the financial result.
In the case of hedging relationships where Merck uses forward contracts as hedging instruments, only the spot element is
designated as the hedging instrument. Changes in the fair value of the forward element in forward contracts are initially
recognized in the cost of cash flow hedge reserve within equity. The subsequent accounting of these amounts depends on
the type of hedged transaction.
In the case of hedging relationships where Merck uses options as hedging instruments, only the intrinsic value of options is
designated as the hedging instrument. Changes in the fair value of the time value component of options that are used for
hedge accounting are recognized in other comprehensive income and in the cost of cash flow hedge reserve within equity.
The subsequent accounting of these amounts depends on the type of the hedged transaction.
Hedging ineffectiveness may occur in the timing of forecasted cash flows or if hedged items are dissolved. Derivatives that
do not or no longer meet the documentation or effectiveness requirements for hedge accounting, whose hedged item no
longer exists, or for which hedge accounting rules are not applied are classified, depending on their balance, as "financial
assets or liabilities at fair value through profit or loss".
Merck only uses derivatives as hedging instruments. Merck uses the dollar offset method as well as regression analyses to
measure hedge effectiveness.
As a result of hedging fair values of assets on the balance sheet, the compensating changes in value of the corresponding
hedged item and hedging instrument offset each other.
The IFRS 9 provisions are applied for hedge accounting. Hedging transactions are entered into for highly probable forecast
transactions in foreign currencies and for hedging fair values of assets on the balance sheet. Cash flow hedge accounting
for forecasted transactions in foreign currency will lead to the hedged item being recognized at a fixed exchange rate on a
net basis - instead of being recognized at the spot exchange rate at the transaction date.
Accounting and measurement policies
(39) Derivative financial instruments
259
Capital Structure, Investments and Financing Activities
Notes
Consolidated Financial Statements
The liabilities to related parties primarily consist of liabilities to E. Merck KG.
1,110
260
Derivative financial instruments are recognized in the consolidated balance sheet, the consolidated income statement, and
the consolidated statement of comprehensive income with the exception of the balance sheet treatment of amounts
-
included directly from the reserve in the initial cost or in the other carrying amount of a non-financial asset or liability - as
follows:
Fair value adjustments (in
equity)
Financial debt
Financial result
Fair value adjustments (in
equity)
values
Negative
market
values
Positive
Financial
transactions
rate
hedge
Other financial
assets
33
Interest
at maturity
during the term
Market on the balance
value
sheet
Positive
Type of
hedged item
Type of
collateral
Hedging relationship
Presentation
Changes in fair value in the consolidated income
statement/consolidated statement of
comprehensive income
market
891
1,170
43
43
1,081
Dec. 31, 2018
Non-current
Current
Total
Dec. 31, 2019
Non-current
Current
Miscellaneous other financial liabilities
1,124
€ million
All other financial liabilities apart from liabilities from derivatives and contingent considerations, which are recognized in the
context of business combinations according to IFRS 3, are initially measured at fair value and in subsequent periods at
amortized cost, applying the effective interest method. The accounting and measurement policies of derivatives are
presented in Note (39) "Derivative financial instruments".
ACCOUNTING AND MEASUREMENT POLICIES
(38) Other financial liabilities
There are no indications that the availability of extended credit lines was restricted.
< 1 year
2022
variable
250
370 variable
620
Other financial liabilities comprised the following:
Financial result
1,019
Total
1,032
1,127
Other financial liabilities
78
20
58
46
46
Liabilities from derivatives with a hedging relationship (operational)
13
94
119
119
thereof: interest accruals
511
511
512
512
thereof: Liabilities to related parties
94
2,799
market
cash flow hedging
1,573
2
2,765
Non-current
Current
Non-current
Current
Dec. 31, 2018
Dec. 31, 2019
Cash flow hedge
€ million
The nominal amounts of Merck's derivative exposures were as follows:
Other operating
expenses
Other operating expenses
Other financial
liabilities
income
Other operating income
366
Interest rate
Currency
2,765
6,859
1,102
7,912
Equity
5,286
5,147
Currency
1,100
Other operating
1,100
1,100
5,286
1,100
5,147
No hedge accounting
366
1,573
2
Interest rate
Other financial
assets
Financial result
Financial result
Other financial
liabilities
Other operating
income
Fair value adjustments (in
equity)
Other financial
assets
Financial result
Fair value adjustments (in
equity)
Financial debt
Financial result
Fair value adjustments (in
equity)
Fair value adjustments (in
equity)
business
in operating
Transactions
Currency
hedging
relationship
transactions
Financial
Other financial
assets
values
Negative
market
values
Positive
market
values
Negative
market
values
Derivatives with a
Other operating
expenses
Interest
Financial debt
Financial result
Financial result
Other financial
assets
Financial result
Financial result
Financial debt
Financial result
Positive
Financial result
market
values
Negative
market
values
Positive
market
values
Negative
market
values
Positive
market
values
Negative
market
values
Transactions
in operating
business
hedging
Currency
Financial
transactions
Derivatives without a
hedging relationship
Financial
transactions
rate
hedge
Other financial
assets
1,587
1,077
549
€
1,000
2.875%
June 20794
995
Hybrid bond 2019/2079
€
500
1.625%
June 20793
495
Hybrid bond 2019/2079
€
500
3.375%
Dec. 2074²
498
Bonds (non-current)
7,835
6,304
Bank loans
less:
Financial debt
6,681
8,644
458
2
73
56
498
51
Non-current financial debt
Lease liabilities (IFRS 16)
Liabilities from finance leases (IAS 17)
Liabilities from derivatives (financial transactions)
Loans from third parties and other financial debt
Liabilities to related parties
250
250
44
Cash and cash equivalents
Hybrid bond 2014/2074
1,000
1,419
USD bond 2015/2025
600
0.005%
Dec. 2023
600
Eurobond 2019/2023
€
550
1.375%
Sept. 2022
548
549
USD
1,000
2.950%
March 2022
1,389
March 2025
3.250%
1,600
2.625%
Dec. 20741
994
997
Hybrid bond 2014/2074
€
800
0.875%
3,820
July 2031
Eurobond 2019/2031
€
600
0.375%
July 2027
596
Eurobond 2019/2027
USD
796
Current financial assets
€
13,194
from
Maturity of
Financing
commitments
Financing
commitments
Dec. 31, 2018
Dec. 31, 2019
Loan agreements represent a further source of financing for Merck. At the balance sheet date, the bank financing commitments vis-
à-vis the Merck Group were as follows:
258
from
Capital Structure, Investments and Financing Activities
Consolidated Financial Statements
Traditionally, the capital market represents a major source of financing for Merck, for instance via bond issues. As of December 31,
2019, there were liabilities of € 3.90 billion (December 31, 2018: € 2.77 billion) from a debt issuance program most recently
renewed in 2019. In addition, Merck had access to a commercial paper program to meet short-term capital requirements with a
volume of € 2 billion, of which € 205 million had been utilized as of December 31, 2019 (December 31, 2018: € 113 million).
The objective of capital management is to secure financial flexibility in order to maintain long-term business operations and to
realize strategic options. Maintaining a stable investment grade rating, ensuring liquidity, limiting financial risks, as well as
optimizing the cost of capital are the objectives of our financial policy and set important framework conditions for capital
management. The responsible committees decide on the target capital structure of the balance sheet, the appropriation of net
retained profit, and the dividend level. In this context, net financial debt is one of the leading capital management indicators.
Capital management
Information on liabilities to related parties can be found in Note (46) "Related-party disclosures".
The financial debt of the Group was not secured by liens or similar forms of collateral. The loan agreements do not contain any
financial covenants. The Merck Group's average borrowing cost as of the balance sheet date was 2.5% (December 31,
2018: 2.7%).
For the 2014/2074 hybrid bond issued in two tranches and the 2019/2079 hybrid bond also issued by Merck KGaA in two tranches,
the rating agencies Standard & Poor's, Moody's, and Scope have given equity credit treatment to half of the issuances, thus making
the issuances more favorable to Merck's credit rating than a traditional bond issue. The bonds are recognized in full as financial
liabilities in the balance sheet.
1 The nominal volumes of bonds denominated in U.S. dollars were converted into euros at the closing rate on December 31, 2019.
2 For the hybrid bonds repayment is assumed at the earliest possible date.
Notes
2.4%
€ million
banks Utilization
Net financial debt5
320
552
Various bank credit lines
250
250
250
Bilateral credit agreement with banks
banks Utilization
2022
1,017
1,017
Loan agreement with banking syndicate for acquisition
financing
2024
Interest commitments
variable
2,000
2,000
Syndicated loan
variable
4.5%
financing
Consolidated Financial Statements
600
The repayment profile of the bonds was as follows:
USD Bond¹
257
Capital Structure, Investments and Financing Activities
Notes
5 Not defined by International Financial Reporting Standards (IFRSS).
4 Merck has the right to prematurely repay this tranche of the hybrid bond issued in June 2019 for the first time in June 2029.
1,000
3 Merck has the right to prematurely repay this tranche of the hybrid bond issued in June 2019 for the first time in December 2024.
1 Merck has the right to prematurely repay this tranche of the hybrid bond issued in December 2014 for the first time in June 2021.
6,701
12,363
24
2,170
781
50
2.875%
8,896
2 Merck has the right to prematurely repay this tranche of the hybrid bond issued in December 2014 for the first time in December 2024.
2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
Hybridbond²
TTTTTTTTTTT
0.875%
800
3.25%
0.375 %
1.375 %
2.950%
669
1.625 %
3.375%
0.005%
500
2.625 %
1,428
892
600
550
1,000
1,350
500
Eurobond
Loans from third parties and other financial debt
Subsequent measurement at fair value through profit
or loss
Other financial liabilities
Liabilities to related parties
Bank loans
Contingent considerations
Subsequent measurement at amortized cost
Bonds and commercial paper
Trade accounts payables
Derivatives without a hedging relationship
Lease liabilities
Refund liabilities
Finance lease liabilities
Cash flows
Cash flows
< 1 year
1-5 years
Cash flows
€ million
> 5 years
Derivatives with a hedging relationship
DECEMBER 31, 2018
-16
-20
-243
Carrying
amount
16
76
-15
-19
-29
46
-46
565
-565
567
-12
-119
-30
16,982
-174
-8,305
-587
-319
-4,698
-189
-4,017
Interest Repayment
-4,769
Interest Repayment
90
-15
-16
-45
78
-58
-20
472
-472
4
-2
-2
12,244
-241
-5,528
-508
-85
-1,899
Refund liabilities
-4
-1
5
-50
7,286
-208
-984
620
-17
-369
-458
-2
-4,430
-85
Interest Repayment
-1,899
1,766
-1,766
1,335
-1,335
522
-508
-13
67
-17
-250
Derivatives with a hedging relationship
Fair
value
Contingent considerations
Interest income/expenses and similar income and expenses
8
2
Other intangible assets
7
11
Property, plant and equipment
15
13
Capitalized borrowing costs for
66
-23
-86
39
Other interest income/expenses and similar income and expenses
-14
-26
Other non-current provisions
-42
-47
Pension provisions
-14
20
-259
-430
-323
-31
Subsequent measurement at
value through other
amortized cost
Financial assets
€ million
losses adjustments gains/losses
Disposal
Consolidated Financial Statements
Interest Interest Impairment impairment
income expenses
losses
55
differences Dividends
of
Net gains and losses
Reversals
Interest result
2019
The following table shows the development of net gains and losses, interest income and expenses, as well as dividend income from
financial instruments (excluding items recognized in other comprehensive income) by measurement categroy in the period under
review:
264
Capital Structure, Investments and Financing Activities
Notes
Consolidated Financial Statements
The rise in other interest expenses and similar expenses compared to 2018 resulted, in particular, from interest expenses for tax
matters and from the restructuring of financial liabilities in connection with the acquisition of Versum Materials, Inc., United States.
Currency
7
35
27
-323
-430
Interest expenses and similar expenses
77
97
16
12
Finance income
Currency differences from financing activities
14
Capital loss from disposal of debt instruments with subsequent measurement at amortized cost
5
Income from fair value changes from debt instruments with subsequent measurement at fair value through profit or loss
Income from the change of the fair value of share-based compensation programs
55
66
2018
2019
Interest income and similar income
€ million
Finance income and expenses were as follows:
(40) Finance income and expenses / Net gains and losses from financial
instruments
263
5
-270
-1
Expenses from fair value changes from debt instruments with subsequent measurement at fair value through profit or loss
Expenses from fair value changes of share-based compensation programs
Interest expenses
Interest income
Interest expenses
Interest income
Leases
Financial instruments
€ million
2018
2019
-266
-1
-385
Financial result
-343
-481
Finance costs
-1
-46
Other interest expenses
-15
-2
-5
Interest income and expenses and similar income and expenses were as follows:
-95
87
-1
Non-cash
Cash
2019
The change in financial debt was as follows:
In determining the cash flows from financing activities, the option to recognize dividend payments in the cash flows from
financing activities is exercised.
Accounting and measurement policies
(41) Net cash flows from financing activities
265
Notes Capital Structure, Investments and Financing Activities
Consolidated Financial Statements
€ million
In the table above, interest income or expenses related to derivatives without a hedging relationship are recognized within fair
value adjustments. The currency result from equity instruments with subsequent measurement at fair value through other
comprehensive income was recognized in other comprehensive income.
105
-77
-259
35
-101
Total
735
Subsequent measurement at fair value
through profit or loss
cost
-259
66
-54
Jan. 1,
20191
Bonds
1,367
Other current and non-
current financial liabilities
E. Merck KG
808
9,854
420
9
2019
scope of Dec. 31,
Other consolidation
Changes in
Cash
-418
821
Financial liabilities to
59
rate Fair value
effects adjustment
Exchange
Change in
lease
liabilities
Other
inflows Repayments
-1,290
3,482
7,173
406
Subsequent measurement at amortized
Financial debt
through profit or loss
87
-95
-270
27
-7
782
Total
value through profit or loss
amortized cost
-270
67
24
Financial debt
value through profit or loss
-714
20
1
Subsequent measurement at fair
Debt instruments
Equity instruments
comprehensive income
Subsequent measurement at fair
Subsequent measurement at
-1
2018
€ million
-669
22
1
Subsequent measurement at fair value
Debt instruments
105
-77
losses adjustments gains/losses
Disposal
impairment Fair value
Net gains and losses
Reversals of
12
Equity instruments
Subsequent measurement at fair value
through other comprehensive income
cost
-47
Subsequent measurement at amortized
Impairment
losses
Interest
Interest
income
Currency
differences Dividends
Interest result
Financial assets
Capital Structure, Investments and Financing Activities
Notes
Consolidated Financial Statements
-36
-47
-81
1
-33
Jan. 1, 2019
-47
-81
-1
13
14
Fair value adjustment (directly
38
-60
-64
swaps
Interest rate
Spot component of
currency forwards
Cash flow hedge
-33
10
5
-48
-68
3
Derivatives without a hedging relationship
Gross
14
45
16
73
73
16
45
16
14
46
Net
16
58
20
As in the previous year, all hedging relationships were transaction related. Netting of derivatives from an economic perspective was
possible due to the existing framework agreements on derivatives trading that Merck had entered into with commercial banks.
Actual netting only takes place in the case of insolvency of the contract partner. Balance sheet netting of derivatives did not take
place, as with other financial assets and other financial liabilities.
Consolidated Financial Statements
Notes
Capital Structure, Investments and Financing Activities
262
The following table presents the potential netting volume of the reported derivative assets and liabilities:
DECEMBER 31, 2019
Potential netting volume
73
of options
Intrinsic value
Forward component of
currency forwards
Gross
liabilities
Derivative assets
Derivative financial
€ million
DECEMBER 31, 2018
liabilities
-89
-32
-122
-122
Net
Derivative financial
32
40
40
Derivative assets
Potential net
amount
due to financial
collateral
due to master netting
agreements
presentation
presentation Netting
€ million
7
presentation
Netting
presentation
-1
options
Time value of
Cost of hedging cash flows
Dec. 31, 2018
Tax effect
Reclassification to assets
Reclassification to profit or loss
Fair value adjustment (directly
recognized in equity)
Jan. 1, 2018
€ million
The reserves for cash flow hedges and the cost of cash flow hedging of the Group applied to the following hedging instruments:
-139
-29
-168
-168
51
29
80
80
Potential net
amount
due to financial
collateral
Potential netting volume
due to master netting
agreements
16
1,193
20
1
recognized in equity)
Notes
Capital Structure, Investments and Financing Activities
261
The fair values of Merck's derivative exposures were as follows:
DECEMBER 31, 2019
€ million
Cash flow hedge
Interest rate
Currency
-1
Negative market values
Transactions in operating
business
Non-current
Current Non-current
Current
Non-current
46
Positive market values
Financial
transactions
Transactions in operating
Financial
transactions
business
12
-29
-70
-13
-25
-8
Dec. 31, 2019
-3
-3
-10
-18
-6
13
Tax effect
35
-1
22
Reclassification to assets
14
17
-52
14
-22
Reclassification to profit or loss
26
Current Non-current
Current
7
Current
Negative market values
Financial
transactions
Transactions in operating
business
Non-current
Current Non-current
Current
1
58
Current Non-current
Non-current
Interest rate
Currency
No hedge
accounting
Interest rate
14
Currency
16
Equity
4
20
business
Transactions in operating
Financial
transactions
No hedge
20
14
accounting
Interest rate
14
Currency
20
Equity
46
19
56
56
19
20
14
19
56
46
DECEMBER 31, 2018
€ million
Cash flow hedge
Positive market values
58
Financial debt
Subsequent measurement at fair
5,080
53
125
thereof: non-current
85
101
122
85
125
1,055
thereof: current
47
129
169
85
178
1,180
KRW
JPY
TWD
CNY
CHF
USD
125
Notional amount
24
Fair value of the hedging instrument
January 2019 -
December 2020
1:1
1:1
Hedge ratio¹
December 2020
January 2019 -
Maturity profile
January 2019
-10
-3
-8
44
-5
-49
9,361
3
2
thereof: positive market values
-10
-8
-5
-2
-49
-3
€ million
DECEMBER 31, 2018
1,378.90
January 2020 -
December 2020
December 2020
January 2020 -
Maturity profile
-3
-6
-31
2
2
2
Hedge ratio¹
-28
thereof: positive market values
Fair value of the hedging instrument
-4
-2
-6
2
163
139
151
392
thereof: negative market values
1:1
1:1
January 2020 -
December 2020
1:1
1 The hedging instruments and the corresponding hedged items were denominated in the same currency, therefore the hedge ratio was 1:1.
127.40
36.24
8.08
1.12
1.19
Weighted average hedging rate
January 1, 2019
1
2
-2
11
determine hedge effectiveness since
Change in value of hedged item used to
instruments since Jan. 1, 2019
-1
-2
2
-11
Change in value of outstanding hedging
January 2020-
January 2021
1:1
January 2020
December 2020
1:1
January 2020 -
December 2020
1:1
January 2019 -
December 2019
1:1
55
January 2019 -
December 2020
1:1
1:1
10,059
Bonds and commercial paper
Subsequent measurement at amortized cost
Interest Repayment Interest Repayment Interest Repayment
Carrying
amount
€ million
> 5 years
Cash flows
Cash flows
1-5 years
< 1 year
Bank loans
Cash flows
The following liquidity risk analysis presents the contractual cash flows such as repayments and interest on financial liabilities and
derivative financial instruments with a negative fair value:
270
Capital Structure, Investments and Financing Activities
Notes
Consolidated Financial Statements
Liquidity risks are monitored and reported to management on a regular basis.
The risk that Merck cannot meet its payment obligations resulting from financial liabilities, is limited by establishing the required
financial flexibility and by Group-wide cash management. Information on issued bonds and other sources of financing can be found
in Note (37) "Financial debt/Capital Management".
Liquidity risks
The shares in publicly listed companies amounting to € 209 million (December 31, 2018: € 134 million) are generally exposed to a
risk of fluctuations in fair value. A 10% change in the price of these financial instruments would impact Group equity by € 21 million
(2018: € 13 million). This change in value would be recognized in Group equity.
Share price risks
DECEMBER 31, 2019
6
1,587
-2,224
Subsequent measurement at fair value through
profit or loss
-44
-8
-53
97
Loans from third parties and other financial debt
-27
-569
596
Other financial liabilities
-120
-25
-1,320
Liabilities to related parties
-2,054
2,054
Trade accounts payables
-3,828
-223
-4,042
-250
-1
-1,337
-519
1,320
11
-23
-100 basis points
126.74
7
6
36.68
8.48
3
3
1.12
-5
58
1.22
1,397.39
Weighted average hedging rate
determine hedge effectiveness since
Change in value of hedged item used to
-7
-6
-3
-3
5
-58
instruments since Jan. 1, 2018
Change in value of outstanding hedging
January 1, 2018
1 The hedging instruments and the corresponding hedged items were denominated in the same currency, therefore the hedge ratio was 1:1.
In addition to the transactional foreign exchange risks described previously, Merck was exposed to currency translation risks since
many of Merck's subsidiaries were located outside the eurozone and had functional currencies other than the reporting currency.
Exchange differences resulting from translation of the assets and liabilities of these companies into euros, the reporting currency,
are recognized in equity.
Consolidated Financial Statements
+100 basis points
-100 basis points
+100 basis points
2018
2019
Effects on equity (other comprehensive income)
Effects on consolidated income statement
Change in market interest rate
€ million
The effects of a parallel shift in the yield curve by +100 or -100 basis points on the consolidated income statement as well as on
equity relative to all short-term or variable monetary deposits and monetary borrowings within the scope of IAS 32, except
contingent considerations, are presented in the following table. In the event of a downward shift, the interest rate for instruments
subject to a contractual interest rate floor of zero percent was limited accordingly.
-269
Dec. 31, 2018
2,196
-2,465
-3,950
-4,761
811
Dec. 31, 2019
Short-term or variable interest rate monetary deposits
Short-term or variable interest rate monetary borrowings
Net interest rate exposure
€ million
The Merck Group's net exposure to interest rate changes comprised the following:
Interest rate risks
269
Capital Structure, Investments and Financing Activities
Notes
January 2019 -
December 2020 January 2021
1:1
1,794
thereof: negative market values
139
Merck uses marketable forward exchange contracts, options, and interest swaps as hedging instruments. The strategy to hedge
interest rate and foreign exchange rate fluctuations arising from forecast transactions and transactions already recognized in the
balance sheet is set by a risk committee, which meets on a regular basis. The use of derivatives is regulated by extensive guidelines
and subject to ongoing risk controls by Group Treasury. Speculation is prohibited. The strict separation of functions between
trading, settlement, and control functions is ensured. Derivatives are only entered into with banks that have a good credit rating.
Related default risks are continuously monitored.
Market fluctuations with respect to foreign exchange and interest rates represent significant profit and cash flow risks for Merck.
Merck aggregates these Group-wide risks and steers them centrally, partly by using derivatives. To estimate existing risks of foreign
exchange and interest rate fluctuations, Merck uses scenario analyses. Merck is not subject to any material risk concentration from
financial transactions.
(42) Management of financial risks
The amount of undrawn borrowing facilities that could be tapped for future operating activities and to meet obligations is disclosed
in Note (37) "Financial liabilities/capital management".
Fair value adjustments of other current and non-current financial liabilities are attributable to liabilities from derivatives. In the
consolidated cash flow statement, cash changes of assets from derivatives were recognized together with repayments of other
current and non-current financial liabilities. In the above reconciliation, changes of assets from derivatives were recognized
separately because they did not form part of financial liabilities.
266
Capital Structure, Investments and Financing Activities
Notes
Consolidated Financial Statements
Other cash changes show interest payments for lease liabilities that are recognized in the net cash flow from operating activities.
Changes in lease liabilities include additions and retirements of right-of-use from leases and the effects from unwinding of the
discount on lease liabilities. Other non-cash changes resulted from the effects of the application of the effective interest method.
The Report on Risks and Opportunities included in the combined management report provides further information on the
management of financial risks.
An inflow of € 3,482 million in the reporting period resulted from the issuance of bonds to finance the acquisition of Versum
Materials, Inc., United States.
8,896
902
821
7,173
121
2018
Other
Dec. 31,
Changes in scope of
consolidation
Fair value
adjustment
-30
Exchange rate
effects
Foreign exchange risks
A more rule-based hedging approach was gradually introduced for hedging foreign exchange risks as of the beginning of the past
fiscal year. The entire foreign exchange exposure is divided into several defined risk levels and systematically hedged using suitable
hedging instruments. Furthermore, the number of currencies included in hedging was once again expanded in the reporting period.
Hedging is performed based on of a regularly reviewed basket of currencies. As part of the new hedging concept, the time horizon
for hedging was reduced from a maximum of 36 months to 12 months. The new hedging concept aims to ensure a consistent
hedging quality at lower costs.
802
Exchange rate -10%
(appreciation vs. €)
Net exposure
€ million
KRW
JPY
TWD
CNY
CHF
USD
Owing to the international nature of its business, Merck is exposed to transactional foreign exchange risks within the scope of both
its business activities and financing activities. Foreign exchange risks are continuously analyzed and different hedging strategies
used to limit or eliminate these risks.
DECEMBER 31, 2019
267
Capital Structure, Investments and Financing Activities
Notes
Consolidated Financial Statements
• Receivables from and liabilities to third parties in non-functional currency.
• Intragroup financing in non-functional currency,
Foreign exchange risks from the following transactions are economically hedged through the use of foreign exchange contracts and
currency options:
• Firm purchase commitments over the next 12 months (2018: 36 months) in non-functional currency.
• Forecast transactions in non-functional currency, the expected probability of which is very high for the next 12 months
(2018: 36 months),
Foreign exchange risks from the following transactions are hedged using foreign exchange contracts and currency options:
The following table shows the net exposure and the effects of transactional exchange rate movements of the key currencies against
the euro in relation to the net income and equity of the Group on the balance sheet date:
Non-cash
-503
495
2018
1 Values effective January 1, 2019, have been adjusted due to the first-time application of IFRS 16, see Note (45) "Effects from new accounting
standards and other presentation and measurement changes".
and non-current)
-33
-502
499
-30
Derivative assets (current
165
966
Cash
9
84
198
-11
2,531
546
495
24
198
-11
-1,281
-2,989
495
Jan. 1,
Cash
€ million
-22
Derivative assets (current and
non-current)
500
119
-2,958
407
10,827
Financial debt
financial liabilities
500
-2
-2,316
32
2,687
Other current and non-current
-323
-319
375
765
Financial liabilities to E. Merck KG
7,375
inflows Repayments
2018
Bonds
-493
933
13,194
39
15
8
-16
110
Equity (other comprehensive income)
(appreciation vs. €)
-16
-13
-15
-74
10
27
Consolidated income statement
Exchange rate +10%
-14
-11
-19
-9
20
-135
Equity (other comprehensive income)
16
-62
12
In this presentation, effects of cash flow hedges are taken into consideration in the equity of the Group. The net exposure of each
of the above currencies consisted of the following components:
• Planned cash flows in the next 12 months in the respective currency less
200
151
392
55
1,794
KRW
JPY
TWD
CHF
USD
thereof: non-current
thereof: current
Notional amount
€ million
DECEMBER 31, 2019
The impact of cash flow hedge accounting for forecasted transactions in foreign currency on the Group's net assets and results of
operations was as follows for the major currencies:
268
Capital Structure, Investments and Financing Activities
Notes
Consolidated Financial Statements
Balance sheet items in the above currencies were economically hedged in full in both 2019 and 2018 by derivatives if they did not
correspond to the functional currency of the respective subsidiary. Accordingly, they do not affect the net exposure presented
above.
The planned cash flows in the next 12 months are usually hedged at a ratio of 25% to 90% (2018: 30% to 70%).
• The nominal values of hedging instruments of these planned cash flows.
13
15
CNY
-27
-4
-20
-93
49
-80
Consolidated income statement
Exchange rate +10%
(appreciation vs. €)
-10
-10
-12
-28
-18
-114
Equity (other comprehensive income)
28
4
20
-49
80
Consolidated income statement
74
284
6
Equity (other comprehensive income)
93
-5
83
Exchange rate -10%
(appreciation vs. €)
163
62
153
741
-274
618
KRW
JPY
TWD
132
Consolidated income statement
CNY
8
7
DECEMBER 31, 2018
7
Net exposure
USD
CHF
€ million
14
21
420
460
427
1,535
36
2
465
1,010
More than 360 days
past due
Goods were generally sold under retention of title so that a reimbursement claim exists in the event of default. Other guarantees
generally were not demanded. The scope of credit-insured receivables was immaterial for Merck.
Loss allowances based on expected credit losses for trade accounts receivable as of December 31, 2019, were as follows:
DECEMBER 31, 2019
€ million
due
Up to 90 days
past due
Up to 180 days
past due
146
Up to 360 days
past due
3,004
Not yet
External credit rating of at least AA- or comparable
External credit rating of at least BBB- or comparable
External credit rating lower than BBB- or comparable
Trade accounts receivable before loss allowances
2,120
617
1,614
Total
1,089
548
3,251
Consolidated Financial Statements
Notes
Capital Structure, Investments and Financing Activities
274
DECEMBER 31, 2018
€ million
Healthcare
Life Science
Performance Materials
Group
856
827
437
252
Expected loss rate
-4
1.9%
-77
thereof: credit impaired
-2
-1
-2
-41
-47
The carrying amounts, already reduced by their expected lifetime credit loss, of trade accounts receivable that are classified as
originated credit impaired financial assets were € 3 million (2018: €0 million) as of December 31, 2019. They are included in the
above table under credit impaired trade accounts receivable. For these receivables, expected credit losses in the amount
of € 3 million (2018: €0 million) were recognized in fiscal 2019.
Loss allowances based on expected credit losses for trade accounts receivable as of December 31, 2018, were as follows:
DECEMBER 31, 2018
Not yet
€ million
due
Up to 90 days
past due
Expected loss rate
0.5%
0.8%
2
Up to 180 days
past due
3.3%
-46
0.6%
-5
-16
6.1%
11.1%
41.3%
Trade accounts receivable before loss
2,669
367
59
43
112
3,251
allowances
thereof: credit impaired
5
1
2
3
42
53
Loss allowances
-7
42
Discretionary judgement is applied in determining individual impairment allowances.
463
Capital Structure, Investments and Financing Activities
272
Impairment of other financial assets
Investments in debt instruments subsequently measured either at amortized cost or at fair value through other
comprehensive income were primarily considered to be investments with low risk so that the expected credit loss in the
upcoming 12 months was used to determine the impairment loss.
For financial assets with only a minimal default risk, the rules concerning the mandatory establishment of a risk provision
for the expected credit loss over the full term were not observed at the time of addition or during subsequent
measurement. Therefore, no assessment of whether there had been a significant increase in the credit risk was carried out
for such assets. Merck does not presume an increased credit risk as of the balance sheet date if the contract partner has an
investment grade rating.
If there were indications that the debtor's creditworthiness had worsened but that this was not yet reflected in its existing
credit rating, the credit risk assessment was adjusted and the impairment allowances recognized for expected credit losses
were increased. In all other cases, there were no new risk assessments as of the balance sheet date and the risk profile
initially assumed was maintained.
Wherever Merck presumes a considerable increase in the default risk, the expected credit loss over the full term of the
financial asset is considered.
On the balance sheet date, the theoretical maximum default risk for all items referenced above corresponded to the net
carrying amounts less any compensation from credit insurance.
Significant discretionary decisions and sources of estimation uncertainty - credit risks
Impairment of trade accounts receivable and contract assets
In terms of the impairment of trade accounts receivable and of contract assets, there is significant discretion and
estimation uncertainty when it comes to
⚫ the identification of customer groups with identical default risks,
⚫ the identification of a substantial increase in the credit risk, and
⚫ the calculation of the expected credit losses.
As of December 31, 2019, trade accounts receivable were impaired by 2.4% (December 31, 2018: 2.4%). If it were
necessary to recognize impairment on trade accounts receivable and contract assets at 10% higher in 2018, this would
have caused a € 8 million reduction in profit before tax (2018: € 8 million).
Impairment of other financial assets
Consolidated Financial Statements
Notes
Capital Structure, Investments and Financing Activities
Notes
273
Consolidated Financial Statements
The individual credit rating of the contract partner is used to determine impairment of other receivables. The general three-
stage impairment model and the simplified approach are used to recognize loss allowances of financial instruments included
in other receivables.
Up to 360 days
past due
34.8%
Consolidated Financial Statements
Notes
Capital Structure, Investments and Financing Activities
271
Credit risks
Credit risk for Merck means the risk of a financial loss if a customer or other contract partner is not able to meet its contractual
payment obligations. Merck is exposed to credit risks mainly due to existing trade accounts receivable, other receivables, other debt
instruments, derivatives, and contract assets.
Credit risks are continuously monitored by credit management. It additionally carries out the management of risks arising from
extending credit to customers, suppliers, and in the course of other business relationships.
Merck analyzes all financial assets that are more than 90 days past due and examines whether the credit risk has risen significantly
and, as a result, there is objective evidence of impairment requiring the recognition of additional risk provisions.
Accounting and measurement policies - CREDIT RISKS
Impairment of trade accounts receivable and contract assets
Merck uses the simplified impairment model for trade accounts receivable subsequently measured at amortized cost and
contract assets, pursuant to which any credit losses expected to occur over the entire lifetime of an asset are taken into
account. In order to measure expected credit risks, the assets are grouped based of the existing credit risk structure and
the respective maturity structure.
The customer groups with comparable default risks to be considered are determined according to the business sector at
Merck and the place of business of the respective customers.
The expected credit loss rates used in the simplified impairment model are derived on the basis of past experience and
current macroeconomic expectations. In doing so, country-specific ratings are taken into consideration since many of
Merck's customers depend directly or indirectly on the economic trends in the country where their place of business is
located (public and private healthcare systems, universities and research companies from within the pharmaceutical
industry as well as state subsidized industries, particularly in Asia). These country ratings are aggregated into three
separate rating groups. Under the impairment model, past default rates and country ratings are used as an approximation
of the defaults to be expected in the future.
Accordingly, when a country's rating changes, the historical default rates of the rating group to which the respective
country has been re-allocated have to be applied, rather than the historical default rates of the previous rating group.
If there is objective evidence that certain trade accounts receivable are fully or partially impaired, additional loss
allowances are recognized to provide for expected credit defaults.
A default generally exists when the debtor cannot fully meet its liabilities.
A debtor's creditworthiness is assumed to be impaired if there are objective indications that the debtor is in financial
difficulties, such as the disappearance of an active market for its products or impending insolvency. On initial recognition,
the credit losses expected over the overall term are deducted from the carrying amount of trade accounts receivable as
originally credit-impaired financial assets.
Impairment of other receivables
Individual cases are analyzed to ascertain whether objective findings suggest that the value of other receivables is
impaired. Such suggestions may include, for example, economic difficulties of the debtor, contractual breaches or the
renegotiation of contractual payment obligations. If the analysis concludes that Merck is subject to a substantially increased
risk of default, the credit losses expected to occur over the entire lifetime are considered.
573
The following table shows impairments for financial assets from operative transactions and contract assets as well as gains from
their reversals recognized in the consolidated income statement:
Impairment losses
The loss allowances recognized for trade accounts receivable shown above applied entirely to receivables resulting from contracts
with customers. Reversals of impairment losses in 2018 mainly related to an other receivable from a final payment in connection
with the generics business divested in 2007.
Credit risks from trade accounts receivable
The credit risk from trade receivables is largely impacted by the specific circumstances of individual customers. Merck also
considers additional factors such as the general default risk in the respective industry and country in which the customer operates.
The credit risk of customers is assessed using established credit management processes that take individual customer risks into
account. This is done in particular by analyzing the aging structure of trade accounts receivable.
Merck continuously reviews and monitors open positions of all its customers in the corresponding countries and takes steps to-
mitigate risks if necessary.
The table below contains an overview of the credit risk by business sector and country rating established by leading rating agencies
as of December 31, 2019:
DECEMBER 31, 2019
€ million
External credit rating of at least AA- or comparable
External credit rating of at least BBB- or comparable
External credit rating lower than BBB- or comparable
Trade accounts receivable before loss allowances
Healthcare
Life Science
Performance Materials
Group
763
883
526
2,172
278
164
20
27
€ million
-8
2
of trade accounts receivable
of contract assets
of other debt instruments subsequently measured at amortized cost
of other debt instruments subsequently measured at fair value through other comprehensive income
Reversals of impairment losses
of trade accounts receivable
of contract assets
of other debt instruments subsequently measured at amortized cost
of other debt instruments subsequently measured at fair value through other comprehensive income
Net impairment on financial assets
2019
2018
-95
-77
-89
-75
-5
87
105
85
69
35
More than 360 days
past due
-77
53.1%
Discounting of expected future cash flows
Derived from observable prices within the
scope of equity refinancing sufficiently close
to the balance sheet date, considered risk
allowances
Cost-based determination
Nominal value less factoring fees
Expected cash flows from recent
business planning, average cost of
capital, expected long-term growth
rate
Observable prices derived from
equity refinancing
Acquisition cost
Nominal value of potentially sold
trade accounts receivable, average
fees for sales of trade accounts
receivable
Subsequent
measurement at fair
value through profit or
loss
Derivatives (without a
hedging relationship)
Contingent
considerations
Other debt
instruments
Trade accounts receivable
that are intended for sale
due to a factoring
agreement
Option on equity
instruments in unlisted
companies
from the sale of
businesses or shares in
corporations
Interests in unlisted funds
Bonds with embedded
settlement option for
equity in an unlisted
company
Option pricing models
Discounting of probability-weighted future
milestone payments and license fees
Consideration of the fair value of companies
in which the funds are invested
Use of recognized actuarial methods
Sales planning, milestone
payments, probabilities of
regulatory and commercial events,
discount rates
Sales planning, milestone payments,
probabilities of regulatory and
commercial events, discount rates
Net asset values of the fund
interests
Interest rates observable on the
market
Financial debt
Subsequent
Contingent considerations
Trade and other
receivables
Equity investments in
unlisted companies
Equity instruments
Derivatives (without a hedging
relationship)
Derivatives (with a hedging
relationship)
Forward exchange contracts and
currency options
Interest rate swaps
Subsequent measurement at
amortized cost
Financial debt
Spot and forward rates observable on
the market as well as exchange rate
volatilities
Use of recognized
actuarial methods
Spot and forward rates observable on
the market as well as exchange rate
volatilities
Interest rate curves available on the
market
Forward exchange contracts and
currency options
Use of recognized
actuarial methods
Liabilities to banks and other loan
liabilities
Discounting of future
cash flows
Spot and forward rates observable on
the market as well as exchange rate
volatilities
Interest rates observable on the
market
Consolidated Financial Statements
Notes Capital Structure, Investments and Financing Activities
278
FAIR VALUE
DETERMINED USING INPUT FACTORS UNOBSERVABLE IN THE MARKET (LEVEL 3)
Financial instruments
concerned
Description of the measurement
technique
Main input factors used to
determine fair values
Financial assets
Subsequent
measurement at fair
value through other
comprehensive income
measurement at fair
Subsequent measurement at fair
value through profit or loss
value through profit or
Contingent
considerations
10%
-28
6
40
-33
0
33
-37
-6
26
Change in probability of regulatory approval
€ million
-10%
Change in probability of regulatory approval
unchanged
unchanged
5.8%
-34
5
45
Change of discount rate
6.3% (unchanged)
6.8%
-38
0
38
-42
-5
32
Total
10%
-10%
DECEMBER 31, 2018
5.9% (unchanged)
6.4%
Contingent considerations
from the purchase of
businesses
Discounting of probability-weighted future
milestone payments and license fees
Sales planning, milestone payments,
probabilities of regulatory and
commercial events, discount rates
Counterparty credit risk was taken into consideration for measurements of financial instruments at fair value. In the case of
non-derivative financial instruments, such as other liabilities or interest-bearing securities, this was reflected using risk
premiums on the discount rate, while discounts on market value (so-called credit valuation adjustments and debit valuation
adjustments) were used for derivatives.
Consolidated Financial Statements
Notes
Capital Structure, Investments and Financing Activities
279
Equity investments in unlisted companies (Level 3)
The planning periods used to determine the fair value of equity investments in unlisted companies ranged from 1 to 9 years
(December 31, 2018: 2 to 8 years). Cash flows for periods in excess of this are included in the terminal value calculation
using long-term growth rates of between 1.0% and 2.0% (December 31, 2018: 0.5% and 2.0%). The applied average cost
of capital (after tax) was 7.0% on December 31, 2019 (December 31, 2018: 7.0%).
The fair values of assets from contingent considerations are calculated by weighting the expected future milestone
payments and royalties using their probability of occurrence and discounting them. The main parameters when determining
contingent considerations are
⚫ the estimated probability of reaching the individual milestone events,
⚫ the underlying sales planning used to derive royalties,
⚫ and the discount factor used.
When determining the probability of occurrence of the individual milestones events in connection with the development of
drug candidates, the focus is on empirically available probabilities of success of development programs in comparable
phases of clinical development in the relevant therapeutic areas. To determine the sales planning, internal sales plans and
sales plans of external industry services are used. The discount rate (after tax) as of December 31, 2019, of between 5.9%
and 6.9% (December 31, 2018: 6.3% to 7.3%) was calculated using the weighted average cost of capital.
Significant discretionary decisions and sources of estimation uncertainty
Equity investments in unlisted companies
Determining the parameters that are to be included in discounted cash-flow-methods and deriving the fair value from
observable prices within the scope of equity refinancing are both subject to discretionary decisions and estimation
uncertainty.
Assets from contingent consideration
The calculation of the fair value of assets from contingent considerations is subject to significant discretionary judgment.
The most significant contingent consideration was the future purchase price claim from the disposal of the Biosimilars
business to Fresenius SE & Co. KGaA, Bad Homburg vor der Höhe, on August 31, 2017. It was calculated by an external
valuation expert on initial recognition in 2017 and continued on this basis. As of December 31, 2019, the carrying amount
was € 198 million (December 31, 2018: € 196 million).
Consolidated Financial Statements
Notes
Capital Structure, Investments and Financing Activities
280
If, in the context of determining the fair value of this contingent consideration at the date of transaction, the probability of
approval as well as the discount factor of the three major development programs had been estimated to be lower or higher,
this would have led to the following changes in the measurement and the corresponding effects on the profit before income
tax:
DECEMBER 31, 2019
€ million
5.4%
Change of discount rate
loss
Financial debt
Assets from contingent considerations (Level 3)
Forward exchange contracts and
currency options
1.1
Additions
Utilizations
Derecognition
Reclassification to assets held for sale
Effects of currency translation
Changes in scope of consolidation
31.12
2019
2018
-73
-373
-89
€ million
-75
308
85
69
4
-3
-7
-3
1
-73
In 2018, Merck utilized a recognized impairment loss of € 299 million in connection with loss allowances established on trade
accounts receivable for the Venezuelan subsidiary, as the probability of receiving payments was considered to be minimal. The
Venezuelan subsidiary was deconsolidated in fiscal year 2016 due to the absence of the possibility of exercising control.
Credit risks from other receivables
As of December 31, 2019, other receivables of € 340 million were almost exclusively allocated to Level 1 of the general three-stage
impairment model, as in 2018 (other receivables as of December 31, 2018: € 314 million). In these cases, the credit loss expected
in the next 12 months was used to determine the amount of impairment when examining the individual credit risk of the respective
contract partner. The loss allowances recognized amounted to € 4 million as of December 31, 2019 (December 31,2018: € 3 million).
Credit risks from other financial assets
7
The corresponding loss allowances changed as follows:
275
Capital Structure, Investments and Financing Activities
2,415
Trade accounts receivable before loss
Use of recognized
actuarial methods
399
60
66
64
3,004
allowances
thereof: credit impaired
2
1
2
16
30
51
Loss allowances
-12
-3
-2
-23
-34
-73
thereof: credit impaired
-1
-14
-29
Consolidated Financial Statements
Notes
Merck limits credit risks from other financial assets by concluding contracts only with contract partners whose creditworthiness is
good. The credit risk from financial contracts is monitored daily on the basis of rating information as well as market information on
credit default swap rates.
Consolidated Financial Statements
-44
Capital Structure, Investments and Financing Activities
Notes
Capital Structure, Investments and Financing Activities
277
FAIR VALUE
DETERMINED USING INPUT FACTORS OBSERVABLE IN THE MARKET (LEVEL 2)
Financial assets
Subsequent measurement at fair
value through other
comprehensive income
Equity instruments
Description of the
measurement
Financial instruments concerned technique
Shares
Derived from active
market including a
liquidity discount
Quoted prices in an active market and
volatilities observable on the market
Subsequent measurement at fair
value through profit or loss
Other debt instruments
Derivatives (without a hedging
relationship)
Derivatives (with a hedging
relationship)
Convertible note/bond with
embedded settlement option for
equity in companies
Forward exchange contracts and
currency options
Interest rate swaps
Nominal value
considering a liquidity
discount
Use of recognized
actuarial methods
Notes
Interest rate curves available on the
market
Volatilities observable on the market
Spot and forward rates observable on
the market as well as exchange rate
volatilities
Consolidated Financial Statements
Quoted prices in an active market
Main input factors used to
determine fair values
Bonds
(43) Information on fair value measurement
Accounting and measurement policies
The measurement techniques and main input factors used to determine the fair value of financial instruments are as
follows:
Derived from active market
276
FAIR VALUE
DETERMINED BY OFFICIAL PRICES AND QUOTED MARKET VALUES (LEVEL 1)
Financial assets
Subsequent measurement at fair value through
Equity instruments
Other debt instruments
Subsequent measurement at fair value through
profit or loss
Other debt instruments
other comprehensive income
Derived from active market
Financial debt
Other short-term cash
investments
Derived from active market
Quoted prices in an active market
Bonds
Main input factors used to
determine fair values
Publicly-traded funds
Description of the
measurement technique
Quoted prices in an active market
Shares
Financial
instruments
concerned
Financial debt
Subsequent measurement at amortized cost
Level 1/Level 2
-22
received/payments made
Transfers out of Level 3 into
-104
-6
10
483
-10
190
Net carrying amounts as of
26
258
-20
-104
Other
-2
20
divestments/payments
-45
24
20
1
thereof: attributable to
assets/liabilities held as of the
20
-50
1
Gains (+)/losses (-) recognized in
98
98
other comprehensive income
Currency translation difference
I
Disposals due to
balance sheet date
Dec. 31, 2019
8
2
Level 1/Level 2
Fair value changes
21
277
105
15
Subsequent measurement
at fair value through other
comprehensive income
Transfers into Level 3 from
Financial liabilities
Derivatives
without a
hedging
relationship instruments
46
-25
Gains (+)/losses (-) recognized in
the consolidated income
Subsequent
measurement at fair
value through profit
or loss
1
of factoring agreements
Additions due to
2
-16
Additions during the reporting period comprised primarily acquisitions of equity instruments, trade accounts receivable that are
designated to be sold on account of a factoring agreement, as well as bonds with a conversion right for shares in unlisted
companies. Disposals during the reporting period related particularly to advance payments received in connection with trade
accounts receivable under factoring agreements and payments received in connection with the contingent consideration from the
sale of the Biosimilars business. The transfer from Level 3 to Level 1 relates to the M Ventures portfolio company Progyny, Inc.,
United States which has since been listed. The gains and losses from Level 3 assets recognized in other comprehensive income
were reported in the consolidated statement of comprehensive income under the item "fair value adjustments".
2018
Consolidated Financial Statements
Notes
Capital Structure, Investments and Financing Activities
acquisitions/divestments/conclusion
284
Subsequent measurement at fair value
through profit or loss
Other debt
Contingent
Total instruments considerations
€ million
Net carrying amounts, Jan. 1,
447
2018
Financial assets
thereof: financial result
12,244
-15
9,076
1 The simplification option under IFRS 7.29(a) was used for disclosures of certain fair values.
2 Previous year's figures have been adjusted, see Note (45) "Effects from new accounting standards and other presentation changes".
3 Measurements within the scope of IAS 17 are exempted from the requirements of IFRS 13 (IFRS 13.6(b)).
Consolidated Financial Statements
Notes
Capital Structure, Investments and Financing Activities
283
5
The changes in financial assets and liabilities for each of the individual classes of financial instruments allocated to Level 3 and
measured at fair value were as follows:
€ million
Financial assets
Subsequent measurement
Subsequent measurement at fair value
through profit or loss
at fair value through other
comprehensive income
Other debt
Contingent
Total instruments considerations
2019
Derivatives
without a
hedging
1,813
6,714
78
-7
78
relationship
Refund liabilities
11
472
7,258
472
37
2
2
4
in accordance with IAS 17)³
Total
5,530
Lease liabilities (measured
Equity
relationship instruments
Trade and other
receivables
27
-13
Gains (+)/losses (-) recognized in
the consolidated income
-22
3
19
-45
26
statement
3
2
-1
thereof: attributable to
assets/liabilities held as of the
-11
2
thereof: other operating result
53
-5
Contingent
considerations
259
45
140
21
Net carrying amounts, Jan. 1,
2019
487
Additions due to
acquisitions/divestments/conclusion
of factoring agreements
Transfers into Level 3 from
Level 1/Level 2
Fair value changes
73
9
Financial liabilities
Subsequent
measurement at fair
value through profit
or loss
balance sheet date
2
After more than 5 years
-1
Other financial obligations comprised the following:
€ million
Acquisition of intangible assets
Acquisition of property, plant, and equipment
Operating lease (IAS 17) 1
Other financial obligations
1 Previous year's figure was restated.
(44) Other financial obligations
Dec. 31, 2019
984
159
1,548
144
561
1,143
2,253
Obligations to acquire intangible assets existed in particular owing to contingent considerations within the scope of in-licensing and
research and development collaborations. In these agreements, Merck has entered into an obligation to make milestone payments
once specific targets have been reached. In the not very likely event that all contract partners achieve all of their milestones, Merck
would be obligated to pay up to € 984 million (December 31, 2018: € 1,548 million) for the acquisition of intangible assets. The
decrease compared to 2018 is mainly attributable to the restructuring of the collaboration with F-Star Delta Ltd., United Kingdom
(see Note (6) "Collaboration agreements"). The table above does not contain any other financial obligations from possible future
sales-based license fees and milestone payments.
Dec. 31, 2018
Consolidated Financial Statements
M Ventures portfolio companies mainly include minority interests in unlisted companies. The mandate of M Ventures is to invest in
innovative technologies and products that are related to Merck's three business sectors. The M Ventures portfolio companies that
were disposed of in fiscal 2019 were Translate Bio, Inc., United States, Canbex Therapeutics Ltd., United Kingdom, and shares in
Progyny, Inc., United States (2018: Prexton Therapeutics SA, Switzerland, F-Star Gamma Limited, United Kingdom, and shares in
ObsEva SA, Switzerland).
-17
10
Cascadian
Therapeutics, Inc.,
United States
Nature's Best Health
Products Ltd.,
Acquired in full by Seattle
Genetics, Inc., United States
Sale to The Procter &
Gamble Company, United
States
-17
United Kingdom
The cumulative gain (+) or loss (-)
on disposal recognized in other
comprehensive income
Transfer of the cumulative gains (+)
or losses (-) within group equity to
retained earnings
5
5
32
32
1 Disposals due to liquidations are not included.
Notes
Capital Structure, Investments and Financing Activities
286
Future finance lease payments
Future operating lease payments¹
1 Previous year's figure was restated.
Under 1 year
In 1-5 years
After more than
Total
Present value of future payments from finance leases
Interest component of finance leases
2
4
2
2
4
115
308
138
2
€ million
DECEMBER 31, 2018
Due to the initial application of IFRS 16 and the associated accounting changes, the maturities of the obligations from lease
agreements are only shown here for 2018. For details see Note (45) "Effects from new accounting standards and other presentation
changes":
The expected maturities of the obligations to acquire intangible assets were as follows:
€ million
Within 1 year
In 1-5 years
78
Obligations to acquire intangible assets
Dec. 31, 2019
Dec. 31, 2018
55
61
159
710
770
776
984
1,548
Other financial obligations were recognized at nominal value.
and full acquisition by third
parties
-7
40
M Ventures portfolio
companies
3
22
22
-1
balance sheet date
Gains (+)/losses (-) recognized in
30
24
other comprehensive income
1
1
Equity Trade and other
receivables
Contingent
considerations
106
-3
33
Currency translation difference
49
24
thereof: attributable to
statement
thereof: other operating result
-31
-1
-29
thereof: attributable to
assets/liabilities held as of the
assets/liabilities held as of the
-37
-36
balance sheet date
thereof: financial result
24
3
22
-1
-1
30
-1
Disposals due to
-5
Consolidated Financial Statements
Capital Structure, Investments and Financing Activities
285
The following equity instruments measured at fair value through other comprehensive income were disposed of in 2019 and 2018:
€ million
20191
Reasons for the disposal
21
Fair value on
the date of
derecognition
M Ventures portfolio
companies
adjustment/restructuring
13
and full acquisition by third
parties
2018¹
Portfolio
Portfolio
140
45
259
divestments/payments
-80
-4
-20
-29
-28
received/payments made
Transfers out of Level 3 into
-9
-9
Level 1/Level 2
Other
-8
8
Net carrying amounts as of
Dec. 31, 2018
487
27
adjustment/restructuring
20
2,170
38, 39
5,086
250
62
499
810
Financial debt
Subsequent measurement at
761
amortized cost
29
2,054
2,054
liabilities
Financial debt
37
4,422
Trade payables and other
8,129
4,325
IFRS 16)²
14
33
33
33
hedging relationship
Derivatives with a hedging
relationship
36, 39
Total
7
7
7
Lease receivables (measured
in accordance with
24
5
5
7
Other financial liabilities
38
1,081
Derivatives with a hedging
38, 39
46
46
46
46
46
hedging relationship
relationship
11
565
565
Lease liabilities (measured in
37
109
458
Refund liabilities
76
76
16
27
12,551
1,108
10,183
2,706
12,889
Subsequent measurement at
fair value through profit or
loss
Contingent considerations
38
16
16
Derivatives without a
37, 39
19
56
76
16
20
567
36, 39
50
quoted market
values (Level 1)
input factors
observable in the
market (Level 2)
input factors not
observable in the
market (Level 3)
Total
amortized cost
Cash and cash equivalents
35
Total
781
Trade and other receivables
(excluding leasing
24
3,458
22
3,480
receivables)
781
Other debt instruments
Non-
current
notes
561
Consolidated Financial Statements
Notes
Capital Structure, Investments and Financing Activities
281
The following table presents the carrying amounts and the fair values of the individual financial assets and liabilities as of
December 31, 2019, for each financial instrument class pursuant to IFRS 9:
DECEMBER 31, 2019
Current
€ million
Subsequent measurement at
Carrying amount
Consoli-
Fair value
determined by
official prices and
Fair value¹
Fair value
determined using
Fair value
determined using
dated
Financial assets
36
8
9
39
Equity instruments
36
Contingent considerations
36
258
258
39
258
Other debt instruments
36
50
50
2
22
26
258
39
9
24
Subsequent measurement at
fair value through other
comprehensive income
Equity instruments
36
Trade and other receivables
24
36
Other debt instruments
Subsequent measurement at
fair value through profit or
loss
།རྨ། ཐ།
399
399
209
190
399
24
24
Derivatives without a
58
accordance with IFRS 16)²
8,295
4
4
relationship
Lease receivables
(measured in accordance
24
1
4
1
Total
5,425
673
6,098
30
174
492
with IAS 17)3
696
1
36,39
50
Derivatives without a
36, 39
16
59
76
259
4
259
27
50
30
45
76
hedging relationship
Derivatives with a hedging
22
Financial liabilities²
Subsequent measurement
at amortized cost
Contingent considerations
37
1
4
5
Derivatives without a
37,39
or loss
16
90
5
5
90
90
hedging relationship
Derivatives with a hedging
73
at fair value through profit
Subsequent measurement
1,032
Trade payables and other
29
1,766
1,766
liabilities
Financial debt
37
2,196
6,601
8,797
7,258
1,645
8,903
Other financial liabilities
38
1,019
13
50
Total
36
259
Total
Fair value
determined by
official prices and
quoted market
values (Level 1)
Fair value1
Fair value
determined using
input factors
observable in the
market (Level 2)
Fair value
determined using
input factors not
observable in the
market (Level 3)
Total
Financial assets²
Current current
Subsequent measurement
Cash and cash equivalents
35
2,170
Trade and other
receivables (excluding
24
3,204
at amortized cost
17
notes
dated
8,687
16,982
10,183
2,828
16
13,027
1 The simplification option under IFRS 7.29(a) was used for disclosures of certain fair values.
2 Measurements within the scope of IFRS 16 are exempted from the requirements of IFRS 13 (IFRS 13.6(b)).
Non-
Consolidated Financial Statements
Capital Structure, Investments and Financing Activities
282
The following table presents the carrying amounts and the fair values of the individual financial assets and liabilities as of
December 31, 2018, for each individual financial instrument class pursuant to IFRS 9:
DECEMBER 31, 2018
€ million
Carrying amount
Consoli-
Notes
3,221
leasing receivables)
Other debt instruments
21
21
36
8
4
12
12
21
12
at fair value through profit
or loss
Equity instruments
36
Contingent considerations
36
259
Subsequent measurement
21
24
274
36
1
9
10
Subsequent measurement
at fair value through other
comprehensive income
Equity instruments
Trade and other
receivables
Other debt instruments
36
274
274
17
118
140
Other debt instruments
Other Disclosures
Notes
Notes
Other non-current non-financial
33
33
20
13
Other non-current financial liabilities
7,030
349
6,681
6,681
Non-current financial debt
780
780
780
Other non-current provisions
2,336
2,336
2,336
Provisions for pensions and other
post-employment benefits
Non-current liabilities
290
19
19
19
liabilities
2,331
116
2,215
2,215
Current financial debt
600
600
600
Current provisions
Current liabilities
Notes
11,487
11,138
1,288
1,288
11,138
-19
-20
-13
52
1,288
Deferred tax liabilities
Other non-current liabilities
349
Other current financial liabilities
Consolidated Financial Statements
17,233
Reserves
Equity capital
Total equity
37,353
465
36,888
36,888
Total assets
9,234
-2
9,236
9,236
2,170
2,170
2,170
Cash and cash equivalents
460
460
460
Income tax receivables
-587
565
15,006
565
565
-15,006
17,233
33
33
33
Non-controlling interests
Merck KGaA shareholders
17,200
17,200
17,200
Equity attributable to
17,233
1,629
1,629
Gains/losses recognized in equity
11,192
11,192
11,192
Retained earnings
3,814
3,814
3,814
Capital reserves
1,629
-295
1,019
1,077
205
-126
1,727
-2,227
-2
-2,225
-1,183
-190
-993
-4,396
-13
-4,384
9,454
9,454
-5,382
-5,382
14,836
14,836
adjusted
changes in presentation
as reported
2018
79
1,727
2018
as reported
731
731
276
39
237
-1,687
-1
-1,686
-329
-28
1 Not defined by International Financial Reporting Standards (IFRSS).
-2,349
4,820
-1,425
6,246
adjusted
changes in presentation
-301
-2,339
4,820
-1,425
6,246
-10
58
Operating result (EBIT) 1
Research and development costs
1,211
1,211
1,211
-1,211
-58
-1,019
2,288
Other current liabilities
Other current non-financial liabilities
1,176
1,176
1,176
Income tax liabilities
472
472
472
Refund liabilities
1,766
1,766
1,766
Trade and other current payables
1,077
8,517
8,517
116
Total equity and liabilities
Administration expenses
Marketing and selling expenses
Gross profit
Cost of sales
Net sales
€ million
HEALTHCARE RESULTS OF OPERATIONS
1 Not defined by International Financial Reporting Standards (IFRSS).
Operating result (EBIT) ¹
Other operating income and expenses
Other operating income and expenses
Research and development costs
Marketing and selling expenses
Gross profit
Cost of sales
Net sales
€ million
CONSOLIDATED INCOME STATEMENT
8,633
37,353
465
36,888
36,888
Administration expenses
Consolidated Financial Statements
Other Disclosures
4
reclassi-
(after
adjustment)
fication)
13,764
7,237
4,811
610
Equity/
reserves
46
13,764
13,764
7,237
7,237
4,811
467
5,278
17
656
(after
Application
of IFRS 16
Property, plant and equipment
Other non-current financial assets
Other non-current receivables
Other non-current non-financial
assets
Other non-current assets
Deferred tax assets
Dec. 31,
Jan. 1, 2019
2018
Reclassi-
fication
reported)
(as Receivables/
liabilities
Derivatives
Reclassi-
fication
Non-
financial
assets/
liabilities
Reclassi-
fication
Dec. 31,
2018
Reclassi-
fication
Other intangible assets
656
17
-2,931
Trade and other current receivables
3,226
3,226
3,226
Contract assets
52
2,931
52
Other current financial assets
24
29
29
Other current non-financial assets
536
534
52
17
Trade accounts receivable
2,764
76
76
76
138
-17
-46
-76
2,764
1,091
1,091
27,652
1,091
467
28,119
Current assets
Inventories
2,764
27,652
Goodwill
Non-current assets
€ million
Total lease liabilities
Jan. 1, 2019
384
17
67
467
-2
Lease liabilities
349
465
Consolidated Financial Statements
Notes
Other Disclosures
288
The following shows a reconciliation from the payment obligation for operating leases (IAS 17) as of December 31, 2018, to the
opening balance for lease liabilities as of January 1, 2019:
€ million
116
Payment obligations for operating leases as of December 31, 2018 (IAS 17) ¹
Current financial debt
Non-current financial debt
Other Disclosures
287
(45) Effects from new accounting standards and other presentation changes
Changes to accounting and measurement policies resulting from IFRS 16 "Leases"
Merck applied the accounting standard IFRS 16 "Leases" for the first time as of January 1, 2019. IFRS 16 replaces IAS 17 "Leases"
and the corresponding interpretations. For transitioning to IFRS 16, Merck applied the modified retrospective method with
recognition of the cumulative transition effect as of January 1, 2019. Prior-year comparative figures were not restated.
IFRS 16 introduces a uniform lessee accounting model that requires lessees to recognize all leases in the consolidated balance
sheet. This model mandates that right-of-use assets be recognized for identified assets and lease liabilities recognized for entered
payment obligations. The new lease accounting regulations affect Merck as a lessee, in particular regarding leased real estate and
vehicles. Rules governing lessor accounting of leases remain largely unchanged. However, this business has no material relevance
for Merck. Furthermore, the new provisions of IFRS 16 on sale and leaseback accounting have no impact on the consolidated
financial statements.
Lease liabilities - recognized for leases with Merck as a lessee - are to be measured at the present value of the outstanding lease
payments in accordance with IFRS 16. The weighted average interest rate used to discount the leases existing as of January 1,
2019, amounted to 2.8%. The present value of outstanding lease payments adjusted for directly attributable costs was also used to
recognize the right-of-use asset. Prepayments and liabilities related to previous periods were also still taken into consideration.
When remaining lease terms are determined at first-time application, the probability that purchase, extension, or termination
options will be exercised is assessed based on current knowledge. These assessments were discretionary.
Lease liabilities
According to IFRS 16, right-of-use assets are recognized within property, plant and equipment, using the same line item that would
have been used if the underlying asset had been purchased by Merck. Interest expenses from the unwinding of the discount on
lease liabilities are recognized in the financial result in accordance with IFRS 16; this differs from the previous accounting method in
accordance with IAS 17, according to which operating lease expenses were recognized in full in the respective functional costs.
€ million
Property, plant and equipment
Land, land rights, and buildings
Plant and machinery
Other facilities, operating and office equipment
Total right-of-use assets
Other current non-financial assets
This had the following effects on the consolidated balance sheet:
Practical expedient for leasing low-value assets
Minimum lease payments (nominal value) of the liabilities from finance leases as of December 31, 2018
Variable lease payments depending on an index or an installment
Lease payments based on renewal options classified as sufficiently probable as of January 1, 2019
Lease payments based on termination options classified as not sufficiently probable as of January 1, 2019
Service agreements outside of the scope of IFRS 16
except land, land rights, and buildings - Merck does not separate non-lease components from lease
⚫ leases that were previously subject to IAS 17 and the corresponding interpretations will continue to be treated as leases under
IFRS 16;
• at first-time application, no impairment tests for right-of-use assets were carried out - instead, Merck charged provisions for
onerous contracts against the respective right-of-use assets;
• at first-time application, directly attributable costs incurred at contract inception were not taken into consideration;
• if renewal or termination options existed, the term was determined retroactively;
⚫ for right-of-use assets and the lease liabilities of leases classified as finance leases under IAS 17, the carrying amounts were
retained on the date of first-time application.
Merck did not apply the practical expedient regarding leases with a term of less than 12 months.
⚫ for right-of-use assets
components;
Other presentational changes
Consolidated Financial Statements
Notes
Other Disclosures
289
The restated 2018 comparative figures in the consolidated income statement and consolidated balance sheet can be seen in the
following tables.
Effects of new accounting standards and other presentation changes in the consolidated income
statement and the consolidated balance sheet
The following table shows the effects of the aforementioned changes to accounting and measurement policies on the consolidated
balance sheet.
To improve comparability and transparency, the presentation of functional costs in the consolidated income statement and the
consolidated balance sheet classification were adjusted. The changes in the consolidated income statement concern the functional
presentation of expenses and income from so-called "adjustments" which were previously included in other operating income and
other operating expenses. The "adjustments" are now presented directly in the respective functional cost in order to make the
connection to functional cost of the relevant expenses and income directly apparent. In the consolidated balance sheet, the other
assets and other liabilities are assigned to financial and non-financial assets and liabilities in accordance with their nature. Contract
assets are now presented as a separate balance sheet item. Furthermore, trade accounts receivable and other receivables were
combined. Under Group equity, reserves were divided into capital reserves and retained earnings.
⚫ leases of intangible assets within the scope of IAS 38 are not recognized in accordance with IFRS 16;
⚫ right-of-use assets, including the corresponding liabilities, from leases of low-value assets are not be recognized in the
consolidated balance sheet;
Merck made use of the following practical expedients of IFRS 16:
Undiscounted lease liabilities as of January 1, 2019
Discount
Lease liability as of January 1, 2019
Present value of the lease liabilities from finance leases as of December 31, 2018
Jan. 1, 2019
561
-54
19
1
27
-33
525
-56
469
-4
465
Additional lease liabilities from the first-time application of IFRS 16 as of January 1, 2019
1 Previous year's figure was restated.
Other current assets
886
536
-5,950
Reconciliation EBITDA pre 1
Change
€ million
2019
2018
€ million
%
EBITDA pre¹
4,385
3,800
585
15.4%
Investments in property, plant, equipment and software, as well as advance payments for
intangible assets
-1,026
-932
-94
10.1%
Changes in inventories
-577
-214
-363 100.0%
Changes in trade accounts receivable as well as receivables from royalties and licenses
Lease payments²
-259
Business free cash flow 1
-145
MERCK GROUP
Internal Management System
Other adjustments
13
-13
58
-58
EBITDA pre¹
4,385
4,385
3,800
3,800
15.4%
thereof: organic growth¹
11.3%
thereof: exchange rate effects
2.5%
thereof: acquisitions/divestments
1.6%
1 Not defined by International Financial Reporting Standard (IFRSS).
2
Previous year's figures have been adjusted, see Note "Effects from new accounting standards and other presentation changes" in the Notes to the
Consolidated Financial Statements.
Business free cash flow (BFCF)
Business free cash flow comprises the major cash-relevant items that the operating businesses can influence and that are under
their full control. It comprises EBITDA pre less investments in property, plant, equipment, software, advance payments for
intangible assets, changes in inventories, trade accounts receivable, and receivables from royalties and licenses. To manage
working capital on a regional and local level, the businesses use the two indicators "days sales outstanding" and "days in
inventory".
Combined Management Report Fundamental Information about the Group
30
-114
78.6%
-136
16,152
%
€ million
2018
2019
Change
Net sales
€ million
Net sales
MERCK GROUP
Net sales are defined as the revenues from the sale of goods, services rendered to external customers, commission income and
profit-sharing from collaborations, net of value added tax, and after sales deductions such as rebates or discounts. Net sales are the
main indicator of our business growth and therefore an important parameter of external as well as internal performance
measurement. In addition, organic sales growth is used for internal performance management. Organic sales growth shows the
percentage change in net sales versus a comparative period, adjusted for exchange rate and portfolio effects. Exchange rate effects
may arise as a result of foreign exchange fluctuation between the functional non-euro currency of a consolidated company and the
reporting currency (euro). By contrast, portfolio effects reflect sales changes due to acquisitions and divestments of consolidated
companies or businesses.
Net sales
The three key performance indicators of net sales, EBITDA pre, and business free cash flow are the most important factors for
assessing operational performance. Therefore, we refer to these KPIs in the Report on Economic Position, the Report on Risks and
Opportunities, and the Report on Expected Developments. As the most important indicators of financial business performance, the
KPIs are key elements of our performance management system.
Key performance indicators of the Group and its businesses
28
Internal Management System
Combined Management Report Fundamental Information about the Group
EBITDA pre margin, ROCE
Payback period,
NPV, IRR,
Capex
1 Not defined by International Financial Reporting Standards (IFRSS).
M&A = mergers and acquisitions.
14,836
1,315
8.9
EBITDA pre
Elimination of first-time consolidations
346
Business free cash flow¹
2,732
2,508
224
8.9%
1
Not defined by International Financial Reporting Standard (IFRSS).
2
Excluding payments for low-value leases and interest components included in lease payments.
-2
Investments and value management
Net present value (NPV)
The main criterion for the prioritization of investment opportunities is the net present value. It is based on the discounted cash flow
method and is calculated as the sum of the discounted free cash flows over the projection period of a project. The weighted average
cost of capital (WACC), representing the weighted average of the cost of equity and cost of debt, is used as the discount rate.
Depending on the type and location of a project, different markups are applied to the WACC.
Internal rate of return (IRR)
The internal rate of return is a further important criterion for the assessment of acquisition projects and investments in property,
plant, and equipment, as well as intangible assets. It is the discount rate that makes the present value of all future free cash flows
equal to the initial investment or the purchase price of an acquisition. A project adds value if the internal rate of return is higher
than the weighted cost of capital including markups.
Merck value added gives information about the financial value created in a period. Value is created when the return on capital
employed (ROCE) of the company or the business is higher than the weighted average cost of capital (WACC). MEVA metrics
provide us with a powerful tool to weigh investment and spending decisions against capital requirements and investors'
expectations.
Merck value added (MEVA)
An additional parameter to prioritize investments in property, plant, equipment, and intangible assets is the payback period, which
indicates the time in years after which an investment will generate positive net cash flow.
Payback period
MERCK GROUP
Combined Management Report Fundamental Information about the Group Internal Management System
EBITDA pre is the main performance indicator measuring ongoing operational profitability and is used internally and externally. To
provide an alternative understanding of the underlying operational performance, it excludes from the operating result depreciation
and amortization, impairment losses and reversals of impairment losses, as well as adjustments. These adjustments are restricted
to the following categories: integration expenses, IT expenses for selected projects, restructuring expenses, gains/losses on the
divestment of businesses, acquisition expenses, and other adjustments. The classification of specific income and expenses as
adjustments follows clear rules and underlies strict governance at Group level. Within the scope of internal performance
management, EBITDA pre allows for necessary changes or restructuring without penalizing the performance of the operating
business. The following table shows the composition of EBITDA pre in fiscal 2019 compared to the previous year. These figures
were adjusted in accordance with IFRSS by the adjustments included in the functional costs.
Sustainable value creation is essential to secure the long-term success of the company. To optimize the allocation of financial
resources, we use a defined set of parameters as criteria for the prioritization of investment opportunities and portfolio decisions.
2
-84
84
56
10,202
9,454
45
9,499
7.4%
Marketing and selling expenses
29
-4,576
10
-4,566
-4,396
13
-4,384
4.2%
Administration expenses
-1,154
109
-1,045
-1,183
190
-993
5.2%
probability of success.
10,145
11.5%
-5,337
56
-6,006
8.9%
14,836
14,836
16,152
-
16,152
Pre¹
Pre1
IFRSS adjustments
Research and development costs
Pre 1
Gross profit
Cost of sales
Net sales
€ million
of
of
Change
20182
Elimination
Elimination
2019
45
IFRSS adjustments
-5,382
-2,268
-2,239
-55
1,746
11.0%
impairment losses
EBITDA¹
4,066
3,528
Restructuring expenses
120
-120
46
-46
Integration expenses/IT expenses
95
-95
142
-142
Gains (-)/losses (+) on the divestment of businesses
6
-6
25
-25
Acquisition-related adjustments
1,801
1,937
-9
1,946
-2,227
2
-2,225
0.7%
Impairment losses and reversal of impairment losses on financial
>
-8
-8
27
27
assets (net)
29
100.0%
-19
123
104
52
78
129
19.6%
Operating result (EBIT) 1
2,120
1,727
Depreciation/amortization/impairment losses/reversals of
Other operating income and expenses
expected net present value.
Return on capital employed (ROCE)
POS¹
To sustain our leadership into the future, Life Science has established a strategy based on three key pillars:
Life Science continues to deliver on our strategic agenda by increasing profitability due to strong organic growth. In 2019, we
maintained our status as a top-three player in the industry. Our organic sales growth exceeded that of the industry and has
remained the highest among integrated peers - as it has since the acquisition of Sigma-Aldrich in November 2015.
Life Science
25
Combined Management Report Fundamental Information about the Group Strategy
In this context, strategic collaborations are an integral part of delivering on our commitment to transform the lives of patients living
with serious unmet medical needs. We recognize the value of collaboration in the research and development of breakthrough
therapies, as well as in strengthening our current portfolio. Here, we focus on balancing the right blend of internal capabilities and
external partnerships (for example, with Pfizer and GlaxoSmithKline) and on building strong collaborations with other leaders in the
industry.
The third strategic pillar is innovation: We aim to develop high-quality, first-to-market, and best-in-class therapies and to build a
portfolio in each of our franchises. We have streamlined our pipeline and expanded our innovation capabilities with strong
investigational drug candidates and technologies. In order to maximize the output of our R&D investments and increase our
chances of success in discovering and developing new therapies, we focus our expertise on specific franchises and are exploiting
synergies in disease mechanisms and biological pathways. We are investing in digital technologies as well as personalized and
translational medicine in order to drive continued pipeline success.
The second pillar of our strategy is the focus on specialty medicine franchises. Here, we expect the oncology, immuno-oncology,
and immunology markets to remain highly attractive in terms of size, growth prospects, and profitability. Within each specialty
franchise, our approach is to develop deep internal expertise and insight, from internal research to commercialization, augmented
by external talent sourcing, strategic partnering, and asset acquisitions.
internal rate of return.
Following on from the successes over the past three years, we continue to drive pipeline projects with the aims of bringing
groundbreaking medicines to patients, maximizing our existing portfolio and continuing our expansion in growth markets. Our
ambition is to become a global specialty innovator, operating in franchises with significant unmet medical needs and bringing high
value to patients. Therefore, we continue to invest in research and development to discover new treatment options and improve
existing ones. Together with our stakeholders and partners, we want to ensure that people can access the medicines they need to
stay healthy and live longer.
Our Healthcare business sector specializes in key franchises and specific diseases. Global megatrends - such as a rising prevalence
of chronic diseases and the increase in average life expectancy - continue to drive the demand for our products. To meet these
demands and respond appropriately to the dynamics of our markets, we have significantly transformed our Healthcare business
sector in recent years.
Healthcare
24
Combined Management Report Fundamental Information about the Group Strategy
Business Strategies
1. Ensure operational excellence by focusing on building our base business, creating value in a strong organization and
implementing consistent processes
2. Strengthen the core organization by expanding our leadership in bioprocessing and e-commerce as well as advancing our
robust offering of testing kits and services to ensure food and beverage safety and quality
3. Establish new growth pillars through our three strategic initiatives: Gene Editing & Novel Modalities, BioReliance ® End-to-End
Solutions, and BrightLabTM.
We have completed the integration of Sigma-Aldrich, the largest in our history and of the industry, during which we consistently
outperformed the market. Work toward harmonizing our Enterprise Resource Planning (ERP) systems continues. Our aspiration
remains to reinforce our leadership position as an innovation-driven tools supplier and collaborator dedicated to solving the
toughest problems in life science.
Additionally, as a general rule, the bond market represents a key element. The most recent bond issues took place in 2019 in
connection with the acquisition of Versum Materials. Hybrid bonds (totaling € 1.5 billion) and euro bonds (totaling € 2.0 billion)
were issued. The use of various instruments provides a broad financing basis and addresses different investor groups.
We ensure that we meet our obligations at all times and adhere to a conservative and proactive funding strategy that involves the
use of various financial instruments. Our diversified and profitable businesses form the basis for our strong and sustainable cash
flow generation capacity. Moreover, we have several funding resources in place. A € 2 billion syndicated loan facility, renewed in
2018, is in place until 2024 to cover any unexpected cash needs. The facility is a pure backup credit facility and has not been drawn
on so far. In addition, we have a commercial paper program with a volume of € 2 billion at our disposal. Within the scope of this
program, we can issue short-term commercial paper with a maturity of up to one year. Furthermore, in 2019, we used bilateral
bank loan agreements with first-class banks to optimize our funding structure and cost. For the acquisition of Versum Materials,
Merck also agreed on a US$ 6.3 billion acquisition loan with Merck's relationship banks, consisting of a US$ 4.0 billion bridge facility
(which was never drawn and was canceled before the closing of the acquisition) and a US$ 2.3 billion term loan, which is partially
drawn.
Financial flexibility and a conservative funding strategy
We are pursuing a conservative financial policy characterized by the following:
Strategic finance and dividend policy
• Accelerate the realization of our growth ambitions through the successful integration of both Versum Materials and
Intermolecular
• Transform into a leading enabler for data driven electronics with best-in-class capabilities and portfolio
We are strengthening Merck as a vibrant science and technology company. In this context, Darmstadt plays an important role as
our headquarters and largest location, where all three business sectors are represented with their entire value chains and where we
have invested around € 1 billion since 2015. At Merck, we are in a phase of accelerated growth and will continue to make targeted
investments in Darmstadt as one of our centers for science and technology. For instance, in 2020 we will open a new research and
development facility for Performance Materials that is currently under construction. And with projects such as a production site for
Life Science's membrane business and a new training center, we plan to invest another € 1 billion in Darmstadt by 2025. The
physical proximity of the business sectors in Darmstadt promotes cross-sector cooperation. By developing a state-of-the-art digital
infrastructure and digital solution approaches, such as those pursued in our Innovation Center, we support profitable growth and
new innovation fields.
Drive top-line growth especially in Semiconductor Solutions and OLED
Our strategic priorities going forward:
26
Combined Management Report Fundamental Information about the Group Strategy
The Bright Future program ensures the successful transformation of Performance Materials by driving the realization of our
strategy. Main outcomes are the shift of our portfolio into growing electronics segments, safeguarding our margin ambition, and
changes in the culture within Performance Materials. The absolute growth of Semiconductor Solutions and the ongoing growth in
OLED are expected to outweigh the decline in liquid crystal sales. We assume to stabilize the EBITDA pre margins at around 30% in
the long term, well above the industry average. From 2020 onward, Performance Materials expects to be back to organic growth.
With Versum Materials and Intermolecular, we are able to obtain a leading position in the electronic materials market. Overall,
strategy realization within the electronics market is well on track, and we are working on measures in Surface Solutions to stabilize
the business.
Performance Materials is currently undergoing a major transformation by repositioning its overall business toward the electronic
materials market. This market is very attractive due to its long-term growth potential. The electronic content of any product is
increasing; electronics are now part of nearly every product, and diversification is securing the market's long-term stability.
Megatrends like the Internet of things (IoT), AI (artificial intelligence), and autonomous driving lead to high innovation pressure
and drive the growth of data from every side. The global data volume grows exponentially with more than 30% annually; the "data
explosion" will transform electronics far beyond what today's systems can handle. Data needs to be generated, transferred,
processed, stored, and made comprehensible for humans through smart interfaces. Our strategy is to cover all aspects of this data
handling and to enable processes by providing customized solutions for the production of innovative electronic components. We are
the company behind the companies advancing digital living. Performance Materials targets the electronic materials market with a
focus on the semiconductor and display industries in order to participate in the growth of data-driven electronics.
Performance Materials
Looking ahead, we expect our strategy to continue delivering net sales growth ahead of the market and further expand our market-
leading EBITDA pre margin. For 2020, we will prioritize the continued support of new growth pillars with our Gene Editing & Novel
Modalities offerings as well as differentiated gene editing tools, drug safety systems and models, and clinical viral vector
manufacturing. In addition, we will further develop our BioRelianceⓇ End-to-End Solutions, a service offering for process
development and manufacturing for emerging biotech companies, alongside our BioContinuum™ Platform, which addresses
intensified bioprocessing and continuous manufacturing. We will also focus on expanding the use of BrightLab™, our digital solution
for lab management, as well as our food and beverage testing kits and services.
•
Maintaining sustainable and reliable business relations with a core group of banks
A major focus of our innovation efforts is digitalization. We are leveraging related opportunities through our Digital Organization in
order to create value for patients, customers, and business associates. To us, digitalization means the digital integration of our
entire value chain, the digitalization of our products, services, and communication interfaces to customers, as well as the
development of new digital business models. All this is supported by state-of the-art methods to collect and analyze vast amounts
of data. Syntropy, our planned joint venture with Palantir technologies to advance cancer research, has been evolving throughout
2019 as we continue to grow our pipeline of potential customers and collaborators who share our vision of creating a step change in
oncology.
While our Innovation Center is operating on a global scale, the China Innovation Hub, with offices in Shanghai, China, and
Guangzhou, China, will accelerate our innovation development by tapping into the China innovation ecosystem. Our objective is to
advance innovation in China, for China and beyond - together with local partners, such as technology companies, start-ups,
universities, and research institutes.
Our priority Performance focuses on the financial aspects of our activities. It provides a clear definition and tangible targets of
financial success. As we focus on organic growth, we aim to sustainably increase our profitability with a focus on cash generation,
and on implementing strict financial discipline.
Performance
To achieve our strategic ambition of becoming the vibrant science and technology company, we focus on our three Group-wide
priorities: Performance, People, and Technology.
Performance Materials has made significant progress with the implementation of its Bright Future transformation program, which
was initially announced in 2018. With the acquisition of Versum Materials and Intermolecular, we reached key milestones in our
transformation journey to become a leading player in the electronic materials market. Performance Materials aims to benefit from
sustainable growth trends, particularly from the trend toward increasing data volumes worldwide.
Life Science growth is driven by our strong product portfolio, our e-commerce platform - www.sigmaaldrich.com, which generates
more than € 1.5 billion in sales - and our strong track record of service and innovation excellence. The business sector plans to
deliver annual growth of 5% to 8% per year in the mid-term, thus continuing to outpace market growth. Our high-growth Process
Solutions business unit and our e-commerce platform are expected to remain meaningful drivers of this growth.
In Healthcare, we intend to fully leverage our pipeline's potential. Our new product launches, MavencladⓇ and BavencioⓇ are
'
increasingly contributing to earnings. We expect our core business with our established products to at least remain organically
stable for the mid-term. By 2022, we aim to achieve additional annual sales of at least € 2 billion with new medicines.
We are now in the growth and expansion phase of our strategy and are well on track. Following the closing of the Versum Materials
acquisition on October 7, 2019, we are putting special emphasis on generating cash in order to quickly lower our post-acquisition
debt. Going forward, we aim to deliver profitable growth while focusing on ensuring a high degree of cost discipline. In 2020, we
expect all three business sectors to drive earnings growth and support the growth and expansion phase of our strategy.
owners.
With our Group strategy, we want to become the vibrant science and technology company. By 2022, we aim to have strong,
innovative science- and technology-focused business sectors with leadership positions in our areas. We want to be a top-tier
company in relation to our peers in terms of sales and margin growth and we aim to continue to deliver sustainable returns to our
Our ambition for 2022
Performance Materials has delivered profitable growth and a significant cash contribution over many years, strongly driven by liquid
crystals. Over the past several years, we evolved this business sector into new areas such as semiconductor materials, for example
through the acquisition of AZ Electronic Materials in 2014. Performance Materials is currently undergoing a major transformation by
repositioning its overall business toward the highly attractive electronic materials market. With the acquisitions of Versum Materials
and Intermolecular, both in 2019, we are expected to achieve a leading position in this market, with a focus on the electronics
market.
Within Life Science, we have significantly transformed to become a diversified industry leader through the acquisition of Millipore in
2010 and Sigma-Aldrich in 2015. We continue to leverage our e-commerce platform to expand our reach and leadership in the
industry as well as invest in strategic initiatives, such as Gene Editing & Novel Modalities, BioReliance® End-to-End Solutions, and
BrightLab™, our digital solution for lab management.
21
Fundamental Information about the Group Strategy
Combined Management Report
In Healthcare, a successful year 2019 included further launches of our innovative products BavencioⓇ and MavencladⓇ. Our
Healthcare business has grown consistently for many quarters, and we continue to diligently develop and manage our pipeline of
innovative medicines. The scientific data we presented at various congresses in 2019 underscored the overall attractiveness of our
pipeline with its highly innovative assets in key indications and various stages of the clinical development process.
Combined Management Report Fundamental Information about the Group Strategy
22
Life Science continued along the path of science and technology leadership through our sustained investment and focus on our
strategic initiatives. Those include Gene Editing & Novel Modalities, BioReliance ® End-to-End Solutions for Bioprocessing, and
BrightLab™, our digital solution for complete lab management. Additionally, we maintained our focus on our leading e-commerce
platform, www.sigmaaldrich.com.
In addition to these global innovation fields, we have also introduced a China-focused innovation field through our China Innovation
Hub: AI-enabled health solutions. Our focus within this field is the exploration of new AI-based technologies, products, and services
that could impact the medical and healthcare industries across the value chain by, for example, increasing efficiency, saving costs,
and improving customer experiences.
Complementary to the business sectors, we are also looking into innovations that fall between our business sectors or beyond our
company's current scope. With our Innovation Center in Darmstadt, Germany, and our Innovation Hubs in Menlo Park, California,
United States, in Shanghai, China, and in Guangzhou, China, we are discovering new ideas and technologies, then scaling them up
to build new businesses. We are focusing on our activities within three core innovation fields of interest: Liquid Biopsy, Clean Meat,
and Biosensing & Interfaces. With liquid biopsies, a variety of diseases can be diagnosed through the detection of biomarkers in
body fluids. This could be a key technology for early disease detection and expanding delivery of precision medicine to more
patients. The innovation field Clean Meat comprises technological innovations to meet the world's growing demand for protein- and
nutrient-dense foods made by means of ethical, eco-friendly methods. The innovation field of Biosensing & Interfaces focuses on
the integration of electronics with the human body to create a digital human/biological interface. This could enable faster, more
accurate (remote) health monitoring and treatment.
23
Combined Management Report Fundamental Information about the Group Strategy
Our approach to technology paves the way for discovering and scaling the most exciting technologies. The majority of our
innovations come from within our existing business sectors, with approximately 7,800 scientists and researchers working for our
company. These innovations include everything from incremental innovations to disruptive opportunities in the fields of Healthcare,
Life Science, and Performance Materials.
Technology
In the context of the People strategy, we also want to look at new forms of cooperation and experiment with methods that result in
better decision-making. For example, pilot initiatives focus on further expanding the Merck Science Network. Through this project,
we are promoting the scientific community within the company to accelerate the exchange of innovative ideas and improve
collaboration between all employees in the Research and Development sector.
Through our Silicon Valley Innovation Hub in Menlo Park, California, United States, we aim to uncover new technological
opportunities and establish partnerships and projects within our three global innovation fields, with a strong focus on Clean Meat.
Additionally, we focus on disruptive external innovation in emerging fields adjacent to, in between, and beyond our established
business sectors. We strive for successful external innovation by transforming groundbreaking scientific ideas into businesses with
the potential to improve patients' lives, disrupt industries, and transform the way we live. This includes M Ventures, the strategic
corporate venture capital fund of Merck, with a total volume of € 300 million distributed across its Healthcare, Life Science,
Performance Materials, and New Businesses evergreen funds. Since inception, M Ventures has invested in over 60 promising start-
ups and companies that could impact Merck's core business areas, while at the same time providing Merck with strategic and
financial returns, such as the successful IPO of Progyny (on October 19, 2019). In addition to company creation initiatives and its
incubator activities in Israel, M Ventures has set up a China seed fund worth RMB 100 million (€ 13 million) to further foster
innovation in this market with strategic importance for us.
We place great importance on continuous advanced training and further development of our managers. This is essential to address
the diverse needs of team members and the changing requirements of the businesses, especially in the area of digitalization. Our
leaders are responsible for pushing our strategy ahead by building up the right competencies, thereby fostering innovation. As part
of this, they take calculated risks, give clear and inspiring direction to their employees, and provide the requisite structures and
resources to achieve our goals. Based on our competency model, we have identified six leadership behaviors that define how we
expect our leaders to act (for further details see People at Merck). Those leadership behaviors are being implemented into our
existing processes and tools (for example, selection, assessment and feedback tools, leadership programs, etc.).
Our leaders play a decisive role in our People strategy. We aim to place leaders who will develop employees for future requirements
not just current needs - and foster the unique strengths of diverse individuals within the organization. At the same time, we want
the leadership style of our managers to enable strategic innovation. The right leaders will help us promote curious talents who can
solve complex problems and are passionate about the work they do. We will also strengthen results-driven teams as well as
networks that value collaboration and provide flexible frameworks within which teams and individuals can drive our business
forward.
-
It is crucial to be perceived as an attractive employer in the market in order to continue to capture the interest of potential
employees. The fact that we rank among the world's best employers was also confirmed by our distinction as a "Global Top
Employer 2019" by the Dutch Top Employers Institute. In addition, we were ranked fourth among employers worldwide in the field
of biotechnology and pharmaceutics by Science Magazine, an international scientific publication.
To become the vibrant science and technology company, we need to focus on our people their talent, their performance, their
ideas. Merck's People strategy aims at building the capabilities we need to shape the future by attracting and retaining the right
people as well as creating the right culture for them to collaborate and perform at their best. It addresses how we as a science and
technology company can create a working environment that meets our employees' individual needs and allows curiosity to unfold.
Our growth strategy calls for people with diverse experiences and backgrounds who work together on the basis of shared values to
innovate new solutions and respond flexibly to changing demands.
-
People
In Performance Materials we are well on track with the execution of our five-year Bright Future transformation program, which we
are using to adapt to new market realities and customer requirements. Bright Future forms the foundation for returning to
sustainable growth, ensuring attractive margins. In 2019, we further streamlined our cost-base and our processes. With the
completion of the acquisition of Versum Materials and Intermolecular, we achieved major milestones of our Bright Future program
to transform Performance Materials into a strong solutions provider and leading player in the electronic materials market.
We want to make data-driven people decisions - both when hiring new members of staff as well as in the personal development of
employees. Another element of this strategy is to promote diversity, with a special focus on women and talent in Asia, and to create
the inclusive environment that enable these groups - and all employees - to bring in their unique strengths and understanding of
key customers and markets. We need to value different perspectives and encourage constructive discussions.
We mainly work with a well-diversified, financially stable and reliable group of banks. Due to Merck's long-term-oriented business
approach, bank relationships typically last for many years and are characterized by professionalism and trust. The banking group
consists of banks with strong capabilities and expertise in various products and geographic regions. We regard these banks as
strategic partners. Accordingly, we involve them in important financing transactions.
The first pillar of our strategy is to reinforce our global footprint, bringing the innovation of our pipeline to patients and growing our
presence - in the United States and in China, for example. The emerging markets and China are expected to be the largest growth
drivers for many of our established products in the future. Managing the balance between delivering innovative new medicines while
expanding our reach and ensuring the profitable growth of the existing business will be one of the strategic challenges. Fertility and
endocrinology offer significant opportunities to bring value to patients, given their high profitability and growth potential.
Maximizing the commercial potential of these areas will remain important.
The rating of our creditworthiness by external rating agencies is an important indicator of the company's financial stability. A strong
investment grade rating is an important cornerstone of Merck's financial policy, as it safeguards access to capital markets at
attractive financial conditions. Merck currently has a Baal rating from Moody's, an A rating from Standard & Poor's (S&P), and an
A- rating from Scope, each with a stable outlook. Continuing to reduce our debt after the Versum Materials acquisition is of utmost
importance to us.
27
Internal Management System
As a global company with a diverse portfolio of products and services, we use a comprehensive framework of indicators to manage
performance. The most important key performance indicator (KPI) to measure performance is EBITDA pre¹.
The Value Creation and Financial KPI Pyramid, which summarizes the important financial performance measures of the Group,
reflects the comprehensive framework of financial KPIs to steer the businesses and prioritize the allocation of cash resources. It
consists of three managerial dimensions: Merck Group, Business, and Projects, each of which require the use of different indicators.
Projects
Business
Merck Group
M&A
NPV, IRR,
EBITDA pre margin,
EPS, ROCE, MEVA
Net Sales,
EBITDA pre, BFCF
Net income, EPS,
EPS pre, Dividend ratio,
Credit rating
MEVA
Net sales,
EBITDA pre,
BFCF
Combined Management Report Fundamental Information about the Group Internal Management System
Net sales growth,
EBITDA pre margin
Licensing
eNPV, IRR,
EBITDA pre margin,
POS, ROCE
Abbreviations
EBITDA pre¹ = earnings before interest, income tax, depreciation and amortization, as well as adjustments
EPS = earnings per share.
Strong investment grade rating
MEVA¹ = Merck value added.
BFCF1 = business free cash flow.
ROCE¹ return on capital employed.
NPV1 = net present value.
IRR¹
eNPV1
ROCE, MEVA
In addition to NPV and IRR, when looking at individual accounting periods, return on capital employed is an important metric for the
assessment of investment projects. It is calculated as the adjusted operating result (EBIT) pre divided by the sum of property,
plant, equipment, intangible assets, trade accounts receivable, trade accounts payable, and inventories.
EPS pre¹ = earnings per share before adjustments.
Sustainable dividend policy
We are pursuing a sustainable dividend policy. Provided the economic environment develops in a stable manner, the current
dividend represents the minimum level for future dividend proposals. Our dividend policy will follow the business development and
earnings increases over the coming years. However, dividend growth could deviate, for example, within the scope of restructuring
or in the event of significant global economic developments. We aim for a target corridor of 20 - 25% of earnings per share pre.
Germany
100.00
Darmstadt
Merck Patent GmbH A)
Germany
100.00
100.00
Darmstadt
Merck Life Science Holding GmbH
Germany
100.00
Eppelheim
Germany
Merck Life Science GmbH A)
Germany
100.00
Darmstadt
Merck Life Science Germany GmbH A)
Germany
100.00
Darmstadt
Merck Internationale Beteiligungen GmbH
100.00
Merck Performance Materials Germany GmbH A)
Darmstadt
100.00
100.00
100.00
Darmstadt
Merck Serono GmbH A)
Germany
100.00
100.00
Hohenbrunn
Merck Schuchardt OHG
Germany
100.00
Germany
100.00
Merck Real Estate GmbH A)
Germany
100.00
100.00
Darmstadt
Merck Performance Materials Holding GmbH
Germany
100.00
Wiesbaden
Merck Performance Materials GmbH
Germany
Darmstadt
100.00
Darmstadt
100.00
100.00
Grundstücksverwaltungsgesellschaft mbH
Germany
Millipart GmbH
Gernsheim
100.00
Germany
Sigma-Aldrich Biochemie GmbH
Steinheim
100.00
Germany
Sigma-Aldrich Chemie GmbH
Consolidated Financial Statements
Steinheim
Sigma-Aldrich Logistik GmbH
Germany
100.00
Steinheim
Sigma-Aldrich Grundstücks GmbH & Co. KG
Germany
100.00
Taufkirchen
Sigma-Aldrich Chemie Holding GmbH
100.00
100.00
Darmstadt
Merck Wohnungs- und
Merck International GmbH
Germany
100.00
100.00
Gernsheim
Merck Holding GmbH
Germany
100.00
Darmstadt
Merck Healthcare KGaA A)
Notes
Scope of Consolidation
296
Country
Company
Registered office
Equity interest
(%)
thereof: Merck KGaA
(%)
Germany
Merck Vierte Allgemeine Beteiligungsgesellschaft mbH
Gernsheim
100.00
Germany
Footnotes on page 305
Singapore
100.00
Merck Pharmaceutical Manufacturing (Jiangsu) Co., Ltd.
Merck Serono (Beijing) Pharmaceutical Distribution Co.,
Ltd.
Nantong
100.00
Beijing
100.00
China
China
Merck Serono (Beijing) Pharmaceutical R&D Co., Ltd.
Merck Serono Co., Ltd.
Beijing
100.00
Beijing
100.00
China
SAFC Hitech (Shanghai) Co., Ltd.
Shanghai
100.00
China
Sigma-Aldrich (Shanghai) Trading Co., Ltd.
Shanghai
100.00
Sigma-Aldrich (Wuxi) Life Science & Technology Co.,
China
Wuxi
China
100.00
Equity interest
(%)
Company
China
China
China
Merck Management Consulting (Shanghai) Co., Ltd.
Merck Performance Materials Hong Kong Ltd.
Merck Pharmaceutical (HK) Ltd.
Shanghai
100.00
Hong Kong
100.00
Hong Kong
100.00
China
Merck Pharmaceutical Distribution (Jiangsu) Co., Ltd.
Nantong
100.00
Footnotes on page 305
299
thereof: Merck KGaA
(%)
Consolidated Financial Statements
Notes
Scope of Consolidation
Country
China
Registered office
Ltd.
China
Versum Materials (Dalian) Co., Ltd.
Jakarta
86.65
Japan
BioReliance K.K.
Tokyo
100.00
Japan
Merck Biopharma Co., Ltd.
Tokyo
100.00
Japan
Merck Ltd.
Tokyo
100.00
Japan
Merck Performance Materials Ltd.
Tokyo
100.00
Japan
Sigma-Aldrich Japan G.K.
Tokyo
100.00
Japan
P.T. Merck Tbk.
Indonesia
100.00
Jakarta
Dalian
100.00
China
Versum Materials (Shanghai) Co., Ltd.
Shanghai
100.00
India
Merck Life Science Pvt. Ltd.
Mumbai
100.00
India
100.00
Merck Performance Materials Pvt. Ltd.
100.00
India
Merck Specialities Pvt. Ltd.
Mumbai
100.00
India
Sigma-Aldrich Chemicals Private Limited
Bangalore
100.00
Indonesia
P.T. Merck Chemicals and Life Sciences
Mumbai
Versum Materials Japan Inc.
Hong Kong
Nantong
United States
Versum Materials Formulations and Technology, LLC
Wilmington
100.00
United States
Versum Materials Manufacturing Company, LLC
Wilmington
100.00
United States
Versum Materials Technology LLC
Wilmington
100.00
United States
Wilmington
100.00
United States
Wilmington
100.00
United States
Wilmington
100.00
Australia
Australia
100.00
Australia
Bellefonte
United States
Sigma-Aldrich Missouri Insurance Company
Sigma-Aldrich Research Biochemicals, Inc.
St. Louis
100.00
St. Louis
100.00
St. Louis
100.00
St. Louis
100.00
Natick
100.00
United States
Sigma-Aldrich RTC, Inc.
Laramie
100.00
United States
Sigma-Aldrich, Inc.
Milwaukee
100.00
United States
Sigma-Genosys of Texas LLC
The Woodlands
100.00
Supelco, Inc.
Australia
Australia
Australia
100.00
Beijing
100.00
Shanghai
100.00
Shanghai
100.00
100.00
China
Merck Holding (China) Co., Ltd.
Shanghai
100.00
China
Merck Innovation Hub (Guangdong) Co., Ltd.
Guangzhou
100.00
China
Merck Life Science Ltd.
Hong Kong
100.00
China
China
Merck Life Science Technologies (Nantong) Co., Ltd.
Merck Ltd.
Macquarie Park
100.00
Macquarie Park
100.00
China
China
China
China
Asia-Pacific (APAC)
Versum Materials US International, Inc.
Versum Materials US LLC
Versum Materials, Inc.
Merck Healthcare Pty. Ltd.
Merck Pty. Ltd.
Proligo Australia Pty. Ltd.
100.00
SAFC Biosciences Pty. Ltd.
Beijing Skywing Technology Co., Ltd.
Merck Chemicals (Shanghai) Co., Ltd.
Merck Display Materials (Shanghai) Co., Ltd.
Merck Electronic Materials (Suzhou) Ltd.
Suzhou
Macquarie Park
100.00
Bayswater
100.00
Macquarie Park
100.00
Macquarie Park
Sigma-Aldrich Oceania Pty. Ltd.
Sigma-Aldrich Pty. Ltd.
Germany
Kawasaki
Malaysia
Darmstadt
100.00
Darmstadt
100.00
100.00
Germany
Chemitra GmbH A)
Darmstadt
100.00
100.00
Germany
Emedia Export Company mbH
Gernsheim
100.00
Germany
Litec-LLL GmbH A)
Greifswald
100.00
100.00
Germany
Merck 12. Allgemeine Beteiligungs-GmbH A)
Darmstadt
100.00
100.00
100.00
Berlin
Darmstadt
100.00
300
thereof: Merck KGaA
(%)
United States
Germany
Germany
Germany
Germany
Merck KGaA
AB Allgemeine Pensions GmbH & Co. KG
Allergopharma GmbH & Co. KG A)
Allergopharma Verwaltungs GmbH A)
AZ Electronic Materials GmbH
Biochrom GmbH A)
BSSN Software GmbH
BSSN UG (haftungsbeschränkt)
Darmstadt
Zossen
Parent company
100.00
100.00
Reinbek
100.00
Darmstadt
100.00
100.00
100.00
Germany
Germany
Germany
Germany
Merck Consumer Health Holding Germany GmbH
Darmstadt
100.00
100.00
Germany
Merck Export GmbH A)
Darmstadt
100.00
100.00
Germany
Merck Financial Services GmbH
Darmstadt
100.00
100.00
Germany
Merck Financial Trading GmbH
Gernsheim
100.00
Germany
Merck Healthcare Holding GmbH
Darmstadt
100.00
100.00
Darmstadt
Merck China Chemicals Holding GmbH
Germany
Germany
Germany
Germany
Merck 13. Allgemeine Beteiligungs-GmbH
Merck 15. Allgemeine Beteiligungs-GmbH
Merck 16. Allgemeine Beteiligungs-GmbH A)
Merck 20. Allgemeine Beteiligungs-GmbH A)
Merck 21. Allgemeine Beteiligungs-GmbH
Merck 24. Allgemeine Beteiligungs-GmbH A)
Darmstadt
100.00
Darmstadt
100.00
Darmstadt
100.00
Darmstadt
Buenos Aires
100.00
100.00
Darmstadt
100.00
100.00
Germany
Germany
Merck Accounting Solutions & Services Europe GmbH A) Weiterstadt
Merck Chemicals GmbH A)
100.00
100.00
Darmstadt
100.00
Darmstadt
100.00
Merck S.A.
Latin America
Argentina
100.00
City
Singapore
Merck Performance Materials Pte. Ltd.
Singapore
100.00
Singapore
Merck Pte. Ltd.
Singapore
100.00
Steinheim
Sigma-Aldrich Pte. Ltd.
Singapore
100.00
Singapore
Versum Materials Singapore International Pte. Ltd.
Singapore
100.00
South Korea
Singapore
South Korea
Merck Ltd.
Versum Materials Singapore Pte. Ltd.
Merck Inc.
Singapore
Philippines
City
Merck Sdn Bhd
Petaling Jaya
100.00
Malaysia
Sigma-Aldrich (M) Sdn Bhd
Kuala Lumpur
100.00
Malaysia
Versum Materials Malaysia Sdn Bhd
Kuala Lumpur
100.00
New Zealand
New Zealand
Philippines
Merck Ltd.
Auckland
100.00
Sigma-Aldrich New Zealand Co.
Auckland
100.00
Bonifacio Global
Merck Business Solutions Asia Inc.
99.99
Bonifacio Global
100.00
Merck Electronic Materials Ltd.
Seoul
Versum Materials PM Korea Inc.
Versum Materials SPC Korea Ltd.
Merck Ltd.
Ulsan
100.00
Pyeongtaek-shi
100.00
Taipei
100.00
Taiwan
Taiwan
Taiwan
Thailand
Vietnam
Merck Performance Materials Ltd.
SAFC Hitech Taiwan Co. Ltd.
Versum Materials Taiwan Co., Ltd.
Merck Ltd.
Merck Vietnam Ltd.
Taipei
100.00
Kaohsiung
100.00
Taipei
Bangkok
74.00
45.11
Ho Chi Minh City
100.00
Taiwan
South Korea
South Korea
100.00
100.00
Seoul
100.00
South Korea
South Korea
Merck Performance Materials Ltd.
Sigma-Aldrich Korea Ltd.
Pyeongtaek-shi
100.00
Yongin City
100.00
South Korea
Footnotes on page 305
Versum Materials ADM Korea Inc.
100.00
South Korea
South Korea
Versum Materials HYT Inc.
Versum Materials Korea Inc.
Ansan-si
100.00
Siheung-si
100.00
South Korea
Versum Materials Korea Technology Inc.
Ansan-si
Ansan-si
100.00
thereof: Merck KGaA
Sigma-Aldrich Produktions GmbH
United States
EMD Accounting Solutions & Services America, Inc.
Rockland
100.00
United States
EMD Digital Inc.
Burlington
100.00
United States
EMD Finance LLC
Wilmington
100.00
United States
EMD Group Holding, Inc.
Wilmington
100.00
United States
EMD Holding Corp.
Rockland
100.00
United States
EMD Millipore Corporation
Burlington
100.00
100.00
West Trenton
Wilmington
Allergopharma USA, Inc.
Alexandria
100.00
United States
United States
United States
United States
United States
United States
BioControl Systems, Inc.
BioReliance Corporation
Cell Marque Corporation
Cerilliant Corporation
Dynaloy, LLC
Electron Transfer Technologies, Inc.
Wilmington
100.00
Rockville
100.00
Rocklin
100.00
Round Rock
100.00
100.00
United States
EMD Performance Materials Corp.
Philadelphia
100.00
United States
Intermolecular, Inc.
Wilmington
100.00
United States
United States
J. C. Schumacher Company
Millipore Asia Ltd.
Los Angeles
100.00
Wilmington
100.00
United States
United States
Millipore UK Holdings I, LLC
Millipore UK Holdings II, LLC
Wilmington
100.00
Wilmington
100.00
United States
Ormet Circuits, Inc.
San Diego
100.00
Evanston
Grzybowski Scientific Inventions Ltd.
United States
100.00
100.00
Footnotes on page 305
Consolidated Financial Statements
Notes
Scope of Consolidation
Country
United States
Company
EMD Serono Holding, Inc.
Registered office
Equity interest
(%)
United States
Rockland
United States
EMD Serono Research & Development Institute, Inc.
Billerica
100.00
United States
EMD Serono, Inc.
Rockland
100.00
United States
FloDesign Sonics, Inc.
Wilbraham
100.00
100.00
Urbana
100.00
London
100.00
United Kingdom
Epichem Group Limited
Gillingham
100.00
United Kingdom
United Kingdom
United Kingdom
Merck Chemicals Ltd.
Merck Holding Ltd.
Merck Investments Ltd.
Gillingham
100.00
Feltham
100.00
Feltham
100.00
United Kingdom
Merck Serono Europe Ltd.
Feltham
100.00
United Kingdom
Merck Serono Ltd.
Feltham
BioReliance U.K. Acquisition Limited
United Kingdom
100.00
Aberdeen
Sigma-Aldrich (Switzerland) Holding AG
Buchs
100.00
Switzerland
Sigma-Aldrich Chemie GmbH
Buchs
100.00
Switzerland
Sigma-Aldrich International GmbH
Buchs
100.00
100.00
Switzerland
Buchs
100.00
Turkey
Merck Ilac Ecza ve Kimya Ticaret AS
Istanbul
100.00
United Kingdom
United Kingdom
BioControl Systems Limited
BioReliance Limited
London
100.00
Sigma-Aldrich Production GmbH
United States
United Kingdom
United Kingdom
United Kingdom
Feltham
100.00
Canada
EMD Inc.
Mississauga
100.00
Canada
Millipore (Canada) Ltd.
Oakville
100.00
Canada
Canada
United States
Natrix Separations, Inc.
Sigma-Aldrich Canada Co.
Aldrich Chemical Co. LLC
Burlington
100.00
Oakville
100.00
Milwaukee
100.00
United States
United States
Aldrich Chemical Foreign Holding LLC
Aldrich-APL, LLC
St. Louis
Toronto
EMD Crop BioScience Canada Inc.
Canada
100.00
100.00
Feltham
100.00
Gillingham
100.00
United Kingdom
SAFC Hitech Limited
Gillingham
100.00
United Kingdom
Sigma-Aldrich Company Limited
Millipore (U.K.) Limited
Millipore UK Holdings LLP
SAFC Biosciences Limited
Gillingham
United Kingdom
United Kingdom
Sigma-Aldrich Financial Services Limited
Gillingham
100.00
Versum Materials UK Limited
London
100.00
North America
Canada
EMD Chemicals Canada Inc.
Oakville
100.00
Switzerland
United States
United States
United States
Audits of financial statements
9.6
2.8
10.0
3.5
Other audit-related services
Tax consultancy services
Other services
0.7
0.3
0.4
0.2
0.4
0.1
0.9
0.4
0.3
0.1
Total
11.0
3.3
11.3
4.1
Other audit-related services pertain to various statutory or contractually agreed audits. Tax consultancy services encompass
services in connection with the preparation of tax returns for employees delegated abroad. Other services pertained to other
consultancy services in regulatory and buisness matters.
Germany
(49) Corporate governance
Merck Group
Merck Group
(2018: € 1.0 million) and for E. Merck Beteiligungen KG with a value of € 0.3 million (2018: € 0.3 million); Merck Real Estate GmbH
performed services for Emanuel-Merck-Vermögens-KG with a value of € 0.2 million (2018: € 0.0 million). During the same period,
E. Merck KG performed services for Merck KGaA with a value of € 0.5 million (2018: € 0.5 million).
As of December 31, 2019, there were receivables of € 5.4 million (December 31, 2018: € 12.0 million) and liabilities of € 5.9 million
(December 31, 2018: € 10.1 million) vis-à-vis non-consolidated subsidiaries. From January to December 2019, the Merck Group
generated revenues of € 0.1 million (December 31, 2018: € 0.1 million) with these companies. During the same period, expenses
amounting to € 0.3 million (December 31, 2018: € 0.3 million) were incurred as a result of transactions with these companies.
Between January and December 2019, sales of € 0.0 million (2018: € 0.7 million) from supplies of goods resulted from transactions
with Altmann-Analytik GmbH & Co. KG, Munich, whose managing director was a member of the Supervisory Board of Merck KGaA
until April 26, 2019, and who also served as a member of the Board of Partners of E. Merck KG until January 27, 2019. In addition,
there were receivables of € 0.0 million vis-à-vis this company as of December 31, 2019 (December 31, 2018: € 0.1 million).
Information on pension funds that are classified as defined benefit plans in accordance with IAS 19 can be found in Note
(32) "Provisions for pensions and other post-employment benefits".
Information on Executive Board and Supervisory Board compensation can be found in Note (47) "Executive Board and Supervisory
Board compensation". Activities above and beyond those set forth in Note (47) such as the provision of services or the granting of
loans, between companies of the Merck Group and members of the Executive Board or the Supervisory Board of Merck KGaA, the
Executive Board or the Board of Partners of E. Merck KG or members of their immediate families neither took place in 2019 nor
2018.
(47) Executive Board and Supervisory Board compensation
The compensation of the Executive Board of Merck KGaA is basically paid by the general partner, E. Merck KG. From January to
December 2019, companies included in these consolidated financial statements recognized expenses of € 3.8 million
(2018: € 3.2 million) for services rendered by members of the Executive Board of Merck KGaA at these companies.
From January to December 2019, fixed salaries of € 5.6 million (2018: € 5.9 million), variable compensation of € 15.3 million
(2018: € 17.2 million), and additional benefits of € 0.8 million (2018: € 0.4 million) were recorded by E. Merck KG and by
companies included in these consolidated financial statements for members of the Executive Board of Merck KGaA. Furthermore,
additions to provisions at these companies also included expenses of € 7.1 million (2018: € 15.9 million) for the long-term incentive
plan, and additions to pension provisions included current service costs of € 3.0 million (2018: € 3.1 million).
The compensation of the Supervisory Board amounting to € 880.8 thousand (2018: € 869.0 thousand) consisted of a fixed portion
of € 823.8 thousand (2018: € 822.5 thousand) and meeting attendance compensation of € 57.0 thousand (2018: € 46.5 thousand).
Further individualized information and details can be found in the Compensation Report.
Consolidated Financial Statements
Notes
Other Disclosures
293
(48) Auditor's fees
The costs for the auditors (KPMG) of the financial statements of the Merck Group consisted of the following:
2019
thereof:
KPMG AG
Wirtschafts-
prüfungs-
gesellschaft,
2018
thereof:
KPMG AG
Wirtschafts-
prüfungs-
gesellschaft,
€ million
Germany
The Statement of Compliance in accordance with section 161 of the German Stock Corporation Act (Aktiengesetz) was published in
the corporate governance section of the website www.merckgroup.com/ investors → Corporate governance in March 2019 and thus
made permanently available.
(50) Information on preparation and approval
The Executive Board of Merck KGaA prepared the consolidated financial statements on February 14, 2020, and approved them for
forwarding to the Supervisory Board. The Supervisory Board is responsible for the examination of the consolidated financial
statements and declaring whether it approves them.
44
33
The list of non-consolidated subsidiaries mainly comprises non-operating shelf companies as well as entities subject to liquidation
procedures, which are subsequently measured at fair value through other comprehensive income.
The list of shareholdings presents all the companies included in the consolidated financial statements as well as all of the
shareholdings of Merck KGaA (see Note (52) "List of shareholdings").
Consolidated Financial Statements
Notes
Scope of Consolidation
295
(52) List of shareholdings
The shareholdings of Merck KGaA as of December 31, 2019, are presented below, along with a list of the fair values for equity
instruments subsequently measured at fair value through other comprehensive income.
Company
Country
I. Fully consolidated companies
Equity interest
thereof: Merck KGaA
Registered office
(%)
(%)
Germany
Germany
Germany
Germany
Germany
335
-14
3
42
Subsequent to February 14, 2020, the impact of the Covid-19 situation created the need to adapt the consolidated financial
statements.
Accordingly, the consolidated financial statements were amended on May 12, 2020 and approved for forwarding to the Supervisory
Board.
Scope of Consolidation
Consolidated Financial Statements
Notes
Scope of Consolidation
294
(51) Changes in the scope of consolidation
Accounting and measurement policies
Overall, the impact of subsidiaries not consolidated due to immateriality on net sales, profit after tax, assets, and equity
was less than 1% relative to the entire Merck Group. Investments held in non-consolidated subsidiaries were disclosed
under non-current financial assets (see Note (36) "Other financial assets").
The scope of consolidation changed as follows in the reporting period:
From January to December 2019, Merck KGaA performed services for E. Merck KG with a value of € 1.2 million
Consolidated subsidiaries as of Dec. 31, 2018
Companies established
Acquisitions
Materiality
Liquidations/mergers
Disposals
Divestments
Immateriality
Loss of control
Consolidated subsidiaries as of Dec. 31, 2019
Non-consolidated subsidiaries as of Dec. 31, 2018
Non-consolidated subsidiaries as of Dec. 31, 2019
301
3
Additions
These included financial liabilities of € 808.4 million (December 31, 2018: € 820.8 million), subject to standard market conditions.
Neither collateral nor guarantees existed for any of the balances either in favor or to the disadvantage of the Merck Group.
292
Other Disclosures
Consolidated Financial Statements
Notes
Other Disclosures
291
LIFE SCIENCE RESULTS OF OPERATIONS
€ million
Net sales
Cost of sales
Gross profit
Marketing and selling expenses
Administration expenses
Research and development costs
Other operating income and expenses
Operating result (EBIT) 1
1 Not defined by International Financial Reporting Standards (IFRSS).
2018
as reported
changes in presentation
adjusted
6,185
6,185
-2,723
-2,723
United States
United States
United States
United States
100.00
Research Organics, LLC
SAFC Biosciences, Inc.
SAFC Carlsbad, Inc.
SAFC, Inc.
Cleveland
100.00
Lenexa
100.00
Carlsbad
100.00
Madison
100.00
Serono Laboratories, Inc.
3,463
Rockland
United States
Sigma Chemical Foreign Holding LLC
St. Louis
100.00
United States
Sigma Redevelopment Corporation
St. Louis
100.00
United States
Sigma-Aldrich Co. LLC
St. Louis
100.00
United States
3,463
-2
2,406
2,406
-1,231
-1,231
1,175
1,175
-255
-255
-90
-17
-107
-242
-242
-81
16
-64
508
508
Accounting and measurement policies
Related parties in respect of the Merck Group are E. Merck KG, Emanuel-Merck-Vermögens-KG and E. Merck Beteiligungen
KG. Furthermore, direct or indirect subsidiaries of Merck KGaA, associates of the Merck Group, jointly controlled companies
where the Merck Group is involved, as well as pension funds that are classified as defined benefit plans in accordance with
IAS 19 are also related parties within the meaning of IAS 24. Members of the Executive Board and the Supervisory Board
of Merck KGaA, the Executive Board and the Board of Partners of E. Merck KG as well as close members of their families
are also related parties, as are companies controlled by this group of persons.
As of December 31, 2019, there were liabilities by Merck Financial Services GmbH, Merck KGaA and Merck & Cie, Switzerland, to
E. Merck KG in the amount of € 1,320.0 million (December 31, 2018: € 1,331.6 million). The balances result mainly from mutual
profit transfers between Merck KGaA and E. Merck KG as well as the profit transfer by Merck & Cie, Switzerland, to E. Merck KG.
Consolidated Financial Statements
Notes
adjusted
changes in presentation
as reported
2018
-1,777
-282
-52
-335
-249
-1
-251
-121
56
-65
1,036
-1,775
1,036
€ million
Net sales
Cost of sales
Gross profit
Marketing and selling expenses
Administration expenses
Research and development costs
Other operating income and expenses
Operating result (EBIT) ¹
1 Not defined by International Financial Reporting Standards (IFRSS).
(46) Related-party disclosures
PERFORMANCE MATERIALS RESULTS OF OPERATIONS
100.00
Coinsins
SeroMer Holding SA
Merck Serono (Ireland) Ltd.
Ireland
Ireland
Ireland
Sigma-Aldrich Holding S.a.r.l.
Merck A.E.
BSSN Software Kft.
100.00
Fallavier
Maroussi, Athens
100.00
Budapest
100.00
Budapest
100.00
Budapest
100.00
Carrigtwohill
100.00
Carrigtwohill
100.00
Dublin
100.00
Ireland
Millipore Cork Unlimited Company
Merck Millipore Ltd.
Merck Finance Limited
France
Millipore S.A.S.
Molsheim
100.00
France
Sigma-Aldrich Chimie S.a.r.l.
Saint Quentin
100.00
Fallavier
Saint Quentin
France
Sigma-Aldrich Chimie SNC
100.00
Fallavier
Saint Quentin
France
Greece
Hungary
Hungary
Merck Kft.
Hungary
Sigma-Aldrich Kft.
Ireland
Ireland
Shrawdine Limited
Sigma-Aldrich Ireland Ltd.
Carrigtwohill
100.00
Colleretto Giacosa
100.00
S.p.A.
Italy
Merck Life Science S.r.l.
Milan
100.00
Italy
Merck S.p.A.
Milan
100.00
Italy
Merck Serono S.p.A.
Rome
99.74
Italy
Versum Materials Italia S.r.l.
Milan
100.00
Latvia
Lithuania
Merck Serono SIA
Riga
Italy
Istituto di Ricerche Biomediche Antoine Marxer RBM
100.00
Rome
Arklow
100.00
Arklow
100.00
Footnotes on page 305
Consolidated Financial Statements
Notes
Scope of Consolidation
297
Country
Ireland
100.00
Company
Registered office
Equity interest
(%)
(%)
Arklow
100.00
Ireland
Versum Materials Ireland Limited
Dublin
100.00
Italy
Allergopharma S.r.l.
Silverberry Limited
Lyon
Merck Serono S.A.S.
France
Vienna
100.00
Sigma-Aldrich Handels GmbH
Vienna
100.00
Merck Chemicals N.V./S.A.
Merck N.V.-S.A.
Sigma-Aldrich BVBA/SPRL
Merck Bulgaria EAD
Overijse
100.00
Overijse
100.00
Overijse
100.00
Sofia
100.00
Croatia
Czech Republic
Merck d.o.0.
Zagreb
100.00
Merck spol. s r.o.
Merck Gesellschaft mbH
100.00
Vienna
Merck Chemicals and Life Science GesmbH
Steinheim
100.00
Germany
Sigma-Aldrich Verwaltungs GmbH
Steinheim
100.00
100.00
Germany
Versum Materials Germany GmbH
Frankfurt am Main
100.00
Prague
Other European
Austria
Austria
Austria
Austria
Belgium
Belgium
Belgium
Bulgaria
Allergopharma Vertriebsgesellschaft m.b.H.
Vienna
100.00
countries
100.00
100.00
Sigma-Aldrich spol. s r.o.
Gonnon S.A.S.
Lyon
100.00
France
Merck Biodevelopment S.A.S.
Lyon
100.00
France
Merck Chimie S.A.S.
Fontenay s/Bois
100.00
France
Merck Performance Materials S.A.S.
Trosly-Breuil
100.00
France
Merck S.A.
Lyon
99.85
France
Merck Santé S.A.S.
Lyon
100.00
100.00
Espoo
100.00
Espoo
Prague
100.00
Denmark
Merck A/S
Soborg
100.00
Denmark
Merck Life Science A/S
Soborg
100.00
Denmark
Czech Republic
Survac ApS
100.00
100.00
Estonia
Merck Serono OÜ
Tallinn
100.00
Finland
Finland
France
Merck Life Science OY
Merck OY
Frederiksberg
Merck Serono, UAB
Vilnius
100.00
Merck d.o.o. Beograd
Moscow
100.00
Belgrade
100.00
Slovakia
Merck spol. s r.o.
Bratislava
100.00
Slovakia
Sigma-Aldrich, spol. s r.o.
Bratislava
100.00
Slovenia
Merck d.o.0.
Ljubljana
100.00
Spain
Merck Chemicals and Life Science S.A.U.
Madrid
100.00
Spain
Merck Life Science S.L.U.
Sigma-Aldrich Rus LLC
Serbia
Russia
100.00
Wroclaw
100.00
Poland
Merck Sp.z.o.0.
Warsaw
100.00
Poland
Portugal
Sigma-Aldrich Sp.z.o.o.
Poznan
100.00
Laquifa Laboratorios S.A.
Madrid
Algés
Portugal
Merck, S.A.
Algés
100.00
Romania
Merck Romania S.R.L.
Bucharest
100.00
Russia
Merck LLC
Moscow
100.00
Merck Business Solutions Europe Sp.z.o.o.
100.00
Merck, S.L.U.
100.00
Switzerland
Ares Trading SA
Aubonne
100.00
Switzerland
Switzerland
Merck & Cie
Merck (Schweiz) AG
Altdorf
51.63
51.63
Zug
100.00
Switzerland
Merck Performance Materials (Schweiz) AG
Schaffhausen
100.00
Switzerland
Merck Serono SA
Coinsins
100.00
Switzerland
100.00
Therwil
Stockholm
100.00
Madrid
100.00
Sweden
Merck AB
Solna
100.00
Footnotes on page 305
Consolidated Financial Statements
Notes
Scope of Consolidation
298
Spain
Sweden
Country
Sweden
Company
Merck Chemicals and Life Science AB
Sigma-Aldrich Sweden AB
Allergopharma AG
Registered office
Equity interest
(%)
thereof: Merck KGaA
(%)
Solna
Switzerland
Germany
Poland
Oslo
Luxembourg
Millipore International Holdings, S.a.r.l.
Luxembourg
100.00
Luxembourg
Sigma-Aldrich Global S.a.r.l.
Luxembourg
100.00
Luxembourg
Sigma-Aldrich S.a.r.l.
Luxembourg
100.00
Malta
Merck Capital Holding Ltd.
Pietà
100.00
Malta
Netherlands
Netherlands
Netherlands
Netherlands
Netherlands
Netherlands
Netherlands
Netherlands
100.00
100.00
Luxembourg
Merck Re S.A.
Luxembourg
Mats Finance S.a.r.l.
Luxembourg
100.00
Luxembourg
Merck Chemicals Holding S.a.r.l.
Luxembourg
100.00
Luxembourg
Luxembourg
Merck Finance S.a.r.l.
Luxembourg
Merck Capital Ltd.
100.00
Luxembourg
100.00
Luxembourg
Merck Holding S.a.r.l.
Luxembourg
100.00
Luxembourg
Merck Invest SCS
Luxembourg
100.00
Luxembourg
Merck Finanz S.a.r.l.
100.00
Merck B.V.
Merck Europe B.V.
100.00
Netherlands
Versum Materials Holdings Nederland B.V.
Utrecht
100.00
Netherlands
Versum Materials International B.V.
Utrecht
100.00
Netherlands
Versum Materials Netherlands B.V.
Utrecht
100.00
Netherlands
Versum Materials Netherlands International B.V.
Utrecht
100.00
Netherlands
Versum Materials Pacific B.V.
Utrecht
100.00
Norway
Merck Life Science AS
Versum Materials Asia B.V.
Netherlands
100.00
Zwijndrecht
Merck Holding Netherlands B.V.
Merck Ventures B.V.
Merck Window Technologies B.V.
Serono Tri Holdings B.V.
Sigma-Aldrich B.V.
Pietà
100.00
Schiphol-Rijk
100.00
Amsterdam
100.00
Zuidoost
Amsterdam
100.00
Merck Chemicals B.V.
Schiphol-Rijk
Amsterdam
100.00
Veldhoven
100.00
100.00
Schiphol-Rijk
100.00
Zwijndrecht
100.00
Netherlands
Sigma-Aldrich Chemie N.V.
100.00
Sigma-Aldrich Corporation
Sigma-Aldrich Foreign Holding Co.
Sigma-Aldrich Manufacturing LLC
Utrecht
< 0.5
Fair value as of Dec.
31, 2018 (€ million)
Fair value as of Dec.
31, 2019 (€ million)
thereof:
Merck KGaA
(%)
Equity
interest
(%)
Registered
office
Company
Finland
Country
Scope of Consolidation
Notes
Consolidated Financial Statements
< 0.5
< 0.5
B)
304
France
Forendo Pharma OY
Aveni S.A.S.
Netherlands
B
B
B
< 20.00
Paris
DNA Script S.A.S.
France
B
< 20.00
Massy
B
B)
< 20.00
Turku
B)
Footnotes on page 305
< 20.00
< 20.00
PharmLog Pharma Logistik
Augustin
Electronic Commerce mbH
1
1
< 20.00
Germany
Sankt
pharma mall Gesellschaft für
B)
< 20.00
Berlin
LegenDairy Foods GmbH
Germany
B)
Germany
Netherlands
Bönen
3
Leuven-
Heverlee
Turku
Abacus Diagnostica OY
Finland
ReWind Therapeutics N.V.
Belgium
Other European
countries
< 0.5
< 0.5
< 20.00
< 20.00
Neuried
PrintCity GmbH & Co. KG
Germany
GmbH
3
< 20.00
Sweden
Mosa Meat B.V.
SynAffix B.V.
London
Storm Therapeutics Limited
United Kingdom
B)
B)
< 20.00
Brompton-
on-Swale
Peratech HoldCo Limited
United Kingdom
B
B
B
B
< 20.00
< 20.00
< 20.00
Cambridge
Berkhamsted
B)
North America
United States
Cambridge
B)
B)
< 20.00
Boston
Bird Rock Bio, Inc.
ApoGen Biotechnologies, Inc.
Bioling Inc.
Akili Interactive Labs, Inc.
Akrevia Therapeutics LLC
Allozyne, Inc.
Altoida, Inc.
United States
United States
United States
United States
United States
United States
United States
B)
B)
F-Star Therapeutics Limited
Macrophage Pharma Limited
B
FoRx Therapeutics AG
Switzerland
B
B
< 20.00
Lund
B
B
< 20.00
Nijmegen
B
B
< 20.00
Maastricht
Galecto Biotech AB
Basel
United Kingdom
< 20.00
Switzerland
< 20.00
Cambridge
Artios Pharma Limited
United Kingdom
United Kingdom
B
B
< 20.00
Cologny
ObsEva SA
Switzerland
B
B
23.28
Schlieren
Inthera Bioscience AG
B
< 20.00
< 20.00
IOmx Therapeutics AG
Fair value as of Dec.
31, 2018 (€ million)
Fair value as of Dec.
31, 2019 (€ million)
303
Nigeria
Morocco
Algeria
< 0.5
Africa (MEA)
Domingo
Republic
100.00
Merck Dominicana, S.R.L.
Santo
Dominican
Middle East and
< 0.5
MDCA Pharma Promotion SARL
Merck Maroc S.A.R.L.
Hydra
Merck Foundation gGmbH
Germany
Germany
III. Majority interest in non-controlled companies
< 0.5
< 0.5
100.00
Lagos
Merck Pharmaceutical and Life
Sciences Ltd.
< 0.5
< 0.5
100.00
Casablanca
< 0.5
49.00
Latin America
Country
thereof:
Merck KGaA
(%)
Equity
interest
(%)
100.00
St. Louis
Burlington
Fluka Chemical Corp.
TocopheRx, Inc.
North America
United States
United States
< 0.5
< 0.5
100.00
Gillingham
< 0.5
< 0.5
100.00
Feltham
Merck Pension Trustees Ltd.
Sigma Chemical Co. Ltd.
< 0.5
< 0.5
< 0.5
Darmstadt
< 0.5
B)
Registered
office
Company
Scope of Consolidation
Notes
Consolidated Financial Statements
Footnotes on page 305
< 0.5
< 0.5
100.00
Bayswater
Biochrom Australia Pty. Ltd.
Australia
(APAC)
Asia-Pacific
B
100.00
100.00
100.00
< 0.5
< 20.00
Darmstadt
Sankt
Augustin
Azelis Deutschland Kosmetik
GmbH
Germany
Alcan Systems GmbH
Germany
Germany
V. Other equity positions
L.P.
50.58
St. Louis
38.32
St. Louis
Prolog Healthy Living Fund, L.P.
Prolog Healthy Living Fund II,
United States
B)
United States
B)
2
Germany
< 0.5
< 0.5
< 20.00
Berlin
Inuru GmbH
Germany
Wiesbaden KG
2
16
< 20.00
Wiesbaden
Germany
InfraServ GmbH & Co.
2
< 20.00
Martinsried
North America
B)
countries
Other European
< 0.5
< 0.5
< 0.5
< 0.5
IV. Associated companies not accounted for using the equity method for reasons of materiality
100.00
100.00
Caracas
Caracas
Representaciones MEPRO S.A.
Venezuela
Merck S.A.
Venezuela
Latin America
< 0.5
Netherlands
B)
Calypso Biotech B.V.
Asceneuron SA
22.06
2
39,11%
Muttenz
Basel
Vaximm AG
Switzerland
CAMAG Chemie-Erzeugnisse und
Adsorptionstechnik AG
Switzerland
B
B
B
B)
25.35
38.81
Amsterdam
Lausanne
Switzerland
B)
Seattle
< 20.00
C) Closed-end funds classified as debt in accordance with IFRS 9.
B) Companies which are affiliates from the Merck Ventures B.V. portfolio. As of December 31, 2019, the fair value of the M Ventures portfolio
amounted to €275 million (December 31, 2018: €145 million).
A) Companies opting for exemption as provided for by Section 264 (3) and Section 264b of the German Commercial Code.
B)
B)
B)
B)
D) This is an affiliate within the meaning of IFRS 11 (joint activity).
< 20.00
Wiliot Ltd.
Israel
22.50
Yavne
Sentaur Bio Ltd. (formerly
Explore Bio 3 Ltd.)
Israel
Caesarea
Darmstadt, February 14, 2020 / May 12, 2020
S. Bun
Stefan Oschmann
The events subsequent to the balance sheet date relate to the impact of the Covid-19 pandemic and the resulting addenda to the
section entitled "General Disclosures - Subsequent events" of the notes to the consolidated financial statement as well as to the
sections entitled "Report on Risks and Opportunities - Overall view of the risk and opportunity situation and management
assessment", section,,Report on Expected Developments - Forecast for the Merck Group" and section "Additional Information on
Merck KGaA in accordance with the German Commercial Code (HGB) - Forecast for Merck KGaA" of the combined management
report.
Addendum to the consolidated financial statements and the combined management report regarding subsequent
events:
Darmstadt, February 14, 2020 / May 12, 2020
To the best of our knowledge, and in accordance with the applicable reporting principles, the consolidated financial statements of
the Merck Group give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group, and the
combined management report includes a fair view of the development and performance of the business and the position of the
Group, together with a description of the material opportunities and risks associated with the expected development of the Group.
Responsibility Statement
306
Responsibility Statement
Marcus Kuhnert
Marius buket
Kai Beckmann
1Behmmm
Belén Garijo
B
Udit Batra
MditBatra
B)
Darom
< 20.00
PxE Computational Imaging Ltd.
B)
B)
< 20.00
Haifa
MediSafe Project Ltd.
Israel
B)
B)
20.00
Yavne
Explore Bio 1 Ltd.
Israel
B)
B)
< 20.00
Israel
Darmstadt, May 12, 2020
Metabomed Ltd.
< 20.00
Israel
Lachish
B)
< 20.00
Tel Aviv
Pilltracker 2015 Ltd.
Israel
B)
B)
< 20.00
Yavne
Pantheon Biosciences Ltd.
Israel
B)
B)
Yavne
S. Zman
Stefan Oschmann
Mit Batray
In addition, we analyzed correspondence with the relevant tax authorities and assessed the assumptions underlying the
determination of income tax liabilities based on our knowledge and experience of how the relevant legal requirements are currently
applied by the tax authorities and courts. We scrutinized Merck's approach regarding the recognition and measurement of deferred
tax liabilities, based on laws and regulations enacted as of the reporting date, and performed recalculations.
We obtained an understanding of existing tax risks through inquiry of management of the affected group companies and employees
of the tax department. We assessed the competence, capabilities and objectivity of the external experts and evaluated their expert
opinions.
We involved our own specialists in international tax law into the audit team in order to evaluate Merck's assessment of tax risks and
the related opinions of external experts engaged by Merck.
OUR AUDIT APPROACH
There is a risk for the financial statements that income tax liabilities and deferred tax liabilities are not fully recognized or not
appropriately measured.
The measurement of income tax liabilities and the assessment of unrecognized contingent tax liabilities are subject to judgment and
estimation uncertainty. Merck routinely engages external experts to support its own risk assessment with expert opinions from tax
specialists.
Merck operates in different jurisdictions with different legal systems. The application of local regulations on income tax, tax
incentives and transfer pricing rules is complex. The recognition and measurement of income tax liabilities require Merck to exercise
judgment in assessing tax matters and to make estimates regarding uncertain tax positions.
As of December 31, 2019, current income tax liabilities amount to EUR 1,402 million, and deferred tax liabilities amount to
EUR 1,828 million.
THE FINANCIAL STATEMENT RISK
Explanatory notes on the recognition and measurement of income tax liabilities and deferred tax liabilities can be found in the notes
to the consolidated financial statements under note 17.
Recognition and measurement of income tax liabilities and deferred tax liabilities
The approach used for identifying and measuring the assets acquired and liabilities assumed is appropriate and in line with the
accounting policies to be applied. The key assumptions and parameters underlying the purchase price allocation are appropriate and
the presentation of the acquisition in the notes to the consolidated financial statements is complete and appropriate.
OUR OBSERVATIONS
309
In addition, we have assessed whether the disclosures in the notes regarding the acquisition are complete and appropriate.
OUR OBSERVATIONS
To assess the computational accuracy of the measurement of the identified assets and liabilities, we used a risk-based audit
approach to recalculate the Company's calculations on a sample basis.
The valuation model and assumptions underlying the recognition and measurement of income tax liabilities are reasonable. The
approach regarding the recognition and measurement of deferred tax liabilities is adequate.
Explanatory notes on the impairment tests can be found in the notes to the consolidated financial statements under note 18.
sources.
As part of our audit of the discount factor, we analyzed the peer group used. With regard to other assumptions and parameters
(e.g. risk-free interest rate, beta factor, market risk premium), we compared those assumptions and parameters with our own
assumptions and publicly available data to assess whether these were appropriate and whether they were within the range of
external recommendations, to the extent available. In addition, we verified the calculation model used to determine the discount
factor.
We assessed the appropriateness of the valuation model used. To verify arithmetical accuracy, we used a risk-based audit approach
to recalculate the Company's calculations based on samples contained in the valuation model.
In addition, we assessed whether the Company's disclosures regarding the goodwill impairment test in the notes to the consolidated
financial statements are complete and appropriate.
OUR OBSERVATIONS
The calculation method used for the goodwill impairment test is appropriate and in line with the applicable valuation principles.
Overall, the assumptions and parameters used by management are balanced. The disclosures in the notes to the consolidated
financial statements are complete and properly depict the judgment associated with the subsequent measurement of goodwill.
Other Information
Management is responsible for the other information. The other information comprises information in the combined management
report, not required by law or DRS 20, and marked as unaudited.
OUR AUDIT APPROACH
There is a risk for the financial statements that an existing goodwill impairment loss was not recognized as of the reporting date. In
addition, there is a risk that the related disclosures in the notes to the consolidated financial statements are not complete and
appropriate.
Goodwill is to be tested for impairment once a year, and may need be tested ad hoc if necessary. In performing the goodwill
impairment test, Merck primarily determines the recoverable amount by means of the discounted cash flow method. The valuation
model used to determine the recoverable amount is complex and the result of this valuation are highly dependent on the projection
of future net cash flows (taking into account future revenue growth, profit margins and long-term growth rates) and the discount
factor used, and therefore is subject to significant estimation uncertainty.
The goodwill in the consolidated financial statements as of December 31, 2019 amounts to EUR 17,141 million (39,1% of the
Group's total assets), with EUR 11,135 million of this attributable to Life Science and with EUR 4,472 million to Performance
Materials. The goodwill of Life Science results especially from the acquisition of the Sigma-Aldrich Corporation, USA, in November
2015. Due to the acquisition of Versum Materials, Inc., USA, in October 2019 the goodwill of Performance Materials has increased
significantly.
THE FINANCIAL STATEMENT RISK
310
Independent Auditor's Report
Impairment testing of goodwill
Yavne
Independent Auditor's Report
We have assessed the competency, skills and objectivity of the independent expert engaged by Merck. Furthermore, we have
assessed the process of the identification of the assets acquired and liabilities assumed in terms of conformity with the
requirements of IFRS 3 on the basis of our knowledge of Merck's business model. We have evaluated the measurement methods
used for their compliance with the accounting policies.
⚫ the accompanying consolidated financial statements comply, in all material respects, with the IFRSS as adopted by the EU, and
the additional requirements of German commercial law pursuant to Section 315e (1) HGB [Handelsgesetzbuch: German
Commercial Code] and, in compliance with these requirements, give a true and fair view of the assets, liabilities, and financial
position of the Group as of December 31, 2019, and of its financial performance for the financial year from January 1, 2019, to
December 31, 2019, and
In our opinion, on the basis of the knowledge obtained in the audit,
We have audited the consolidated financial statements of MERCK Kommanditgesellschaft auf Aktien, and its subsidiaries (the
Group), which comprise the consolidated balance sheet as of December 31, 2019, the consolidated income statement, the
consolidated statement of comprehensive income, consolidated statement of changes in net equity and consolidated cash flow
statement for the financial year from January 1, 2019, to December 31, 2019, and notes to the consolidated financial statements,
including a summary of significant accounting policies. In addition, we have audited the combined management report of MERCK
Kommanditgesellschaft auf Aktien for the financial year from January 1, 2019, to December 31, 2019. In accordance with German
legal requirements, we have not audited the components of the combined management report specified in the "Other Information"
section of our auditor's report.
Opinions
Report on the Audit of the Consolidated Financial Statements and of the Combined
Management Report
To MERCK Kommanditgesellschaft auf Aktien, Darmstadt
Independent Auditor's Report
307
Independent Auditor's Report
Marcus Kuhnert
flarius bankust
Belén Garijo
Kai Beckmann
Behmmm
Udit Batra
⚫ the accompanying combined management report as a whole provides an appropriate view of the Group's position. In all material
respects, this combined management report is consistent with the consolidated financial statements, complies with German legal
requirements and appropriately presents the opportunities and risks of future development. Our opinion on the combined
management report does not cover the content of the components of the combined management report specified in the "Other
Information" section of the auditor's report.
We have discussed projected revenue and margin development with those responsible for planning. Furthermore, we have
reconciled these with the budgets prepared by management and have assessed the consistency of the assumptions with external
industry-specific market assessments, including analyst expectations. We compared the license fee rates utilized to measure certain
intangible assets with benchmarks from relevant databases. We compared the assumptions and parameters underlying the capital
costs, in particular the risk-free rate, the market risk premium and the beta factor, with our own assumptions and publicly available
data. We involved our valuation experts in the audit team to assist with this.
Pursuant to Section 322 (3) sentence 1 HGB, we declare that our audit has not led to any reservations relating to the legal
compliance of the consolidated financial statements and of the combined management report.
We conducted our audit of the consolidated financial statements and of the combined management report in accordance with
Section 317 HGB and EU Audit Regulation No 537/2014 (referred to subsequently as "EU Audit Regulation") and in compliance with
German Generally Accepted Standards for Financial Statement Audits promulgated by the Institut der Wirtschaftsprüfer [Institute of
Public Auditors in Germany] (IDW). Our responsibilities under those requirements and principles are further described in the
"Auditor's Responsibilities for the Audit of the Consolidated Financial Statements and of the Combined Management Report" section
of our auditor's report. We are independent of the group entities in accordance with the requirements of European law and German
commercial and professional law, and we have fulfilled our other German professional responsibilities in accordance with these
requirements. In addition, in accordance with Article 10 (2)(f) of the EU Audit Regulation, we declare that we have not provided
We reconciled the total purchase price to the relevant agreements and evidence of payment.
With the involvement of our own valuation experts, we have assessed the appropriateness of key assumptions and parameters as
well as the identification and calculation methods used, among other things. For this purpose, we initially obtained an
understanding of the acquisition by interviewing employees in the Finance and M&A departments as well as by assessing the
relevant contracts.
OUR AUDIT APPROACH
There is the risk for the consolidated financial statements that the assets acquired and liabilities assumed are improperly identified
or inaccurately measured. There is also the risk that the disclosures in the notes to the consolidated financial statements are not
complete and accurate.
The identification and measurement of assets acquired and liabilities assumed are complex and based on assumptions of
management that require judgment. The significant assumptions are related to the projections of the acquired business' sales and
margins, customers churn rate, license fee rates as well as the cost of capital.
The identifiable assets acquired and liabilities assumed are generally recognized at fair value pursuant to IFRS 3 on the date of
acquisition. Merck engaged an external expert to assist in the identification and measurement of the identifiable assets acquired
and the liabilities assumed.
On October 7, 2019, the Merck Group acquired Versum Materials, Inc. The purchase price in accordance to IFRS 3 amounted to
EUR 5,198 million. Taking into account the net assets acquired in the amount of EUR 2,054 million, this results in goodwill in the
amount of EUR 3,144 million.
THE FINANCIAL STATEMENT RISK
The accounting policies applied and disclosures on the acquisition are presented in the notes to the consolidated financial
statements under note 5.
Acquisition of Versum Materials, Inc.
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated
financial statements for the financial year from January 1, 2019, to December 31, 2019. These matters were addressed in the
context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, we do not provide a
separate opinion on these matters.
Key Audit Matters in the Audit of the Consolidated Financial Statements
non-audit services prohibited under Article 5 (1) of the EU Audit Regulation. We believe that the evidence we have obtained is
sufficient and appropriate to provide a basis for our opinions on the consolidated financial statements and on the combined
management report.
308
Independent Auditor's Report
Basis for the Opinions
ARTSAVIT Ltd.
Israel
< 0.5
B)
B)
< 20.00
New York
Lumiode, Inc.
United States
< 0.5
< 0.5
< 20.00
Ann Arbor
Kraig Biocraft Laboratories, Inc.
United States
118
B)
101
United States
United States
< 20.00
MemryX Inc.
< 20.00
< 20.00
B)
< 20.00
Wilmington
Wilmington
B)
< 20.00
Boston
Progyny, Inc.
Plexium Inc.
Pacific Light & Hologram, Inc.
Neurable Inc.
United States
United States
United States
B)
Ann Arbor
B)
Germantown
< 20.00
< 20.00
La Jolla
B)
B)
< 20.00
San Diego
B)
B)
< 20.00
Seattle
B)
< 20.00
Suwanee
< 0.5
< 0.5
B)
B)
B)
Austin
B)
< 20.00
Wilmington
Culver City
D)
50.00
Wilmington
Intrexon Corporation
Indi Molecular, Inc.
Immunitas Therapeutics, Inc.
Hydrochlor, LLC
United States
United States
United States
United States
B)
< 20.00
ElectronInks Inc.
100.00
Menlo Park
B)
Footnotes on page 305
B)
< 20.00
Grand
Cayman
CLEARInk Displays, Ltd.
Cayman Islands
Latin America
a
< 0.5
< 0.5
35.00
Tokyo
Showa Denko Versum Materials
2 Co., Ltd.
< 20.00
Sydney
Consolidated Financial Statements
Immutep Limited
Notes
Company
1
Tipiza
20.00
Wilaya de
Novapharm Production SARL
Algeria
Africa (MEA)
Middle East and
Country
Fair value as of Dec.
31, 2018 (€ million)
Fair value as of Dec.
31, 2019 (€ million)
305
thereof:
Merck KGaA
(%)
Equity
interest
(%)
Registered
office
Scope of Consolidation
< 20.00
Japan
(APAC)
Oakland
Riffyn, Inc.
United States
B)
B)
< 20.00
Durham
B)
B)
< 20.00
Cambridge
Raze Therapeutics, Inc.
Ribometrix Inc.
United States
United States
B)
< 20.00
Australia
B)
Sonde Health, Inc.
Asia-Pacific
< 0.5
< 0.5
< 20.00
< 20.00
9
< 20.00
Wilmington
San Diego
Tioga Pharmaceuticals, Inc.
United States
Telios Pharma, Inc.
United States
B)
< 20.00
Boston
United States
We reconciled the expected net cash flows underlying the recoverable amount calculations with the current medium-term plan
approved by management. To assess the assumptions used in preparing the medium-term plan, we obtained an understanding of
the planning process through discussions with company representatives, including corporate management and representatives from
the corporate divisions and the research and development department, we assessed the plausibility and consistency of the
explanations received with the projections, and we compared the assumptions used with the expectations of external analysts and
Feltham
United Kingdom
United Kingdom
United Kingdom
Sigma-Aldrich Israel Ltd.
Versum Materials Israel Ltd.
Merck Healthcare and Life Science Limited
Merck (Pty) Ltd.
Sigma-Aldrich (Pty) Ltd.
Rehovot
South Africa
100.00
100.00
Nairobi
100.00
Halfway House
100.00
Kempton Park
Tel Aviv
South Africa
Kenya
Israel
Yavne
100.00
Israel
Merck Serono Ltd.
Herzliya Pituach
100.00
Israel
PMatX Ltd.
Yavne
90.00
Israel
QLight Nanotech Ltd.
Jerusalem
100.00
Israel
100.00
InterPharm Laboratories Ltd.
Tunisia
Tunis
Registered
office
Equity
interest
(%)
thereof:
Merck KGaA
(%)
Fair value as of Dec.
31, 2019 (€ million)
II. Subsidiaries not consolidated for reasons of materiality
Fair value as of Dec.
31, 2018 (€ million)
Company
Germany
AB Pensionsverwaltung GmbH
Zossen
100.00
100.00
< 0.5
< 0.5
Germany
302
Scope of Consolidation
Notes
100.00
Tunisia
Merck SARL
Tunis
100.00
United Arab Emirates
Merck Serono Middle East FZ-Ltd.
Dubai
100.00
Footnotes on page 305
301
thereof: Merck KGaA
(%)
Country
Consolidated Financial Statements
Merck Promotion SARL
Germany
Israel
Yavne
Merck S.A.
Sigma-Aldrich Brasil Ltda.
Merck S.A.
Sigma-Aldrich Quimica Ltda.
Merck S.A.
Merck C.A.
Sigma-Aldrich de Argentina S.r.l.
Merck, S.A.
Sigma-Aldrich Quimica, S. de R.L. de C.V.
Mesofarma Corporation
Peru
Uruguay
Merck Peruana S.A.
ARES Trading Uruguay S.A.
Registered office
Merck Biopharma Distribution S.A. de C.V.
Merck, S.A. de C.V.
Company
Panama
Mexico
Merck Ltd.
Consolidated Financial Statements
Notes
Scope of Consolidation
Country
Argentina
Brazil
Brazil
Chile
Chile
Colombia
Ecuador
Guatemala
Mexico
Mexico
Equity interest
(%)
100.00
Buenos Aires
Rio de Janeiro
Panama City
100.00
Lima
100.00
Montevideo
100.00
100.00
Middle East and Africa
Egypt
Merck Ltd.
Cairo
100.00
Israel
Inter-Lab Ltd.
(MEA)
Toluca
100.00
Mexico City
100.00
São Paulo
100.00
Santiago de Chile
100.00
Santiago de Chile
100.00
Bogota
100.00
Quito
100.00
Guatemala City
100.00
Mexico City
100.00
100.00
Merck 25. Allgemeine
Using our own sensitivity analyses, we assessed the extent to which the goodwill of the cash-generating unit would still be
sufficiently covered by the respective recoverable amount if assumptions and parameters underlying the calculations were to
change in a manner that is deemed possible. On the basis of these analyses, our audit particularly focused on the cash-generating
units Life Science and Performance Materials.
100.00
Darmstadt
100.00
100.00
< 0.5
< 0.5
Beteiligungs-GmbH
Merck 41. Allgemeine
Other European
Greece
Sigma-Aldrich (OM) Ltd.
Athens
100.00
< 0.5
< 0.5
countries
Germany
Beteiligungs-GmbH
< 0.5
< 0.5
Merck 39. Allgemeine
Germany
Darmstadt
100.00
100.00
< 0.5
< 0.5
Beteiligungs-GmbH
Merck 40. Allgemeine
Germany
Darmstadt
100.00
100.00
< 0.5
Ireland
Beteiligungs-GmbH
Arklow
< 0.5
Plan-les-
Switzerland
iOnctura SA
73.60
B)
B)
< 0.5
Ouates
Merck Cross Border Trustees
Ltd.
Feltham
100.00
< 0.5
< 0.5
Darmstadt
United Kingdom
< 0.5
100.00
Moscow
< 0.5
Russia
Chemical Trade Limited LLC
Moscow
100.00
< 0.5
< 0.5
Russia
MedChem Limited
Moscow
100.00
< 0.5
< 0.5
Russia
SAF-LAB LLC
100.00
< 0.5
SAFC Arklow Ltd.
100.00
Beteiligungs-GmbH
Merck 28. Allgemeine
Germany
Darmstadt
100.00
100.00
< 0.5
< 0.5
Merck 29. Allgemeine
Germany
Darmstadt
100.00
100.00
< 0.5
Beteiligungs-GmbH
100.00
100.00
Darmstadt
< 0.5
100.00
100.00
< 0.5
Beteiligungs-GmbH
Merck 26. Allgemeine
Germany
Darmstadt
100.00
100.00
< 0.5
Beteiligungs-GmbH
< 0.5
Merck 27. Allgemeine
Germany
< 0.5
Beteiligungs-GmbH
< 0.5
Merck 30. Allgemeine
100.00
100.00
< 0.5
< 0.5
Beteiligungs-GmbH
Merck 37. Allgemeine
Germany
Darmstadt
100.00
100.00
< 0.5
Beteiligungs-GmbH
< 0.5
Germany
Darmstadt
Darmstadt
Germany
Merck 38. Allgemeine
Beteiligungs-GmbH
Merck 36. Allgemeine
Darmstadt
100.00
100.00
< 0.5
< 0.5
Merck 31. Allgemeine
Beteiligungs-GmbH
Darmstadt
100.00
100.00
< 0.5
< 0.5
Germany
Germany
4.0%
14,050
17,914
17,233
14,066
Financial liabilities
589
Equity
-64.0%
781
2,170
13,713
939
832
Cash and cash equivalents
12,855
12,597
8,033
8,896
8.1%
2,215
2,790
4,550
3,788
4,097
Current
29.4%
8,644
6,681
8,809
9,616
Non-current
48.3%
13,194
10,823
3,488
Other intangible assets
3,170
4,811
4,512
4,231
4,008
Property, plant, and equipment
26.8%
9,175
7,237
8,317
9,980
10,930
24.5%
17,141
13,764
>100.0%
6,213
29.1%
Current assets
7,344
3,161
2,890
Trade receivables and other current receivables
20.9%
3,342
2,764
2,632
3,226
2,609
Inventories
thereof:
-2.5%
9,003
9,236
7,455
7,670
2,610
Liquidity
M
179
2 According to the consolidated cash flow statement.
1 Not defined by International Financial Reporting Standards (IFRSS).
10.3%
57,036
51,713
52,880
50,348
49,613
Employees (number as of December 31)
4.0%
1.304
1.25
1.25
1.20
1.8%
3 Fiscal 2018 has been adjusted, see Note (45) "Effects from new accounting standards and other presentation changes" in the Notes to the
Consolidated Financial Statements.
4 Proposal on the appropriation of profits for 2019.
FINANCIAL CALENDAR
for 2020
DESIGN
Website: www.merckgroup.com
Fax: +49 6151 72-5577
64293 Darmstadt, Germany
Telephone: + 49 6151 72-0
Published on March 5, 2020 / May 14, 2020
by Merck KGaA, Group Communications
Frankfurter Strasse 250,
13,582
Annual General Meeting
2,268
May
5/28/2020
November
11/12/2020
Quarterly Statement Q1
May
5/14/2020
Half-yearly Financial Report
August
8/6/2020
Annual Press Conference
March
3/5/2020
Quarterly Statement Q3
2,227
2,108
1,976
3,193
3,318
2,766
Business free cash flow¹
-10.7%
813
910
2,508
919
514
Investments in property, plant, and equipment²
95.8%
208
106
392
132
716
Investments in intangible assets²
2,732
Net financial debt¹
1,709
1.05
Dividend per share (in €)
Research and development costs³
40.9%
46.7%
39.5%
36.7%
8.9%
33.8%
Other key data
84.5%
12,363
6,701
10,144
11,513
12,654
Equity ratio (in %) 1
15,015
13.1%
Goodwill
-
Business Development 2015-
314
Business Development 2015-2019
[German Public Auditor]
Wirtschaftsprüferin
[signature] Rienecker
[German Public Auditor]
Wirtschaftsprüfer
[signature] Rackwitz
[Original German version signed by:]
Wirtschaftsprüfungsgesellschaft
KPMG AG
Frankfurt am Main, 17 February 2020 / limited to the amendment referred to in the Information on the Supplementary Audit:
13 May 2020
The German Public Auditor responsible for the engagement is Bodo Rackwitz.
2019
This overview may include historically adjusted values in order to ensure comparability with the reporting period.
€ million
2015
2,423
2,481
1,843
Operating result (EBIT) 1
16,152
14,836
14,517
German Public Auditor Responsible for the Engagement
15,024
Net sales
Results of operations
Changein %
2019
2018
2017
2016
12,845
1,727
We issue this auditor's report on the amended consolidated financial statements and amended combined management report on the
basis of our statutory audit completed on February 17 2020 and our supplementary audit completed on May 13 2020, which
concerned the amendment to disclosures in the notes to the consolidated financial statements and the combined management
report due to the updated reporting on risks and opportunities and on expected developments. Please refer to the presentation of
the amendments by the Executive Board in the amended notes to the consolidated financial statements, section "General
Disclosures - Subsequent Events" and in the amended combined management report, section,,Report on Risks and Opportunities -
Overall view of the risk and opportunity situation and management assessment", section,,Report on Expected Developments -
Forecast for the Merck Group" and section „Additional Information on Merck KGaA in accordance with the German Commercial Code
(HGB) Forecast for Merck KGaA".
We declare that the opinions expressed in this auditor's report are consistent with the additional report to the Supervisory Board
pursuant to Article 11 of the EU Audit Regulation (long-form audit report).
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from
material misstatement, whether due to fraud or error, and whether the combined management report as a whole provides an
appropriate view of the Group's position and, in all material respects, is consistent with the consolidated financial statements and
the knowledge obtained in the audit, complies with the German legal requirements and appropriately presents the opportunities and
risks of future development, as well as to issue an auditor's report that includes our opinions on the consolidated financial
statements and on the combined management report.
Auditor's Responsibilities for the Audit of the Consolidated Financial Statements and of the Combined Management
Report
The Supervisory Board is responsible for overseeing the Group's financial reporting process for the preparation of the consolidated
financial statements and of the combined management report.
Furthermore, management is responsible for the preparation of the combined management report that, as a whole, provides an
appropriate view of the Group's position and is, in all material respects, consistent with the consolidated financial statements,
complies with German legal requirements, and appropriately presents the opportunities and risks of future development. In
addition, management is responsible for such arrangements and measures (systems) as they have considered necessary to enable
the preparation of a combined management report that is in accordance with the applicable German legal requirements, and to be
able to provide sufficient appropriate evidence for the assertions in the combined management report.
In preparing the consolidated financial statements, management is responsible for assessing the Group's ability to continue as a
going concern. They also have the responsibility for disclosing, as applicable, matters related to going concern. In addition, they are
responsible for financial reporting based on the going concern basis of accounting unless there is an intention to liquidate the Group
or to cease operations, or there is no realistic alternative but to do so.
Management is responsible for the preparation of the consolidated financial statements that comply, in all material respects, with
IFRSS as adopted by the EU, and the additional requirements of German commercial law pursuant to Section 315e (1) HGB and that
the consolidated financial statements, in compliance with these requirements, give a true and fair view of the assets, liabilities,
financial position, and financial performance of the Group. In addition, management is responsible for such internal control as they
have determined necessary to enable the preparation of consolidated financial statements that are free from material
misstatement, whether due to fraud or error.
• otherwise appears to be materially misstated.
⚫ is materially inconsistent with the consolidated financial statements, with the information in the combined management report
audited for content or our knowledge obtained in the audit, or
In connection with our audit, our responsibility is to read the other information and, in so doing, to consider whether the other
information
Our opinions on the consolidated financial statements and on the combined management report do not cover the other information,
and consequently we do not express an opinion or any other form of assurance conclusion thereon.
The other information do not comprise the consolidated financial statements, the audited parts of the combined management report
and our auditor's report.
The other information furthermore comprises the remaining parts of the annual report.
311
Independent Auditor's Report
3st kommunikation GmbH, Mainz
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with
Section 317 HGB and the EU Audit Regulation and in compliance with German Generally Accepted Standards for Financial Statement
Audits promulgated by the Institut der Wirtschaftsprüfer (IDW) will always detect a material misstatement. Misstatements can arise
from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence
the economic decisions of users taken on the basis of these consolidated financial statements and this combined management
report.
Independent Auditor's Report
312
We exercise professional judgment and maintain professional skepticism throughout the audit. We also:
We were elected as group auditor at the annual general meeting on April 26, 2019. We were engaged by the Supervisory Board on
June 28, 2019. We have been the group auditor of MERCK Kommanditgesellschaft auf Aktien without interruption since the financial
year 1995.
Further Information pursuant to Article 10 of the EU Audit Regulation
Other Legal and Regulatory Requirements
313
Independent Auditor's Report
From the matters communicated with those charged with governance, we determine those matters that were of most significance in
the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these
matters in our auditor's report unless law or regulation precludes public disclosure about the matter.
We also provide those charged with governance with a statement that we have complied with the relevant independence
requirements, and communicate with them all relationships and other matters that may reasonably be thought to bear on our
independence, and where applicable, the related safeguards.
Information on the Supplementary Audit
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit
and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
• Evaluate the consistency of the combined management report with the consolidated financial statements, its conformity with
[German] law, and the view of the Group's position it provides.
• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the
Group to express opinions on the consolidated financial statements and on the combined management report. We are responsible
for the direction, supervision and performance of the group audit. We remain solely responsible for our opinions.
• Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and
whether the consolidated financial statements present the underlying transactions and events in a manner that the consolidated
financial statements give a true and fair view of the assets, liabilities, financial position and financial performance of the Group in
compliance with IFRSS as adopted by the EU and the additional requirements of German commercial law pursuant to
Section 315e (1) HGB.
• Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence
obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group's
ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in the
auditor's report to the related disclosures in the consolidated financial statements and in the combined management report or, if
such disclosures are inadequate, to modify our respective opinions. Our conclusions are based on the audit evidence obtained up
to the date of our auditor's report. However, future events or conditions may cause the Group to cease to be able to continue as
a going concern.
• Obtain an understanding of internal control relevant to the audit of the consolidated financial statements and of arrangements
and measures (systems) relevant to the audit of the combined management report in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of these systems.
• Evaluate the appropriateness of accounting policies used by management and the reasonableness of estimates made by
management and related disclosures.
Identify and assess the risks of material misstatement of the consolidated financial statements and of the combined management
report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence
that is sufficient and appropriate to provide a basis for our opinions. The risk of not detecting a material misstatement resulting
from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions,
misrepresentations, or the override of internal controls.
•
• Perform audit procedures on the prospective information presented by management in the combined management report. On the
basis of sufficient appropriate audit evidence we evaluate, in particular, the significant assumptions used by management as a
basis for the prospective information, and evaluate the proper derivation of the prospective information from these assumptions.
We do not express a separate opinion on the prospective information and on the assumptions used as a basis. There is a
substantial unavoidable risk that future events will differ materially from the prospective information.
14,492
2,120
Margin (% of net sales) 1
3.75
2.56
Earnings per share (in €)
-61.0%
1,324
3,396
2,615
1,633
1,124
Profit after tax
18.8%
1,735
1,461
2,129
2,154
5.99
7.76
3.04
-60.8%
thereof:
25.9%
34,808
27,652
28,166
30,589
30,737
1,487
18.8%
36,888
35,621
38,258
38,081
Non-current assets
Total assets
Assets and liabilities
43,811
8.9%
22.8%
Profit before income tax
25.6%
28.7%
29.4%
26.1%
Margin (% of net sales) 1
15.3%
4,066
3,528
4,164
4,415
3,354
EBITDA¹
11.6%
16.7%
16.5%
14.3%
23.8%
25.2%
Adjustments¹
276
29.3%
29.9%
28.3%
Margin (% of net sales) 1
15.4%
4,385
3,800
27.1%
4,246
3,630
EBITDA pre¹
16.9%
318
272
82
75
4,490
Responsibilities of Management and the Supervisory Board for the Consolidated
Financial Statements and the Combined Management Report
www.3st.de
The safety of our products is at the core of our corporate responsibility. When used properly, they must pose no risk to customers,
patients, consumers, or the environment. Our goal is to ensure a positive benefit/risk profile for our products, which is why we
regularly examine safety across their entire life cycle and continuously take steps to minimize risks. We provide patients,
consumers, and customers with extensive informational material so they can use our products in a safe, responsible, and proper
CR
Strategy
Broad
Minds
License to Operate
Solutions
Sustainable
In recognition of our dedication to responsible and sustainable business practices, we were able to maintain our good position in
sustainability evaluations in 2019 and are listed on numerous indices. We are included in the FTSE4Good index, the STOXX Global
ESG Leaders index, the Euronext Vigeo Eurozone 120 index, and the Ethibel Sustainability Index (ESI) Excellence Europe. In early
2019, the independent rating agency EcoVadis granted us Gold status for our sustainability engagement. EcoVadis examines around
60,000 suppliers from 155 countries across four categories: environment, social affairs, ethics, and sustainable procurement.
Strategic sphere of activity: Global Health
Our aim is to create a healthier future for all, including individuals, communities, and countries. We want to use innovation in
science and technology to improve the health of underserved populations in low and middle-income countries. To achieve this, we
are leveraging our expertise from all business sectors and collaborating closely with a wide range of partners. We also participate in
industry-wide initiatives and work closely with other businesses to develop new approaches.
Our Global Health strategy is designed to overcome access barriers for underserved populations and communities in low and
middle-income countries in an economically viable and sustainable manner to create shared value for our business and for society.
We want to develop a business model that increases the value and competitiveness of our company while solving unmet health
needs and strengthening health systems. We want to be instrumental in curbing schistosomiasis and fighting malaria and other
infectious diseases while helping to build local capacity across the value chain. In the Access to Medicine Index, which is published
every two years, Merck continued to rank fourth in 2018. This index assesses the world's leading pharmaceutical companies on
activities and initiatives they have implemented to promote access to medicine in low and middle-income countries.
Strengthening the availability of healthcare solutions
We research, develop and refine healthcare solutions that address unmet needs, tailoring them to local environments. With our
Global Health Institute, we have defined a comprehensive portfolio of R&D projects to develop integrated health solutions. This
includes treatments, diagnostics, preventive measures against infections, and approaches to strengthen health systems targeting
schistosomiasis, malaria, and bacterial infections. For schistosomiasis, the portfolio also includes the development of a new
pediatric formulation of praziquantel to treat the worm disease schistosomiasis in children under the age of six, through the
Pediatric Praziquantel Consortium, a public-private partnership. We started a Phase III study in September 2019 and expect the
product to be ready to launch in the first affected countries in Africa in 2022.
-
Combined Management Report
Fundamental Information about the Group
Corporate Responsibility
36
As part of our One Merck for Malaria program, we completed a Phase I/Ib clinical trial of our anti-malarial compound M5717. In the
upcoming next phase of the program, we will examine options for developing the substance in combination with other anti-malarial
compounds for single administration in combination therapy to treat or prevent malaria.
In the drug discovery area, our strategic collaboration with the University of Cape Town in South Africa and the Medicines for
Malaria Venture has continued the screening of our almost 100,000 proprietary substances with the aim of identifying new drug
candidates for treatment of malaria, while also expanding our research capacity in and for Africa. This program is co-funded by the
German Federal Ministry of Education and Research.
Additionally, we are working toward making IR3535Ⓡ available as a malaria prevention method in Africa. This insect repellent is
already used for complementary prevention from vector-borne diseases such as dengue fever and ZIKA. Products containing this
active ingredient stand out due to their particularly good tolerance in young children and pregnant women.
In 2019, we continued our collaboration to support the National Malaria Control Program in Ghana. Alongside an integrated
approach of prevention and diagnosis of the disease, we aim to expand local research competencies.
Addressing affordability challenges
Through intellectual property initiatives and equitable pricing strategies, we can assist those people who are unable to pay for the
health solutions they need. We refrain from filing or enforcing patents in many low and middle-income countries and use a publicly
available database to be transparent about our patents and patent applications.
Through our Open Innovation Initiative, we are addressing affordability challenges around intellectual property (IP) with an initial
focus on neglected disease areas where we do not have portfolio competencies or expertise. Under this platform, we are a member
of WIPO Re: Search, an open innovation platform sponsored by the World Intellectual Property Organization (WIPO) to accelerate
early discovery of active ingredients for compounds through the sharing of IP and know-how. Our newest collaboration is with the
University of Yaoundé I in Cameroon, at which our compound library is being screened for a potential cure for Buruli ulcer. We are
also a member of the Drugs for Neglected Diseases initiative (DND) NTD Drug Discovery Booster, which simultaneously searches
the compound libraries of the eight partnering companies.
In 2019, we continued our long-term partnership with the World Health Organization (WHO), under which we undertake to donate
praziquantel tablets every year. The tablets are distributed in 47 affected countries in Africa for the treatment of school children. In
2019, we donated over 233 million tablets for distribution in 35 countries. Since 2007 we have supplied more than one billion
tablets free of charge, which is equivalent to the treatment of around 400 million school children. Latest numbers from WHO show
that in 2017, 72% of all school-aged children in need of treatment in sub-Saharan Africa were treated. As a founding member of
the Global Schistosomiasis Alliance, we are at the forefront of the campaign to eliminate schistosomiasis worldwide.
Raising awareness
Through access to the appropriate tools, knowledge, and skills, we help health professionals, communities, and patients make
informed decisions about prevention, diagnostics, treatment, and care. Our regular campaigns help increase awareness of certain
diseases globally, with a focus on those diseases where we have extensive expertise, such as cancer, thyroid disorders, diabetes,
multiple sclerosis, and infertility. In addition, Merck has championed World Malaria Day with awareness campaigns and through
engagement around the One Merck for Malaria program.
Together with the NALA Foundation, we have been involved in a schistosomiasis health education project in rural southwestern
Ethiopia since late 2017. The project helps to promote the long-term behavioral change that is needed to eliminate
Global
Health
Responsibility
35
Corporate Responsibility
Regulatory
agencies
Employees
Patients
Merck
family
Share-
holders
MERCK
Federations
& policy
makers
Employee
represen
tatives
Scientists
Community
Healthcare
systems
schistosomiasis. In 2019, we extended the project to two additional districts and reached around 188,000 people, of which nearly
40% were school children. In a survey, we learned that 58% of children had never heard of intestinal parasites. This demonstrates
the importance of further health education.
NGOS
Customers
* The contents of this chapter or section are voluntary and th refore not audited. However, our auditor has read the text critically.
Combined Management Report
Fundamental Information about the Group
Corporate Responsibility
34
Global Health: We are developing and producing medicine and intelligent devices that contribute to comprehensive healthcare.
Awareness plays a key role in our approach to improving access to healthcare, which is why we regularly conduct campaigns to
raise awareness of various diseases across the globe. We focus on those diseases that align with our core competencies, expertise
and experience along the health value chain. In collaboration with our partners, we also support people in low and middle-income
countries, for example by donating praziquantel tablets for the treatment of schistosomiasis. Through our Global Health Institute,
we are developing diagnostics, therapies, and preventive solutions to fight malaria, schistosomiasis, and other infectious and
tropical diseases.
Sustainable Solutions: We are constantly working to improve the sustainability footprint of our products - even during their use
phase - which also helps our customers achieve their own sustainability goals. For example, with our Design for Sustainability
program in the Life Science business sector, we have developed a systematic approach for product development. This approach
allows us to review the sustainability of products during the development process. This is achieved, for instance, by product
developers using product lifecycle analyses.
Broad Minds: As a science and technology company, we endeavor to excite people about science, inspire curiosity, and help
creativity to soar. Our goal is to strengthen our reputation in the field of science, especially in those areas where we have particular
expertise. We not only support educational programs for schools, but also back pioneering research at universities. Reflecting the
way that music and literature inspire people, we promote a range of cultural initiatives worldwide. Creativity and curiosity are the
bedrock of science, culture, and art, and they also underpin our holistic approach.
Our corporate responsibility efforts are aligned with the United Nations (UN) Sustainable Development Goals (SDGs), and we are
working to help achieve this ambitious agenda by 2030. However, our contribution toward achieving the SDGs does not limit itself
to the strategic spheres of activity established in our Corporate Responsibility strategy. We report on which specific sub-goals of
relevant SDGs we support through our management approaches, products, and projects, and we identify material goals based on
these SDGs.
In addition to promoting the SDGs, we also support relevant responsible governance initiatives. Through our membership in the UN
Global Compact, we are committed to upholding the Compact's principles on human rights, labor standards, environmental
protection, and anticorruption. We ensure that we live our own corporate responsibility principles by following the guidelines of the
Responsible Care Global Charter, which is an initiative of the International Council of Chemical Associations (ICCA). Responsible
Care aims to help the chemical industry enhance its environmental, health, and safety performance. We are also a member of the
Chemie³ initiative in Germany, a collaboration between the German Chemical Industry Association (VCI), the German Employers'
Federation of the Chemical Industry (BAVC), and the German Mining, Chemical, and Energy Industrial Union (IG BCE). This globally
unique alliance seeks to make sustainability a core part of the chemical industry's guiding principles and to drive the sector's
position within the German economy as a key contributor to sustainable development.
To us, corporate responsibility means listening and taking action, and so we place great importance on dialogue with our various
stakeholders. These stakeholders include employees, business associates, the Merck family, investors, regulatory agencies, industry
associations, and non-governmental organizations (NGOs). This continuous exchange creates transparency and clearly
demonstrates how we live our values.
Combined Management Report Fundamental Information about the Group
Competitors
Furthermore, Embracing Carers is a global initiative that we lead in collaboration with prominent caregiving organizations around
the world. Embracing Carers is designed to heighten awareness of the often-overlooked needs of caring relatives and care staff as
well as stimulating a public debate about this issue and any relevant measures. We believe that care in today's healthcare policy is
the issue that receives the least attention. In 2019, Embracing Carers backed up words with action and launched the global Time
Counts campaign. The campaign calls for the support of caring relatives through gestures large and small and the offer of time.
Combined Management Report Fundamental Information about the Group Corporate Responsibility
37
39
over 66,500 young people. As part of SPARK, in 2019, we once again sent our Curiosity Cube™ on a journey through the United
States and Canada. This is a freight container that has been transformed into a mobile laboratory and is equipped with state-of-the-
art technology. Directed by our employees, school students can use it to carry out scientific experiments. In 2019, the Cube traveled
approximately 48,000 kilometers across the United States and engaged students in 99 communities. 94% of schools visited fall
under the Title 1 category, where students mainly come from low-income backgrounds.
The Deutsche Philharmonie Merck
The Deutsche Philharmonie Merck is our musical ambassador. We consider classical music to be the universal language that brings
people together; as such, it is an important part of our culture. The concerts of this professional ensemble represent an integral part
of cultural life in the vicinity of our Group headquarters in Darmstadt and remain highly popular, with around 21,000 people having
attended these concerts in 2019. In the orchestra workshop, children and teenagers gained their first experience in a professional
orchestra. We also fostered enthusiasm for classical music among young people through cushion concerts for children aged four
years and above, as well as through youth concerts. In addition, the orchestra again toured internationally. In 2019, one concert
took place in Moscow.
Promoting literature
Like music, literature is an important mediator between cultures. That is why we support five literary prizes in Germany, India, Italy,
Japan, and Russia. The awards primarily recognize those authors who build bridges between cultures as well as between literature
and science. We awarded two of the prizes in 2019: The Johann Heinrich Merck Award for Literary Critique and Essay in Germany
went to author Daniela Strigl, and the winner of the Merck-Tagore Literature Award in India was Kris Manjapra.
Responsibility for our products
manner.
In our pharmaceutical marketing activities, the focus is always on the health and well-being of patients because we want them to
receive effective and high-quality treatment. All guidelines pertaining to marketing and advertising are part of our Group-wide
compliance program, which is complemented by our internal guidelines and various voluntary commitments that, in many cases, far
exceed the applicable statutory regulations.
Safety of our chemical products
Numerous regulations are in place to ensure that chemicals pose no risk to humans or the environment. Compliance with these
regulatory requirements is an important part of our work. Our Group-wide Regulatory Affairs Governance Policy governs the
processes with which we implement and manage product safety as well as the corresponding management structures. We
incorporate all relevant national and international chemical regulations into our policies and guidelines. This includes the EU
chemicals regulation REACH (Registration, Evaluation, Authorisation and Restriction of Chemicals) and CLP (Classification, Labelling
and Packaging of Substances and Mixtures, EU GHS). We issue all chemicals classified as hazardous with safety data sheets, which
contain information on the physicochemical, toxicological, and ecotoxicological properties of the agent and reflect the relevant
regulatory requirements of the countries in which they are published. We have standardized and automated the majority of our
Group-wide hazard communication processes. In the course of integrating the companies we acquired, Versum Materials and
Intermolecular, we are examining compliance with the applicable regulatory requirements and our internal standards and making
any necessary adjustments to the underlying processes.
Combined Management Report Fundamental Information about the Group
Corporate Responsibility
Corporate Responsibility
40
Patient safety has a top priority in everything we do. During the entire life cycle of our medicines, we provide patients and
physicians with up-to-date risk-benefit evaluations. To this end, company experts process safety-relevant information from various
sources such as clinical trials, adverse reaction reports, and medical/scientific literature. Our Global Patient Safety unit continuously
monitors and evaluates the safety and risk-benefit ratio of our pharmaceutical products worldwide (pharmacovigilance). Presided
over by our Global Chief Medical Officer, our Medical Safety and Ethics Board examines and assesses, where necessary, significant
medical safety risks and questions regarding risk-benefit evaluations. For products in our Allergopharma business, we have also
developed comprehensive clinical efficacy and safety profiles that we continuously update. For the safety of patients, we have
established a global pharmacovigilance system that we are always working to enhance.
Quality of our products
Our goal is to provide customers and patients with high-quality products at all times. Through our quality vision - "Quality is
embedded in everything we do!" - we remind our employees of their responsibility across all business sectors, all Group functions,
and all levels of the company.
Supplier management
We procure many raw materials, packaging materials, technical products, components, and services worldwide. We aim to promote
supply chain stability while providing our customers with high-quality products and services. Our supplier management focuses on
compliance with fundamental environmental and social standards in addition to high-quality, delivery reliability, and competitive
prices. They are set out in our Responsible Sourcing Principles and primarily derived from the core labor standards of the ILO
(International Labour Organisation) and the UN Global Compact.
Due to the global focus of our procurement, we are continuously working to ensure adherence to our supply chain standards. As a
member of the industry initiative Together for Sustainability (TFS), we are able to use the supplier self-assessments and audit
results shared among all member companies, who in turn abide by all restrictions stipulated within competition law.
In the course of integrating Versum Materials and Intermolecular, we are examining conformance with our policies and processes
and will make any necessary adjustments.
Responsibility for our employees
Our employees contribute to groundbreaking progress in science and technology across the world. They are the basis of our success
and therefore play a central role in the success of our business. In accordance with the Merck values, we live a culture of mutual
esteem and respect. To remain successful in the future, we want to attract people to our company who contribute their curiosity,
courage, and spirit of invention. We therefore place a strategic focus on employee development, leadership, and performance
management. Furthermore, we strive to foster diversity among our employees (more information can be found under "People at
Merck").
Responsibility for the environment
We seek to impact the environment as little as possible while doing business. This is the reason we work to efficiently conserve
resources such as energy, water, and raw materials, while also continuously reducing our emissions and waste.
Environmental management system
In our Corporate Environment, Health and Safety Policy, which is applicable Group-wide, we have defined our principles and
strategies for environment, health, and safety. It is an integral component of our EHS management system, which is certified
annually by external auditors in accordance with the international standard ISO 14001. At all our sites, local EHS managers oversee
operational environmental protection measures. These employees continually receive training and obtain additional qualifications.
Since our businesses are constantly changing, we carry out internal audits of our environmental management system and have this
Safety of our Healthcare products
Media
Combined Management Report Fundamental Information about the Group
As part of SPARK, our global volunteer program, employees from our Life Science business sector share their skills and experience
with students and support our local communities. The program is intended to spark curiosity in science and inspire students to
consider a STEM¹-related career. In 2019, more than 2,300 employees invested more than 19,400 hours in the program, reaching
Promoting accessibility and improving supply chains
We promote initiatives to strengthen supply chains and to develop localized health solutions in order to deliver and reach out
efficiently at the point of care. We are a founding member of the Accessibility Platform, an informal, private-sector initiative that is
working on a comprehensive approach to meeting supply chain and distribution challenges in countries with low or medium income.
In a collective action, we are engaging in an Access Delivery mentorship program. A pilot was successfully launched and
implemented in Tanzania with Bahari, a local private wholesaler, in collaboration with Business for Health Solutions (BHS).
NTDeliver is our digital information tool for improving transparency in medicine donation supply chains created through public-
private partnerships. Deliveries from companies running donation programs are clearly displayed from purchase orders made by
-
WHO through delivery to the first warehouse in the destination country. This improves coordination and provides a more
transparent overview of the in-country inventory. In Kenya, where schistosomiasis poses a significant risk to schoolchildren, we are
collaborating with around 12,000 teachers across the country to support the de-worming program running with WHO. We deploy
our NTDeliver tool to monitor volumes of medicines reaching schools, particularly “last mile" deliveries to remote, rural locations. In
2019, we further improved the tool and firmly established it as an essential part of the program. Building on this experience, we are
reviewing the best way to retrieve unused medicines from the field and store them centrally for upcoming de-worming campaigns.
To realize our vision of achieving basic medical care everywhere and for everyone, we want to help eliminate inequality in access to
healthcare in emerging economies. Our CURAFATM stations serve as points of care for integrated primary healthcare. In these
communities, local pharmacists and nurses provide pharmaceutical and clinical services, medicine, digital health solutions, health
education, and insurance and financing schemes. In Kenya we have five facilities running that in 2019 served a total of more than
2,000 patients a month.
Falsified medicines pose a threat to millions of people. Latest figures refer to around one million deaths per year due to the use of
ineffective or toxic products. Merck is fighting against falsified medicines — for instance through the Global Pharma Health Fund
(GPHF), a non-profit organization funded by our company. Its mission is to combat falsified and poor-quality medicines in low and
middle-income countries. The GPHF Minilab™ fits into a tropics-resistant flight case and enables scientists and clinical staff to verify
some 100 active pharmaceutical ingredients in medicines for authenticity. More than 850 Minilabs are currently in use. 21 Minilabs
were delivered in 2019. Of these, 15 went to the Philippines and the remaining six to Bangladesh, the Democratic Republic of the
Congo, India, and Mongolia. Furthermore, we are collaborating with Boston University to explore new technologies against falsified
medicines, particularly for antimalarials and antimicrobials. The objective is to test, validate, and optimize a new user-friendly
technology to qualitatively and quantitatively assess the validity of drugs.
Strategic sphere of activity: Sustainable Solutions
Through our products, we are helping our customers reduce the impact of their own activities on sustainability and achieve their
own sustainability goals.
Life Science: reducing environmental impact throughout the product life cycle
-
from production
We aim to continuously improve the environmental impact of our products. This applies to the entire life cycle
and use through to the disposal of our products. To lower the environmental impact of our devices and instruments during use by
customers, we apply our Design for Sustainability (DFS) program. This comprehensive approach keeps sustainability criteria in the
foreground during product development or re-engineering and documents them in a scorecard. When developing a new product,
our aim is to improve as many of these criteria scores as possible. Beginning with the concept stage, product teams identify
potential environmental impacts and opportunities to make improvements. By the end of 2019, 32% of these product development
projects met at least three or more sustainability criteria.
In addition, our researchers are developing innovative solutions in line with the 12 Principles of Green Chemistry developed by
chemists Paul T. Anastas and John C. Warner. The objective is to enable research that is as environmentally conscious as possible
and to minimize adverse effects on human health. More than 830 greener alternatives to conventional products are available so far.
With DOZNⓇ, we have developed a web-based quantitative Green Chemistry analysis tool. To date, we have used this matrix to
assess and improve more than 45 products. In 2019, we launched a version of the tool for our customers. DOZNⓇ 2.0 brings new
1 Science, Technology, Engineering, and Mathematics
Combined Management Report Fundamental Information about the Group Corporate Responsibility
possibilities for sustainable product design to our customers and empowers them with data to make more environmentally friendly
choices in their development processes.
We are expanding our portfolio to include greener alternatives, such as the new bio-based solvent Cyrene™, which is derived from
waste cellulose and is employed as an alternative to widely used solvents that are subject to increasing regulatory restrictions due
to their associated toxicity. CyreneTM was named Environmental Product of the Year at the Environmental Leader Awards in 2019.
The application of single-use products, many of which pose a challenge to recycle in the current infrastructure, is growing as life
science markets are expanding and adopting new technologies. We have developed innovative recycling programs that led to the
recycling of almost 4,200 metric tons of our customers' products from 2015 to 2019. The figure for 2019 alone was 1,500 metric
tons, which means our target of recycling a total of 5,000 metric tons by 2020 is easily achievable.
In 2019, we launched a sustainable packaging strategy for Life Science called SMASH Packaging. The strategy is built on three
pillars: optimizing resources, using more sustainable materials, and designing for a circular economy. We set specific 2022 targets,
such as reducing air space in distribution packaging by 20%, demonstrating that our packaging materials do not contribute to
deforestation, and reducing our use of expanded polystyrene (EPS) by 20%.
Performance Materials: increasing the sustainability of end products
Windows that can be darkened in a matter of seconds are now a reality, thanks to our liquid crystal window (LCW) technology.
These darkened windows regulate the heat generated by direct sunlight. Based on initial estimates, this technology is capable of
lowering the energy consumption caused by air conditioning in buildings, as well as replacing conventional sun protection systems.
This helps save materials and costs during construction. The LC material is commercialized under our licrivision® and eyrise™
brands.
In the cosmetics industry, we are addressing the continuing trend towards ingredients that meet stringent sustainability criteria. Our
portfolio of fillers eliminates the need for microplastic particles that are heavily criticized for polluting waters and damaging marine
life. Our cosmetic formulations comply with strict criteria. By the end of 2019, 73 of our cosmetic pigments and active ingredients
were certified according to Ecocert's COSMOS standard for organic and natural cosmetics. We also obtained halal certificates for our
Eusolex T and UV-Titan product ranges.
Strategic sphere of activity: Broad Minds
The promotion of science, education, and culture in an integrated manner constitutes one of the central concerns of our engagement
in society. In this way, we champion characteristics that are indispensable for our activities as a science and technology company:
creativity, passion for new discoveries and curiosity, and the courage to transcend boundaries.
Boosting scientific education
-
We view education as a key component of culture and vice versa. Education can help us understand culture. But culture can also
build a bridge to education by stimulating curiosity and creativity. We therefore support educational projects at many of our sites.
For instance, we grant scholarships and help to create interesting science classes in school through employee volunteering. We want
to spark interest in science, particularly among young people. This is why we have been supporting the "Jugend forscht"
(Young Researchers) competition for more than 35 years. Since 1996, we have been organizing the state-level competition for the
German Federal State of Hesse. 72 future young scientists took part in the 2019 competition. In the reporting year, we awarded the
Julius Adolph Stöckhardt prize for the first time. This award recognizes committed chemistry teachers who conduct innovative
experiments to impart chemistry to students in captivating ways.
Through our Junior Labs, we want young people to enjoy conducting experiments. These learning labs at the Technical University of
Darmstadt combine classroom instruction with trending topics and modern research methods. In 2019, around 2,500 school
students used the chemistry laboratory and around 1,500 school students experimented in the biology laboratory.
38
Sales &
business
partners
Suppliers
Our corporate responsibility (CR) activities are steered by our CR Committee, which consists of representatives from our business
sectors and relevant Group functions, such as Environment, Human Resources, Compliance, and Procurement. The Chairman of the
Executive Board is responsible for the Committee, which is chaired by the head of the Group Corporate Responsibility unit.
2018
€ million
%
1,320
3,374
3
22
-2,053
-19
-60.9%
-85.1%
-28
-2,303
2,275
-98.8%
440
368
72
2019
19.7%
Change
Earnings per share pre¹ (€)
31
Capital market-related parameters
Net income, earnings per share (EPS), and earnings per share pre (EPS pre)
Earnings per share are calculated by dividing profit after tax attributable to the shareholders of Merck KGaA (net income) by the
weighted average number of theoretical shares outstanding. The use of a theoretical number of shares takes into account the fact
that the general partner's capital is not represented by shares. To provide an alternative view, we also report earnings per share
pre, in other words, after the elimination of the effects of integration expenses, IT expenses for selected projects, restructuring
expenses, gains/losses on the divestment of businesses, acquisition expenses, and other adjustments. Moreover, amortization of
acquired intangible assets as well as impairment losses on property, plant, equipment, and intangible assets are eliminated. The
adjustment excludes impairment losses on intangible assets for acquired research and development (R&D) projects below a
threshold value of € 50 million. Income tax is calculated on the basis of the company's underlying tax rate. The following table
presents the reconciliation of net income to net income pre for the calculation of EPS pre.
MERCK GROUP
Reconciliation of net income to net income pre¹
€ million
Net income
Non-controlling interests
Profit after tax from discontinued operation
Humankind is being confronted with global societal challenges such as climate change, resource scarcity, an increasing global
population, rising life expectancy, and insufficient access to healthcare in low and middle-income countries. Responsible governance
can help solve these global issues. We believe that in pursuing this approach, we can also strengthen our financial performance. In
2019, we continued the realignment of our CR strategy begun in 2018. We are increasingly pursuing a shared value approach and
are working to make the value we create measurable for the company and for society. We have defined three strategic spheres of
activity as the center of our CR strategy: Global Health, Sustainable Solutions, and Broad Minds. We focus our resources on those
areas where we can have the greatest impact. Needless to say, we respect the interests of our employees, customers, investors,
and communities in which we operate, and we work to minimize ethical, economic, and social risks, thereby sustainably
contributing to our long-term corporate success.
Amortization of acquired intangible assets
Adjustments
1
Income taxes on the basis of the underlying tax rate ¹
Non-controlling interests to be adjusted
Net income pre¹
1 Not defined by International Financial Reporting Standards (IFRSS).
1,119
Income tax
-55
The rating of our creditworthiness by external agencies is an important indicator with respect to our ability to raise debt capital at
attractive market conditions. The capital market makes use of the assessments published by independent rating agencies in order
to assist debt providers in estimating the risks associated with a financial instrument. We are currently assessed by Moody's,
Standard & Poor's, and Scope. The most important factor for the credit rating is the ability to repay debt, which is determined in
particular by the ratio of operating cash flow to net financial debt.
Dividend ratio
With the aim of ensuring an attractive return for our shareholders, we are pursuing a reliable dividend policy with a target payout
ratio based on EPS pre (see definition above).
Combined Management Report Fundamental Information about the Group Internal Management System
32
Other relevant/non-financial performance measures
Apart from the indicators of the financial performance of the businesses, non-financial measures also play an important role in
furthering the success of the company. From a Group perspective, innovations in the businesses as well as the promotion of a
diverse workforce, especially at the leadership level, and sustained planning for the filling of company-critical positions, are of
particular importance.
Innovation
Innovations are the foundation of our business and will also be the prerequisite for future success in changing markets. We are
continuously working to develop new products and service innovations for patients and customers. Indicators for the degree of
innovation are defined individually depending on the specifics of the respective businesses.
Sustained employee development
We believe that a diverse workforce strengthens our ability to innovate. We actively promote diversity among our leaders to create
an integrative culture that reflects our values and enables every employee to fulfill their potential. We ensure that our ambitious
corporate goals can be realized through strategic succession planning for company-critical positions. To gauge the success of the
related measures, we have introduced these two focus issues as non-financial indicators.
33
Corporate Responsibility*
-
We take responsibility every day and have been doing so for over 350 years. This commitment is codified in our corporate
strategy and values. Responsible conduct with respect to employees, products, the environment, and society is a fundamental
prerequisite for our business success.
Strategy and management
1,175
Credit rating
9.0%
Combined Management Report Fundamental Information about the Group Corporate Responsibility
5.10
-4.7%
0.46
369
327
12.7%
-807
Combined Management Report Fundamental Information about the Group Internal Management System
-741
42
8.9%
-3
5.56
3
2,417
2,219
198
-66
100.0%
8.9%
1,330
1,319
1,3234
1,339
1,260
1,273
1,2574
36
32
Solid tumors
32
33
1,254
Electricity
149
729
7554
756
Steam, heat, cold
95
146
145
Total energy sold
0.3
0.1
0.0
Biomass and self-generated renewable energy
0.1
692
34
2017
34
Electricity
Liquid fossil fuels 5
Direct energy consumption
Natural gas
2,240
2,2274
2,194
2,117
Total energy consumption
20193
20182
2016
In gigawatt hours
33
ENERGY CONSUMPTION 1
baseline), irrespective of production growth. In total, we emitted 665,000 metric tons of CO2 equivalents (CO2 eq) in 2019. We have
thus reduced our greenhouse gas emissions by around 15% when compared with 2006, even though our operating business
has grown.
Climate impact and resource scarcity are key challenges facing society. Seeking to make a positive contribution is for us a given. We
have therefore set ourselves the goal of reducing total direct and indirect greenhouse gas emissions by 20% by 2020 (2006
Focus areas: Energy efficiency, greenhouse gas emissions, water, waste, and recycling
audited externally on a regular basis to ensure that the ISO 14001 requirements are still being met. In 2019, we obtained an
ISO 14001 group certificate for the 11th consecutive year. This certificate covers 81 sites around the world. In the course of
integrating Versum Materials and Intermolecular, we are examining compliance with our requirements and making any necessary
adjustments to the underlying processes. The environmental KPIs reported do not yet include any data relating to these two
acquired companies.
41
Corporate Responsibility
Combined Management Report Fundamental Information about the Group
901
9044
875
787
Indirect energy consumption
33
In 2019, our company received a "C" rating from the CDP (formerly the Carbon Disclosure Project), thus maintaining the results
achieved in 2018 (likewise "C"). The CDP analyzes companies in terms of their performance and transparency in climate impact and
water management.
0.3
Solid tumors
0.0
49
Research and Development
Combined Management Report Fundamental Information about the Group
In October, we gave notice that results from FORWARD, a five-year, multicenter Phase II study of sprifermin, a recombinant human
fibroblast growth factor-18, in patients with symptomatic radiographic knee osteoarthritis (OA) were published online in the Journal
In late September, we announced that the Committee for Medicinal Products for Human Use (CHMP) of the European Medicines
Agency (EMA) issued a positive opinion to update the product label of RebifⓇ to include that women with RMS may continue
treatment with RebifⓇ during pregnancy if clinically needed and while breastfeeding. Treatment with RebifⓇ while breastfeeding is
an important option as many patients experience a relapse in their MS during the first three months following childbirth.
In early September, we reported the initiation of two global pivotal Phase III trials (EVOLUTION RMS 1 and 2) studying the efficacy
and safety of evobrutinib in adult patients with RMS.
New data on evobrutinib were also presented at ECTRIMS, further elucidating the proposed mechanism of action for this
investigational MS therapy, which is the first oral, highly selective Bruton's Tyrosine Kinase (BTK) inhibitor to demonstrate clinical
proof of concept in relapsing multiple sclerosis.
of the American Medical Association (JAMA). Published results, based on the two-year primary outcome and the three-year follow-
up analysis from the trial, show statistically significant, dose-dependent increases in total femorotibial joint cartilage thickness
compared to both baseline and placebo comparator.
We also presented new long-term efficacy data for RebifⓇ showing no evidence that exposure to our injectable before and during
pregnancy in women with MS affected infant birth weight for gestational age and head circumference. These data points expand on
safety data presented at recent congresses that suggest exposure to IFNẞ does not increase risk of spontaneous abortions or affect
other pregnancy outcomes, such as ectopic pregnancies or fetal malformations.
• A retrospective analysis of real-world follow-up data from an Italian MS registry showed that five years after receiving the last
dose of our oral treatment, nearly two-thirds of patients (64%) had no disability progression and more than half of the patients
(57%) were free of relapse.
• Long-term efficacy data on our oral treatment for MS, showing that 75% of patients from the CLARITY and CLARITY Extension
studies exhibited no disability progression at five years post-treatment.
At the 35th Congress of the European Committee for Treatment and Research in Multiple Sclerosis (ECTRIMS) from September 11-
13, 2019 in Stockholm, Sweden, we presented 39 abstracts highlighting key data with Mavenclad®, Rebif® and evobrutinib. The
data we presented at ECTRIMS include key insights from real-world follow-up of patients from our clinical trials and the post-
approval setting for MavencladⓇ, further validating it as an important treatment option available to patients in more than 70
countries worldwide. Among the data presented on cladribine tablets were:
In July, we shared further new pregnancy outcomes data in women with MS treated with IFNẞ, including RebifⓇ, at the European
Academy of Neurology (EAN) 2019 Congress in Oslo, Norway. Results from the largest population-based observational study in
women treated with IFNẞ who became pregnant showed no increased risk of major congenital anomalies compared to those
unexposed. The results are based on Finnish and Swedish health registry data collected between 1996 and 2014.
Key evobrutinib data included new 48-week results of the double-blind, randomized, placebo-controlled, Phase II study in patients
with RMS. The new data showed that the effect on T1 gadolinium-enhancing lesions reduction seen at week 12 was maintained
through 48 weeks with evobrutinib 75 mg QD and 75 mg BID. The results were simultaneously published in the New England
Journal of Medicine.
Key RebifⓇ data included the results of an investigation into the prevalence of pregnancy outcomes in IFNẞ-exposed women from
the European Interferon Beta (IFNẞ) pregnancy registry and Nordic health study. These data add to the wealth of pregnancy
outcome data that have been collected over more than 20 years for RebifⓇ and other beta interferons.
Key MavencladⓇ data included a post-hoc analysis of the CLARITY Extension study to examine the durability of no evidence of
disease activity-3 (NEDA-3) in RMS patients receiving cladribine tablets, plus an integrated analysis of pooled long-term safety data
of cladribine tablets in patients with MS collated from the CLARITY, CLARITY Extension, ORACLE-MS studies and the PREMIERE
registry. We also presented abstracts from the ORACLE-MS study describing the effect of cladribine tablets on early MS, as well as
results from studies investigating the biological effects of cladribine tablets to offer further insights on the mode of action.
• Final results from the PREMIERE safety registry were presented, which allowed for a thorough characterization of the long-term
safety profile of cladribine tablets and showed no new safety findings. Furthermore, post-marketing data in the first 8,419
patients treated with cladribine tablets worldwide were consistent with the safety profile seen in the clinical development
program, with no increase in incidence of adverse events from original clinical program findings.
We also announced that we are evaluating external partnership opportunities for our OA portfolio, including sprifermin, with the
goal of finding the right partner to advance the development of structurally-modifying treatments to change the course of OA. By
pursuing alternative paths to internally driven development, our plan is to further focus our efforts in inflammatory neurology and
immunology diseases with potentially overlapping inflammatory mechanisms like MS and systemic lupus erythematosus (SLE).
Fertility
To date, an estimated three million babies have been born with the help of our Fertility portfolio.
BIOPHARMA PIPELINE
50
Research and Development
Fundamental Information about the Group
Combined Management Report
In March, we entered a collaboration agreement with Iktos, a French start-up company specialized in the development of artificial
intelligence (AI) solutions applied to chemical research. The collaboration will comprise the use of Iktos' generative modeling AI
technology to facilitate rapid and cost-effective discovery and design of promising new compounds.
In January, we signed a strategic collaboration agreement with Tencent, a leading provider of Internet services. The collaboration
will primarily focus on increasing public disease awareness and providing more accessible healthcare services via digital platforms in
China.
Other collaborations
The launch of Aluetta Ⓡ, our new pen for the injection of Saizen ®, complements our device portfolio and supports the growth of
SaizenⓇ by expanding our business in key geographies like Germany. Aluetta ® is currently approved in 20 countries.
The number of patients taking Saizen ® (somatropin) enrolled on Easypod ® Connect continued to grow in 2019, reaching almost
21,000 at the end of Q4. Saizen ® is our main endocrinology product and is indicated for the treatment of growth hormone
deficiency in children and adults, while Easypod® Connect is a unique web-based platform that allows HCPs to monitor their
patients' adherence to treatment with real-time injection data collected and transmitted from their EasypodⓇ devices.
We continued to execute our Branded Off-Patent Products (BOPPS) strategy. Toreza ® (rosuvastatin) was approved in Chile in July.
TorezaⓇ is available in two strengths, 10 mg and 20 mg, offering HCPs an important choice for the treatment of dyslipidemia.
GlucophageⓇ, containing the active ingredient metformin, is now approved in 53 countries for prediabetes when lifestyle
intervention is not enough to control the condition. At the 55th Annual Meeting of the European Association for the Study of
Diabetes (EASD) in Barcelona, Spain in September, a first-of-its-kind Millennial Advisory Board was held with a new generation of
healthcare professionals (HCPs) to discuss treatment paradigms for prediabetes. In Brazil, we successfully launched Glucophage XR
850 dedicated to the prediabetes condition.
Our new formulation of Euthyrox® (levothyroxine) for the treatment of hypothyroidism obtained further regulatory approvals in
2019, resulting in a total of 35 countries where this incremental innovation is registered, allowing for more precise dosing. New
launches planned for the coming quarters include the remaining eight EU countries (Portugal and Spain, for example), China,
Colombia and two countries in Asia-Pacific (Malaysia and Singapore).
0.1
In June, we announced we are working with the Leibniz Institute for Zoo and Wildlife Research (IZW), Berlin, Germany and other
research partners to support efforts to save the northern white rhinoceros from extinction.
Fertility Lab Technologies continued to expand its footprint in Asia-Pacific, successfully launching the fertility lab devices GeriⓇ,
Gavi®, Gems, and GidgetⓇ in Korea and India.
The PergoverisⓇ Pen, a convenient and ready-to-use fertility combination treatment option for women with severe follicle
stimulating hormone and luteinizing hormone deficiency, was successfully launched in several countries in Europe, Asia-Pacific and
Latin America in 2019. Additional launches in other countries are planned.
48
As of: December 31, 2019
Research and Development
At the American Academy of Neurology (AAN) 2019 Annual Meeting, May 4-10 in Philadelphia, Pennsylvania, United States, we
presented a total of 20 abstracts (18 posters and two platform presentations), including data on Mavenclad Ⓡ, Rebif® (interferon
beta-1a) and evobrutinib.
46
Research and Development
Combined Management Report Fundamental Information about the Group
* The contents of this chapter or section are voluntary and therefore not audited. However, our auditor has read the text critically.
In November, we and Pfizer announced topline results of the Phase III JAVELIN Gastric 100 study evaluating avelumab as first-line
maintenance therapy following induction chemotherapy in patients with unresectable, locally advanced or metastatic HER2-negative
gastric or gastroesophageal junction cancer versus continuation of chemotherapy or best supportive care. While the study showed
clinical activity for avelumab in this setting, it did not meet the primary endpoints of improved overall survival (OS) compared with
the standard of care in the overall intent-to-treat population or the PD-L1-positive population.
In March, we and Pfizer reported the discontinuation of the ongoing Phase III JAVELIN Ovarian PARP 100 study evaluating the
efficacy and safety of avelumab in combination with chemotherapy followed by maintenance therapy of avelumab in combination
with talazoparib, a poly (ADP-ribose) polymerase (PARP) inhibitor, versus an active comparator in treatment-naïve patients with
locally advanced or metastatic ovarian cancer. The decision was based on several emerging factors since the trial's initiation,
including the previously announced interim results from JAVELIN Ovarian 100 as well as the rapidly changing treatment landscape.
The discontinuation of the trial was not based on safety results.
Through our strategic alliance with Pfizer, we continue to explore the therapeutic potential of avelumab. Our clinical development
program JAVELIN currently involves at least 30 clinical programs and more than 10,000 patients evaluated across more than 15
different tumor types. In addition to RCC, these tumor types include head and neck cancer, Merkel cell carcinoma (MCC), non-small
cell lung cancer (NSCLC), and urothelial cancer (UC).
At the 2019 American Society of Clinical Oncology (ASCO) Annual Meeting, May 31 - June 4 in Chicago, Illinois, United States, we
presented new data:
The United States, EC and Japanese approvals in RCC were based on interim results from the pivotal Phase III JAVELIN Renal 101
trial, which were published in the New England Journal of Medicine in February. The combination of BavencioⓇ and axitinib
significantly extended median progression-free survival (PFS) by more than five months compared with sunitinib as a first-line
treatment for patients with advanced RCC.
Oncology and immuno-oncology are core focus areas in our R&D portfolio. With an emphasis on biology-driven research, we aim to
deliver transformative treatments. Translational research is embedded into the whole R&D process, with several projects addressing
unmet needs in hard-to-treat cancers through innovative treatment approaches and novel combinations. In 2019, we achieved a
number of significant milestones across our oncology and immuno-oncology pipeline.
Oncology and immuno-oncology
45
Research and Development
Fundamental Information about the Group
Combined Management Report
Biopharma
We continue to develop much-needed new treatment options for patients with hard-to-treat cancers and have made key progress in
this area with avelumab, an anti-PD-L1 antibody we are co-developing and co-commercializing with Pfizer Inc. To date, avelumab
has received approval in more than 50 countries across the world under the brand name BavencioⓇ. In May, we and Pfizer
announced that the U.S. Food and Drug Administration (FDA) approved Bavencio® in combination with axitinib for the first-line
treatment of patients with advanced renal cell carcinoma (RCC). As well, in October, we and Pfizer reported that the European
Commission (EC) authorized BavencioⓇ in combination with axitinib for the first-line treatment of adult patients with advanced
RCC. In December, the combination was approved in Japan for the treatment of unresectable or metastatic RCC.
• For avelumab, we shared data from five studies across tumor types including MCC, RCC, hepatocellular carcinoma and UC. These
included an oral presentation of biomarker analyses of baseline tumor samples from the Phase III JAVELIN Renal 101 trial in
previously untreated patients with advanced RCC.
• Erbitux® (cetuximab) data from a retrospective analysis of OS by subsequent therapy in patients with RAS wild-type metastatic
colorectal cancer from the Phase III EPIC study were presented. The analysis evaluated the effect of post-study therapies (with
cetuximab, without cetuximab, or no subsequent therapy) on OS following treatment with cetuximab plus chemotherapy or
chemotherapy alone.
⚫ For the investigational targeted therapy tepotinib, updated results from the potentially registrational Phase II VISION study
showed promising activity in advanced NSCLC patients harboring MET exon 14 skipping mutations detected by liquid biopsy or
tissue biopsy.
Cladribine tablets have been approved by the FDA as a treatment for RRMS and SPMS that provides two years of proven efficacy
with a maximum of 20 days of oral treatment, during a two-year period. Cladribine tablets have demonstrated clinical efficacy
across key measures of disease activity, such as annualized relapse rate, disability progression, and magnetic resonance imaging
(MRI) activity. We continue to receive regulatory approvals for Mavenclad Ⓡ around the world. MavencladⓇ is now approved in
more than 70 countries, including those of the European Union, Australia, Canada and Switzerland.
Multiple sclerosis (MS) is one of the world's most common neurological disorders. Despite the emergence of a number of therapies
in the last two decades, there are still significant unmet needs for MS patients. At the end of March 2019, our MS therapy
MavencladⓇ (cladribine tablets) was approved in the United States for the treatment of adults with relapsing-remitting multiple
sclerosis (RRMS) and active secondary progressive multiple sclerosis (SPMS).
Neurology & Immunology
In September, we signed a collaboration and license agreement with Y-Trap Inc. of Baltimore, Maryland, United States for the
exclusive development of multiple specific antibody-ligand traps for cancer immunotherapy. The collaboration leverages Y-Trap's
proprietary platform of multifunctional antibody-ligand traps for immuno-oncology. The Y-Trap platform exploits combinatorial
protein engineering to counteract key determinants of immune dysfunction in the tumor microenvironment. Y-Trap and Merck will
collaborate to explore the pharmacology of Y-Trap multifunctional proteins and Merck will be responsible for all development,
manufacturing and commercialization activities. Under the agreement, Merck will provide Y-Trap with an upfront payment in
addition to milestone payments and royalties based on the achievement of specific pre-clinical, clinical development, regulatory,
and commercial milestones.
In accordance with the agreement with GSK, Merck received an upfront payment of € 300 million and is eligible for potential
development milestone payments of up to € 500 million triggered by data from the lung cancer program. Merck will also be eligible
for further payments of up to € 2.9 billion upon successful achievement of future approval and commercial milestones. The total
potential deal value is up to € 3.7 billion. Both companies will jointly conduct development and commercialization. In the event of
regulatory approval, net sales will be realized by Merck in the United States and by GSK in all other countries, whereas net profits
from sales and defined expense components will be shared equally by the alliance partners.
In February, we announced a global strategic alliance with GlaxoSmithKline (GSK) to jointly develop and commercialize bintrafusp
alfa, including potential registrational studies, for multiple difficult-to-treat cancers. During the year, we achieved our alliance
objective of eight trials ongoing or with protocol under development. Our advanced clinical program includes three studies focused
on NSCLC, two studies focused on BTC and a study focused on cervical cancer. Our lung cancer studies include a randomized, open-
label controlled Phase II study of bintrafusp alfa compared with pembrolizumab as a first-line (1L) treatment in patients with PD-L1
expressing advanced NSCLC (INTR@PID LUNG 037); a Phase II study of bintrafusp alfa with concurrent chemoradiation therapy
(CCRT) in unresectable Stage III NSCLC (INTR@PID LUNG 005), and a Phase Ib/II, open-label study of bintrafusp alfa in
combination with chemotherapy in participants with Stage IV NSCLC regardless of PD-(L)1 expression status (INTR@PID LUNG
024). Our BTC studies include a phase II, open-label study to evaluate bintrafusp alfa monotherapy in participants with locally
advanced or metastatic BTC who failed, or were intolerant to, first line platinum-based chemotherapy (INTR@PID BTC 047), and a
phase II/III, multicenter, randomized, placebo-controlled study of gemcitabine plus cisplatin with or without bintrafusp alfa in
patients with 1L BTC (INTR@PID BTC 055). In addition to use as a single agent, bintrafusp alfa is also being considered for use in
combination with other assets from the pipelines of both companies.
In November, we reported that the Japanese Ministry of Health, Labour and Welfare (MHLW) granted orphan drug designation
(ODD) for tepotinib for patients with NSCLC harboring MET gene alterations. The MHLW ODD program is designed to promote
research and development of orphan drugs for diseases that affect fewer than 50,000 patients in Japan, and for which significant
unmet medical need exists. An investigational drug can qualify for ODD if there is no approved alternative treatment option or if
there is an expectation of high efficacy or safety compared to existing treatment options. Drugs receiving ODD qualify for several
benefits intended to support development, such as guidance and subsidies for research and development activities from the MHLW,
preferential tax treatment, priority consultation for clinical development, and priority review of applications.
47
Research and Development
Combined Management Report Fundamental Information about the Group
In early October, the first patient was enrolled in the bintrafusp alfa INTR@PID BTC 055 study (NCT04066491), a Phase II/III,
multicenter, randomized, placebo-controlled study of gemcitabine plus cisplatin with or without bintrafusp alfa in patients with 1L
biliary tract cancer (BTC). Bintrafusp alfa is our investigational bifunctional fusion protein immunotherapy and currently in clinical
development. BTC is a collective term for a group of rare and aggressive gastrointestinal cancers with limited treatment options and
poor patient outcomes.
At the 2019 European Society for Medical Oncology (ESMO) Congress, September 27 - October 1, in Barcelona, Spain, we
presented new data representing several key therapeutic agents from our diverse oncology pipeline, including avelumab data in
advanced RCC, cetuximab data in RAS wt mCRC, and our investigational oral MET inhibitor tepotinib in advanced solid tumors. In
addition, a number of investigator-sponsored studies (ISS) and collaborative research studies (CRS) exploring our pipeline were
also presented.
Also in September, the National Medical Products Administration (NMPA) of China approved Erbitux® for the first-line treatment for
patients with RAS wild-type (wt) metastatic colorectal cancer (mCRC) in combination with Folfox or Folfiri, or in combination with
irinotecan in patients who are refractory to irinotecan-based chemotherapy. The pivotal Phase III evidence from the TAILOR study,
on which the approval was based, shows significant benefit in overall response rate, PFS and OS for patients treated with cetuximab
in combination with Folfox, compared to Folfox alone, in the first-line setting for this challenging type of cancer.
In September, we announced that the FDA granted Breakthrough Therapy Designation (BTD) for tepotinib in patients with
metastatic NSCLC harboring MET exon 14 skipping alterations who progressed following platinum-based cancer therapy. This BTD is
based on data from the ongoing VISION study (NCT02864992) showing preliminary clinical evidence that tepotinib may offer an
improvement over available therapy in patients with metastatic NSCLC harboring MET exon 14 skipping alterations detected by
liquid biopsy or tissue biopsy across different lines of treatment.
In September, we shared important milestones for two combination studies of tepotinib in locally advanced or metastatic NSCLC
with epidermal growth factor receptor (EGFR) mutation and select MET dysregulations. These include PFS and OS data from the
Phase Ib/II INSIGHT study of tepotinib plus the EGFR inhibitor gefitinib, along with an update stating that the Phase II INSIGHT 2
study of tepotinib plus the tyrosine kinase inhibitor (TKI) osimertinib is now open for enrollment. Tepotinib, discovered in-house at
Merck, is an investigational oral MET inhibitor that underscores our strategic focus on delivering innovative precision medicines to
patients with cancer.
In October, we and Pfizer shared three-year results from Part A of the pivotal Phase II JAVELIN Merkel 200 trial regarding long-
term OS and durable responses in patients with previously treated metastatic MCC (mMCC) who received avelumab. In this
exploratory analysis, the OS rate at three years was 32%; the median duration of response (DOR) was 40.5 months; and the
objective response rate (ORR) was 33.0%, which was unchanged from the one-year analysis. These data were presented at the
First International Symposium on Merkel Cell Carcinoma in Tampa, Florida, United States on October 21-22.
• Abstracts also showcased the scientific innovation and diversity of our pipeline, with results from a number of high-priority
clinical development programs, including tepotinib, bintrafusp alfa and our comprehensive DNA Damage Response (DDR)
portfolio.
Combined Management Report Fundamental Information about the Group
Healthcare*
Therapeutic area
Neurology
Phase II
2
Non-small cell lung cancer
Urothelial cancer
Phase II
Solid tumors
2
Phase II
2
Phase II
Locally advanced head and neck cancer
Colorectal cancer, 1st line
Merkel cell cancer, 15
1st line
Phase III
Phase III
Registration
Non-small cell lung cancer, 1st line
Urothelial cancer, 1st line maintenance
5
Renal cell cancer, 1st line
Phase III
Phase II
Non-small cell lung cancer, 1st line
Phase II
Footnotes on next page
Bintrafusp alfa (TGFbeta trap / anti-PD-L1)
M9241 (NHS-IL12, cancer immunotherapy)
Bintrafusp alfa (TGFbeta trap / anti-PD-L1)
Bintrafusp alfa (TGFbeta trap / anti-PD-L1)
Bintrafusp alfa (TGFbeta trap / anti-PD-L1)
Bintrafusp alfa (TGFbeta trap / anti-PD-L1)
Bintrafusp alfa (TGFbeta trap / anti-PD-L1)
Avelumab (anti-PD-L1 mAb)
Avelumab (anti-PD-L1 mAb)
Phase I
1
Solid tumors
Phase I
Phase I
Phase II
Biliary tract cancer, 2nd line
Phase II
Biliary tract cancer, 1st line
Phase II
Locally advanced non-small cell lung cancer
Phase II
Non-small cell lung cancer, 1st and 2nd line
Phase I
Compound
Phase I
Phase I
Abituzumab (pan-av integrin inhibiting mAb)
Avelumab (anti-PD-L1 mAb)
Avelumab (anti-PD-L1 mAb)
Avelumab (anti-PD-L1 mAb)
Avelumab (anti-PD-L1 mAb)
Immuno-Oncology
M8891 (MetAP2 inhibitor)
Avelumab (anti-PD-L1 mAb)
M6620 (ATR inhibitor)
Peposertib (M3814) (DNA-PK inhibitor)
M3258 (LMP7 inhibitor)
Peposertib (M3814) (DNA-PK inhibitor)
Tepotinib (MET kinase inhibitor)
Tepotinib (MET kinase inhibitor)
Oncology
Evobrutinib (BTK inhibitor)
M4344 (ATR inhibitor)
Avelumab (anti-PD-L1 mAb)
Avelumab (anti-PD-L1 mAb)
Indication
Phase I
Phase II
Phase II
Registration
Phase III
Status
Solid tumors
Solid tumors
Solid tumors
1
Solid tumors
Multiple myeloma
Rectal cancer
Non-small cell lung cancer
Non-small cell lung cancer, METex14 skipping
4
Multiple sclerosis
Phase I
The ratio of research spending to sales was 14.0% (2018: 15.0%). The decline is attributable to positive sales development.
General Medicine & Endocrinology
2
782
681
689
6666
665
384
373
3536
359
404
20194
297
0
14
13
3136
13
306
12
1
In line with the Greenhouse Gas Protocol, for all previous years (up to the 2006 baseline) the greenhouse gas emissions have been calculated based
on the corporate structure as of December 31 of the reporting year and retroactively adjusted for acquisitions or divestments of (parts of) companies, or
for changes in emission factors (portfolio-adjusted).
2 Baseline for our emission targets is 2006.
3 Since 2018, our reported figures have excluded the Consumer Health business, which was divested on December 1, 2018.
316
20183
2017
2016
TOTAL GREENHOUSE GAS EMISSIONS (SCOPE 1 AND 2 OF THE GHG PROTOCOL) 1
42
Combined Management Report Fundamental Information about the Group Corporate Responsibility
Energy management plays a key role in our efforts toward energy efficiency and climate impact mitigation. Our production sites in
Darmstadt and Gernsheim account for 28% of our global energy consumption. Both sites meet the international energy
management standard ISO 50001. Currently, 13 of our production sites have a certified energy management system.
We have consolidated all our climate impact mitigation and energy efficiency activities in the Edison program. Overall, thanks to the
Edison programm, we have saved approximately 89,000 megawatt hours of energy since 2012. Most of this is power. By deciding to
purchase increasing quantities of energy from renewable sources, in 2019 we took a further big step toward reaching our climate
protection target.
5 Light and heavy fuel oil, liquefied petroleum gas (LPG), diesel and gasoline.
4 Figure retroactively adjusted.
3 Since 2019, our reported figures have included Intermolecular (acquired on September 20, 2019). Data on Versum Materials (acquired on October 8, 2019)
are not yet available. We are presently reviewing the current process for collecting greenhouse gas and energy consumption-related indicators and are
working to harmonize methodologies and timelines. Starting in 2020, we will be incorporating the environmental figures for Versum Materials into our
reporting.
2 Since 2018, our reported figures have excluded the Consumer Health business, which was divested on December 1, 2018.
1 In line with the Greenhouse Gas Protocol, for all previous years (up to the 2006 baseline) the energy consumption has been calculated based on the
corporate structure as of December 31 of the reporting year and retroactively adjusted for acquisitions or divestments of (parts of) companies, or for
changes in emission factors (portfolio-adjusted).
0.0
0.0
0.0
0.0
Steam, heat, cold
0.1
In metric kilotons
Total CO2 eq5 emissions
Thereof:
Direct CO2 eq emissions
Indirect CO2 eq emissions
Biogenic CO2 emissions
20062
4 Since 2019, our reported figures have included Intermolecular (acquired on September 20, 2019). Data on Versum Materials (acquired on October 8,2019)
are not yet available. We are presently reviewing the current process for collecting greenhouse gas and energy consumption-related indicators and are
working to harmonize methodologies and timelines. Starting in 2020, we will be incorporating the environmental figures for Versum Materials into our
reporting.
5
378
6 Figure retroactively adjusted.
€ million
%
1,666
1,687
-21
-1.3%
276
eq = equivalent.
251
25
10.1%
2018
267
25
10.5%
59
47
12
24.7%
2,268
2,227
41
1.8%
1 Previous year's figures have been adjusted, see Note (45) "Effects from new accounting standards and other presentation changes" in the Notes to
the Consolidated Financial Statements.
242
2019
R&D spending that cannot be allocated to individual business sectors.
Total
Research and Development
44
Research and Development
Combined Management Report Fundamental Information about the Group
We carried out more than 300 charitable projects in 60 countries worldwide in 2019. In more than half of all initiatives, our
colleagues joined us in our efforts, whether through donations in cash or in kind or through their active collaboration in projects.
Change
Science is at the heart of everything we do. We conduct research and development (R&D) worldwide in order to develop new
products and services designed to improve the quality of life of patients and satisfy the needs of our customers. Further optimizing
the relevance and efficiency of our research and development activities - either on our own or in cooperation with third parties - is
one of our top priorities.
43
Combined Management Report
Our subsidiaries are engaged in a wide variety of local projects. We have defined a general set of criteria for selecting projects, and
the decisions concerning the implementation of specific projects are made by our subsidiaries. In 2019, we spent a total of
Our social responsibility activities are primarily focused on those areas in which we have particular expertise stemming from our
core businesses. We are thus engaged in health and culture projects and furthermore support education, especially in the natural
sciences. Additionally, we provide disaster relief and support people in need in the areas in which we operate.
We see ourselves as part of society - both at our individual sites and worldwide. Taking responsibility in society is an integral part of
our entrepreneurial approach. We believe we can make an important contribution to the community through our knowledge, our
skills, and our products.
Responsibility to society
Our acquisition of Versum Materials is expected to increase our reported greenhouse gas emissions in 2020 by around 1.3 million
metric kilotons. This estimate is based on the figures reported by Versum Materials for 2017 and 2018. Most of these emissions are
generated in manufacturing processes. In the course of the integration, we are investigating the specific causes of these high
emissions and analyzing where they could be reduced. Since Versum Materials does not have any data going back to the 2006
baseline for our climate impact mitigation goal, we cannot include these additional emissions in our current goal. In 2019, we began
to develop a new climate impact mitigation goal for the period through 2030. We will include Versum Materials' emissions in this.
Alongside energy efficiency and climate protection, we also focus on water. Since 2016, we have been pursuing the goal of
implementing a sustainable water management system at sites with high consumption levels by 2020. At sites with relevant water
use located in areas of high water stress, we are aiming to cut our water consumption by 10% by 2020 (2014 baseline). At the end
of 2019, we had lowered our water consumption at the relevant sites by 21% in comparison with 2014. In 2019, the CDP gave our
activities to conserve water a "B" rating (2018: B-). However, it is not just water that is becoming scarcer; other resources are too.
This makes it imperative for us to use raw materials as efficiently as possible and reduce the waste generated from these. In 2016,
we developed the Merck Waste Score, which allows us to compare the amount of waste our sites are producing and monitor the
development of the amount of waste we produce. Based on this score, we have set ourselves the goal of reducing the environmental
impact of our waste by 5% by 2025 (2016 baseline). For this purpose, we continuously analyze the improvement potential of our
production processes and disposal routes.
Fundamental Information about the Group Corporate Responsibility
In 2019, approximately 7,800 employees worked for Merck researching innovations to serve long-term health and technology
trends in both established and growth markets (2018: approximately 7,200).
around € 46 million on community engagement activities. This figure also includes the activities of Versum Materials and
Intermolecular since October 2019. It does not include contributions from the Merck Foundation.
Corporate and Other²
Performance Materials
Life Science
Healthcare
€ million
RESEARCH AND DEVELOPMENT COSTS¹
Expenditure on research and development (R&D) incurred by Merck amounted to € 2.3 billion in the year under review
(2018: € 2.2 billion). In our R&D activities, we focus on both in-house research and external collaborations that enable us to
increase the productivity of our research while simultaneously reducing financial outlay. The organizational setup of our R&D
activities reflects the structure of Merck with three business sectors. In Healthcare, we aspire with our research pipeline to make a
positive difference for patients - always with the purpose to help create, improve, and prolong life. Our main research areas include
oncology, immuno-oncology, and immunology including multiple sclerosis. In the Life Science business sector, our research
activities focus in particular on technologies for laboratory and life science applications as well as the promotion of new
developments. Improved test kits, chromatography methods, substrates for separating active substances, and innovations continue
to be in focus in the fields of microbiology and hygiene monitoring. Research activities in the Performance Materials business sector
include the development of new and improved basic materials and mixtures for LC displays, for innovative OLED applications, and
for materials for the production of integrated circuits. To strengthen the Pigments business, new effect pigments for the
automotive, cosmetics, and printing ink sectors are being developed.
Completing the Smart Effects initiative in our Cosmetics business, we are further driving the development of cosmetic pigments on
matte effects (Allure series) and luster effects (Lights series). The newest additions will be the blue interference effect pigments
RonastarⓇ Blue Lights and Ronastar® Dazzling Lights, a new gold pigment with a spectacular body color. In addition, we further
drove the development of active ingredients of natural origin for new cosmetics solutions. We are currently in the process of
preparing for the product launches in 2020.
Middle East & Africa
1,366
6%
Latin America
2%
3,433
North America
12,829
47%
Europe
26,715
22%
Asia Pacific
12,728
1 With the completion of the acquisition of Versum Materials on October 7, 2019, around 2,300 employees joined Merck.
2 Merck also has employees at sites that are not fully consolidated subsidiaries. These figures refer to all people directly employed by Merck and therefore may deviate
from figures in the financial section of this report.
Building empowered leaders
Good leaders are key to the success of not only our employees, but also our company. Because they provide our talent with the
right framework to unleash their potential and generate new ideas, we highly value the continuing education and development of
our managers.
* The contents of this chapter or section are voluntary and therefore not audited. However, our auditor has read the text critically.
Combined Management Report Fundamental Information about the Group
22%
by Region
our success.
As of December 31, 2019, we had 57,071 employees worldwide 1 (2018: 51,749). In 2019, we were represented by a total of 222
legal entities with employees in 66 countries².
Surface Solutions
Combined Management Report Fundamental Information about the Group
People at Merck
56
"Bring Your Curiosity to Life" - our promise as an employer describes how we collaborate at Merck, how we advance our business,
how our employees can develop within the company, and who we are. Becoming a global science and technology company would
not have been possible without the passion, creativity, and curiosity of our employees. And we are certain that our current and
future employees ensure our economic success. They create innovations for patients and customers, and they secure our ability to
compete. For this reason, the development of all our employees is very important to us. In short, we are working to create an
environment where people are able to develop and reach their full potential.
-
A career with Merck is enriching both professionally and personally. We offer conditions that meet the individual needs of our
employees and encompass an exciting range of tasks and advanced training possibilities, furthering flexible forms of cooperation
and a culture of mutual esteem and respect. The latter is particularly important, as our workforce represents a broad range of
nationalities, cultures, religions, and age groups, as well as a variety of personal and professional backgrounds. We are convinced
that this diversity, paired with a corporate culture based on mutual respect, strengthens our innovative potential and contributes to
Merck's VA (vertical alignment) liquid crystal platform including PS-VA (polymer-stabilized vertical alignment) technology remains
predominant when it comes to large-format TV sets. Here, our latest materials provide additional performance benefits and improve
processing efficiency in the production of TV sets. Moreover, we have successfully demonstrated our manufacturing expertise with
respect to the new liquid crystal technology SA-VA (self-aligned vertical alignment). We are now focusing our attention on
applications for specialized display products from the premium segment through to TV applications produced in large numbers, as
this technology offers the high contrast and image quality of the PS-VA technology while also enabling improvements in display
design and panel production, for example through the reduction of waste and energy consumption in the production of LCDs.
OLED technology continues to gain shares in the display market, particularly in the premium segment. Our R&D activities are
covering a broad variety of OLED materials, targeting a wide range of applications from smartphones to TVs. We continue to be
successfully qualified in a number of upcoming devices from leading consumer electronics players. In addition, we are supporting
our customers in their ambition to establish inkjet printing as a new OLED display manufacturing process.
DISTRIBUTION OF EMPLOYEES
Combined Management Report Fundamental Information about the Group
Display Solutions
In 2019, we also introduced CHEMGUARD® CG350, which heats process molecules in a safe, process-stable manner and provides
the reliable uptime needed for high-volume manufacturing.
To better support our customers in Asia, we opened a new manufacturing facility in Shanghai, China, to produce our latest specialty
gas delivery equipment product line, GasSTAR®. Both the GasSTAR cabinet and BSGS enable semiconductor manufacturers in Asia
to meet the rising demand for 200 and 300-mm memory and logic devices, flat panel displays, photovoltaics, LEDs, and other
applications.
55
Research and Development
People at Merck
In our automotive pigments business, our focus on developing achromatic pigments continues. The latest example is Xirallic NXT
Amur Black, a blue-black effect pigment with a silky-silvery fine texture and a wealth of Living Sparkle®. Another key topic in our
development is fueled by the evolution of autonomous driving. In our pipeline, we address the special requirements that radar and
lidar sensor applications demand of coating pigments.
Overview of our headcount figures
In our Display Solutions business unit, our liquid crystal technology UB-FFS (ultra-brightness fringe-field switching) continues its
successful growth, thanks to new product qualifications and rising demand in the liquid crystal displays (LCD) sector for mobile
devices, especially mobile phones and tablet PCs. The development of high-resolution 4K and 8K TV sets continues to pose a
challenge, as the LCD backlight transmission and efficiency will be reduced due to higher pixel density. We are therefore actively
working to expand our ultra-bright (UB) technology offering with our UBplus liquid crystal materials for the TV market. With such
technologies, we increase the light transmission efficiency of applications for large-format TV sets and display panels by 10% to
15%.
People at Merck✶
Combined Management Report Fundamental Information about the Group
Strategic competency development
Leveraging the opportunities of digitalization
The digital transformation has been leaving its mark on the world of work for a long time now. New, agile ways of working and
artificial intelligence (AI) are thus increasingly gaining ground, a shift we are actively supporting at Merck. For example, since 2017
we have been developing an intelligent humanoid robot in collaboration with Darmstadt Technical University. We aim to find out
how people respond to intelligent robots and AI in the workplace and in which areas they could be used. Another goal is to prepare
our executives and staff for the introduction of AI in the working environment. Furthermore, the study is intended to make new
technologies hands-on so as to create acceptance of them early on.
Using such big data applications developed by our People Analytics HR unit, leaders obtain rapid, specific answers to HR-related
questions. Besides consolidating conventional master data, this software also collects information on compensation, performance,
and potential, along with information on engagement and succession planning, interconnecting this data in meaningful ways and
allowing trends to be identified at an early stage. Managers thus have access to an extensive trove of data that they may utilize as
long as they comply with data privacy regulations.
Digitalization is also impacting our vocational training and continuing education programs, where IT skills are becoming increasingly
crucial. At the same time, digital media is creating new ways of learning, which is why we are increasingly integrating 3D printing,
big data, and artificial intelligence into our curricula. Moreover, we are testing out novel learning and innovation methods such as
Scrum and Design Thinking. To learn how to operate plants and machinery, our apprentices also utilize virtual reality environments,
initially learning how to operate the machinery through the virtual image before developing the corresponding expertise in real
environments.
Furthering and asking more of talent
We believe that curiosity can make great things happen. We therefore seek to provide an environment that gives our employees
plenty of scope for creativity and awakens their desire to innovate. In particular, training and career development plays a key role
in attracting and retaining people. Focusing on their individual strengths, aspirations, and skills, we support their personal and
professional development, thereby laying the groundwork for an enriching and challenging career with our company. We endeavor
to discover qualified employees at an early stage in their career and develop their talents.
A holistic recruitment approach
When filling job vacancies, we pursue a holistic recruitment approach coupled with globally uniform and binding procedures. This
starts with an internal job posting before external channels such as job portals and recruitment agencies are used. This process
enables us to offer employees better development opportunities. For employees with leadership responsibility, we offer targeted
interview coaching to support them in selecting candidates and to establish uniform quality standards.
Combined Management Report
A globally accessible welcome portal is available to new employees in order to help them prepare for their new job at Merck and to
support their onboarding phase. To further improve the onboarding process, supervisors, Human Resources, and new employees
can exchange information and documents before their first day of work. In addition, all new employees are assigned an experienced
colleague who can help them familiarize themselves with the daily work routine. Our managers are also given detailed information
such as onboarding plans and process descriptions to support them with this task.
In 2019, we again maintained a constant, high vocational training rate in Darmstadt, our largest site. A total of 552 young people
were enrolled in vocational training in 25 different occupations at our headquarters in the reporting period. We give unlimited
employment contracts to all employees in vocational training who work in occupations for which we have sustainable demand. On
average, the post-vocational training hiring rate - taking voluntary terminations into account - was more than 90% over the past
five years. We also offer vocational training at other sites in Germany, in which a total of 589 young employees participated. We
promote the professional and social expertise of our employees in vocational training through numerous regional and global project
activities.
* The contents of this chapter or section are voluntary and therefore not audited. However, our auditor has read the text critically.
People at Merck
59
In Darmstadt, through our "Start in die Ausbildung" (Starting Vocational Training) program, we help prepare young people who
have a school-leaving qualification but have been searching for a vocational training position for at least one year without success.
At our company, they complete an 11-month program, gain insights into working life, and become ready for vocational training.
The number of interns remained stable year-on-year, with 20 participants aged between 16 and 25 years.
Since 2016, we have also been working on a specially developed program to help refugees enter the job market. As part of the
Integrating Refugees through Training” program, a further group of ten young people who were forced to flee their home countries
started language, technical, cultural, and career-related training in 2019 to prepare them for vocational training and thus for the
labor market.
Targeted advanced training and maximizing performance capability
Our focus on systematic personnel development allows us to sustainably strengthen the performance potential within our company
and to increase the motivation of our people. Only by expanding the abilities of each individual can we count on innovative and
curious employees and managers in the future and flexibly respond to different requirements.
Vocational training to recruit young people
57
Fundamental Information about the Group
51
A transparent competency model is the pillar of our personnel development efforts. Managers and employees should show strategic
competence by being purposeful, future-oriented, innovative, results-driven, collaborative, and empowering. By demonstrating
these qualities, our managers can build a strong culture of collaboration based on curiosity, creativity, and trust. In addition, our
leaders are expected to set an example by living the Merck values and taking responsibility for their own decisions. Based on this
competency model, we have defined six leadership behaviors that summarize the conduct we expect from our leaders. To assess
the performance and potential of every individual and to establish an effective leadership culture, regular and differentiated
feedback is also of great importance. In this way, employees and supervisors can develop a shared vision, execute the business
strategy and further develop a unifying corporate culture.
Management programs for executives
In recent years, we have initiated three programs to enhance the skills of our people managers. The Managerial Foundation
Program imparts the basics of leadership, such as communication techniques, leadership styles, conflict management, motivation,
and emotional intelligence. The Advanced Management Program covers topics such as change management, self-reflection, and
resilience. The third initiative is our Global Leadership program, which focuses on competencies needed to ensure successful
international collaboration.
For the past 20 years, we have been partnering with top international universities to offer the Merck University program. Over a
period of around a year, senior executives take classes on management techniques and strategic business development. To date, a
total of 480 executives have completed this program.
Another initiative we have been offering our up-and-coming leaders since the 1990s is our International Management Program,
where participants work on an interdisciplinary project over a period of eight months. The results are then presented to the
Executive Board. In 2019, 25 of our employees took part in this program.
In addition to these various programs, we partner with universities across the globe to enable our employees to obtain
qualifications such as an Executive MBA.
In growth markets, we offer management programs specifically for local people managers, which focus on business management
and Merck-specific topics. We have implemented Growth Markets Management Programs in China and the Middle East, for instance.
Diversity and management
Research and Development
In order to manage our global and diverse organization, we need managers who can build international teams and promote
international collaboration so as to contribute to a productive and flexible working environment. We seek managers whose inclusive
leadership style also reflects different employee and customer traits. This opens up career opportunities for talented employees
from all areas of our company and ensures a broad experience base as well as differentiated decision-making.
At the end of 2019, women occupied 33% of leadership roles Group-wide, which means that once again we exceeded our goal of
maintaining the proportion of women leaders at a stable level of 30% by 2021. At the same time, we developed goals and
measures to ensure a balance of men and women when filling vacancies at the different levels of our businesses. We already have a
stronger female presence in leadership programs. In addition, we have introduced processes to reduce unconscious bias, thus
supporting female candidates when vacancies are being filled. Our flexible working models and unconscious bias training are also
helping to increase the percentage of women in the Group.
The report on stipulations to promote the proportion of women in leadership positions at Merck KGaA, pursuant to section 76 (4)
and section 111 (5) of the German Stock Corporation Act (AktG), can be found in the Corporate Governance section of this report.
Combined Management Report
Fundamental Information about the Group
People at Merck
58
As of: December 31, 2019
BIOPHARMA PIPELINE
At Merck, many teams work across sites and internationally. The diversity of competencies and experiences among the team
members offers tremendous potential that our leaders can use. Internationality and a global mindset characterize our company
culture and are therefore mirrored by our international management team. In 2019, 64% of our executives were not German
citizens. Altogether, 73 different nationalities are represented in such positions.
We were successful this year in broadening our portfolio of high-value products for both advanced memory and logic applications.
Our pathfinding teams are developing next-generation precursors and processes for flowable CVD (chemical vapor deposition) gap
fill applications, high aspect ratio etching, and area selective deposition. In the patterning space, our R&D is expanding the DSA
(directed self-assembly) pipeline with several customized solutions for additional applications. We continue to see a strong pull for
our high-performance dielectric (HPD) series advanced colloidal ceria slurries for oxide/shallow trench isolation (STI) applications as
a result of their demonstrated industry-leading low defectivity, extremely high uniformity, broad operating window, and polishing
efficiency. Our conductive paste materials adopted a solutions-focused approach to create high-value products for our customers
that go beyond just materials. The unique attributes of our conductive pastes plus novel packaging fabrication techniques,
developed by our engineering team, enable packaging architectures needed for the enormous 5G infrastructure deployment.
With respect to our Delivery Systems & Services (DS&S) business, we completed the manufacture and installation of ISO Bulk
Specialty Gas Systems (ISO-BSGS) at two new fabs for a customer in Xi'an, China, and another project near Pyeongtaek, Korea.
ISO-BSGS systems provide the safe and efficient factory-level distribution of bulk container specialty gases, such as NF 3, N2O,
NH3, and SiH4, and are key enablers of our Specialty Gases business.
As such, we launched more than 18,500 products, including those launched through our "faucet program" for antibodies, reference
materials, chemicals and nanomaterials. These included innovations from all our business units, such as ZooMAbⓇ recombinant
antibodies, Sucrose Ultrafiltrated, a MillipakⓇ Final Fill extension and a Stericup® extension of our Milli-Q® 7000 line.
With the additions of Versum Materials and Intermolecular, we are now more capable than ever of addressing all our customers'
critical material needs through every step of the wafer manufacturing process. The outstanding capabilities and competencies of the
businesses are manifold and will enable us to bring game-changing innovations for our customers into the market faster.
M6495 (anti-ADAMTS-5 nanobody)
Phase I
Immunology
M5049 (TLR7/8 antagonist)
Phase II
Psoriasis
3
M1095 (ALX-0761, anti-IL-17 A/F nanobody)
Phase II
Osteoarthritis
Osteoarthritis
Sprifermin (fibroblast growth factor 18)
Systemic lupus erythematosus
Evobrutinib (BTK inhibitor)
Phase II
Rheumatoid arthritis
Evobrutinib (BTK inhibitor)
Phase II
IgA nephropathy
Atacicept (anti-BLYS / anti-APRIL fusion protein)
Phase II
Systemic lupus erythematosus
Phase II
Atacicept (anti-BLYS/ anti-APRIL fusion protein)
Phase I
M5717 (PeEF2 inhibitor)
Employee development at Merck is founded on regular exchanges and a culture in which employees aspire to high levels of
performance and engagement. As the basis for internal strategic talent management, the performance and potential management
process is globally aligned for all employees in accordance with the same principles and is part of a shared IT system. We
systematically combine talent recognition with performance assessments based on employee target agreements, as we are
convinced that ongoing feedback helps all employees to grow in terms of their performance and potential. Regular individual
assessments permit us to more readily identify high-potential employees and to further them accordingly. Clear objectives,
differentiated and open feedback, and individual development plans are thus important prerequisites for both the personal
development of every individual and the success of the company.
PD-L1: Programmed cell death ligand 1
MET: MET proto-oncogene, receptor tyrosine kinase
METex14: MET exon 14
MetAP2: Methionine aminopeptidase 2
mAb: Monoclonal antibody
IL: Interleukin
IgA: Immunoglobulin A
BTK: Bruton's tyrosine kinase
BLYS: B-lymphocyte stimulator
Global Health
ATR: Ataxia telangiectasia and Rad3-related kinase
ADAMTS-5: A disintegrin and metalloproteinase with thrombospondin motifs
On December 20, 2019, avelumab in combination with axitinib was approved in Japan for treatment of patients with curatively unresectable or
metastatic renal cell carcinoma.
5
4 In Q4 2019, tepotinib was filed in Japan for the treatment of patients with non-small cell lung cancer harboring METex14 skipping.
3 As announced on March 30, 2017 in an agreement with Avillion, anti-IL-17 A/F nanobody will be developed by Avillion for plaque psoriasis and
commercialized by Merck.
2 Avelumab combination studies with talazoparib, axitinib, ALK inhibitors, cetuximab or chemotherapy.
1 Includes studies in combination with avelumab.
More information on the ongoing clinical trials can be found at www.clinicaltrials.gov. Pipeline products are under clinical investigation and have not
been proven to be safe and effective. There is no guarantee any product will be approved in the sought-after indication.
Phase I
Malaria
APRIL: A proliferation-inducing ligand
Despite the market experiencing a flat year in the semiconductor space, our R&D teams were busier than ever, taking advantage of
the increased bandwidth our customers had for their own product development activities - which is often the case during periods of
reduced manufacturing demand. In the logic/foundry space we continue to focus on 3D transistor technology and to interconnect
improvements to drive performance, size, and power efficiency. In the memory segment, there is a drive to increase the number of
levels in vertical and 3D NAND architectures to enable even higher memory capacities, and in DRAM (dynamic random-access
memory), continuing node shrinkage drives density, speed and reliability. This translates into adoption of more new materials and
higher volume requirements for our products in the future. Enhanced technological competence in combination with a strengthened
supply chain resulting from the acquisition of Versum Materials and Intermolecular will contribute to this growth.
Immunology
PK: Protein kinase
Collaboration Center in Molsheim, France, tapping into our internal manufacturing expertise and process knowledge in viral vaccines
and vectors.
Expanding our portfolio and accessibility to benefit customers
Throughout 2019, we launched innovations across all segments of our portfolio from the Research Solutions, Process Solutions, and
Applied Solutions business units. Those included Trehalose Emprove® Expert, a broadly used stabilizer in lyophilization (freeze
drying) of biomolecules; recombinant Cas9 and eCas9 GFP fusion proteins, offering all the advantages of ribonucleoprotein-based
(RNP) genome editing; and a new formulation of modified Tryptic Soy Broth (mTSB), an enrichment broth for the detection of
Salmonella, E. coli O157 and non-0157 STEC from food and animal feed.
In March, we launched our new, cloud-based lab water service and monitoring capability: Milli-Q® Connect. The product combines
deep water purification expertise with cloud-based digital technology to allow users to monitor lab performance remotely and
securely. Available on all Milli-Q® CLX 7000 clinical water purification systems, the portfolio addition delivers the value of
convenience to our customers via remote diagnostics and assistance features. In September, we again advanced the Milli-QⓇ
product portfolio with the launch of Milli-Q® IQ Element. This portfolio addition is a water purification and dispensing unit that
provides our customers with ultrapure water tailored for trace elemental analysis.
Additional novel digital offerings launched in 2019 include our Supelco® SmartTitrants and Supelco® SmartStandards. These tools
leverage SmartChemicals Radio Frequency Identification (RFID) tags on our titration consumables, allowing seamless transfer of
relevant product data to titration instruments. The technology saves time, reduces transcription errors and ensures maximum data
integrity for our customers.
In April 2019, we launched our BioContinuum™ Buffer Delivery Platform, a first-of-its kind integrated solution for streamlined buffer
management. Used for continuous processing and in batch mode, this configurable platform is comprised of four components: a
selection of distinct buffer concentrates, reliably delivered in Mobius® Select single-use assemblies, and an automated, highly
accurate, and precise buffer dilution system with tailored system services.
We also launched Cyrene™, a sustainable dipolar aprotic solvent produced in two steps from a renewable cellulose source. The bio-
derived alternative reflects our focus on green chemistry and the need for solvents to meet stricter regulation requirements for both
employee safety and environmental sustainability.
Over the course of 2019, we expanded our portfolio with acquisitions in addition to our own product launches, adding to our
breadth of tools and technology. With the acquisition of BSSN Software of Darmstadt, Germany, which we announced in August, we
added marketing data management and integrated software that unifies data from instruments and data systems to make it
available for analyzing, processing, and sharing. The middleware offering collects and converts scientific data from a broad range of
more than 200 lab instrument models into a single, unified format.
In October, we acquired FloDesign Sonics of Wilbraham, Massachusetts, United States, to leverage their acoustic cell processing
platform. The addition allows enhanced cell washing and concentration for manufacturing cell therapies.
We remain conscious of ensuring ease of access to our broad product portfolio. In addition to our industry-leading e-commerce
website, www.sigmaaldrich.com, we launched our official flagship store on Alibaba's 1688.com in China. We became the first life
science business to do so, improving the e-commerce experience for our customers in China. The launch also allows us to leverage
Alibaba's leading technology in big data, cloud services, and artificial intelligence, as well as its digitalized operations and offline
channel capabilities.
53
Recognized for award-winning innovation
In April, our Pellicon ® Capsule with UltracelⓇ Membrane, an innovation in next-generation bioprocessing, won an INTERPHEX
Exhibitor Award for Best New Product. This first-of-its-kind product acts as a single-use tangential flow filtration capsule used in
Combined Management Report Fundamental Information about the Group
Research and Development
54
antibody drug conjugate (ADC) and monoclonal antibody (mAb) bioprocessing. That same month and coinciding with the launch of
our new Supelco® products, Supelco® founders Dr. Walter Supina and Mr. Nicholas Pelick received the prestigious 2019 Pittcon
Heritage Award for their contributions to the instrumentation and laboratory supplies community.
In November of 2019, Life Science won an R&D 100 Award for our Eshmuno® CP-FT Chromatography Resin. This first-to-market
product used in biopharmaceutical manufacturing received the prestigious award to recognize its status as one of the 100 most
innovative and significant technologies introduced in 2019. This tool removes aggregates, delivering capacities 10 times higher than
traditional bind/elute chromatography. Part of our BioContinuum™ Polishing Platform, the significant reduction in resin and buffer
volume results in a smaller manufacturing footprint as well as lower costs.
Through our Advance Biotech Grant Program, we announced 12 total grant recipients for 2019, selected based on the scientific and
societal merit of their respective therapies in development, as well as process challenges and expertise gaps.
Performance Materials*
Within our Performance Materials business sector, we are the market and technology leader in most of our industries. As a science
and technology company, we offer leading-edge products and solutions that in many cases set us apart from the competition. In
order to bring our R&D closer to our businesses and reflect our new organizational structure after the acquisition of Intermolecular
and Versum Materials, we transferred our research activities of Early Research & Business Development to our business units. We
have also set up a Chief Technology Office (CTO) that bundles important technology competencies and technology scouting. As a
dedicated technology organization, the CTO focuses on interacting with top-level customers and the electronics industry, managing
research partnerships, shaping our technology roadmap and managing our long-term R&D portfolio.
Semiconductor Solutions
To begin the year, Life Science won BioInformatics LLC's 2018 Life Science Industry Award® for best use of social media.
Recognized for our strategic use of social media platforms, we were selected for our engagement with scientific customers and
industry peers as well as the satisfaction and loyalty of our customers. The award speaks to our dedication to our stakeholders and
their experience with our company.
PeEF2: Plasmodium eukaryotic elongation factor 2
Combined Management Report Fundamental Information about the Group Research and Development
In April, we announced a partnership with India's Food Safety and Standards Authority (FSSAI) on food safety skill development,
handing over a fully equipped microbiological testing lab. There, food safety scientists from government labs and FSSAI-ratified
private labs will be trained by the Center for Microbiological Analysis Training on the latest microbiological testing technology.
TGFbeta: Transforming growth factor beta
TLR7/8: Toll-like receptors 7 and 8
Allergopharma
Allergopharma is a leading manufacturer of diagnostics and prescription drugs for allergen immunotherapy. As scientists, we are
determined to fully understand allergies so as to be optimally positioned to discover new solutions and therapeutic concepts. In
close cooperation with research institutions and other experts around the world, we are constantly acquiring valuable insights into
the complex immunological mechanisms responsible for allergy development. Equipped with these insights, we pursue new
pathways to innovative treatments to meet the needs of allergy patients now and in the future.
Life Science*
Across our three business units of Research Solutions, Process Solutions and Applied Solutions, our R&D teams of more than 2,000
employees continue to bring a diversified and relevant portfolio of products and services to our customers around the world. In
2019, our Life Science business sector focused on delivering the promise of accelerating access to health for people everywhere
with investment in collaboration with the global scientific community.
* The contents of this chapter or section are voluntary and therefore not audited. However, our auditor has read the text critically.
Combined Management Report
Fundamental Information about the Group
Research and Development
In May, we joined the TRANSVAC2 Program to participate in the collaboration to accelerate vaccine development and manufacturing
under the European Union's (EU) Horizon 2020 program. As part of our participation, we provided training sessions at our M Lab™
52
In early 2019, we received our first United States patent for proxy-CRISPR technology. The patent addresses a new genome-editing
technique that makes CRISPR more efficient, flexible, and specific by opening the genome for modification of DNA. This technique
helps scientists modify difficult-to-access regions on the genome.
In April, we were formally granted a Canadian patent for the use of paired CRISPR nickases in eukaryotic cells. Covering paired
Cas9 nickase technology, the patent advances gene therapy and research as well as reducing off-target effects. It provides an
important and specific solution for scientists who need accurate methods when developing treatments for difficult-to-treat diseases,
improving the ability to fix diseased genes without affecting healthy ones. Similar patents were granted in Australia and Europe in
late 2018.
Life Science was granted seven additional patents for genome-editing technology in August, adding CRISPR patents in Europe,
Israel, South Korea and the United Kingdom. The European Patent Office allowed patents for vectors for CRISPR integration, proxy-
CRISPR technology, and engineered Ribonucleic Acid (RNA)-guided endonuclease and protein-RNA complexes. The Israeli and
South Korean IP Offices allowed patents for paired nickase technology, while the United Kingdom Office allowed patents for proxy-
CRISPR technology.
In November, we again were granted patents covering paired Cas9 nickase CRISPR genome-editing technology, this time from the
Japan Patent Office and the Intellectual Property Office of Singapore. This technology increases specificity, reducing off-target
effects in gene editing through a highly flexible and efficient approach. In total, we have achieved 22 CRISPR patents across nine
markets, including China and Europe.
Furthermore, we announced an agreement with the Massachusetts-based Broad Institute of MIT and Harvard to offer non-exclusive
licenses to CRISPR intellectual property (IP) under our respective control for use in research and commercial product development.
The offering streamlines access for scientists, contributing to our goal of allowing all entities to apply CRISPR technology with a
wider range of tools.
To complete an active year advancing and licensing the IP of our CRISPR technology, in November, we executed an agreement to
license our CRISPR IP to Evotec SE of Hamburg, Germany. The license accelerates research and enables testing and development of
new drugs.
In addition to patent allowances, we expanded our global network of genome-editing experts by announcing a CRISPR core
partnership with Zhejiang University in Hangzhou, China. The CRISPR Core Partnership Program provides researchers from leading
institutions with a network of commercial and research scientists stemming from its 80-some partners.
Increasing collaboration with partnerships and agreements
Along with our CRISPR partnerships and agreements, we signed a Memorandum of Understanding (MoU) with Chinese biotech
company GenScript in March of 2019. The planned alliance aims to accelerate cell and gene therapy industrialization in China by
collaborating to build a global standard platform for plasmid and virus manufacturing. Today, more than 130 companies in China
are developing cell and gene therapies. The confluence of demand, growth, and consequent need to scale the cell and gene therapy
market is an important driver for us to deliver in this region.
We signed a non-binding MoU with Phanes Therapeutics Inc. of Shanghai, China to collaborate on the development of biologics for
the treatment of solid tumors. This allows us to support Phanes in accelerating research and development as well as
commercializing new therapies as their demand increases for process development solutions. Under the terms of the MoU, we plan
on providing Phanes our BioReliance® End-to-End Solutions for cell line development, process development, and GMP
manufacturing up to commercialization.
Advancing CRISPR technology globally
Furthermore, we have continued the Merck Science Network project. Due to the broad positioning of our company, we do not have
a central research and development organization that unites expertise across our businesses. Through this project, we are
promoting the establishment of a science community within the company to accelerate the exchange of innovative ideas and
facilitate collaboration among all our R&D employees. One element of this project are the Continuous Performance Dialogues
between 1,300 employees and their supervisors to align performance and potential appraisals with research and development
needs. Other aspects focus on the advanced training of experts and their career paths and on the transfer of knowledge within the
network.
Our Chief Diversity Officer is responsible for overseeing our Group's diversity strategy. Consisting of executives from all our
business sectors and select Group functions, our Diversity Council specifically works on the further implementation of our diversity
strategy. This focuses on two areas. First, we aim to promote the advancement of women into leadership positions and give
talented people from the Asian region greater opportunities. Second, we aim to develop a better understanding of this growth
market. However, our other goals remain unchanged: We aim to recruit people representing a breadth of qualifications, skills, and
experiences. In addition, we support specific employee networks in order to foster exchange among like-minded individuals. Apart
from our women's networks in various countries, we also support networks that promote the interests of the LGBTQI (lesbian, gay,
bisexual, trans, queer or questioning, intersex) community as well as African American and international employees. Our Carer
network brings together employees from all over the world who care for a relative.
A transparent and flexible employee reward system
Demographic change is posing challenges to society in Germany as well as several other EU countries, the United States, China,
and Japan. The average age of our employees is approximately 42. We assume that this figure will continue to rise in the coming
years and are preparing for this situation. As part of our range of Health and Well-Being offerings, we specifically promote our
employees' physical and psychological well-being throughout their entire career.
Women currently make up 43% of our workforce. However, the ratio of women to men varies widely across the different regions,
businesses, and functions. We are therefore working to raise the proportion of women wherever they are underrepresented, taking
into account the situation typical for the industry as well as regional differences.
As a global employer with intercultural expertise, people from a total of 139 nations work for Merck; 22% of our employees are
German citizens and 76% of our employees work outside Germany. At our headquarters in Darmstadt, 11% of staff are not German
citizens.
Different aspects of diversity
Furthermore, we create awareness of unconscious bias throughout the Group. We help executives to identify and reassess
unconscious thought patterns in their daily encounters as well as in decision-making processes and to bring about long-term
changes in their own behavior in this regard. We also use the Job Analyzer, an online tool that allows job advertisements to be
checked for critical wordings prior to their publication, thus fostering gender-neutral communication with those applying for jobs.
In Germany, we signed the Charta der Vielfalt (Diversity Charter) in 2013, the Charta der Gleichstellung (Equal Opportunity
Charter) in 2015, and the Inclusion Action Plan of the German Mining, Chemical, and Energy Industrial Union (IG BCE) in 2017. At
the international level, we support the Women Empowerment Principles, an initiative of UN Women and the UN Global Compact
aimed at empowering women in the workplace. In 2019, we also joined the Business Coalition for Equality Act, a group of leading
U.S. employers that support the Equality Act. By joining these initiatives, we underscore our commitment to fairness and tolerance
in the workplace.
Our diversity strategy
We are a global science and technology company. At Merck people work together closely - regardless of their gender and gender
identity, skin color, religion or creed, age, disability status, country of origin, ancestry, nationality, family situation or marital
status, military or veteran status, genetic information, and sexual orientation. All bring their specialist backgrounds, individual life
experiences, and outlook to the company. We firmly believe that a diverse workforce and a respectful corporate culture are
indispensable for our Group's ability to innovate and contribute significantly to our business success.
Global classroom training courses and workshops developed specifically for teams help our employees develop and build individual
abilities in line with new requirements and perspectives. In 2019, more than 11,200 employees participated. Digital solutions in the
form of more than 2,900 e-learning and language courses are available to our employees. To enable our employees and managers
to realize their full potential, we also provide local business and function-related offers. All measures are documented in a globally
standardized development plan. Individual development opportunities are also supported by our job architecture, which applies
globally and enables us to harmonize all positions and simplify their classification. This job architecture defines three fundamental
career types: managers, experts, and project managers. They are all equal. Employees who wish to advance in their careers and
aim for a top position within the company can also do so via the expert and project manager career paths.
Valuing diversity and dialogue
60
People at Merck
Combined Management Report Fundamental Information about the Group
• Service offers
• Health and well-being
Company benefits including a company pension
•
At Merck, we reward the performance of every individual through appropriate and competitive total compensation. For years, we
have been achieving this through global processes and programs that are supported by digital platforms. We also offer our
managers flexible, market and needs-oriented compensation tools. These support well-informed decisions and thus provide
comprehensible, performance and position-based compensation. Apart from monetary compensation components, we also offer our
employees attractive fringe and social benefits. Our fringe benefits feature globally under the internal benefits4me brand. Its
offerings comprise three pillars:
Specific benefit packages are in place at a national level to meet the different needs of our employees using well-established
management mechanisms. Focusing more closely on individualized fringe and social benefits in the future will continue to enable
our employees to individually choose those benefits that best meet their personal situation and stage of life.
In Germany
33.5%7
32.3%5
39.1%
38.9%
38.9%
29.7% 3,4
30.3%³
30.9% 5
63.6%5
global, total
6.0% 3,4
6.5%5
6.2%7
Percentage of executives who are
not German citizens
64.4%3
In Germany
global, total
64%7
Number of nationalities
31.6%7
43%
22.4%
43.1%
Percentage of employees aged 30-49 years
Percentage of employees aged 50+
Average age globally
global, total
217
207
222
131
136
139
44.0%
97
96
23.2%
24.1%
653
74.9%
73.9%
75.8%
10.2%
10.6%
11%
95
705
5,698
588
41.7
41.7
Asia-Pacific (APAC)
Europe
36.9
36.9
36.8
42.5
42.8
43
Latin America
40.3
40.4
40.3
Average age by region
Middle East and Africa (MEA)
39.4
39.2
38.6
North America
44.1
44.1
41.4
24.8%
24.4%
23.4%
604
589
4.4%
4.1%
4.3%
5,267
Percentage of employees aged 17-29 years
5,990
global, total
Men
737
4.6%
4.9%
10.7%
12.5%
16.9%
14.5%
14.5%
15%
62.1%
61.1%
60.2%
4.8%
Percentage of employees working part-
time
global, total
Vocational training rate
Merck (overall)
Dec. 31 2017
Merck (overall)
Dec. 31 20182
Merck (overall)
Dec. 31 20196
global, total
52,941
51,749
57,071
Asia-Pacific (APAC)
11,294
10,486
12,728
Europe
25,980
25,792
26,715
Number of employees
by
Latin America
4,050
3,340
3,433
OVERVIEW OF EMPLOYEE FIGURES¹
region
63
Combined Management Report Fundamental Information about the Group
Combined Management Report Fundamental Information about the Group
People at Merck
61
Understanding our employees
We want to create a working environment that empowers our employees to think outside of the box and find new solutions,
opening the door to creative ideas and the discovery of new market opportunities. In order to promote this and to allow us to carry
out even better comparisons both within the company and with our competitors, we conduct Group-wide employee engagement
surveys every year. In this way, we ensure a regular exchange between employees, leaders, and senior management. The honest
feedback we receive from staff shows us whether the measures and initiatives specified here are successful and highlights areas
where we can improve further.
In October and November 2019, the global employee engagement survey was again conducted in 22 languages and the status of
implementation reviewed. Around 47,000 employees (88%) took part. Our Group-wide score, which indicates how attached our
employees feel to the company, was 74%. The survey methodology was fundamentally changed in 2019, which means that this
year's result is not comparable with the results for previous years.
These surveys are supplemented by smaller snapshot surveys, where employees are asked about selected strategic issues or
projects. The results are used to identify strategic focus areas, and they feed into the company-wide work on an ongoing basis.
Differentiated solutions to support employee well-being
As an employer, we take responsibility for the well-being of our people and offer a wide range of opportunities to optimize work-life
balance and protect their health and safety.
Fostering work-life balance
We know that people's priorities in life can change and we take this into account, for example by offering flexible working
time/location models, working time accounts for early retirement, and the possibility of taking an extended break from work. We
also place great emphasis on family life. Here our commitment ranges from parental leave to childcare as well as support of
employees caring for a relative.
Our employees can choose between different flexible working models. For instance, at our German sites in Darmstadt and
Gernsheim as well as in Australia and many countries in Asia and Europe, we offer a model we developed ourselves. The
mywork@merck working model allows employees to freely choose their working hours and location in agreement with their teams
and supervisors. Employees agree with their direct supervisors on when and how often all team members are required to be in the
office. Time tracking and time control are no longer required. The model reinforces our company's performance culture and culture
of trust. Workplace permitting, the model can be taken up both by employees formally covered by collective agreements and
employees exempt from them. Over the coming years, mywork@merck will be rolled out across the company. The model is
currently being implemented in Brazil, China, Colombia, Ecuador, France, Guatemala, Italy, Korea, Mexico, Spain, Switzerland, the
United Kingdom, and the United States. At the end of 2019, a total of 5,990 employees in Germany made use of this model. In
2019, 5% of our employees worldwide worked part-time, 17% of whom are men.
By offering information, advice, and assistance in finding childcare and nursing care as well as home and garden services, we help
employees to reconcile the demands of their professional and personal lives. At various sites, employees benefit from childcare
options that we subsidize. For example, for over 50 years, our headquarters in Darmstadt has featured a daycare center that offers
150 slots in crèche, kindergarten, and after-school care. The Parents@Merck program makes it easier for our employees to return
to work following parental leave, giving mothers and fathers on parental leave the chance to talk and interact while also helping
them keep in touch with the company. Moreover, they can make use of our various training and networking opportunities. We have
established a similar program in the United States.
A constant focus on health and safety
The health and safety of our employees constitutes an important part of our daily responsibilities. We do everything to protect them
against accidents and work-related illnesses, principally in the areas of stress prevention, nutrition, and exercise. We focus on
preventive measures that can be easily incorporated into the daily work routine. They are designed to help our employees avoid
short-term and protracted health problems.
Combined Management Report Fundamental Information about the Group
People at Merck
62
At our Darmstadt and Gernsheim sites, our Health Management unit conducts an array of campaigns and programs to promote the
health of our workforce. Our employees have access to a health catalog detailing our Health Management services in both English
and German. Among other things, this contains information on ergonomics, nutrition, stress, and mental health issues.
Workplace safety and health protection are the highest priority at Merck. It is especially important to us to do everything we can to
prevent workplace-related illnesses and accidents. We apply the lost time injury rate (LTIR) as an indicator to determine the
success of measures aimed at accident prevention as well as occupational health and safety. This key performance indicator
describes the number of workplace accidents resulting in lost time of one day or more per one million working hours. After having
reached the goal of 2.5 that we had set in 2010, in 2015 we set ourselves a new, ambitious goal: By 2020 we intend to sustainably
lower the LTIR to 1.5. In 2019, our LTIR was 1.5.
Experience shows that most workplace accidents can be prevented by proper conduct. Through our BeSafe! safety culture initiative,
we are working to educate our employees on dangers in the workplace and provide them with rules of conduct that help keep them
safe. Uniform standards as well as local modules to meet specific safety requirements at individual sites can help achieve a steady
improvement in the current situation. The program focuses on engaging managers in the safety culture and building their buy-in,
aiming to make safety an intrinsic value and empower our employees to take responsibility for their own safety. In 2019, we
continued to sensitize our employees to workplace hazards through numerous awareness campaigns.
People at Merck
Middle East and Africa
(MEA)
1,097
(MEA)
1,096.1
1,151.1
1,365.2
North America
10,506.7
10,959.6
12,704.4
Number of countries
66
66
66
Number of legal entities
Number of nationalities
44.4
Number of nationalities working in Germany
Percentage of employees with German citizenship
Percentage of employees working outside Germany
Percentage of employees with global managers
Percentage of women in the workforce
Percentage of women in leadership
positions (= role 4 or higher)
Percentage of executives (= role 4 or
higher)
global, total
Number of employees in vocational training in Germany
Middle East and Africa
region
3,427.8
3,339.5
1,153
1,366
North America
10,520
10,978
12,829
global, total
52,223.5
51,039.8
56,204.6
Number of employees in the mywork@merck model (Germany)
Asia-Pacific (APAC)
10,462.9
12,694.2
Europe
25,302.5
25,126.8
26,013.1
Number of employees in FTE (FTE = full-
by
Latin America
4,046.2
11,272.1
Germany
time equivalents)
43.3
For 2019, we expected business free cash flow of the Merck Group to see a moderate increase. This forecast was exceeded with a
rise of +8.9% to € 2,732 million (2018: € 2,508 million). In the Healthcare business sector, the increase of +22.1% over the prior
year was in line with our forecast of growth in the low twenties percentage range, issued at the start of the year. The business free
cash flow of the Life Science business sector was -1.3% below the prior year. We thus slightly exceeded our forecast of a moderate
performance below the previous year. For the Performance Materials business sector, we anticipated a decline in the low teens
range. With growth of 9.1% over the previous year, the business sector significantly exceeded the figure we forecast at the start of
the year, mainly thanks to the acquisition of the Versum Materials business, which had not been included in the forecast issued at
the start of the year but was included in our reporting on the third quarter of 2019 with an additional € 70 million to € 85 million.
Combined Management Report.
Report on Economic Position
Review of Forecast against Actual Business Developments
70
MERCK GROUP
€ million
Actual results
2018
Net sales
14,836
Forecast for
2019 in the
2018 Annual
Report
Moderate organic growth
Slightly negative foreign exchange
effect of -1% to -2%
Main
comments
Growth driven by Life Science and
Healthcare, which more than
offsets the decline of Performance
Materials
Foreign exchange effect primarily
resulting from several emerging
market currencies
EBITDA pre
Business free cash flow
EPS pre
2,508
Business free cash flow
€ 5.10
of € -381 million, this corresponded to a rise in costs of 23.0%. This development was mainly due to higher losses from currency
hedging and resulted from exchange rate developments that were forecast differently. The rising organic costs from the further
expansion of our innovation and digitalization initiatives corresponded to our original forecast.
Corporate and other
Our Life Science business sector generated organic sales growth of +9.0% in 2019 and thus significantly exceeded our forecast of
organic growth slightly above medium-term market growth in the amount of 4% per annum due to increased demand in our main
customer industries. The forecast raised to between +8% and +9% in our reporting on the third quarter of 2019 was achieved. As
expected, Process Solutions was the most dynamic business unit, delivering the largest contribution to organic sales growth within
Life Science. Also as expected, Applied Solutions and Research Solutions contributed positively to the organic sales performance,
albeit to a lesser extent than Process Solutions.
Performance Materials
For our Performance Materials business sector, we had forecast a moderate organic decline compared with the previous year. The
main assumption was a continuing price decline in the Liquid Crystals business, which is only mitigated by a temporary rise in
volume due to capacity expansions of customers in China. We also anticipated high growth momentum in Semiconductor Solutions,
but this failed to materialize in fiscal 2019 due to weaker end markets. Against this backdrop, we updated our forecast of organic
growth for the business in our reporting on the second quarter of 2019 to a range from -4% to -7%; we were within this range with
Combined Management Report
Report on Economic Position Review of Forecast against Actual Business Developments
68
a reported decline in growth of -6.5% for 2019. Following the successful completion of the acquisition of Versum Materials on
October 7, 2019, this acquisition was also included in the forecast in our reporting on the third quarter of 2019 with an expected
sales effect of around € 270 million. The reported acquisition-related increase in sales was slightly below this figure at € 250 million,
which was due to phasing effects at Versum Materials in the second half of the year and a slight weakening on the relevant
semiconductor end markets.
EBITDA pre
For 2019 we expected a strong organic growth of EBITDA pre amounting to a low teens percentage figure over the prior year for
the Merck Group. The assumption was based on growth driven by Healthcare and Life Science, which should be more than able to
offset the decline of Performance Materials, and a positive contribution from the first-time application of IFRS 16 Leases.
Furthermore, because of the unfavorable foreign exchange environment, we still expected negative exchange rate effects to burden
EBITDA pre by between -3% and -4% over the prior year. In 2019, EBITDA pre came to € 4,385 million, equivalent to an increase
of +15.4% compared with the prior year (2018: € 3,800 million). The organic growth of +11.3% entailed by this figure was in line
with our forecast. By contrast, at +2.5% the foreign exchange effect on EBITDA pre in 2019 as a whole was substantially more
positive than expected at the start of the year, although it was only slightly above the range of between 0% and +2% to which we
had adjusted in the course of our reporting on the first quarter of 2019. The positive depreciation of the euro against the U.S. dollar
in 2019 was more supportive than we expected at the start of the year. The portfolio effect of Versum Materials was included in the
forecast at the next possible date, following the successful completion of the acquisition. It was included in our reporting on the
third quarter of 2019.
Healthcare
For our Healthcare business sector, we were forecasting strong organic growth of EBITDA pre over the prior year due to substantial
expected earnings contributions from our new products, particularly MavencladⓇ, and a decline in development expenses in
relation to sales as well as earnings contributions from the strategic alliance with GlaxoSmithKline plc. In addition to this, we had
expected strongly negative exchange rate effects. In 2019, EBITDA pre in Healthcare amounted to € 1,922 million
(2018: € 1,556 million). This is equivalent to an increase of +23.5% over 2018; the organic rise of +19.5% corresponded to the
lower end of the forecast range we issued at the start of the year. The exchange rate effects had a substantially greater positive
impact than expected at the start of the year, however. As a result, in our reporting over the course of the year, we ultimately
narrowed our forecast range to between 0% and +2%. We closed out the year 2019 at +4.1%.
Life Science
For Life Science, we had expected a strong up to double-digit rise in organic EBITDA pre in percentage terms due to the expected
organic sales growth. Thanks to a better-than-expected development of the main end markets, the forecast was raised in the
course of the year. In our reporting on the third quarter of 2019, we forecast a range of between +12% and +14%. In fiscal 2019,
the business sector generated organic growth of +14.4% to € 2,129 million and was thus at the top end of our forecast range. The
exchange rate development supported EBITDA pre with +1.5% and was thus more positive than projected at the start of the year,
when we forecast a moderately negative development.
Performance Materials
Owing to a price decline in liquid crystals, for which it was not expected that it would be able to be offset by growth in other
businesses or active cost management, we forecast an organic decline of EBITDA pre in the Performance Materials business sector
totaling a high single-digit to low teens percentage figure at the start of the year. For the exchange rate effects, we projected a
roughly neutral impact on EBITDA pre over 2018. For 2019 as a whole, Performance Materials achieved an EBITDA pre
of € 803 million (2018: € 786 million). This corresponded to an increase of +2.3% over 2018, of which -12.3% was attributable to
the organic business performance and a further +6.1% to exchange rate developments. The forecast of organic growth was thus
within the range we issued at the start of the year; however, the exchange rate trend ended up substantially more positive than we
originally assumed. Our reporting on the third quarter of 2019, following the successful completion of the acquisition of Versum
Materials on October 7, 2019, expected an earnings effect of around € 80 million to € 90 million from the acquisition for the year as
a whole. The total reported portfolio effect of the Performance Materials business sector was +8.5% and slightly below this range.
Combined Management Report
Report on Economic Position Review of Forecast against Actual Business Developments
69
This is primarily attributable to phasing effects at Versum Materials in the second half of 2019, a weaker momentum in the relevant
semiconductor end markets, and the negative portfolio contribution from the acquisition of Intermolecular.
EBITDA pre of Corporate and Other, which reached a level of € -469 million in 2019, was within our forecast range of € -460 million
to € -490 million that we specified in the reporting on the third quarter of 2019. Compared with the prior-year figure
3,800
Strong organic percentage growth
in the low teens range
Negative foreign exchange effect
of between -3% and -4%
Growth driven by Healthcare and
Organic growth of +3% to +5% Organic growth of +10% to +13%
vs. 2018
vs. 2018
~2,600 to 2,850
€ 5.30 to
Q3/2019
Exchange rate effect of +1% to
+2%
Exchange rate effect of 0% to
+2%
€ 5.65
Versum Materials included with 70 to 85
Versum Materials included with
approximately 80 to 90
Results 2019
in € million
Versum Materials included with
approximately 270
16,152
(+8.9%:
+5.3% organic,
+1.4% portfolio,
+2.1% currency)
4,385
(+15.4%:
+11.3% organic,
+1.6% portfolio,
+2.5% currency)
2,732
+8.9%
€ 5.56
+9.0%
43.0
Exchange rate effect of 0% to
+2%
~4,230 to 4,430
~15,700 to 16,300
Exchange rate effect of 0% to
+2%
€ 5.65
Life Science, which more than
offsets the decline of Performance
Materials
First-time application of IFRS 16
with a positive contribution of
around € 130 million
Foreign exchange effect primarily
resulting from several emerging
market currencies
Moderate increase
Higher EBITDA pre and positive effects in
working capital offset higher investments in
property, plant and equipment as well as
digitalization initiatives
Forecasts for
2019 in the
interim
report:
Q1/2019
Q2/2019
Life Science
~15,300 to 15,900
Organic growth of +3% to +5% Organic growth of +10% to +13%
vs. 2018
vs. 2018
€ 5.30 to
~2,500 to 2,750
€ 5.65
~15,300 to 15,900
Exchange rate effect of 0% to
+2%
~4,150 to 4,350
Organic growth of +3% to +5% Organic growth of +10% to +13%
vs. 2018
vs. 2018
€ 5.30 to
~2,550 to 2,800
~4,150 to 4,350
For our Healthcare business sector, we had forecast moderate organic sales growth at the start of the year. Sales growth of the
business sector in 2019 as a whole was solid at +6.2% and thus slightly exceeded both our original forecast and our updated
forecast in the first quarter, which provided for organic growth ranging between +4% and +6%. Growth was supported by the sales
development of the base business and the significant growth contribution of our newly approved products, mainly MavencladⓇ and,
in particular, the successful market approval of Mavenclad Ⓡ in the United States.
Exchange rate effect of 0% to
+2%
For 2019, we had forecast moderate organic net sales growth for the Group. In the course of the year Merck reported a more
dynamic organic sales growth driven particularly by the strong organic growth of Life Science. This meant that we generated a solid
organic net sales growth of +5.3%, all told, in fiscal 2019, thus slightly exceeding our forecast. Due to the unfavorable
development of several currencies in emerging markets at the start of the year, we anticipated a slightly negative exchange rate
effect on our net sales. Contrary to our original assessment, however, the trend of these currencies in the first half of 2019,
especially in Latin America, was not as unfavorable as we had assumed at the start of the year. Furthermore, the depreciation of
the euro against the U.S. dollar continued during this period. The exchange rate between the euro and the U.S. dollar remained
supportive in the second half of the year compared with the previous year. The positive exchange rate effect in 2019 as a whole
was +2.1% and thus slightly above our updated range. The portfolio effect due to the acquisition of Versum Materials was included
in the forecast at the next possible date, following the successful completion of the acquisition. It was included in our reporting on
the third quarter of 2019.
As in 2018, Merck's organic sales growth was above the IMF's global growth expectations in 2019 and came to 5.3%. This growth
was supported by all regions. The Asia-Pacific region accounted for the largest share of growth across the Group at 42.3%, followed
by Europe at 22.6%, North America at 19.0%, Latin America at 12.5%, and the Middle East and Africa at 3.6%. Overall growth and
growth in the Asia-Pacific, Europe, and Latin America regions was driven primarily by the Healthcare and Life Science business
sectors, while Performance Materials was below the 2018 figure. Growth in North America was attributable in particular to the Life
Science business sector.
Healthcare
Global pharmaceutical market
Market for multiple sclerosis therapies²
Market for type 2 diabetes therapies²
Market for fertility treatment²
Market for the treatment of colorectal cancer³
Life Science
Market for laboratory products
Share of biopharmaceuticals in the global pharmaceutical market²
Performance Materials
Growth of wafer area for semiconductor chips
Growth of LC display surface area 4
Global sales of cosmetics and care products
Change 20191
Change 2018
5.7%
5.4%
1.0%
2.7%
12.8%
According to the latest forecasts available from the IMF, the global gross domestic product (GDP) rose at a significantly lower
growth rate of 2.9% in 2019 (2018: 3.6%). Despite strong differences between the various regions and between industrial nations
and emerging economies, the trend toward weakening growth is visible. While growth in industrial nations fell to 1.7%
(2018: 2.2%), the emerging markets and developing countries saw growth of 3.7% (2018: 4.5%). The United States, the world's
largest economy, achieved slightly weaker growth of 2.3% (2018: 2.9%). The same trend is apparent in the eurozone, whose GDP
growth weakened to 1.2% (2018: 1.9%), as well as in Asia's emerging economies, which reported growth of 5.6% (2018: 6.4%).
The strongest drivers were again China with 6.1% (2018: 6.6%) and India with a year-on-year slowdown in growth to 4.8%
(2018: 6.8%). Japan reported GDP growth of 1.0% (2018: 0.3%), Taiwan registered GDP growth of 2.0% (2018: 2.6%), and
Korea of 2.0% (2018: 2.7%).
9.8%
In keeping with expectations, the global economy experienced weakening growth in 2019. According to the International Monetary
Fund (IMF), however, projected growth for 2020 should be slightly above the 2019 level. The global economy is thus showing initial
signs that its growth momentum is stabilizing.
Report on Economic Position
43.7
Healthcare
Average length of service
Average length of service in Germany
global, total
9.8
10.0
9.5
14.0
14.5
14.8
1 Merck also has employees at sites that are not fully consolidated subsidiaries. These figures refer to all people directly employed by Merck and
therefore may deviate from figures in the financial section of this report.
2 The Consumer Health business was transferred to Procter & Gamble (P&G) as of December 1, 2018, and was already classified as a discontinued
operation according to IFRS 5 in April 2018. With the completion of the sale, around 3,300 employees joined P&G.
3 Not including Sigma-Aldrich legal entities in Germany or Allergopharma.
4 Ratio adjusted retrospectively.
5 Not including the Sigma-Aldrich legal entity in Steinheim, Germany, or Allergopharma.
7
Not including the Versum Materials legal entities or Allergopharma.
Combined Management Report Report on Economic Position
Report on Economic Position
64
Macroeconomic and Sector-Specific Environment
4.8%
6 With the completion of the acquisition of Versum Materials on October 7, 2019, around 2,300 employees joined Merck.
7.7%
The developments in the therapeutic areas of relevance to Merck reflect robust growth, albeit with different trends. The global
market for type 2 diabetes excluding the United States followed the positive trend of previous years and reached growth of 12.8%
in 2019 (2018: 9.8%). In the therapeutic area of infertility, growth dropped to 4.8% (2018: 9.2%). After a strong upturn in 2018,
the growth rate in the market for colorectal cancer reached 7.7% (2018: 4.8%). Growth in the market for multiple sclerosis
patients continued the trend of previous years and declined to 1.0% in 2019 (2018: 2.7%).
Life Science
Our Life Science business sector is a leading supplier of products and services for both research and applied laboratory applications,
as well as for formulating, purifying, manufacturing, and quality-assuring drug therapies of chemical and biological origin.
According to the market research firm Frost & Sullivan, growth in the laboratory product market relevant to Research Solutions and
Applied Solutions businesses slowed to 3.2% in 2019 (2018: 3.6%). Growth moderated from a peak in 2018 due to negative
impacts from macroeconomic and geopolitical factors, despite a positive impact from continued strong demand from customers in
the biopharmaceutical industry, specifically emerging biotech.
Our Life Science business sector competes in markets all around the globe. The European market growth slowed to 2.0%
(2018: 2.4%), attributable to continuing uncertainties, most notably surrounding the outcome of Brexit. The market in the United
States softened, growing 3.5% (2018: 4.2%), also due to increased geopolitical uncertainty, despite solid National Institutes of
Health (NIH) funding to academic research customers. The Chinese market growth decelerated to 6.5% (2018: 7.0%) due to
slowing GDP growth, trade relations, and imposed tariffs that have led to uncertainties in procurement, though domestic stimulus
policies in China are providing some buffer for scientific tools and product investments in the laboratory area. The Indian market
grew 7.8% (2018: 8.2%), where increased government spending, recovery from currency reform, and implementation of the
national Goods and Services Tax (GST) has contributed to elevated spending.
The demand for Process Solutions products depends heavily on the sales of biopharmaceutical companies with biologics, as well as
on the productivity of their research and development activities. According to IQVIA, the market volume of biotechnological
pharmaceuticals grew to € 295 billion in 2019 (equivalent to 30.1% of the global pharmaceutical market). This is equivalent to
growth of around 13.6% (2018: 13.2%), which is supported by all regions.
Performance Materials
The semiconductor industry is the most important market for business with material for integrated circuits (Semiconductor
Solutions). The growth in demand for semiconductor materials depends on the wafer area produced for semiconductors. The silicon
wafers required as raw materials are used as an indicator to estimate the demand for semiconductor materials. According to the
global industry association SEMI.org, the area of delivered silicon wafers decreased by approximately 6% in 2019. The
Combined Management Report
Report on Economic Position
Not only the growth of the pharmaceutical sector as a whole, but also in particular the development of the biopharmaceutical
market, is relevant for our business. According to IQVIA, the market volume for biological pharmaceuticals was
approximately € 295 billion in 2019, continuing the recent trend of a continuously increasing market share. These products
accounted for 30.1% of the global pharmaceutical market in 2019 (2018: 28.0%). The most important market for biological
pharmaceuticals is the United States with a 62.4% share of global market volume.
Report on Economic Position
With its Liquid Crystals business, Merck is the leading producer of liquid crystal mixtures for the display industry. According to
surveys by market researchers at IHS, the growth rate of display surfaces area was about 1% in 2019. This weak growth was
mainly due to the low demand for televisions due to uncertainties caused by the trade conflict between the United States and
China, as well as an overall weaker economic situation. In addition, inventories of display panels were carried over from 2018 into
2019. Liquid crystals will continue to play a key role in the display industry in the future. OLED technology, for which Merck also
ranks among the leading material suppliers, is gaining importance in the high-quality display sector.
The markets for cosmetics and automotive coatings are crucial to Merck's Pigments business. The market for cosmetics and care
products grew by around 4% overall in 2019, a slightly slower rate than in 2018. The Asia-Pacific region, particularly China, was the
main growth driver. The reasons for the slowdown in growth are the trade conflicts between the United States and China and
uncertainties surrounding Brexit. Furthermore, the economic downturn in Europe is leading to a declining price structure.
Global automobile production fell by around 5% in 2019. Due to the major importance of China, the sharp decline in the production
figures there was reflected globally. The declining figures in China are primarily due to the trade conflict between the United States
and China, the implementation of new emission standards, and high inventories in 2018.
Combined Management Report. Report on Economic Position Review of Forecast against Actual Business Developments
67
Review of Forecast against Actual Business Developments
The forecast of the Merck Group for fiscal 2019 published in the Annual Report for fiscal 2018 comprised the forecast for the Group
as well as the forecast for the three business sectors Healthcare, Life Science, and Performance Materials. On April 12, 2019, Merck
signed a final agreement to acquire Versum Materials Inc. for US$ 53 per share. On October 7, 2019, the successful closing of the
acquisition of Versum Materials for a purchase price of approximately € 5.3 billion was announced. Consequently, the acquisition
was not included at the time the Annual Report for 2018 was prepared and the forecast at the time did not include the Versum
Materials business.
9.2%
Due to this portfolio change, the following analysis reflects the new structure of the Merck Group and only includes the Versum
Materials business from the date the acquisition was successfully closed.
Net sales
66
In its latest study (as of September 2019), the pharmaceutical market research firm IQVIA forecast an increased year-on-year
growth for 2019 of 5.7% for the global pharmaceutical market (2018: 5.4%). The main contributors to growth were the Latin
America and Asia-Pacific regions. Latin America reported significant growth of 12.0% (2018: 9.3%). The Asia-Pacific region also
continued to expand and recorded growth of 5.6% in 2019 (2018: 3.8%). Growth in North America slowed slightly in comparison
with 2018 but remains solid, especially in the United States at 5.3% (2018: 5.9%). The EMEA (Europe, the Middle East, and Africa)
region recorded weaker growth of 5.2% compared to the previous year (2018: 5.5%).
semiconductor industry was in a correction phase in 2019. Demand for semiconductor chips weakened due to the high economic
uncertainty in connection with trade restrictions between the United States and China, as well as between Japan and Korea, the
export restrictions relating to Huawei, and Brexit. However, due to the expansion of capacity in recent years, this resulted in a
significant increase in inventory levels within the entire semiconductor industry. Prices for semiconductor chips, in particular
memory chips, thus came under strong pressure and only stabilized toward the end of the year. Semiconductor manufacturers
countered this in the course of the year with production cutbacks and delayed further expansion of capacities. Toward the end of
the year, however, there were increasing signs that the industry had navigated past the bottom and swung back to its long-term
growth trajectory.
65
3.6%
3.2%
Healthcare
4.8%
30.1%
28.0%
-6.3%
0.9%
10.1%
3.6%
4.1%
8.0%
-1.2%
Report on Economic Position
Report on Economic Position
Combined Management Report
-5.4%
3 Growth rates based on market data stated in U.S. dollars. Market data from Evaluate Pharma on the growth of indications are based on published
company reports and are subject to exchange rate fluctuations.
4 Growth of display area is a pure volume indicator, which is counteracted by a negative price momentum.
2 Growth rates based on market data in local currency, translated at a constant euro exchange rate. The IQVIA market data on the growth of
indications are based on current figures, including the third quarter of 2019. Annual growth based on the values for the past 12 months. The type 2
diabetes market excludes the United States, since this market is insignificant to Merck.
Global automobile sales volumes
1 Predicted development. Final development rates for 2019 were not available for all industries when this report was prepared.
Middle East and Africa (MEA)
591
4%
16,152
5.2%
2.4%
1.0%
8.6%
544
4%
Merck Group
5.3%
100%
6%
12.8%
6.5%
26%
Asia-Pacific (APAC)
2.1%
5,599
35%
6.7%
2.7%
3.3%
4,965
33%
Latin America
1,012
6%
10.4%
-3.8%
950
1.4%
%
14,836
%
€ million
1,315
8.9%
-624
11.6%
2018
14,836 100.0%
-5,382 -36.3%
9,454 63.7%
691
Marketing and selling expenses
Administration expenses
-4,576 -28.3% -4,396
-1,154 -7.1%
-29.6%
3,818
-180
7.3%
8.9%
16,152 100.0%
-6,006 -37.2%
10,145 62.8%
2019
100%
1
Not defined by International Financial Reporting Standards (IFRSS).
Combined Management Report Report on Economic Position
Merck Group
78
%
The Consolidated Income Statement of the Merck Group is as follows:
Consolidated Income Statement1
Change
€ million
Net sales
Cost of sales
Gross profit
MERCK GROUP
10.4%
-0.6%
5.3%
10.4%
3.1%
-6.5%
16%
2,574
Performance Materials
42%
6,185
11.0%
2.6%
9.0%
42%
6,864
Life Science
42%
6,246
7.5%
4.1%
€ million
2019
Share Organic growth
effects
Acquisitions/
divestments
7.0%
Total change
Share
Healthcare
6,714
42%
6.2%
1.3%
2018
2,406
16%
Merck Group
Total change
2018
Share
Europe
4,735
29%
Acquisitions/
divestments
3.9%
4,559
31%
North America
4,214
26%
3.9%
3.9%
1.1%
effects
2019
16,152
100%
5.3%
2.1%
1.4%
8.9%
Share Organic growth¹
14,836
1 Not defined by International Financial Reporting Standards (IFRSS).
In fiscal 2019, the Merck Group recorded the following regional sales performance:
MERCK GROUP
Net sales by region
Exchange rate
€ million
100%
-1,183
Profit after tax from discontinued operations of € 28 million (2018: € 2,303 million) resulted from the sale of the Consumer Health
business in December 2018 and arose from subsequent effects in connection with the transaction. This profit must be reported
separately in the Consolidated Income Statement pursuant to IFRS 5. The high figure for 2018 essentially includes the profit from
the sale of the Consumer Health business amounting to € 2,244 million. Further information on the divestment of the Consumer
Health business can be found in Note (5) "Acquisitions and divestments" in the Notes to the Consolidated Financial Statements.
The decline in net income of -60.9% to € 1,320 million (2018: € 3,374 million) was mainly attributable to the profit from the sale of
the Consumer Health business realized in 2018. Earnings per share accordingly decreased to € 3.04 (2018: € 7.76).
29
MERCK GROUP
The development of EBITDA pre in the individual quarters in comparison with 2018 as well as the respective growth rates are
presented in the following overview:
Merck Group
Combined Management Report Report on Economic Position
EBITDA pre, the key financial indicator used to steer operating business, rose by € 585 million, or 15.4%, to € 4,385 million
(2018: € 3,800 million). The organic increase in this key performance indicator was 11.3%. It included favorable effects from the
application of IFRS 16 "Leases" amounting to € 143 million. Furthermore, the development of EBITDA pre was positively influenced
by foreign exchange effects and portfolio effects. Relative to net sales, the EBITDA pre margin was 27.1% in 2019 (2018: 25.6%).
The reconciliation of the operating result (EBIT) to EBITDA pre is presented in the chapter entitled "Internal Management System."
Income tax expense came to € 440 million in 2019 (2018: € 368 million) and resulted in a tax rate of 25.3% (2018: 25.2%).
Further information on income taxes are included in Note (17) "Income taxes" in the Notes to the Consolidated Financial
Statements.
The further deterioration of the financial result of 44.6% to € -385 million (2018: € -266 million) resulted mainly from higher
interest expenses due to new borrowings of financial liabilities to finance the acquisition of Versum Materials. Details with respect to
the development of finance income and finance expenses of the Group are shown in Note (40) "Financial income and expenses/Net
profit and losses from financial instruments" in the Notes to the Consolidated Financial Statements.
Other operating income and expenses showed an expense balance of € 19 million in 2019, after an income balance of € 52 million
in 2018. Detailed information about the development and composition of other operating expenses and income can be found in
Note (15) "Other operating income" and Note (16) "Other operating expenses" in the Notes to the Consolidated Financial
Statements.
1 Not presented: research and development costs of € 59 million allocated to Corporate and Other
75%
Healthcare
1,666
267
Performance Materials
12%
276
Life Science
13%
€ million/%
3,374
22.7%
-2,053
-60.9%
1 Previous year's figures have been adjusted, see Note (45) "Effects from new accounting standards and other presentation changes" in the Notes to
the Consolidated Financial Statements.
EBITDA pre¹ and change by quarter²
2 Not defined by International Financial Reporting Standards (IFRSS).
Combined Management Report.
Report on Economic Position
Merck Group
79
MERCK GROUP
Research and development costs by business sector 1 - 2019
The positive development of net sales led to an increase of 7.3% in gross profit of the Merck Group to € 10,145 million
(2018: € 9,454 million). The resulting gross margin of the Group, i.e. gross profit as a percentage of net sales, amounted to 62.8%
(2018: 63.7%). Group-wide research and development costs rose by 1.8% to € 2,268 million and led to a research spending ratio
(research and development costs as a percentage of net sales) of 14.0% (2018: 15.0%). Accounting for 75% (2018: 77%) of
Group R&D spending, Healthcare remained the most research-intensive business sector of the Merck Group.
€ million/change in %
2019
Q1
929
All business sectors contributed to the growth in Group EBITDA pre. Life Science, the business sector with the highest EBITDA pre,
generated a 15.7% increase to € 2,129 million (2018: € 1,840 million) in fiscal 2019. At the same time, the EBITDA pre margin of
this business sector also rose to 31.0% (2018: 29.8%). EBITDA pre of Healthcare even increased by 23.5% to € 1,922 million in
2019 (2018: € 1,556 million). The resulting EBITDA pre margin improved substantially to 28.6% (2018: 24.9%). The share of
Group EBITDA pre accounted for by Healthcare (not taking into account the € -469 million reduction due to Corporate and Other)
rose by 3 percentage points to 40% (2018: 37%). With an EBITDA pre of € 803 million (2018: € 786 million), the share of this
Group key performance indicator attributable to Performance Materials decreased to 16% (2018: 19%). The EBITDA pre margin
declined slightly to 31.2% (2018: 32.7%).
MERCK GROUP
EBITDA pre¹ by business sector 2 - 2019
€ million/%
16%
Performance Materials
2 Quarterly breakdown unaudited.
803
Life Science
2,129
1 Not defined by International Financial Reporting Standards (IFRSS).
2 Not presented: Decline in Group EBITDA pre by €-469 million due to Corporate and Other.
40 %
Healthcare
1,922
44%
-85.1%
1 Not defined by International Financial Reporting Standards (IFRSS).
27.0%
Q2
1,139
2018
967
920
%
-4.0%
80
23.8%
1,111
963
15.4%
Q4
1,206
950
Q3
-8.0%
19
-22
Financial result
22.8%
393
11.6%
1,727
13.1%
2,120
Operating result (EBIT)²
100.0%
-71
0.3%
52
-0.1%
-19
Other operating income and expenses
100.0%
-35
-2.5%
Research and development costs
-2,268
-14.0%
-2,227
Exchange rate
Profit before income tax
-15.0%
1.8%
Impairment losses and reversals of impairment losses on financial assets (net)
-8
-0.0%
27
0.2%
-41
Income tax
Profit after tax from continuing operations
Profit after tax from discontinued operation
Profit after tax
Non-controlling interests
7.4%
203
28
0.2%
2,303
15.5%
1,093
1,324
3,396
22.9%
-2,275
-2,072
18.5%
-98.8%
-61.0%
-3
1,320
-0.0%
8.2%
8.2%
-0.2%
8.0%
-72
Net income
-385
1,735
-2.4%
10.7%
-266
1,461
-1.8%
-119
19.7%
44.6%
275
18.8%
-440
1,296
-2.7%
-368
-2.5%
9.8%
42%
Healthcare
6,714
Overview of 2019
MERCK GROUP
~2,000 to 2,100
with an operating margin expansion
of 20 to 30 base points
Organic growth of around
+10% to +12%
Exchange rate effect
0% to +3%
~2,020 to 2,120
with an operating margin expansion
of 20 to 30 base points
Organic growth of around
+11% to +13%
Exchange rate effect
0% to +2%
~2,040 to 2,140
with an operating margin expansion
of 20 to 30 base points
Organic growth of
+12% to +14%
Exchange rate effect
0% to +2%
2,129
(+15.7%:
+14.4% organic,
-0.2% portfolio,
+1.5% currency)
~1,300 to 1,400
~1,350 to 1,450
~1,350 to 1,450
1,375
-1.3%
+2.6% currency)
Combined Management Report.
million
6,864
(+11.0%:
+9.0% organic,
-0.6% portfolio,
Negative foreign exchange effect, particularly
on account of the development of emerging
market currencies
1,393
Moderately below
2018 levels
Improved EBITDA pre
Increase in investments in
property, plant, and equipment
in strategic projects
Q1/2019
Q2/2019
Q3/2019
~6,550 to 6,750
Organic growth of
+6% to +7%
Exchange rate effect
0% to +3%
~6,620 to 6,820
Strong organic growth of
+7% to +8%
Exchange rate effect
0% to +3%
~6,700 to 6,900
Organic growth of
+8% to +9%
Exchange rate effect
+1% to +3%
Results 2019 in €
Report on Economic Position Review of Forecast against Actual Business Developments
73
PERFORMANCE MATERIALS
Decline in
EBITDA pre
Forecasts for 2019
in the interim
report:
Q1/2019
Q2/2019
Q3/2019
Results 2019 in €
million
*Lower half of the corridor
~2,250 to 2,400
~700 to 760
Moderate organic decline of -3% to -6%
Organic growth of
-7% to -11%
~500 to
600
Exchange rate effect 0% to +2%
Exchange rate effect 0% to +4%
~2,230 to 2,380
Organic decline of -4 % to -7%
Exchange rate effect
0% to +2%
Neutral foreign exchange effect due to the
development of the exchange rate of the euro
against the U.S. dollar
management
Drop in liquid crystal prices cannot be offset by
growth in other businesses and active cost
Foreign exchange effect roughly neutral
€ million
Actual results 2018
Forecast for 2019
in the 2018 Annual
Report
Main comments
Net sales
EBITDA pre
Business
free cash
flow
In addition, positive contribution to organic
earnings growth from the switch to IFRS 16
2,406
588
Organically moderate decline from the prior year level
Exchange rate effect roughly neutral
Organic high single-digit to low double-digit
percentage decline
Decline in
the low
teens
Strong growth momentum in the Semiconductor Solutions
business unit
Continuing price decline in Liquid Crystals business, mitigated
by a temporary rise in volume due to capacity expansions of
customers in China
Neutral foreign exchange effect due to the development of the
exchange rate of the euro against the U.S. dollar
786
~2,250 to 2,400
Organic earnings growth on account of the
expected sales growth and slight margin
expansion
Negative foreign exchange effect, particularly
on account of the development of emerging
market currencies
EBITDA pre
Business free cash flow
1,556
1,025
Strong organic growth rate in the low to mid-
twenties percentage range
Strongly negative foreign exchange effect
Expected substantial earnings contributions from
our new products, especially MavencladⓇ more
than offset negative mix effects associated with the
projected decline of RebifⓇ
Moderate increase in research and development
expenses due to the development of our pipeline,
but down in relation to sales
Earnings contributions from the strategic alliance
with GlaxoSmithKline plc of approximately
€ 100 million and owing to license payments for
ErbituxⓇ that were lower than expected
Negative foreign exchange effect due to trend of
exchange rates on several growth markets
Increase in the low teens
percentage range
Rise in EBITDA pre
Positive net working capital
effects (including positive
effects from the sale of the
Consumer Health business)
Forecasts
for 2019 in
the interim
report:
~6,450 to 6,750
~1,820 to 1,950
Q1/2019
Moderate organic growth of +4% to +6%
Exchange rate effect of -1% to +2%
~6,450 to 6,750
Negative foreign exchange effect due to trend
of exchange rates on several growth markets
Organic growth of +19% to +23%
Exchange rate effect of -2% to +3%
~1,830 to 1,940
has been taken into account
At least stable sales development of the base
business in organic terms
Net sales by business sector
Combined Management Report.
Report on Economic Position Review of Forecast against Actual Business Developments
71
HEALTHCARE
€ million
Actual results
2018
Forecast for
2019 in the
2018
Annual
Report
Main
comments
Net sales
6,246
Moderate organic growth
Moderately negative foreign exchange effect
Substantial growth contribution of our newly
approved products, particularly MavencladⓇ ;
expected market approval in the United States
~1,200 to 1,300
Q2/2019
Q3/2019
Combined Management Report.
Report on Economic Position Review of Forecast against Actual Business Developments
72
LIFE SCIENCE
€ million
Actual results 2018
Forecast for 2019
in the 2018
Annual Report
Main comments
Forecasts for
2019 in the
interim report:
Net sales
6,185
EBITDA pre
Business free cash flow
1,840
Organic growth slightly above medium-term Strong organic growth of up to a double-digit
market growth of 4% p.a.
percentage rate
Slightly negative foreign exchange effect
Process Solutions is likely to remain the
strongest growth driver, followed by Applied
Solutions
Research Solutions will also make a
moderately positive contribution to the
organic sales development
No material portfolio effect as a result of the
sale of the flow cytometry business
1,252
+22.1%
+4.1% currency)
+19.5% organic,
1,922
(+23.5%:
Solid organic growth of +4% to +6%
Exchange rate effect
of 1% to +2%
~6,500 to 6,700
Solid organic growth of
+4% to +6%
Exchange rate effect
0% to +2%
6,714
(+7.5%:
+6.2% organic,
Moderately negative foreign exchange effect
Results
2019 in €
0.0% portfolio,
+1.3% currency)
Organic growth of +19% to +23%
Exchange rate effect
of 1% to +2%
~1,830 to 1,940
~1,200 to 1,300
Organic growth of +19% to +23%
Exchange rate effect
~1,200 to 1,300
0% to +2%
million
Organic decline of -4 % to -7 %*
0.0% portfolio,
Additionally around 270 due to Versum Materials
-4.72
-60.8%
Earnings per share pre (€)
5.56
5.10
0.46
9.0%
Business free cash flow 1
2,732
2,508
224
8.9%
1
Not defined by International Financial Reporting Standards (IFRSS).
Combined Management Report
Report on Economic Position
Merck Group
7.76
76
3.04
-61.0%
539
15.3%
Margin (% of net sales) 1
25.2%
23.8%
EBITDA pre¹
4,385
3,800
585
15.4%
Margin (% of net sales) 1
27.1%
25.6%
Profit after tax
1,324
3,396
-2,072
Earnings per share (in €)
Development of sales and results of operations
In fiscal 2019, the Merck Group generated net sales of € 16,152 million (2018: € 14,836 million). This represented a year-on-year
increase of € 1,315 million or 8.9%, to which all business sectors contributed. Organic sales growth for the Group amounted
to € 790 million or 5.3% and was attributable to the Life Science (9.0%) and Healthcare (6.2%) business sectors. Performance
Materials reported a decline in organic sales of -6.5%. Sales growth attributable to foreign exchange rates came to € 312 million or
2.1% and was primarily due to the U.S. dollar, the Japanese yen, and the Chinese renminbi; exchange rate developments in
particular in some South American countries, such as Argentina and Brazil, had the opposite effect. Because of portfolio changes,
Group net sales rose by € 213 million or 1.4%. This was essentially due to the acquisition, completed on October 7, 2019, of
Versum Materials, Inc., United States (Versum Materials), and the completed acquisition of Intermolecular, Inc., United States
(Intermolecular), on September 20, 2019, both of which supplement the semiconductor business of the Performance Materials
business sector. The divestment in December 2018 of the flow cytometry business that was allocated to the Life Science business
sector diminished sales.
The net sales in the individual quarters as well as the respective organic growth rates in 2019 are presented in the following graph:
Driven by the gratifying organic sales growth of 9.0%, net sales of the Life Science business sector rose by 11.0%
to € 6,864 million overall (2018: € 6,185 million). Life Science therefore was the strongest business sector in terms of sales with a
share of 42% (2018: 42%) of Group sales in fiscal 2019. With organic growth of 6.2% and an exchange rate-related increase in
sales of 1.3%, the Healthcare business sector recorded an overall rise in net sales of 7.5% to € 6,714 million
(2018: € 6,246 million). In 2019, net sales of the Performance Materials business sector rose by 7.0% to € 2,574 million
(2018: € 2,406 million). This was primarily due to acquisition-related sales growth (10.4%) and positive exchange rate effects
(3.1%), which more than offset the decline in organic sales (-6.5%). Performance Materials thus generated 16% (2018: 16%) of
net sales of the Merck Group.
MERCK GROUP
Combined Management Report.
Report on Economic Position
Merck Group
77
Net sales by business sector - 2019
€ million/% of net sales
16%
Performance Materials
2,574
42%
Life Science
6,864
Exchange rate effect
+1% to +3%
O
2 Quarterly breakdown unaudited.
1 Not defined by International Financial Reporting Standards (IFRSS).
4.3%
5.7%
MERCK GROUP
Net sales and organic growth 1 by quarter²
€ million/organic growth in %
2019
Q1
3,746
Q2
Q4
3,971
3,528
4,054
2018
3,486
3,714
3,749
3,888
%
5.7%
5.6%
4,381
4,066
Q3
11.6%
+6.1% currency)
Combined Management Report.
Report on Economic Position
Review of Forecast against Actual Business Developments
74
CORPORATE AND OTHER
€ million
Actual results 2018
EBITDA pre
-381
Business free cash flow
-497
Forecast for 2019 in the 2018 Annual Report
The expenses for Corporate and
Other will, in our opinion, show an
increase in the low to mid-teens
range on an organic basis in 2019.
This increase will be based on a
further expansion of our innovation
and digitalization initiatives.
A greater focus on the costs of the
administrative functions and
substantially reduced burden from
foreign exchange effects are likely
to partly offset the increase.
Main comments
Forecasts for 2019 in the interim report:
Q1/2019
Q2/2019
+8.5% portfolio,
641
+9.1%
-12.3% organic,
803
(+2.3%:
2,574
(+7.0%:
-6.5% organic,
EBITDA¹
+10.4% portfolio,
+3.1% currency)
~685 to 745
~500 to
Organic growth of -9% to -13%
Exchange rate effect +1% to +4%
Q3/2019
600
~500 to
600
Organic growth of
-9% to -13%*
Additionally
around 70
Exchange rate effect
+3% to +5%
to 85
due to
Versum
Additionally around 80 to 90 due to Versum
Materials
~695 to 755
Results 2019 in € million
Materials
-500 to -580
Key figures
Change
€ million
2019
2018
€ million
%
Net sales
14,836
1,315
8.9%
Operating result (EBIT) 1
2,120
1,727
393
-420 to -480
22.8%
13.1%
MERCK GROUP
16,152
•
-420 to -480
~-460 to -490
-469
+23.0%
Acquisition-related rise in net financial debt to € 12.4 billion (December 31, 2018: € 6.7 billion)
-500 to -580
~-500 to -580
-536
+7.9%
Combined Management Report. Report on Economic Position
Merck Group
75
Course of Business and Economic Position
Margin (% of net sales) 1
Merck Group
• Growth in earnings per share pre to € 5.56 (2018: € 5.10)
• Profitable growth for the Group: increase in EBITDA pre margin to 27.1% (2018: 25.6%)
• EBITDA pre rose by 15.4% and amounted to € 4.4 billion (2018: € 3.8 billion)
• Increase in business free cash flow to € 2.7 billion (2018: € 2.5 billion)
• Increase in Group net sales of 8.9% to € 16.2 billion; organic growth (5.3%) was supported by positive exchange rate effects
(2.1%) and acquisition-related growth (1.4%)
• Organic sales growth was achieved by the Life Science (9.0%) and Healthcare (6.2%) business sectors
Payments for investments in property, plant and equipment
-65.6%
-106
-813
67
23
Proceeds from the disposal of intangible assets
28.7%
95.8%
-102
-44
%
Payments for investments in intangible assets
-910
€ million
637
2,219
Change
2,856
Cash flow from operating activities according to the consolidated cash flow statement
2019
€ million
MERCK GROUP
Free cash flow 1
-208
2018
The distribution of business free cash flow across the individual quarters and the percentage changes in comparison with 2018 were
as follows:
-10.7%
2018
718
%
In 2019, equity of the Merck Group rose by 4.0% to €17,914 million (December 31, 2018: €17,233 million). The increase in equity
was essentially due to profit after tax generated in fiscal 2019 (€1.3 billion). Opposing effects resulted from dividend payments and
profit distribution (€0.7 billion) (see "Consolidated Statement of Changes in Net Equity" in the Consolidated Financial Statements).
Despite the increase in equity, the equity ratio declined by around 6 percentage points to 40.9% (December 31, 2018: 46.7%) due
to the aforementioned rise in total assets. The composition of free cash flow as well as the development of the relevant items are
presented in the following table:
Q1
545
2019
€ million/change in %
Business free cash flow¹ and change by quarter²
MERCK GROUP
84
Merck Group
Combined Management Report Report on Economic Position
In fiscal 2019, the Merck Group generated business free cash flow of € 2,732 million (2018: € 2,508 million). The increase was
mainly attributable to a higher EBITDA pre. The composition of business free cash flow is presented in the chapter entitled "Internal
Management System."
For further information on the impact of the first-time application of IFRS 16 "Leases" on the consolidated cash flow statement,
please refer to Note (41) "Net cash flows from financing activities" in the Notes to the Consolidated Financial Statements.
1 Not defined by International Financial Reporting Standards (IFRSS).
45.2%
588
1,301
-2.3%
-1
31
31
1,889
Proceeds from the disposal of property, plant and equipment
Free cash flow¹
98
6,701
6,701
-1,301
93
€ million
Reconciliation of net financial debt¹
MERCK GROUP
83
Merck Group
Report on Economic Position
Combined Management Report.
84.5%
5,663
12,363
> 100.0%
26
-64.0%
-1,390
2,170
24
781
50
Excluding current derivatives (operational).
3
2 The first-time application of IFRS 16 led to an increase of €465 million as of January 1, 2019.
1 Not defined by International Financial Reporting Standards (IFRSS).
-24.1%
Other current financial assets³
Net financial debt¹
Jan. 1
12,363
Currency translation difference
Dividend payments³
24
-1,889
966
-3,129
110
5,020
768
689
663
126
79
10,144
6,701
2018
2019
2 Thereof € 465 million due to the first-time application of IFRS 16 as of January 1, 2019.
3 According to the Consolidated Cash Flow Statement.
1 Not defined by International Financial Reporting Standards (IFRSS).
Dec. 31
Other
Free cash flow¹
Transfer of financial debt due to acquisitions
Payments for/proceeds from the disposal of assets held for sale³
Acquisitions³
Change in lease liabilities²
Q2
The solid accounting and financing policies of the Merck Group find expression in persistently good key balance sheet figures. The
equity ratio as at December 31, 2019, was 40.9% (December 31, 2018: 46.7%) and thus remains at a very good level. Due to the
Q4
In fiscal 2019 we continued to implement our strategy in a disciplined fashion and reached important milestones. The financial
targets we had set ourselves for 2019 were reached or even exceeded. In particular, we were able to return to profitable growth.
Group sales in fiscal 2019 rose by 8.9% to € 16,152 million and EBITDA pre, the key financial indicator used to measure operating
business, grew by 15.4% to € 4,385 million. All business sectors contributed to this success.
Overall assessment of business performance and economic situation
1 Not defined by International Financial Reporting Standards (IFRSS).
Liabilities (total)
37.2%
37.5%
40.1%
43.3%
45.7%
Finance structure¹
Current liabilities
Non-current assets
41.8%
45.9%
49.9%
62.3%
51.5%
1
Asset coverage'
Total equity
Total assets
80.7%
80.0%
Ⓡ
79.1%
We also realized important strategic milestones in respect of the Group's long-term orientation: following the takeovers of Versum
Materials and Intermolecular, our Performance Materials business sector is in a very good position to become a leading provider on
the market for electronic materials, and to push further ahead with future innovations in this field. Our research results in
Healthcare are promising. The United States Food and Drug Administration (FDA) has approved our therapy Mavenclad Ⓡ for the
treatment of specific forms of multiple sclerosis in the United States. Our cancer immunotherapy Bavencio was granted approval
in the United States, Europe, Japan, and in other markets for the treatment of patients with locally advanced kidney cancer in
combination with another medicine. We entered into a global strategic alliance with GlaxoSmithKline to push further ahead with the
clinical development of new therapy bintrafusp alfa to fight cancers that are difficult to treat. In Life Science, we made progress
with our genome editing technologies. Last year we received further patents in this important area. All told, we now hold more than
22 patents for CRISPR technologies worldwide.
Report on Economic Position
6,714
Cash and cash equivalents
2019
Business free cash flow 1
Margin (% of net sales) 1
1
EBITDA pre
Margin (% of net sales) 1
Operating result (EBIT) 1
Margin (% of net sales) 1
EBITDA1
Net sales
€ million
Change
87
Healthcare
Report on Economic Position
Combined Management Report
Key figures
HEALTHCARE
Healthcare
Based on our solid net assets and financial position, and our profitable operations, we view the economic situation of the Merck
Group as positive overall. Thanks to our leading position in science and technology we are able to look to the future with optimism.
acquisition of Versum Materials, net financial debt as of December 31, 2019, rose to € 12,363 million (December 31,
2018: € 6,701 million). To achieve a rapid reduction of financial liabilities we are focusing on generating organic growth and on high
inflows of financial resources from operating business activities.
86
Merck Group
Combined Management Report
75.0%
79.4%
Asset ratio 1
38%
1 Not defined by International Financial Reporting Standards (IFRSS).
O
1,375
Life Science
42%
641
Performance Materials
20%
33.5%
2.9%
€ million/%
Business free cash flow ¹ by business sector² - 2019
MERCK GROUP
2 Quarterly breakdown unaudited.
1 Not defined by International Financial Reporting Standards (IFRSS).
36.4%
565
711
514
754
731
701
Healthcare
1,252
2 Not presented: decline in Group business free cash flow by € -536 million due to Corporate and Other.
The contributions of the operating business sectors to business free cash flow of the Group in 2019 developed as follows: Life
Science generated business free cash flow amounting to € 1,375 million (2018: € 1,393 million). Consequently, with a 42% share
(2018: 46%) of Group business free cash flow (excluding the decline of € -536 million due to Corporate and Other), Life Science
was the business sector with the highest cash inflows. In 2019, the Healthcare business sector showed a double-digit increase of
22.2% to € 1,252 million (2018: € 1,025 million), thus contributing a share of 38% to Group business free cash flow (2018: 34%).
With business free cash flow of € 641 million (2018: € 588 million), Performance Materials contributed 20% (2018: 20%) to this
Group key performance indicator.
Investments in property, plant, equipment, and software, as well as advance payments for intangible assets included in the
calculation of business free cash flow, rose in 2019 by 10.1% to € 1,026 million (2018: € 932 million). The investments in property,
plant, and equipment included therein amounted to € 1,104 million in 2019 (2018: € 890 million), of which € 497 million
(2018: € 480 million) was attributable to strategic investment projects each with a project volume of more than € 2 million; the
remainder was attributable to smaller investment projects.
Non-current assets
Total assets
33.8%
36.7%
39.5%
46.7%
40.9%
Dec. 31, 2015
Dec. 31, 2016
Dec. 31, 2017
Dec. 31, 2018
Q3
Dec. 31, 2019
Equity ratio 1
%
Key balance sheet figures
MERCK GROUP
The development of key balance sheet figures was as follows:
Outside Germany, high levels of strategic investments were made particularly in Switzerland (€ 105 million), China (€ 60 million),
and the United States (€ 54 million). In Switzerland, the Healthcare business sector invested € 34 million in a new development
center to produce biotechnological products and € 30 million in a new production building for bottling these products. In China, Life
Science invested € 16 million in a production campus; Healthcare invested € 13 million in a logistics center. The United States saw
a Healthcare investment of € 15 million in the expansion of the research and development center in Billerica, Massachusetts.
Our credit ratings from the independent rating agencies did not change in 2019. Merck is currently rated by Standard & Poor's,
Moody's, and Scope. Standard & Poor's has issued a long-term credit rating of A with a stable outlook, Moody's a rating of Baal
with a stable outlook, and Scope a rating of A-, likewise with a stable outlook. An overview of the development of our rating in
recent years is presented in the Report on Risks and Opportunities.
In 2019, strategic investments of € 116 million (2018: € 161 million) were made to expand our site in Darmstadt, of which the
Performance Materials business sector invested € 20 million in a new research center and € 15 million in a silica production facility.
The Life Science business sector invested € 11 million in a new membrane production plant.
85
Merck Group
Report on Economic Position
Combined Management Report
Total equity
less:
Trade and other current receivables
Lease liabilities²
4.0%
681
46.7%
17,233
40.9%
17,914
Equity
18.8%
6,923
36,888 100.0%
100.0%
43,811
-1,390
289
28
262
577
Total assets
2,170
781
Cash and cash equivalents
1,048
1,336
Non-current liabilities
Other current assets
14,056
11,138
Current provisions
thereof:
Current liabilities
624
1,963
-290
620
1,340
1,965
Other non-current liabilities
6,681
8,644
Non-current financial debt²
780
490
Other non-current provisions
2,336
2,957
Provisions for pensions and other post-employment benefits
thereof:
26.2%
2,918
30.2%
32.1%
29
57
Other current financial assets
79.4%
34,808
%
€ million
%
€ million
%
€ million
Change
Dec. 31, 2018
Dec. 31, 2019
81
Merck Group
Report on Economic Position
Combined Management Report.
thereof:
Current assets
Other non-current assets
Property, plant and equipment²
Other intangible assets
Goodwill
thereof:
Non-current assets
27,652
75.0%
7,155
25.9%
3,226
3,488
2018
6,246
2,764
3,342
Inventories
-2.5%
-232
25.0%
9,236
20.6%
Current financial debt²
9,003
1,402
1,938
3,377
1,840
4,811
7,237
13,764
2,278
6,213
9,175
17,141
438
Financial debt
Trade and other current payables/refund liabilities
Total equity and liabilities
%
€ million
2,773
Dec. 31, 2018
7,286
10,059
Dec. 31, 2019
Change
Liabilities to related parties
Bank loans
Bonds and commercial paper
€ million
Net financial debt¹
MERCK GROUP
The composition and the development of net financial debt were as follows:
13.2%
459
3,486
3,944
17.0%
-380
-2,238
-2,618
21.0%
579
38.1%
2,764
1,587
967
Liabilities from derivatives (financial transactions)
Loans from third parties and other financial debt
48.3%
4,299
8,896
13,194
> 100.0%
563
4
567
-15.2%
-14
90
76
34.9%
25
72
97
-1.9%
-16
824
809
> 100.0%
620
3,344
57.9%
17
6,923
276
380
2,336
333
100.0%
36,888
3,464
2,238
2,215
600
100.0%
43,811
3,740
2,618
4,550
933
39.0%
3,324
23.1%
8,517
27.0%
11,842
18.8%
1 Previous year's figures have been adjusted, see Note (45) "Effects from new accounting standards and other presentation changes" in the Notes to
the Consolidated Financial Statements.
2 The first-time application of IFRS 16 led to an increase in property, plant and equipment as well as financial debt as of January 1, 2019; see
Note (45) "Effects of new accounting standards and other presentation changes" in the Notes to the Consolidated Financial Statements.
The total assets of the Merck Group amounted to € 43,811 million as of December 31, 2019 (December 31,
29
45
8.3%
243
%
€ million
Dec. 31, 2018
2,931
3,174
Dec. 31, 2019
Change
1 Not defined by International Financial Reporting Standards (IFRSs).
Other current liabilities
Working capital¹
Inventories/right of return for goods already delivered
Receivables from royalties and licenses
Trade accounts receivable
€ million
Working capital¹
MERCK GROUP
The growth in working capital of 13.2% to € 3,944 million (December 31, 2018: € 3,486 million) was largely attributable to the
acquisition-related inventory build-up and increase in receivables.
82
Merck Group
Combined Management Report. Report on Economic Position
2018: € 36,888 million), representing an increase of 18.8% or € 6,923 million. The main reason for the strong increase in total
assets and the development of the balance sheet items was the first-time consolidation of Versum Materials (see Note (5)
"Acquisitions and divestments" in the Notes to the Consolidated Financial Statements). Due to exchange rate changes, total assets
rose by around € 0.4 billion.
Trade and other current payables/refund liabilities
€ million
4%
468
Middle East and Africa
11%
661
6.2%
-3.6%
9.8%
11%
702
Latin America
24%
1,501
21.0%
2.0%
19.0%
27%
1,816
Asia-Pacific (APAC)
23%
1,432
2.9%
4.9%
-2.0%
22%
482
1,474
7%
3.0%
Cost of sales
Net sales
€ million
of
of
Change
2018²
Elimination
2019
Elimination
Reconciliation EBITDA pre¹
HEALTHCARE
The following table presents the composition of EBITDA pre in fiscal 2019 in comparison with 2018. The IFRS figures have been
modified to reflect the elimination of adjustments included in the functional costs.
1 Not defined by International Financial Reporting Standards (IFRSS).
6,246 100%
7.5%
1.3%
6.2%
100%
6,714
Healthcare
(MEA)
7%
448
7.4%
4.4%
IFRSS adjustments
North America
2,203
Gonal-fⓇ, the leading recombinant hormone used in the treatment of infertility, generated organic growth of 3.3%. Including
positive exchange rate effects, global sales increased by 4.9% to € 743 million (2018: € 708 million). North America and China, in
particular, contributed to the organic growth.
Sales of the drug RebifⓇ, which is used to treat relapsing forms of multiple sclerosis, saw an organic decline in net sales of -13.9%
in 2019. Including positive exchange rate effects, net sales of € 1,273 million were recorded in 2019 (2018: € 1,438 million). This
trend resulted from an organic decline on the main sales market, North America, amounting to -16.5%, followed by Europe with
-13.7%. The drop in sales was attributable to the persistently difficult competitive situation on the interferon market and the
competition from alternative therapies, including oral dosage forms. Since October 2019, Rebif® has been approved as well in the
European Union for use during pregnancy and breast-feeding if clinically needed. The use of RebifⓇ while breast-feeding is an
important option because many patients experience a relapse in the first three months after birth.
1 Not defined by International Financial Reporting Standards (IFRSS).
6%
-11.1%
16.5%
8%
31.1%
39%
47%
100%
-6.8%
6.7%
Organic growth¹ in %
% of sales
Erbitux®
50
72
344
405
871
€ million
5%
3%
1%
9.9%
The General Medicine & Endocrinology franchise (including CardioMetabolic Care) generated organic growth of 8.3% in comparison
with the prior-year period. The franchise includes medicines to treat cardiovascular diseases, thyroid disorders, diabetes, and
growth disorders. In all, the franchise generated net sales of € 2,557 million in fiscal 2019 (2018: € 2,341 million), equivalent to
growth of 9.2%, of which 8.3% was organic and 0.9% currency-related.
35%
Ⓡ
Double-digit sales growth (10.4%) was also achieved with beta-blocker ConcorⓇ. Additional positive exchange rate effects
prompted an increase in sales of 11.6% to € 530 million. Net sales in the previous year were € 475 million.
1.7%
-0.4%
2.1%
33%
2,241
Europe
Share
2018
effects Acquisitions/divestments change
Total
Exchange rate
Organic
growth1
Share
2019
€ million
Net sales by region
HEALTHCARE
Net sales of the Healthcare business sector by region in 2019 developed as follows:
90
Healthcare
Combined Management Report Report on Economic Position
The organic sales growth of 3.3% reported by growth hormone SaizenⓇ was reduced to 1.7% due to a negative exchange rate
effect; as a result, sales overall rose to € 238 million (2018: € 234 million).
A positive performance was also recorded by Euthyrox®, a medicine to treat thyroid disorders, with organic sales growth of 10.4%.
Net sales thus increased to € 402 million (2018: € 363 million), with exchange rate effects playing only a minor role.
The diabetes drug Glucophage®, the best-selling product in this area, recorded organic growth of 18.5%. The main driver was the
positive development in China. Taking into account positive exchange rate effects, global Glucophage sales increased
to € 877 million (2018: € 733 million).
Pre 1
IFRSS adjustments
Pre¹
Integration expenses/IT expenses
-12
12
-17
17
Restructuring expenses
1,492
1,896
EBITDA¹
-0.5%
749
-11
761
746
-1
747
Depreciation/amortization/impairment losses/reversals of
impairment losses
731
1,149
Operating result (EBIT)¹
17.8%
308
29
13
279
-13
-18
MERCK GROUP
the Consolidated Financial Statements.
2 Previous year's figures have been adjusted, see Note (45) "Effects from new accounting standards and other presentation changes" in the Notes to
1 Not defined by International Financial Reporting Standard (IFRSS).
thereof: acquisitions/divestments
4.1%
23.5%
19.5%
1,556
1,556
1,922
-8
8
thereof: exchange rate effects
thereof: organic growth¹
1,922
EBITDA pre¹
Other adjustments
Acquisition-related adjustments
-26
26
5
-5
Gains (-)/losses (+) on the divestment of businesses
18
363
6
357
-2,303
3
-2,305
Marketing and selling expenses
5.8%
4,827
7
4,820
5,109
5,109
Gross profit
13.1%
-1,419
7
-1,425
-1,605
-1,605
7.5%
6,246
6,246
6,714
6,714
Pre 1
-2,349
10
-2,339
-1.5%
Other operating income and expenses
-61.7%
-3
-3
assets (net)
-1
-1
Impairment losses and reversals of impairment losses on financial
-1.4%
-1,686
1
0.1%
-1,687
2
-1,666
Research and development costs
9.2%
-301
28
-329
-329
15
-344
Administration expenses
-1,663
-5.9%
70
43
6.7%
13%
871
thereof: ErbituxⓇ
15%
944
9.1%
0.2%
8.9%
15%
1,030
Oncology
Share
2018
Total change
effects
rate
Organic
growth 1
Share
2019
€ million
Exchange
Net sales by major product lines/products
-0.1%
HEALTHCARE
6.6%
13%
-11.5%
2.4%
-13.9%
19%
1,273
thereof: RebifⓇ
24%
1,529
4.2%
2.5%
1.8%
24%
1,594
Neurology & Immunology
1%
69
48.0%
3.9%
44.1%
2%
103
Ⓡ
thereof: Bavencio
816
Net sales of the key product lines and products developed as follows in 2019:
88
Healthcare
22.1%
227
1,025
1,252
24.9%
28.6%
23.5%
366
1,556
1,922
23.9%
28.2%
27.1%
404
1,492
1,896
11.7%
17.1%
57.2%
418
731
1,149
7.5%
1
Not defined by International Financial Reporting Standards (IFRSs).
Development of sales and results of operations
In fiscal 2019, the Healthcare business sector recorded net sales of € 6,714 million (2018: € 6,246 million). Total growth
of € 468 million or 7.5% was generated compared to the 2018 reporting period, consisting of organic growth amounting to 6.2%
and positive exchange rate effects of 1.3%. The positive exchange rate effects resulted, in particular, from the trends of the U.S.
dollar, the Chinese renminbi, and the Japanese yen.
Report on Economic Position
Combined Management Report
8.4%
8.0%
2 Quarterly breakdown unaudited.
1 Not defined by International Financial Reporting Standards (IFRSS).
5.2%
1,630
1,596
1,584
1,800
1,438
1,756
Q4
Q3
Q2
2.9%
%
Q1
1,481
1,435
2018
2019
€ million/organic growth in %
Net sales and organic growth ¹ by quarter²
The net sales in the individual quarters as well as the respective organic growth rates in 2019 are presented in the following graph:
1,677
%
23%
321
In the field of immuno-oncology, sales of oncology drug BavencioⓇ (avelumab) rose organically by 44.1% and
Oncology drug Erbitux® (cetuximab) showed a positive organic sales trend of 6.7%, with the addition of ErbituxⓇ to the National
Reimbursement Drug List (NRDL) in China being a major contributing factor. In addition, in September 2019, the National Medical
Products Administration (NMPA) of China approved Erbitux® for the first-line treatment for patients with RAS wild-type metastatic
colorectal cancer (mCRC) in combination with FOLFOX or FOLFIRI, or in combination with irinotecan in patients who are refractory
to irinotecan-containing chemotherapy. As a result, the Asia-Pacific region generated organic sales growth of 31.1%. By contrast,
the situation in Europe remained marked by a difficult competitive environment, which led to an organic sales decline of -6.8%.
Global net sales of Erbitux® in fiscal 2019, taking into account slightly negative exchange rate effects, increased by 6.6%
to € 871 million (2018: € 816 million).
1 Not defined by International Financial Reporting Standards (IFRSS).
100%
6,246
7.5%
1.3%
6.2%
100%
6,714
Healthcare
4%
270
4%
287
Other
4%
234
1.7%
-1.6%
3.3%
238
thereof: SaizenⓇ
reached € 103 million (2018: € 69 million), supported by a positive exchange rate trend of 3.9%. The extension of approval in
various regions contributed to this growth. In May 2019, for example, the United States Food and Drug Administration (FDA) issued
approval for the combination of BavencioⓇ (avelumab) plus axitinib for patients with advanced renal cell carcinoma. The European
Commission followed suit in October with the approval of BavencioⓇ (avelumab) in combination with axitinib as a first-line
treatment in patients with advanced renal cell carcinoma. In Japan, too, approval was granted in December 2019.
6%
A material contribution to the pleasing organic growth of the Healthcare business sector amounting to 6.2% came from
MavencladⓇ, a medicine for the oral short-course treatment of highly active relapsing multiple sclerosis. MavencladⓇ generated
net sales of € 321 million in fiscal 2019 (2018: € 90 million), a three and a half times increase on the prior-year figure. The sharp
rise in sales of Mavenclad Ⓡ was also thanks to the FDA approval in the United States in March 2019, where Mavenclad Ⓡ was
approved as the first and only oral short-course treatment of highly active relapsing and active secondary progredient multiple
sclerosis. This means that the therapy is now available in more than 70 countries, including the countries of the European Union,
Australia, Canada, and the United States.
Report on Economic Position
12
809
-16.5%
64%
27%
100%
% of sales
340
-13.7%
-13.9%
1
Organic growth in %
RebifⓇ
1,273
€ million
(MEA)
Latin America
Middle East
and Africa
Asia-Pacific
(APAC)
North America
Europe
Total
Sales and organic growth 1 of Rebif® and Erbitux® by region - 2019
HEALTHCARE
89
Healthcare
Combined Management Report
363
10.6%
0.2%
General Medicine & Endocrinology
11%
708
4.9%
1.6%
3.3%
11%
743
thereof: Gonal-fⓇ
19%
1,162
7.3%
1.4%
5.9%
19%
1,247
Fertility
1%
90
> 100.0%
3.7%
> 100.0%
5%
2,557
38%
8.3%
0.9%
10.4%
6%
402
thereof: EuthyroxⓇ
8%
475
11.6%
1.2%
10.4%
8%
530
thereof: MavencladⓇ
thereof: ConcorⓇ
733
19.6%
1.1%
18.5%
13%
877
Ⓡ
thereof: Glucophage
38%
2,341
9.2%
12%
Balance sheet structure1
As shareholders, you are also benefiting from this. In 2020, the Merck share price increased by 33%. The
dividend reflects this growth as well because, in line with our sustainable dividend policy, we focus primarily on
the development of the Group's earnings. Consequently, we will propose to the Annual General Meeting the
payment of a dividend of € 1.40 per share for fiscal 2020 - 10 cents more than in the previous year.
Management Report
2017
14,517
2017
3,800
2018
14,836
2018
4,385
2019
16,152
2019
4,246
5,201
17,534
2020
€ million
EBITDA pre¹
Merck Group
€ million
Net sales
Merck Group
1 Not defined by International Financial Reporting Standards (IFRS).
37.8%
1,033
2020
2016
15,024
2016
76
76 Report on Economic Position
67 People at Merck
50 Research and Development
Internal Management System
Sustainability
41
35
188 Objectives of the Supervisory Board with
respect to Its Composition and Profile of
Skills and Expertise
184 Report of the Supervisory Board
149 Statement on Corporate Governance
including Compensation Report
148 Capital Structure and Corporate Bodies of
Merck KGaA
Corporate Governance
26 Strategy
14 Merck
about the Group
14 Fundamental Information
Combined
10 Merck Shares
The Executive Board
9
5 Letter from Stefan Oschmann
To Our Shareholders
TABLE OF CONTENTS
1 Not defined by International Financial Reporting Standards (IFRS).
4,490
2,732
Macroeconomic and
3,765
20.5%
13.1%
17.0%
Margin (% of net sales)¹
40.8%
865
2,120
2,985
Operating result (EBIT)¹
8.6%
1,383
16,152
EBITDA¹
17,534
%
€ million
2019
2020
€ million
Change
Merck Group
KEY FIGURES 2020
2020
Annual Report
Merck
Net sales
4,923
4,066
857
1.14
5.56
6.70
Earnings per share pre (€)¹
50.3%
1.53
3.04
4.57
Earnings per share (in €)
50.6%
1,324
1,994
Profit after tax
27.1%
29.7%
Margin (% of net sales)¹
18.6%
817
4,385
5,201
EBITDA pre¹
25.2%
28.1%
Margin (% of net sales)¹
21.1%
Business free cash flow¹
Sector-Specific Environment
670
Review of Forecast against
80
Letter from Stefan Oschmann
To our Shareholders
In Electronics, formerly Performance Materials, we remain committed to further expanding our leading position
as an innovation partner. We are the company behind the companies, advancing digital living. To this end, we
aim to grow while securing stable margins, especially in businesses with materials and solutions for the
semiconductor industry as well as with organic light-emitting diodes (OLED). We are therefore pushing forward
with the execution of the five-year Bright Future transformation program.
In Life Science, we are aiming to further expand our strong positions in Process Solutions and e-commerce. To
achieve this, we must resolutely realize new growth opportunities, for instance in genome editing and novel
modalities, end-to-end bioprocessing and connected laboratories. At the same time, we are doing everything
possible to meet the increased demand for our life science products in these unprecedented times. Together
with the global Life Science team, Matthias Heinzel will be building on our previous successes. He will become a
member of the Executive Board of Merck on April 1, 2021, assuming responsibility for the Life Science business
sector.
Being a global supplier of innovative specialty products - that is and remains our strategy in Healthcare. An
important priority will be to further drive the profitable growth of our core General Medicine, Endocrinology and
Fertility franchises, particularly in China. We will focus also on realizing the commercial potential of MavencladⓇ,
BavencioⓇ and TepmetkoⓇ. We want to further unlock the possibilities of our pharmaceutical pipeline while at
the same time operating efficiently in order to meet our ambition for the future. At the beginning of 2021, we
welcomed Peter Guenter as a new member of the Executive Board with responsibility for the Healthcare
business sector. He has many years of experience and superb knowledge of the international pharmaceutical
sector.
-
We can be very satisfied with how well we made it through the "crisis year 2020". At the same time, we must
set our sights on the future. We want to drive our transformation to become the leading science and technology
company forward. That is why we have set ourselves clear priorities for 2021.
Our positive business performance in 2020 was also reflected in the capital markets. For the first time in
German stock market history, Merck became the company with the highest market capitalization in the
chemical and pharmaceutical industries. This is superb recognition of our development and strategic direction.
In addition, we also celebrated the 25th anniversary of our listing on the Frankfurt Stock Exchange.
In a year marked by a pandemic, these positive results should not be taken for granted. First and foremost,
they are thanks to the engagement, the perseverance and the unabated passion for innovation shared by our
global workforce of over 58,000 employees. On behalf of the entire Executive Board, I would like to warmly
thank them for their extraordinary commitment last year.
We are proud to note that in all our businesses and functions, we are helping both directly and indirectly to
meet the global challenges posed by Covid-19. Whether through financial contributions or by donating masks
and disinfectant, we have been providing support in the regions and cities in which we operate worldwide.
Yet, also in terms of business, we performed very well overall in 2020, despite considerable pandemic-related
obstacles in some businesses. Once again, we generated growth. Group sales rose to a total of € 17.5 billion,
growing by 8.6% over 2019. And EBITDA pre, the most important financial indicator to steer our operating
business, amounted to € 5.2 billion, a year-on-year increase of 18.6%. EBITDA pre was positively impacted by
income from the release of a provision of € 365 million for potential damages relating to patent litigation with
Biogen Inc. USA (Biogen). Earnings per share pre (EPS pre) increased by 20.5% to € 6.70.
We want to continue to grow profitably in 2021. As in the past, we will be guided by a high degree of cost
discipline and the optimum design of our operating business models.
7
To our Shareholders
1 Clustered Regularly Interspaced Short Palindromic Repeats
• And as countless people around the world work from home and practice social distancing, our high-
tech materials are critically important to the electronic equipment and devices that bring people
together virtually.
Moreover, we are working with the Bill & Melinda Gates Foundation and the European consortium
CARE. In both projects, we aim to help accelerate research and development into the coronavirus.
• We initiated a study with our own active ingredient candidate M5049. We are investigating whether
M5049 could prevent Covid-19 from inducing a "cytokine storm", a dangerous and excessive immune
response that often leads to death in patients with Covid-19.
By donating RebifⓇ, one of our relapsing multiple sclerosis therapies, last year we supported global
initiatives to study potential therapies for Covid-19. These include the SOLIDARITY study by the World
Health Organization (WHO) as well as a study by the French Institut National de la Santé et de la
Recherche Médicale (INSERM).
.
.
• We help scientists to detect and characterize viruses and to develop vaccines and therapies. This also
includes our co-work on more than 50 potential or approved Covid-19 vaccines and support in the
development of more than 35 Covid-19 testing solutions as well as over 20 therapeutic options. One
example is the collaboration with the biotech company Mammoth Biosciences on the development and
production of their CRISPR¹-based Covid-19 diagnostic tests.
At the same time, we have been actively fighting the pandemic on many fronts since the very start. With our
products and services we are contributing to the global Covid-19 response in many ways.
Our Life Science business sector offers a broad portfolio of products and services for customers around the
globe from academic institutions to biotech and pharmaceutical companies. In terms of sales, this business
sector ranks among the top three in the global life science industry. Our full portfolio encompasses more than
300,000 products and solutions, ranging from lab water systems to genome-editing tools, antibodies, cell lines
and complete solutions for the manufacture of medicines. And we are investing further in research,
development and production worldwide. Last year, we celebrated the topping-out ceremony for our new
membrane plant in Darmstadt, Germany. To meet the high demand in the Process Solutions business unit,
which offers products and services for the entire pharmaceutical production value chain, we announced plans to
expand our U.S. production facilities in Danvers, Massachusetts, and in Jaffrey, New Hampshire. Thanks to
strong business growth, we will also be expanding our capacities for antibody-drug conjugate manufacturing at
our facility near Madison, Wisconsin, as well as for viral and gene therapy production in Carlsbad, California.
These investments are worth millions and will allow us to position ourselves well in highly promising fields.
Our specialty chemicals business is combined in our Performance Materials business sector. Within the
framework of our Bright Future transformation program, we developed further into a leading materials-based
solutions player in the electronics market in 2020. Thanks not least to the acquisitions of Versum Materials and
Intermolecular in 2019, we already hold a strong position in the electronic materials market. Following the
successful completion of these acquisitions we rolled out the new, integrated Performance Materials
organization last year. A further step in the course of the ongoing transformation is now the renaming of the
business sector: Performance Materials will become Electronics. The new name reflects our strategic focus and
makes it clear at a glance what the business sector stands for. After all, through our product and service
portfolio, we are enabling the technical progress emanating from continuously growing data volumes. This
development is being driven by strong growth trends, such as 5G, Big Data, and new applications such as
autonomous driving and the Internet of Things.
-
Letter from Stefan Oschmann
In all these efforts, we will run our business as a good corporate citizen. For us, scientific progress and
responsibility go hand in hand. Responsible and sustainable conduct with respect to employees, products, the
environment, and society is a fundamental prerequisite for our business success. That is why we specified the
following goals in our sustainability strategy: In 2030, we will achieve human progress for more than one billion
people through sustainable science and technology. By 2030, we will integrate sustainability into all our value
chains. And by 2040, we will achieve climate neutrality and reduce our resource consumption. These are
ambitious goals. However, we are convinced that we can reach them and contribute in this way to the
achievement of the UN Sustainable Development Goals.
Climate impact mitigation, resource scarcity and a pandemic are major societal challenges that can be solved
only through broad-based collaboration. In particular, the search for a Covid-19 vaccine has made clear how
important it is for research, business and decision-makers from the political sphere to pull in the same
direction. International cooperation is the order of the day; multilateralism is the answer to economic standstill.
Simultaneously, the crisis is acting as a catalyst for new-found trust in science. Widespread skepticism is giving
way to greater openness and mutual respect. As a science and technology company, we can and must seize
these opportunities to enable social progress.
Merck is a company with a passion for research and discovery. Our actions are shaping human progress: We
are developing innovative therapies, working on the biotechnology of tomorrow and enabling the digital
revolution. This is something I have experienced every day for the past ten years. My time at Merck will be over
at the end of April 2021. On May 1, Belén Garijo will succeed me. We have worked together successfully for the
last ten years. The company is in very good hands with her. It was a special honor for me to lead this unique
company. And I firmly believe that Merck is excellently-positioned for sustainable and profitable growth - and
will also remain committed to progress in the future.
80
The average daily trading volume of our shares rose by around 13% year-on-year, from approximately 505,000
to just over 569,000 in 2020. Europe accounted for the largest proportion of the free float in 2020, with its
share increasing by 5 percentage points to 46%. By investor type, growth investors and value investors
dominated, as in the previous year. In 2020, the proportion of growth investors at Merck remained broadly
unchanged year-on-year at 33%. As in 2019, the top five investors at the end of 2020 cumulatively held
around 24% of the free float.
Despite the restrictions that were in place in 2020, the Merck Executive Board and the Investor Relations team
gave in-depth briefings in largely virtual form to more than 750 investors at investor conferences, as well as
during roadshows and conference calls.
The shares closed 2020 up on the relevant reference indices, which saw differing development over the course
of the year. With its share price rising by 33.2%, Merck narrowly outperformed the S&P 500 Life Sciences Tools
& Services Index, which saw growth of 32.8% in the same period. Merck shares clearly outperformed the DAX®
reference index, which rose by 4% over the period as a whole, as well as the relevant reference index of the
chemical industry, which saw full-year growth of around 8%. By contrast, the pharmaceutical industry index fell
by around 8% in 2020, meaning it was outperformed by Merck shares by 40 percentage points in the same
period.
With the subsequent turnaround in the second, third and fourth quarters, Merck shares enjoyed resilient
development despite the global uncertainty in the context of the Covid-19 pandemic. In particular, the share
price was boosted by positive development in the Life Science sector, the rapid recovery of the Healthcare
sector and the sustained strong performance of the semiconductor business in the Performance Materials
sector.
On the whole, the performance of Merck shares in 2020 was characterized by a strong increase in value of
33%. The shares started the year trending upward before entering a rapid downward movement from February
21 as a result of the Covid-19 pandemic, which also affected the relevant indices. The shares bottomed out on
March 18. While the pharmaceutical industry index performed slightly better during this period (-16% as of
March 18), Merck shares (-23% as of March 18) developed better than the relevant reference index for the
chemical industry (-28% as of March 18) and considerably better than the DAX® (-36% as of March 18).
At a glance
Merck Shares
Merck Shares
To our Shareholders
10
Marcus Kuhnert
Member of the Executive Board
Chief Financial Officer
www.merckgroup.com -> Company -> Who We Are -> Management
More information can be found on our website:
Short biographies
Peter Guenter
Member of the Executive Board
CEO Healthcare
Kai Beckmann
Member of the Executive Board
CEO Performance Materials
and Deputy CEO of Merck
Vice Chair of the Executive Board
Belén Garijo
Stefan Oschmann
Chairman of the Executive Board
and CEO of Merck
EXECUTIVE BOARD
Dr. Stefan Oschmann
Irfan Suman
Sincerely,
6
Letter from Stefan Oschmann
Chairman of the Executive Board and CEO
Stefan Oschmann
198 General Disclosures
198 Notes
in Net Equity
195 Consolidated Cash Flow Statement
196 Consolidated Statement of Changes
194 Consolidated Balance Sheet
Comprehensive Income
193 Consolidated Statement of
192 Consolidated Income Statement
Financial Statements
Consolidated
the German Commercial Code (HGB)
Merck KGaA in accordance with
Section 315a (1) of the German
Commercial Code (HGB)
113 Report on Risks and Opportunities
130 Report on Expected Developments
135 Report in accordance with
112 Corporate and Other
108 Performance Materials
104 Life Science
Healthcare
98
Merck Group
88
Course of Business and Economic Position
88
To our Shareholders
Actual Business Developments
204 Group Structure
216 Operating Activities
138 Additional Information on
and Contingent Liabilities
600
235 Operating Assets, Liabilities,
A major milestone in our Healthcare business sector was the full approval of our immuno-oncology therapy
BavencioⓇ by the U.S. Food and Drug Administration (FDA) for the treatment of patients with advanced
urothelial cancer. We gained further approvals around the world for MavencladⓇ, our oral multiple sclerosis
therapy. It is now registered in more than 80 countries globally, including the European Union, the United
States, Australia, Canada, and Switzerland. Both products made an increasingly larger contribution to organic
sales growth in Healthcare. In addition, our oncology precision medicine Tepmetko® (tepotinib), which was
developed in-house, was approved in Japan. It is thus the world's first oral MET inhibitor indicated for the
treatment of advanced lung cancer with MET gene alterations to receive regulatory approval. However, this
business sector was temporarily strongly impacted by Covid-19, especially the Fertility franchise. Yet in the
third quarter, sales of this franchise recovered significantly from the pandemic-related impacts incurred in the
first half of the year. Having divested Allergopharma, we are now sharpening our focus within Healthcare on the
development of innovative medicines for difficult-to-treat diseases.
From the start, one thing was clear to us: The health and safety of our employees as well as business continuity
would have top priority. Consequently, we succeeded in keeping the infection rates at Merck low. At the same
time, we continued to supply patients, scientists and customers with essential medicines and products and were
again able to mark key accomplishments in 2020.
weathered the pandemic so far. That's because the strengths of our business model with three innovation-
driven business sectors have become particularly evident during the Covid-19 crisis. Thanks to our clear focus
on science and technology, we are very well positioned even during economically challenging times.
-
Without a doubt, 2020 was a very challenging year. The Covid-19 pandemic has upended the world. For us at
Merck, it has also been extremely demanding but it has not shaken us. In fact, we have successfully
We have successfully weathered the pandemic
so far. That's because the strengths of our
business model with three innovation-driven
business sectors have become particularly
evident during the Covid-19 crisis. Thanks to
our clear focus on science and technology, we
are very well positioned even during
economically challenging times.
5
Letter from Stefan Oschmann
To our Shareholders
10 Merck Shares
Dear shareholders, dear friends
of March,
325 Responsibility Statement
271 Capital Structure, Investments,
and Financing Activities
The Executive Board
310 Other Disclosures
313 Scope of Consolidation
326 Reproduction of the Independent
Auditor's Report
-
260 Employees
TO OUR SHAREHOLDERS
5
Letter from Stefan Oschmann
9
334 Business Development 2016 – 2020
335 Financial Calendar
-3.7%
thereof: ErbituxⓇ
15%
891
13%
6.0%
57.4%
thereof: BavencioⓇ
871
13%
156
-4.9%
2%
2.3%
1,030
2020
-3.6%
Net sales by major product lines/products
52.5%
Healthcare
Organic
Exchange
€ million
8.4%
Share
2019
Share
Oncology
1,116
17%
12.0%
growth¹ rate effects Total change
103
1,079
Neurology & Immunology
70.5%
-5.2%
65.4%
321
5%
Fertility
8%
16%
-2.7%
-13.4%
1,247
19%
Net sales of the key product lines and products developed as follows in 2020:
thereof: Gonal-fⓇ
-10.7%
2%
531
19%
1,662
25%
6.7%
-2.4%
4.3%
1,594
thereof: MavencladⓇ
24%
1,131
17%
-9.4%
-1.7%
-11.1%
1,273
thereof: RebifⓇ
99
1,149
Healthcare
34.1%
Margin (% of net sales) 1
18.0%
346
1,922
2,267
EBITDA pre¹
28.2%
32.9%
15.2%
288
1,896
2,184
17.1%
27.2%
56.9%
654
630
Operating result (EBIT)¹
Margin (% of net sales) 1
EBITDA¹
Margin (% of net sales) 1
2020
28.6%
2019
%
6,639
6,714
-75
-1.1%
1,804
€ million
Business free cash flow¹
1,895
1,252
2019
1,481
1,677
1,756
1,800
%
1,738
15.3%
1 Not defined by International Financial Reporting Standards (IFRS).
2 Quarterly breakdown unaudited.
3.2%
4.1%
Combined Management Report
Report on Economic Position
-7.4%
99
1,702
1,701
643
51.4%
1 Not defined by International Financial Reporting Standards (IFRS).
Development of sales and results of operations
In fiscal 2020, the Healthcare business sector recorded net sales of € 6,639 million (2019: € 6,714 million).
Organic sales growth amounted to 3.4%. All in all, net sales decreased by -1.1% due to unfavorable exchange
rate developments (-3.6%) and the disposal of the Allergopharma allergy business in the first quarter of 2020
(-0.9%). The exchange rate effect reflects the unfavorable development of various currencies against the euro,
particularly the U.S. dollar, individual Latin American currencies, and the Russian ruble.
The net sales in the individual quarters as well as the respective organic growth rates in 2020 are presented in
the following graph:
1,499
Healthcare
€ million/organic growth in %
Q1
Q2
Q3
Q4
2020
Net sales and organic growth¹ by quarter²
9%
12%
-2.5%
8.4%
1.9%
8.1%
110
128
543
123
903
€ million
Organic growth¹
GlucophageⓇ
5%
3%
1%
62%
29%
100%
Share
€ million
1,131
331
705
Rebif®
Organic growth¹
18.0%
-9.4%
-11.2%
11
-3.2%
34
50
-2.4%
-28.1%
-2.3%
2.1%
Share
100%
100%
45%
4%
39%
7%
5%
-2.0%
1 Not defined by International Financial Reporting Standards (IFRS).
Fertility was the product line in the Healthcare business sector that was hardest hit by the Covid-19 pandemic.
Gonal-fⓇ, the leading recombinant hormone used in the treatment of infertility, saw an organic decline in net
sales of -12.7% in 2020 that was exacerbated by negative exchange rate effects of -2.5%. As a result, global
sales fell to € 630 million (2019: € 743 million). Despite signs of a recovery and isolated catch-up effects in the
second half of 2020, only the North America region reported moderate organic growth of 2.7% in 2020,
whereas full-year sales in the other regions were down compared to the previous year.
The General Medicine & Endocrinology franchise (including CardioMetabolic Care) recorded organic growth of
5.9% in fiscal 2020. The franchise includes medicines to treat cardiovascular diseases, thyroid disorders,
diabetes, and growth disorders. Taking into account negative exchange rate effects of -4.8%, net sales in the
General Medicine & Endocrinology franchise amounted to € 2,585 million (2019: € 2,557 million).
The diabetes drug GlucophageⓇ from the General Medicine franchise became the second-strongest drug in the
Healthcare product portfolio in terms of net sales, which increased to € 903 million (2019: € 877 million). This
corresponds to organic growth of 8.1%, which was offset by negative exchange rate effects of -5.0%. The main
driver of this development was positive performance in China and Latin America.
The beta-blocker ConcorⓇ also generated positive organic sales growth of 4.4%. However, negative exchange
rate effects of -4.7% meant that total sales stagnated at € 529 million (2019: € 530 million).
Euthyrox®, a medicine to treat thyroid disorders, developed very favorably with organic sales growth of 18.6%.
Taking into account negative exchange rate effects of -5.5%, net sales increased to € 455 million (2019:
€ 402 million).
Sales of the growth hormone SaizenⓇ declined slightly to € 234 million in fiscal 2020 (2019: € 238 million).
Organic growth of 4.0% was not enough to offset negative exchange rate effects of -5.8%.
Sales of the drug RebifⓇ, which is used to treat relapsing forms of multiple sclerosis, saw an organic decline in
net sales of -9.4% in fiscal 2020. This meant the long-term downward trend slowed temporarily in the year
under review. Taking into account negative exchange rate effects of -1.7%, global net sales decreased to
€ 1,131 million (2019: € 1,273 million). The drop in sales was attributable to the persistently difficult
competitive situation on the interferon market and the competition from alternative therapies, including oral
dosage forms and high-efficacy therapies.
Middle East and
Africa (MEA)
15.9%
> 100.0%
14%
60%
14%
Net sales
Erbitux®
€ million
Organic growth¹
Share
0.6%
891
32.2
342
64
48
6.0%
1.9%
404
Latin America
Asia-Pacific
(APAC)
North America
13%
thereof: ConcorⓇ
529
8%
4.4%
-4.7%
877
-0.2%
8%
thereof: Euthyrox®
455
7%
18.6%
-5.5%
530
13.1%
3.1%
8.1%
-15.2%
743
11%
General Medicine & Endocrinology
2,585
39%
-5.0%
5.9%
1.1%
2,557
38%
thereof: GlucophageⓇ
903
14%
-4.8%
-12.7%
402
thereof: SaizenⓇ
6,714
100%
1 Not defined by International Financial Reporting Standards (IFRS).
The oncology drug Erbitux® (cetuximab) posted organic sales growth of 6.0% in fiscal 2020. Taking into
account negative exchange rate effects of -3.7%, global net sales of Erbitux® increased by 2.3% to
€ 891 million (2019: € 871 million). While China continued to see encouraging development following the
addition of ErbituxⓇ to the National Reimbursement Drug List (NRDL) in 2018, growth in the Asia-Pacific region
as a whole stagnated as a result of the difficult competitive situation in Japan due to the launch of new drugs.
The situation in the core European markets was also characterized by a difficult competitive environment, but
positive effects from successful tenders resulted in moderate organic growth of 1.9%. All in all, ErbituxⓇ sales
in Europe amounted to € 404 million (2019: € 405 million). A partnership with Eli Lilly and Company, United
States, also had a positive impact. Services performed for the production of cetuximab as part of this
cooperation resulted in net sales in the United States in 2020.
In the area of immuno-oncology, sales of the oncology drug BavencioⓇ (avelumab) posted organic growth of
57.4%. Taking into account negative exchange rate effects of -4.9%, net sales of € 156 million were generated
in 2020 (2019: € 103 million). This highly encouraging growth was due in particular to the approval granted for
the first-line maintenance treatment of patients with locally advanced or metastatic urothelial carcinoma (UC) in
the United States in June 2020. Bavencio® is the first immunotherapy to demonstrate an improvement in
overall survival in a Phase III study compared with the standard treatment in the first-line setting for patients
with locally advanced or metastatic urothelial carcinoma. Sales growth was also driven by the approval of
BavencioⓇ in combination with axitinib for the treatment of patients with advanced renal cell carcinoma (RCC)
in Europe and Japan in 2019.
MavencladⓇ, for the oral short-course treatment of highly active relapsing multiple sclerosis, also made a
substantial contribution to the encouraging organic growth in the Healthcare business sector. MavencladⓇ
posted net sales of € 531 million in fiscal 2020, almost double the figure recorded in the previous year (2019:
€ 321 million). In a market environment impacted by Covid-19, prescription rates for MavencladⓇ declined
temporarily. However, the second half of 2020 in particular saw strong signs of a recovery, supported by new
safety data indicating that patients treated using MavencladⓇ who acquire Covid-19 are not at an increased risk
of severe outcomes. With the additional approvals obtained in 2020, MavencladⓇ is now approved in more than
80 countries around the world.
-1.1%
Healthcare
Report on Economic Position
Healthcare
100
Product sales and organic growth¹ of Rebif®, Glucophage® and ErbituxⓇ by region - 2020
Total
Europe
Combined Management Report
6%
-3.6%
100%
234
4%
4.0%
-5.8%
-1.8%
238
3.4%
4%
197
3%
287
4%
Healthcare
6,639
Other
Change
€ million
3,944
10.6%
Non-current liabilities
thereof:
Non-current provisions for
employee benefits
3,880
Other non-current
281
provisions
Non-current financial debt
9,785
Other non-current liabilities
1,603
3,194
254
8,644
1,962
686
27
1,141
-359
9,231
22.1%
11,842
27.0%
-2,610
-22.0%
Current liabilities
1,496
32.1%
14,053
37.2%
91
125
assets
Other current assets
1,286
Cash and cash equivalents
1,355
57
1,336
781
68
-51
575
thereof:
Total assets
100.0%
43,808
100.0%
-2,012
-4.6%
Equity
17,017
40.7%
17,914
40.9%
-897
-5.0%
15,548
41,796
Current provisions
613
Current financial debt
€ million
Trade accounts receivable
Receivables from royalties and licenses
Inventories/right of return for goods already delivered
Trade and other current payables/refund liabilities
Working capital¹
1 Not defined by International Financial Reporting Standards (IFRS).
Change
Dec. 31, 2020
3,052
Dec. 31, 2019
3,174
€ million
%
94
-122
24
45
-22
-47.8%
3,296
3,344
-47
-1.4%
-2,434
-2,618
185
-7.1%
3,938
-3.8%
Other current financial
Merck Group
Combined Management Report.
2,357
Trade and other current
payables/
2,434
refund liabilities
Other current liabilities
3,828
Total equity and liabilities
41,796
100.0%
933
4,550
2,618
Report on Economic Position
3,740
100.0%
-320
-2,193
-185
88
-2,012
-4.6%
1 Previous year's figures have been adjusted, see Note (2) "Reporting principles" in the Notes to the Consolidated Financial Statements.
The total assets of the Merck Group amounted to € 41,796 million as of December 31, 2020
(December 31, 2019: € 43,808 million), representing a decrease of -4.6% or € -2,012 million in fiscal 2020.
The development of total assets was largely due to exchange rate changes, in particular the weaker US dollar at
the reporting date. Working capital remained largely unchanged year-on-year at € 3,938 million (2019:
€ 3,944 million) despite the increase in the business volume in fiscal 2020.
Merck Group
Working capital¹
94
43,808
98
receivables
-48
Q2
Q3
2020
1,181
1,074
1,701
2019
929
1,139
1,111
1,206
%
27.2%
-5.7%
53.0%
Q4
1,245
3.3%
1 Not defined by International Financial Reporting Standards (IFRS).
2 Quarterly breakdown unaudited.
All business sectors contributed to the growth in Group EBITDA pre. Life Science generated EBITDA pre of
€ 2,405 million, up 13.0% on the previous year (2019: € 2,129 million). This meant the EBITDA pre margin in
the Life Science business sector increased to 32.0% in fiscal 2020 (2019: 31.0%). The share of Group EBITDA
pre attributable to the Life Science business sector (not taking into account the € -495 million reduction due to
Corporate and Other) amounted to 42% in the year under review (2019: 44%).
EBITDA pre in the Healthcare business sector increased by 18.0% to € 2,267 million (2019: € 1,922 million).
The resulting EBITDA pre margin improved substantially to 34.1% (2019: 28.6%). The share of Group EBITDA
pre attributable to Healthcare remained unchanged year-on-year at 40%.
In fiscal 2020, the Performance Materials business sector benefited considerably from the acquisition of Versum
Materials in October 2019, reporting a 27.5% increase in EBITDA pre to € 1,024 million (2019: € 803 million).
Accordingly, the share of Group EBITDA pre attributable to Performance Materials rose by 2 percentage points
to 18% (2019: 16%). The EBITDA pre margin declined slightly to 30.3% (2019: 31.2%).
Merck Group
EBITDA pre¹ by business sector² - 2020
€ million/%
18%
Q1
€ million/change in %
EBITDA pre¹ and change by quarter²
Merck Group
Merck Group
The positive business performance in the year under review led to an increase of 5.5% in the gross profit to
€ 10,699 million (2019: € 10,145 million). The resulting gross margin of the Group, i.e. gross profit as a
percentage of net sales, amounted to 61.0% (2019: 62.8%). The -8.1% reduction in marketing and selling
expenses to € 4,207 million (2019: € 4,576 million) was attributable to the Healthcare business sector (see
"Healthcare" section). Group-wide research and development (R&D) costs rose slightly year-on-year to
€ 2,288 million in fiscal 2020 (2019: € 2,268 million) and led to a research spending ratio (research and
development costs as a percentage of net sales) of 13.0% (2019: 14.0%). Accounting for 74% (2019: 75%) of
Group R&D spending, Healthcare remained the most research-intensive business sector of the Merck Group.
Merck Group
Research and development costs by business sector¹ - 2020
€ million/%
12%
Performance Materials
274
14%
Life Science
313
74%
Healthcare
1,640
Performance Materials
1 Not presented: research and development costs of € 62 million allocated to Corporate and Other.
An increase in provisions for obligations under long-term variable compensation programs (Merck Long-Term
Incentive Plan) had an adverse effect on the operating result in the year under review, with the rise in the
intrinsic value of the Merck Share Units being reflected in the respective functional costs depending on the area
of activity of the plan beneficiaries.
The financial result improved by 7.9% to € -354 million in fiscal 2020 (2019: € -385 million) which was
particularly attributable to lower interest expenses. Details about the development of the finance income and
finance expenses of the Group can be found in Note (40) "Financial income and expenses/Net profit and losses
from financial instruments" in the Notes to the Consolidated Financial Statements.
Income tax expense amounted to € 637 million in 2020 (2019: € 440 million) and resulted in a tax rate of
24.2% (2019: 25.3%). Further information on income taxes can be found in Note (15) “Income taxes” in the
Notes to the Consolidated Financial Statements.
The profit after tax from discontinued operations reported in the previous year in the amount of € 28 million
was due to subsequent effects in connection with the sale of the Consumer Health business in December 2018.
The net income attributable to Merck KGaA shareholders increased by 50.5% to € 1,987 million (2019:
€ 1,320 million) and resulted in a corresponding improvement in earnings per share to € 4.57 in fiscal 2020
(2019: € 3.04).
EBITDA pre, the key financial indicator used to steer operating business, rose by € 817 million, or 18.6%, to
€ 5,201 million (2019: € 4,385 million). Organic earnings growth, which also includes income from the release
Combined Management Report.
Report on Economic Position
Merck Group
92
92
of a provision for patent dispute in the amount of € 365 million (see Note (27) "Other provisions" in the Notes
to the Consolidated Financial Statements), amounted to 16.8%. Portfolio effects - primarily resulting from the
acquisition of Versum Materials - led to a 6.4% increase in EBITDA pre in fiscal 2020. This was offset by
negative exchange rate effects of -4.6%. Relative to net sales, the Merck Group recorded an EBITDA pre
margin of 29.7% (2019: 27.1%). The reconciliation of the operating result (EBIT) to EBITDA pre is presented in
the chapter entitled "Internal Management System".
The development of EBITDA pre in the individual quarters in comparison with 2019 as well as the respective
growth rates are presented in the following overview:
Detailed information about the development and composition of other operating expenses and income can be
found in Note (13) "Other operating income" and Note (14) "Other operating expenses" in the Notes to the
Consolidated Financial Statements.
1,024
42%
Life Science
2,405
Other intangible assets
7,653
9,221
Property, plant and
6,421
6,192
equipment
Other non-current assets
2,483
2,278
-1,155
-1,567
229
17,114
205
9,280
22.2%
9,003
20.6%
277
3.1%
thereof:
Inventories
3,294
Trade and other current
3,221
3,342
3,488
Current assets
-267
15,959
thereof:
O
1 Not defined by International Financial Reporting Standards (IFRS).
2 Not presented: Decline in Group EBITDA pre by €-495 million due to Corporate and Other.
40%
Healthcare
2,267
Merck Group
Balance sheet structure¹
Combined Management Report.
Report on Economic Position
Merck Group
93
Dec. 31, 2020
Goodwill
Dec. 31, 2019
€ million
%
€ million
%
€ million
%
Non-current assets
32,516
77.8%
34,805
79.4%
-2,289
-6.6%
Change
-6
-0.2%
The composition and the development of net financial debt were as follows:
>100%
2.9%
Combined Management Report.
Report on Economic Position
Merck Group
Merck Group
Business free cash flow¹ by business sector² - 2020
€ million/%
19%
847
Performance Materials
37%
Life Science
1,595
44%
Healthcare
1,895
1 Not defined by International Financial Reporting Standards (IFRS).
2 Not presented: decline in Group business free cash flow by € -571 million due to Corporate and Other.
The contributions of the operating business sectors to Group business free cash flow developed as follows in
fiscal 2020: The contribution of Healthcare increased by 51.4% to € 1,895 million (2019: € 1,252 million) and
hence was the business sector with the highest cash flows, accounting for a 44% share (2019: 38%) of Group
business free cash flow (not taking into account the € -571 million reduction due to Corporate and Other). In
2020, the Life Science business sector generated business free cash flow of € 1,595 million (2019:
€ 1,375 million), thus contributing a share of 37% to Group business free cash flow (2019: 42%). With
business free cash flow of € 847 million (2019: € 641 million), Performance Materials contributed 19% (2019:
20%) to this Group key performance indicator.
Investments in property, plant, equipment, and software, as well as advance payments for intangible assets
included in the calculation of business free cash flow, rose in 2020 by 40.2% to € 1,439 million (2019:
€ 1,026 million). The investments in property, plant, and equipment included therein amounted to
€ 1,344 million in 2020 (2019: € 1,104 million), of which € 858 million (2019: € 497 million) was attributable to
strategic investment projects each with a project volume of more than € 2 million.
In 2020, strategic investments of € 168 million were made in Germany (2019: € 146 million), of which
€ 118 million related to the expansion of our site in Darmstadt. Among other things, the Performance Materials
business sector invested € 15 million in a new research center and the Life Science business sector invested
€ 34 million in a new membrane production plant. The Life Science business sector also invested € 33 million in
a new filling and logistics center in Schnelldorf.
Outside Germany, high levels of strategic investments were made in the United States (€ 366 million) and
Switzerland (€ 162 million) in particular. The United States saw a Healthcare investment of € 27 million in the
expansion of the research and development center in Billerica, Massachusetts, and a Life Science investment of
€ 36 million in a new manufacturing facility for gene therapy products in Carlsbad. In addition, the Life Science
business sector acquired its previously leased company headquarters in Burlington, Massachusetts, for
€ 208 million. The same applies to the Performance Materials business sector, which purchased its previously
leased facility in Tempe, Arizona, for € 18 million. In Switzerland, the Healthcare business sector invested € 85
million in a new development center to produce biotechnological products and € 41 million in a new production
building for bottling these products.
777
Q4
2 Quarterly breakdown unaudited.
1 Not defined by International Financial Reporting Standards (IFRS).
35
31
4
2,038
1,889
149
14.3%
7.9%
The business free cash flow of the Merck Group rose by 37.8% to € 3,765 million in fiscal 2020 (2019:
€ 2,732 million). This was due in particular to the higher level of EBITDA pre and the development of
inventories and receivables. The composition of business free cash flow is presented in the chapter entitled
"Internal Management System".
The distribution of business free cash flow across the individual quarters and the percentage changes in
comparison with 2019 were as follows:
Merck Group
Business free cash flow¹ and change by quarter²
€ million/change in %
Our credit ratings from the independent rating agencies did not change in 2020. Merck is currently rated by
Standard & Poor's, Moody's, and Scope. Standard & Poor's has issued a long-term credit rating of A with a
stable outlook, Moody's a rating of Baal with a stable outlook, and Scope a rating of A-, likewise with a stable
outlook. An overview of the development of our rating in recent years is presented in the Report on Risks and
Opportunities.
Q1
Q3
2020
661
813
1,514
2019
545
701
731
754
%
21.4%
16.0%
Q2
96
96
Combined Management Report. Report on Economic Position
62.3%
49.9%
45.9%
Non-current assets
Current liabilities
Finance structure¹
37.3%
45.7%
43.3%
40.1%
37.5%
Liabilities (total)
1 Not defined by International Financial Reporting Standards (IFRS).
51.5%
Overall assessment of business performance and economic situation
Despite considerable obstacles in some business units as a result of the pandemic, the financial targets we had
set for 2020 were reached or even exceeded. In particular, we recorded further profitable growth in fiscal 2020.
Group net sales increased by 8.6% to € 17,534 (2019: € 16,152 million), while the key financial indicator used
to steer our operating business, EBITDA pre, rose by as much as 18.6% to € 5,201 million (2019:
€ 4,385 million). All our business sectors contributed to this success.
Another milestone in our Healthcare business sector was the approval of our cancer immunotherapy BavencioⓇ
by the U.S. Food and Drug Administration (FDA) for the treatment of patients with advanced urothelial
carcinoma. We obtained additional approvals for MavencladⓇ around the world, meaning that the product is
now approved in more than 80 countries including in the European Union, the United States, Australia, Canada,
and Switzerland. With the sale of our Allergopharma allergy business, we are now further heightening our focus
on the development of innovative medicines for hard-to-treat diseases.
We also invested in research, development and production in the Life Science business sector in fiscal 2020. For
example, we celebrated the topping-out ceremony for our new membrane facility in Darmstadt and announced
the expansion of production sites in the United States.
In Performance Materials, we developed further into a leading player for materials-based solutions for the
electronics market in 2020 as part of the "Bright Future" transformation program. Our current portfolio means
we already occupy a strong position on the market for electronic materials, thanks in part to the acquisitions of
Versum Materials and Intermolecular in 2019.
The solid financing policies of the Merck Group are reflected in persistently good key balance sheet figures. The
equity ratio was 40.7% on December 31, 2019 (December 31, 2019: 40.9%), and thus at a very good level.
Having risen to € 12,363 million in the previous year due to the acquisition of Versum Materials, net financial
debt was reduced by 13.0% in 2020 and amounted to € 10,758 million at the end of the fiscal year. So that we
can continue to achieve a rapid reduction in financial liabilities, we are focusing on generating organic growth
and on high inflows of financial resources from operating business activities.
Based on our solid net assets and financial position, and our profitable operations, we view the economic
situation of the Merck Group as positive overall. Our clear focus on science and technology means we are well
positioned even in economically challenging times.
Healthcare
Healthcare
Key figures
Combined Management Report
Report on Economic Position
Healthcare
986
2020 was dominated by the global spread of Covid-19. Merck succeeded in mastering the unprecedented
challenges this entailed, with the effectiveness of our business model and its three innovative business sectors
proving its worth in the Covid-19 crisis.
73.8%
52.3%
Total equity
Merck Group
The development of key balance sheet figures was as follows:
Merck Group
Key balance sheet figures
97
97
%
Total equity
Equity ratio¹
Dec. 31, 2020
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2017
Asset coverage¹
Dec. 31, 2016
40.9%
46.7%
39.5%
36.7%
Total assets
Non-current assets
Asset ratio¹
77.8%
79.4%
75.0%
79.1%
80.0%
Total assets
40.7%
-600
-813
-1,413
Lease liabilities
Financial debt
less:
Cash and cash equivalents
438
567
-129
-22.7%
12,142
13,194
-1,052
-8.0%
1,355
34.2%
Other current financial assets²
781
50
575
73.6%
-22
-43.4%
Net financial debt¹
10,758
12,363
-1,605
-13.0%
1 Not defined by International Financial Reporting Standards (IFRS).
2 Excluding current derivatives (operational).
Merck Group
28
Reconciliation of net financial debt¹
26
102
Merck Group
Net financial debt¹
Change
€ million
Bonds and commercial paper
Dec. 31, 2020
9,642
Dec. 31, 2019
10,059
€ million
%
-417
-4.1%
Bank loans
76
1,085
-501
-31.6%
Liabilities to related parties
817
809
8
1.0%
Loans from third parties and other financial debt
58
97
-39
-40.5%
Liabilities from derivatives (financial transactions)
1,587
Report on Economic Position
€ million
Currency translation difference
Merck Group
95
In fiscal 2020, the equity of the Merck Group declined by -5.0% to € 17,017 million (December 31, 2019:
€ 17,914 million). This development was primarily due to negative currency translation effects as well as
dividend payments and profit withdrawals. The profit after tax generated in fiscal 2020 was not sufficient to
offset these effects (see "Consolidated Statement of Changes in Equity" in the Consolidated Financial
Statements). The equity ratio declined only slightly to 40.7% (December 31, 2019: 40.9%). The composition of
free cash flow as well as the development of the relevant items are presented in the following table:
Merck Group
Free cash flow¹
€ million
Cash flow from operating activities according to the
consolidated cash flow statement
Payments for investments in intangible assets
Proceeds from the disposal of intangible assets
Payments for investments in property, plant and equipment
Proceeds from the disposal of property, plant and equipment
Free cash flow¹
1 Not defined by International Financial Reporting Standards (IFRS).
Change
2020
Report on Economic Position
2019
%
3,477
2,856
621
21.7%
-150
-208
58
-27.8%
88
23
66
> 100.0%
€ million
Jan. 01
Combined Management Report.
3 According to the Consolidated Cash Flow Statement.
Change in lease liabilities²
Dividend payments/profit withdrawals³
Acquisitions³
2020
2019
12,363
6,701
-189
79
65
663
687
689
10,758
11
-48
110
966
-2,038
-93
-1,889
24
12,363
Payments for/proceeds from the disposal of assets held for sale³
Transfer of financial debt due to acquisitions
Free cash flow¹
Other
Dec. 31
1 Not defined by International Financial Reporting Standards (IFRS).
2 In 2019 included € 465 million due to the first-time application of IFRS 16 as of January 1, 2019.
5,020
Combined Management Report.
Combined Management Report
31.0%
Report on Economic Position
Business free cash flow¹
101
405
357
6
363
11.5%
expenses
Operating result (EBIT)¹
1,804
1,149
Depreciation/amortization/
impairment losses/reversals of
381
-2
379
747
746
-49.2%
impairment losses
EBITDA¹
2,184
1,896
Restructuring expenses
95
-95
17
-17
Integration expenses/IT expenses
406
Other operating income and
Impairment losses and reversals
of impairment losses on financial
assets (net)
> 100.0%
5,109
5,109
Healthcare
-1,664
47
-1,617
-2,305
3
-2,303
-29.8%
-320
7
-313
4
-344
-329
-4.8%
-1,640
24
-1,616
-1,666
2
-1,663
-2.9%
-4
-4
-1
-1
15
-4
13
-13
Healthcare
EBITDA pre¹ and change by quarter²
€ million/change in %
2020
Q1
472
Q2
Q3
374
896
2019
332
528
501
The development of EBITDA pre in the individual quarters in comparison with 2019 is presented in the following
overview:
%
-29.1%
78.9%
Q4
525
561
-6.4%
1 Not defined by International Financial Reporting Standards (IFRS).
2 Quarterly breakdown unaudited.
Development of business free cash flow
In 2020, business free cash flow increased by 51.4% year-on-year to € 1,895 million (2019: € 1,252 million).
This was primarily due to the higher EBITDA pre and the positive development of receivables compared with
the previous year.
Healthcare
Business free cash flow¹
Combined Management Report
42.2%
5,033
The restructuring expenses eliminated in calculating EBITDA pre are primarily attributable to transformation
and growth programs initiated in fiscal 2020 (see Note (27) "Other provisions" in the Notes to the Consolidated
Financial Statements).
Marketing and selling expenses after adjustments declined by -29.8% year-on-year to € 1,617 million (2019:
€ 2,303 million). The main reasons were lower costs due to the Covid-19 pandemic and the end of scheduled
amortization in connection with purchase price allocation for the Serono acquisition in 2006. With investment
requirements for our development portfolio being slightly lower at present, research and development costs
declined by -2.9% to € 1,616 million in the year under review (2019: € 1,663 million). The change in other
operating expenses and income was due to several factors. Earnings were positively affected in the amount of
€ 365 million as a result of the reversal of a provision for potential compensation payments for damages in
connection with the patent dispute with Biogen Inc., United States (Biogen). This was offset by the end of the
recognition of the upfront cash payment by Pfizer Inc., United States, from 2014. The 2019 reporting period
was also positively influenced by the recognition of milestone payments of € 75 million from BioMarin
Pharmaceutical Inc., United States, in connection with the sale of Palynziq™ rights in 2016 and € 90 million
from the partnership with Pfizer following the extension of approval of BavencioⓇ for the treatment of advanced
renal cell carcinoma in combination with axitinib.
Gains (-)/losses (+) on the
-16
16
-5
5
divestment of businesses
Acquisition-related adjustments
Other adjustments
EBITDA pre¹
2,267
2,267
1,922
of which: organic growth¹
EBITDA pre developed very favorably in 2020, rising by 18.0% to € 2,267 million (2019: € 1,922 million).
Organic earnings growth amounted to 26.6%. Overall, the EBITDA pre margin also saw growth of more than
5 percentage points to 34.1% (2019: 28.6%).
of which: exchange rate effects
divestments
1 Not defined by International Financial Reporting Standards (IFRS).
1,922
18.0%
26.6%
-8.5%
-0.1%
The gross profit of the Healthcare business sector after adjustments declined slightly to € 5,033 million (2019:
€ 5,109 million). This was largely due to the sales development. At 75.8%, the resulting gross margin was
down slightly on the 2019 reporting period (76.1%).
Combined Management Report
Report on Economic Position
Healthcare
102
of which: acquisitions/
7
5,026
0.1%
6,864
7,515
7,515
Pre¹
Pre¹
Elimination of
adjustments
IFRS
Pre¹
Elimination of
adjustments
IFRS
Cost of sales
Net sales
€ million
6,864
Change
-2.0%
-2.8%
-3.7%
2,241
33%
North America
1,554
23%
7.8%
-2.3%
5.5%
1,474
22%
2019
Asia-Pacific (APAC)
9.5%
5
-307
34
-341
-322
32
-354
Administration expenses
3.6%
-1,922
2
-1,924
-1,992
4
-3,215
-1,995
10.2%
3,908
5
3,903
4,305
5
4,300
Gross profit
8.6%
-2,957
5
-2,962
-3,210
Marketing and selling expenses
Report on Economic Position
1,831
2.4%
Reconciliation EBITDA pre¹
€ million
Net sales
Cost of sales
Gross profit
Marketing and selling expenses
Administration expenses
Research and development costs
2020
2019
Change
IFRS
Elimination of
adjustments
Healthcare
Pre¹
Elimination of
adjustments
Pre¹
Pre¹
6,639
6,639
6,714
6,714
-1.1%
-1,613
7
-1,606
-1,605
-1,605
IFRS
28%
The following table presents the composition of EBITDA pre in fiscal 2020 in comparison with 2019. The IFRS
figures have been modified to reflect the elimination of adjustments included in the functional costs.
100%
-1.5%
0.9%
1,816
27%
Latin America
641
10%
9.3%
-18.0%
-8.8%
702
11%
Middle East and Africa (MEA)
1 Not defined by International Financial Reporting Standards (IFRS).
455
-3.5%
-2.0%
-5.5%
482
7%
Healthcare
6,639
100%
3.4%
-3.6%
-0.9%
-1.1%
6,714
7%
Healthcare
103
Change
2019
Total change
Acquisitions/
divestments
Exchange
rate effects
Organic
growth¹
Share
2020
€ million
Net sales by region
Life Science
Net sales of the business sector by region developed as follows:
The Research Solutions business unit, which provides products and services to support life science research for
pharmaceutical, biotechnology, and academic research laboratories, recorded an organic sales growth of 4.6%
in 2020. This was due to a recovery of the base business in the second half of 2020 combined with some
tailwind in Covid-19 demand. Amid an unfavorable foreign exchange rate effect of -2.5%, net sales totaled
€ 2,215 million in 2020 (2019: € 2,170 million). Research Solutions thus accounted for 29% of Life Science
total net sales. The organic sales growth was reported in Asia-Pacific, North America and Europe.
The Applied Solutions business unit with its broad range of products for researchers as well as scientific and
industrial laboratories, accounted for a 23% share of Life Science sales. Applied Solutions recorded an organic
sales growth of 3.3% in 2020. The Applied Solutions product portfolio faced some slowdown in customer
demand due to Covid-19 related lockdowns, in particular in the first half of 2020. With an unfavorable foreign
exchange rate effect of -2.6%, sales totaled € 1,704 million in 2020 (2019: € 1,692 million). Applied Solutions
saw organic sales growth in all regions apart from Middle East and Africa.
The Process Solutions business unit, which markets products and services for the pharmaceutical production
value chain, generated organic sales growth of 21.8%, which was the highest rate within the Life Science
business sector. The business experienced strong demand in both Covid-19 and non Covid-19 related product
and service offerings. With an unfavorable foreign exchange rate effect of -2.1%, net sales amounted to
€ 3,596 million in fiscal 2020 (2019: € 3,002 million). The percentage contribution of the Process Solutions
business unit to Life Science total net sales rose by 4 percentage points to 48%. All regions experienced
double-digit organic sales growth within Process Solutions.
Share
105
Report on Economic Position
Combined Management Report
2 Not defined by International Financial Accounting Standards (IFRS).
1 Previous year's figures have been adjusted due to internal realignment.
100%
6,864
9.5%
-2.3%
11.8%
100%
7,515
Life Science
25%
Life Science
1,692
Europe
35%
278
-13.2%
-18.3%
5.1%
3%
241
Latin America
26%
1,743
9.0%
-2.5%
11.5%
25%
2,583
1,900
36%
2,474
9.2%
-2.4%
11.6%
36%
2,701
North America
33%
2,277
13.4%
-0.2%
13.6%
Asia-Pacific (APAC)
4%
0.8%
3.3%
6.3%
5.6%
%
1,783
1,715
1,705
1,661
2019
2,030
1,910
1,806
1,769
2020
1 Not defined by International Financial Reporting Standards (IFRS).
Q4
Q2
Q1
€ million/organic growth in %
Net sales and organic growth¹ by quarter²
Life Science
The development of sales in the individual quarters in comparison with 2019 as well as the respective organic
growth rates are presented in the following graph:
In fiscal 2020, Life Science posted organic sales growth of 11.8% with unfavorable foreign exchange impact of
-2.3%, resulting in a total net sales growth of 9.5% compared to the previous year. All three business units
contributed to the organic growth, with the largest contribution coming from Process Solutions followed by
Research Solutions. Overall, Life Science net sales increased to € 7,515 million (2019: € 6,864 million).
Development of sales and results of operations
1 Not defined by International Financial Reporting Standards (IFRS).
16.0%
220
1,375
1,595
Q3
-2.6%
2 Quarterly breakdown unaudited.
Net sales by business unit¹
23%
1,704
Applied Solutions
31%
2,170
2.1%
44%
3,002
19.8%
Share
2019
Total change
Acquisitions/
divestments
Life Science
Exchange
rate effects
-2.1%
-2.5%
29%
2,215
Research Solutions
21.8%
48%
3,596
Process Solutions
Organic
growth²
Share
2020
€ million
19.3%
15.6%
4.6%
4.6%
Middle East and Africa (MEA)
1%
Business free cash flow¹
1,895
1,252
643
51.4%
1 Not defined by International Financial Reporting Standards (IFRS).
2 Excluding payments for low-value leases and interest components included in lease payments.
The development of business free cash flow items in the individual quarters in comparison with 2019 is
presented in the following overview:
Healthcare
Business free cash flow¹ and change by quarter²
€ million/change in %
2020
Q1
377
Q2
-26
Q3
790
2019
222
346
311
373
%
69.9%
-24.4%
1 Not defined by International Financial Reporting Standards (IFRS).
2 Quarterly breakdown unaudited.
Q4
467
261
>100%
-5.5%
-50
€ million
2020
2019
€ million
%
EBITDA pre¹
2,267
1,922
346
18.0%
Investments in property, plant and equipment, software as well
as advance payments for intangible assets
-448
-427
3
-22
Changes in inventories
-20
-94
73
-78.2%
Changes in trade accounts receivable as well as receivables
from royalties and licenses
170
-100
270
> 100.0%
Lease payments²
Elimination Allergopharma divestment
-47
5.1%
89
25.0%
Life Science
EBITDA pre¹
2,405
2,129
276
13.0%
Margin (% of net sales) 1
32.0%
2020
Reconciliation EBITDA pre¹
Life Science
The following table presents the composition of EBITDA pre for 2020 in comparison with 2019. The
International Financial Reporting Standards (IFRS) figures have been modified to reflect the elimination of
adjustments included in the respective functional costs.
106
Life Science
30.2%
Report on Economic Position
1 Not defined by International Financial Accounting Standards (IFRS).
100%
6,864
9.5%
-2.3%
11.8%
100%
7,515
Life Science
1%
92
-3.3%
-3.3%
Combined Management Report
Life Science
31.8%
317
Key figures
Combined Management Report
Report on Economic Position
Life Science
104
Change
€ million
Net sales
Operating result (EBIT)¹
Margin (% of net sales) 1
EBITDA¹
Margin (% of net sales) 1
2020
15.3%
2019
%
7,515
6,864
651
9.5%
1,599
1,280
318
24.9%
21.3%
18.7%
2,387
2,070
€ million
Research and development costs
Impairment losses and reversals
of impairment losses on financial
assets (net)
-1.5%
1
1%
37
Middle East and Africa (MEA)
1%
32
-11.2%
3.9%
-15.3%
0.2%
1%
28
Latin America
79%
2,041
26.5%
30.5%
-0.4%
-3.6%
76%
2,582
Asia-Pacific (APAC)
10%
267
81.2%
82.0%
-3.1%
2.2%
-3.2%
Performance Materials
3,380
100%
Elimination of
adjustments
IFRS
Pre¹
Elimination of
adjustments
IFRS
Net sales
€ million
Change
2019
2020
Reconciliation EBITDA pre¹
Performance Materials
The following table presents the composition of EBITDA pre for 2020 in comparison with 2019. The IFRS figures
have been modified to reflect the elimination of adjustments included in the respective functional costs.
14%
110
Report on Economic Position
Combined Management Report
1 Not defined by International Financial Reporting Standards (IFRS).
100%
2,574
31.3%
35.4%
1%
17
> 100.0%
> 100.0%
-3.8%
-0.9%
-3.2%
Performance Materials
484
North America
9%
438
49%
1,256
34%
878
Share
2019
Total change
> 100.0%
-11.7%
-15.4%
-56.1%
0.1%
-56.2%
1
Other
-1.9%
17%
-13.5%
370
Surface Solutions
> 100.0%
Acquisitions/
divestments
rate effects
-1.5%
14.3%
-11.7%
33%
1,108
Display Solutions
56%
1,901
Semiconductor Solutions
Exchange
11%
Pre¹
2
3,380
217
15.2%
21.5%
-0.4%
Share
2019
Total change
Acquisitions/
divestments
Exchange
rate effects
Organic
growth¹
-5.9%
8%
250
Europe
Performance Materials
Share
€ million
Net sales by region
Performance Materials
Net sales of the Performance Materials business sector by region developed as follows:
2 Not defined by International Financial Accounting Standards (IFRS).
1 Previous year's figures have been adjusted due to internal realignment.
100%
2,574
31.3%
35.4%
-0.9%
-3.2%
100%
2020
Pre¹
3,380
3,380
EBITDA pre¹
Other adjustments
-82
82
-21
21
Acquisition-related adjustments
divestment of businesses
-1
1
Gains (-)/losses (+) on the
-23
23
1,024
-61
637
-47
47
Integration expenses/IT expenses
-31
31
Restructuring expenses
925
EBITDA¹
impairment losses
74.0%
323
-7
61
330
1,024
of which: organic growth¹
Net sales of the Healthcare business sector by region in 2020 developed as follows:
Healthcare
Net sales by region
€ million
2020
Share
Organic
growth¹
Exchange
rate effects
Acquisitions/
divestments
Total change
2019
Share
803
Europe
32%
1.1%
The rise in marketing and selling expenses, administrative expenses and research and development costs was
due to the additional costs of the Versum Materials and Intermolecular organizations. The successful
implementation of the "Bright Future" transformation program reduced the underlying research and
development costs of the legacy business - excluding the increase associated with the acquisitions of Versum
Materials and Intermolecular. EBITDA pre of the business sector grew by 27.5% to € 1,024 million (2019:
€ 803 million) as the additional EBITDA pre from the acquisitions (36.3%) more than offset the decline in
organic EBITDA pre (-7.5%) and negative foreign exchange effects (-1.3%). At 30.3%, the EBITDA pre margin
in 2020 was down from the prior-year figure (2019: 31.2%).
Adjusted gross profit of the Performance Materials business sector rose by 19.0% to € 1,414 million in fiscal
2020 (2019: € 1,188 million). The main driver for the increase was the acquisition of Versum Materials in the
fourth quarter of 2019. The adjusted gross margin declined to 41.8% in 2020 (2019: 46.2%), primarily owing
to the consolidation of the lower-margin Versum Materials business and the additional depreciation and
amortization associated with acquisition accounting (purchase price allocation). Not including adjustments, the
operating result (EBIT) decreased by € 67 million to € 240 million in 2020 (2019: € 307 million). The decrease
was attributable to additional amortization and impairments partially offset by the additional EBIT provided by
the Versum Materials acquisition.
1 Not defined by International Financial Reporting Standards (IFRS).
36.3%
-1.3%
-7.5%
27.5%
803
divestments
of which: acquisitions/
of which: exchange rate effects
2,158
Organic
growth²
561
684
Administration expenses
64.0%
-323
6
-329
-530
9
-539
Marketing and selling expenses
19.0%
1,188
51
1,137
-162
1,414
1,374
Gross profit
41.9%
-1,386
51
-1,437
-1,966
40
-2,007
-313
31.3%
2,574
2,574
40
-123
17
-118
impairment losses/reversals of
Depreciation/amortization/
307
240
-85.3%
-37
80
-116
-5
154
-160
Operating result (EBIT)¹
expenses
-144
Other operating income and
of impairment losses on financial
Impairment losses and reversals
12.9%
-241
26
-267
-272
2
-274
Research and development costs
34.7%
-107
11
assets (net)
Share
Cost of sales
€ million
%
549
531
533
516
2019
653
630
569
553
2020
Q4
Q3
7.2%
Q2
€ million/change in %
EBITDA pre¹ and change by quarter²
Life Science
The development of EBITDA pre in the individual quarters in comparison with 2019 is presented in the following
overview:
107
Life Science
Report on Economic Position
Combined Management Report
€ 312 million (2019: € 276 million). After eliminating adjustments, amortization, and depreciation, EBITDA pre
rose by 13.0% to € 2,405 million (2019: € 2,129 million) reflecting the strong performance of the Life Science
business. Organically, EBITDA pre increased by 17.2% in 2020. The result margin, i.e. EBITDA pre as a
percentage of net sales, improved to 32.0% in 2020 (2019: 31.0%).
Adjusted gross profit increased by 10.2% to € 4,305 million (2019: € 3,908 million). The increase was mainly
driven by the strong sales development. Marketing and selling expenses increased by 3.6% to € 1,992 million
(2019: € 1,922 million), with higher logistics costs as the main driver. Administration expenses increased by
4.6% to € 322 million (2019: € 307 million) and research and development costs increased by 13.1% to
1 Not defined by International Financial Reporting Standards (IFRS).
divestments
-0.5%
Q1
-3.8%
6.7%
19.0%
Changes in trade accounts receivable as well as receivables
from royalties and licenses
> 100.0%
246
-232
13
Changes in inventories
80.4%
-309
-384
-693
Investments in property, plant and equipment, software as well
as advance payments for intangible assets
13.0%
276
18.7%
2,129
EBITDA pre¹
%
€ million
2019
2020
€ million
Change
Business free cash flow¹
Life Science
In 2020, Life Science generated business free cash flow which amounted to € 1,595 million (2019:
€ 1,375 million). This positive development was mainly driven by higher EBITDA pre as well as a decrease in
inventories partly offset by increased capital spending.
Development of business free cash flow
2 Quarterly breakdown unaudited.
1 Not defined by International Financial Reporting Standards (IFRS).
2,405
-75
17.2%
of which: acquisitions/
789
786
-3
789
impairment losses/reversals of
Depreciation/amortization/
1,280
1,599
Operating result (EBIT)¹
expenses
5.4%
-56
19
789
-75
-21
-38
Other operating income and
-79.9%
-7
-7
-1
-1
13.1%
-276
-276
-312
2020
-59
13.0%
-0.4%
EBITDA¹
of which: exchange rate effects
of which: organic growth¹
2,129
2,405
2,405
EBITDA pre¹
Other adjustments
-2
2
-9
9
-36
36
impairment losses
-13
2,070
30
-30
Acquisition-related adjustments
divestment of businesses
Gains (-)/losses (+) on the
-32
32
Integration expenses/IT expenses
-16
16
Restructuring expenses
2,387
13
-81
2,129
-7.8%
Performance Materials
The net sales in the individual quarters as well as the respective organic growth rates in 2020 are presented in
the following graph:
In 2020, net sales of the Performance Materials business sector increased 31.3% to € 3,380 million (2019:
€ 2,574 million). The acquisitions of Versum Materials and Intermolecular contributed 35.4% to the growth of
Performance Materials, but an organic decline of -3.2% and a negative exchange rate impact of -0.9% partially
offset the acquisition effects.
Development of net sales and results of operations
32.1%
206
641
847
31.2%
30.3%
27.5%
221
803
€ million/organic growth in %
1,024
27.4%
45.2%
288
637
925
11.9%
7.1%
-21.7%
-67
307
240
31.3%
807
24.8%
2,574
Q1
900
Performance Materials
Net sales by business unit¹
6
Net sales of the Surface Solutions business unit decreased by a total of -15.4% in fiscal year 2020. An organic
decline of -13.5% was due to Covid-19 pandemic-driven demand decreases in the automotive, industrial and
cosmetic markets. Foreign exchange effects contributed a further decrease of -1.9%.
The Display Solutions business unit, consisting mainly of the businesses with liquid crystals, photoresists for
display applications as well as OLED materials, recorded a sales decrease of -11.7% for fiscal year 2020, which
was in total organically driven. The Covid-19 pandemic had a considerable impact on the development of net
sales in 2020.
semiconductor markets helped drive organic growth of 14.3% for fiscal 2020. The organic growth was broad
based across nearly all of the Semiconductor Materials businesses. Exchange rates negatively impacted net
sales by -1.5%. Total growth in Semiconductor Solutions was mainly attributable to the acquisitions of Versum
Materials and Intermolecular in the fourth quarter of 2019.
109
Performance Materials
Report on Economic Position
Combined Management Report
The Semiconductor Solutions business unit was transformed through the acquisitions of Versum Materials and
Intermolecular in the fourth quarter of 2019. As a result, the share of Performance Materials sales attributable
to Semiconductor Solutions increased from 34% to 56%. Semiconductor Solutions now comprises two
businesses, Semiconductor Materials and Delivery Systems & Services. Semiconductor Materials will continue to
focus on the development and commercialization of material-based solutions for the semiconductor industry.
Delivery Systems & Services focuses on developing and operating delivery systems for semiconductor
manufacturers. Additionally, the unit offers services to support the equipment install base and safe handling of
the specialty materials that flow through it. In Semiconductor Solutions, strong improvement in the underlying
The Covid-19 pandemic caused a significant demand decrease in both Surface Solutions and Display Solutions
in the second quarter of fiscal year 2020 and was a major factor for the organic sales growth development for
fiscal year 2020.
8.0%
-5.4%
2020
831
2 Quarterly breakdown unaudited.
1 Not defined by International Financial Reporting Standards (IFRS).
-13.7%
-5.4%
%
798
583
589
604
2019
836
Q3
Q2
814
Q4
3,380
Net sales and organic growth¹ by quarter²
Business free cash flow¹ and change by quarter²
46.0%
-8.2%
%
323
2019
472
22
Q2
Q1
246
2020
€ million/change in %
Life Science
The development of business free cash flow in the individual quarters in comparison with 2019 is presented in
the following overview:
2 Excluding payments for low-value leases and interest components included in lease payments.
1 Not defined by International Financial Reporting Standards (IFRS).
16.0%
220
1,375
1,595
Business free cash flow¹
-100.0%
-1
1
Elimination first-time consolidation
-0.4%
-56
%
-56
Lease payments²
Q3
566
268
410
€ million
2019
2020
Change
1 Not defined by International Financial Reporting Standards (IFRS).
Business free cash flow¹
Margin (% of net sales) 1
EBITDA pre¹
Margin (% of net sales) 1
EBITDA¹
Operating result (EBIT)¹
Net sales
€ million
Key figures
Performance Materials
Margin (% of net sales) 1
108
373
1 Not defined by International Financial Reporting Standards (IFRS).
Performance Materials
38.0%
Q4
311
2 Quarterly breakdown unaudited.
Combined Management Report
Report on Economic Position
Performance Materials
-16.7%
Likely
5
20 50 million €
> 50 million €
Risk matrix
The combination of the two factors results in the risk matrix below, which shows the individual risks and their
significance to the Group.
Critical negative impact on the net asset, financial position, and results of operations
Substantial negative impact on the net asset, financial position, and results of operations
Moderate negative impact on the net asset, financial position, and results of operations
Immaterial negative impact on the net asset, financial position, and results of operations
Explanation
5 20 million €
<5 million €
> 50 million €
2050 million €
Degree of impact
Very likely
20 million €
<5 million €
Degree of Impact
Impact
6.6%
Report on Risks and Opportunities
115
Medium
Medium
Medium
High
High
Medium
Low
Low
Medium
Low
Medium
Medium
Low
High
Medium
Low
Possible
Probability of occurence
< 20%
Combined Management Report
Unlikely
Report on Risks and Opportunities
> 80%
After eliminating adjustments, administrative costs increased by 3.1% to € 311 million in fiscal 2020 (2019:
€ 302 million). Cross-business research and development costs amounting to € 62 million (2019: € 59 million),
such as expenses for the Innovation Center, were allocated to Corporate. After eliminating adjustments, other
operating expenses (net) increased to € -197 million (2019: € -167 million). After eliminating depreciation,
amortization, and adjustments, EBITDA pre amounted to € -495 million in 2020 (2019: € -469 million). The
increase in negative business free cash flow to € -571 million (2019: € -536 million) was largely due to the
development of EBITDA pre.
20 - 50%
Combined Management Report
113
Report on Risks and
Opportunities
Risks and opportunities are inherent to entrepreneurial activity. We have put systems and processes in place to
identify risks at an early stage and counteract them by taking appropriate action. Within the company,
opportunity management is an integral component of our internal decision-making processes such as short-
and medium-term planning and intra-year business plans.
Risk and opportunity management
Merck is part of a complex, global business world and is therefore exposed to a multitude of external and
internal influences. Every business decision is therefore based on the associated risks and opportunities.
In our internal risk reporting, risks are defined as potential future events or developments that could lead to a
negative deviation from our (financial) targets. In parallel, opportunities are defined as potential events or
developments that imply a positive deviation from our planned (financial and non-financial) targets. Identified
future events and expected developments are taken into account in internal planning, provided that it can be
assumed that their occurrence is likely in the planning period. The risks and opportunities presented in the
following risk and opportunities report are those potential future events or developments that could respectively
lead to a negative or positive deviation from the targets covered by planning.
Risk management process
The objective of our risk management activities is to recognize, assess, and manage risks early on and to
implement appropriate measures to minimize them. The responsibilities, objectives, and processes of risk
management are described in our internal risk management guidelines. The business heads, managing
directors of Merck subsidiaries, and the heads of Group functions are specified as employees with responsibility
for risks. The group of consolidated companies for risk reporting purposes is the same as the group of
consolidated companies for the Consolidated Financial Statements. Every six months, the risk owners assess
their risk status and report their risk portfolio to Risk Management. We use special risk management software
in the context of these activities.
Likewise, risk-mitigating measures are reported and assessed. The effectiveness of these measures and the
planned implementation time frame are monitored by Group Risk Management.
The residual risk after the implementation of these measures is presented in the internal risk report as net risk.
Group Controlling & Risk Management forms the organizational framework for risk management and reports
directly to the Group Chief Financial Officer. Group Risk Management uses the information reported to
determine the current risk portfolio for the Merck Group, presenting this in a report to the Executive Board, the
Supervisory Board, and the Finance Committee with detailed explanations twice per year. This also
encompasses a probability-weighted aggregation of risks at the Group level using a Monte Carlo simulation.
Furthermore, significant changes in the assessment of the risks already known and new significant risks can be
reported at any time and are communicated to the Executive Board on an ad hoc basis.
For reporting risks with a potential negative impact on our EBITDA pre, a minimum threshold is set at the level
of € 5 million before mitigation measures in the standard process and € 25 million in the ad hoc process. Risks
below these thresholds are steered independently within the business sectors. The relevant timeframe for
internal risk reporting is five years. It can go beyond five years, e.g. for regulatory risks related to climate
change. The effects of risks described in this report on risks and opportunities are presented as annual values.
The assessment of the risks presented relates to December 31, 2020. There were no relevant changes after the
balance sheet date that would have necessitated an amended presentation of the risk situation of the Group.
Combined Management Report
Report on Risks and Opportunities
114
Within the scope of audits, Group Internal Auditing regularly reviews the performance of risk management
processes within the units and, at the same time, the communication of relevant risks from the operating
businesses to Group Risk Management.
Opportunity management process
The risk management system described concentrates on business risks, and not on opportunities at the same
time. The opportunity management process is integrated into our internal controlling processes and carried out
in the operating units on the basis of the Group strategy. The businesses analyze and assess potential market
opportunities as part of strategy and planning processes. In this context, investment opportunities are
examined and prioritized primarily in terms of their potential value proposition in order to ensure an effective
allocation of resources. We specifically invest in growth markets to leverage the opportunities of dynamic
development and customer proximity at a local level.
If the occurrence of the identified opportunities is rated as likely, they are incorporated into the business plans
and the short-term forecasts. Trends going beyond this, or events that could lead to a positive development in
the net assets, financial position, and results of operations, are presented in the following report as
opportunities. These could have a positive effect on our medium-term prospects.
Risks
The significance of risks is calculated on the basis of their potential negative impact on the forecast financial
targets in conjunction with the probability of occurrence of the respective risk. In line with these two factors,
risks are classified as "high", "medium", or "low".
The underlying scales for measuring these factors are shown below:
Probability of success
Probability of success
< 20%
20-50%
51 - 80%
Explanation
51 - 80%
Merck also opened a new research center for electronic applications on the campus at its headquarters in
Darmstadt, Germany. The building offers space for additional research and development activities, especially
for next-generation materials including display materials such as innovative liquid crystals and quantum dot
pixel color converters (QDPCC) as well as semiconductor materials such as photoresist materials, dielectrics,
and directional self-alignment materials (DSA).
Opportunities
118
Opportunities from leveraging the e-commerce and distribution platform
With the acquisition of Sigma-Aldrich in 2015, we gained access to the leading e-commerce platform in life
science, www.sigmaaldrich.com. With this distribution platform, our customers continue to benefit from a
portfolio of more than 300,000 products, including highly respected brands. We are further expanding this
platform to continuously increase the number of products available through e-commerce. Increasing speed and
convenience during our customers' ordering processes as well as offering support through individualized
product recommendations can lead to higher sales volumes and the winning of new customers. Consequently,
this distribution channel can lead to an above-average development of sales in the medium term.
Risks and opportunities of research and development
For us, innovation is a major element of the Group strategy. Research and development projects can
experience delays, expected budgets can be exceeded, or targets can remain unmet. Research and
development activities are of special importance to the Healthcare business sector. In the course of portfolio
management, we regularly evaluate and, if necessary, refocus research areas and all R&D pipeline projects.
Alliances with external partners and the out-licensing of programs also form part of the catalog of measures for
the efficient allocation of resources. The conclusion and continuation of these partnerships and externalizations
plays an important role. A deviation from the strategic targets defined in this area could have a critical negative
impact on net assets, financial position, and results of operations. The occurrence of a risk of this magnitude is
considered unlikely, which means that this is a medium risk.
The global strategic alliance with GlaxoSmithKline plc., United Kingdom, (GSK) for the joint development and
marketing of the bintrafusp alfa (M7824) immunotherapy developed by Merck is one example of an opportunity
for research and development in the Healthcare business sector. This year, the Japanese Ministry of Health,
Labor and Welfare granted fast-track status to bintrafusp alfa as a potential treatment for biliary tract cancer
(BTC) as part of its SAKIGAKE strategy. In addition, we are currently exploring bintrafusp alfa in multiple non-
correlated clinical studies. This innovative immunotherapy shows potential for new options for several hard-to-
treat cancers. Despite the latest findings and the discontinuation of the INTR@PID Lung 037 study on the first-
line treatment of patients with stage IV non-small cell lung cancer (NSCLC) that have high expression of PD-L1,
we remain committed to investigating bintrafusp alfa in other indications. The findings from the INTR@PID Lung
037 study may be applied in other studies.
The strategic alliance concluded with Pfizer Inc. in 2014 enabled us to jointly develop BavencioⓇ. Following
approvals for patients with metastatic Merkel cell carcinoma and those with locally advanced or metastatic
urothelial carcinoma in 2017, the United States Food and Drug Administration (FDA) and the European
Commission issued approvals for BavencioⓇ (avelumab) plus InlytaⓇ (axitinib) for the first-line treatment of
patients with advanced renal cell carcinoma last year. This year, the FDA approved BavencioⓇ for the
maintenance treatment of patients with locally advanced or metastatic urothelial carcinoma (UC) that has not
progressed with first-line platinum-containing chemotherapy. After the Committee for Medicinal Products for
Human Use (CHMP) of the European Medicines Agency (EMA) adopted a positive opinion, BavencioⓇ has been
approved recently as monotherapy for the first-line maintenance treatment of adult patients with locally
advanced or metastatic urothelial carcinoma (UC) who are progression-free following platinum-based
chemotherapy. Additional applications for BavencioⓇ have been submitted to regulatory authorities worldwide.
MavencladⓇ was approved by the European Commission in 2017. It is the first short-course oral treatment
approved in Europe for the treatment of relapsing multiple sclerosis in patients with high disease activity. With
the approvals in a number of additional countries in 2018 and 2019, including the United States and
Switzerland, MavencladⓇ is now approved in around 80 countries.
In March, the Japanese Ministry of Health, Labor and Welfare approved the oncology drug tepotinib for the
treatment of patients with inoperable, advanced or recurrent non-small cell lung cancer (NSCLC) with METex14
skipping alterations. In addition, the FDA has accepted the filing of the application for tepotinib for the
treatment of adult patients with metastatic NSCLC and granted priority review.
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This year, Erbitux was approved by the National Medical Products Administration (NMPA) of China for the first-
line treatment of patients with recurrent and/or metastatic squamous cell carcinoma of the head and neck in
combination with platinum-based treatment with fluorouracil. This represents another step in our focus on
acting as a global innovator for specialty products, including bringing innovative medicines to markets with high
unmet medical needs.
In addition to marketing already approved medicines, we are pushing ahead with research projects in other
important therapeutic areas. The portfolio of projects is evaluated on a regular basis. This may also lead to in-
licensing or out-licensing, or further strategic alliances.
Investments made in 2020, e.g. to expand biotech development in Switzerland, are intended to accelerate
scientific progress and the further development of our innovative clinical pipeline worldwide. The expenses
currently being incurred, especially in our Healthcare research and development, are already reflected in the
current plans. The same applies to sales of products for approved indications in the respective markets (e.g.
BavencioⓇ and MavencladⓇ). Further approvals may result in an increased sales potential.
Risks due to increased competition and customer technology changes
In the Healthcare business sector, both our biopharmaceutical products and classic pharmaceutical business are
exposed to increased competition from rival products (in the form of biosimilars and generics). In the Life
Science and Performance Materials business sectors, risks are posed by not only cyclical business fluctuations
but also changes in the technologies used or customer sourcing strategies, particularly with respect to liquid
crystals. We use close customer relationships and in-house further developments as well as market proximity,
including precise market analyses, as mitigating measures. Overall, owing to its possible occurrence with a
critical negative impact, the market risk is classified as a medium risk.
Opportunities presented by activities to boost innovative strength
With the M LabTM Collaboration Center in Shanghai, we opened the doors to the largest of our nine centers
worldwide to date. Encompassing non-GMP (Good Manufacturing Practice) laboratory space for pilot projects
and process developments, it offers customizable solutions that are tailored to the Chinese life science
community to advance drug development. Pharmaceutical and biopharmaceutical manufacturers can explore
ideas, learn innovative techniques and work side-by-side with our scientists and engineers. The Collaboration
Center is located in Pudong, at the heart of the biomedical sciences and research community in Shanghai,
meaning we have our pulse right on the finger of Asia's rapidly growing pharmaceutical market. Other M Lab™M
Collaboration Centers are located in the United States, Singapore, Japan, Korea, India, France, and Brazil.
Digital technologies are becoming increasingly important for our markets and our world of work. In 2015, we
launched several strategic digital initiatives geared toward improving the efficiency of our internal processes
and toward evaluating the opportunities of digitalization for our products and customers. In this context, we set
up a collaborative partnership with Siemens in 2020 in order to advance our modular production and to meet
customer and market requirements quicker, more efficiently and more flexibly. Developing and adhering to
rigorous ethical standards is of utmost importance for all our activities. Therefore, we created the Merck Digital
Ethics Advisory Panel to provide external guidance and expertise on complex ethical matters around data
usage, algorithms and new digital innovations, ensuring that the company develops new digital technologies
responsibly. We are also working on establishing new business outside our three business sectors, with a focus
on digitalization and our innovation fields of Clean Meat, Liquid Biopsy, and Biosensing and Interfaces. In
addition to collaborations with external partners such as the European Space Agency, the Accelerator program,
which is being driven by our Innovation Center, is one component of our innovation strategy.
Cooperating with start-ups gives us extensive opportunities to drive innovative approaches and ideas. In 2020,
we helped to advance numerous projects through various support models like our Innovation Labs and Centers
and different investment programs, such as the China Seeds Fund. Among other things, we invested in
SynSense, a neuromorphic computing start-up based in China and Switzerland whose AI (artificial intelligence)
processors and sensors provide an unprecedented combination of ultra-low power consumption and low latency
for a broad range of edge applications for smart home, smart security, autonomous driving, drones and robots.
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120
The Industry 4.0 start-up Feelit also launched its first commercial product on the market. RetroFeel™ combines
a wireless edge computing device with a printed nanotechnology sticker sensor that detects structural changes
in mechanical parts and systems and is able to predict upcoming failures (predictive maintenance). This sensor
solution can be used in process industries such as pharmaceuticals, food and beverage, oil and gas, as well as
in semiconductor manufacturing. We take an active role in our portfolio companies and focus our investments
on the early stage and the foundation of companies or spin-offs with a view to utilizing their science and
technology base.
In the Life Science business sector, we strengthened our viral vector manufacturing capabilities with the launch
of the VirusExpress™ lentiviral production platform. We are committed to accelerating the manufacture of cell
and gene therapies with the goal of getting these lifesaving treatments to patients faster. This proven, scalable
platform increases dose yields and reduces process development times.
In Life Science, we also expanded our HPAPI and ADC manufacturing capabilities in the United States with the
creation of one of the largest single-digit nanogram containment production facilities for high-potent
pharmaceutical ingredients (HPAPI). This will allow the continuous manufacturing at an industrial scale of
increasingly potent agents for therapies with the potential to treat cancer. Antibody drug conjugates (ADCs) are
an emerging class of medicines designed for the high-specificity targeting and destruction of cancer cells while
preserving healthy cells. Only nine ADCs are currently approved worldwide. The ADC industry is experiencing
strong growth and is expected to reach € 13 billion by 2030.
-
Opportunities provided by the CRISPR technology
As a pioneer of genome-editing innovation for 15 years, we are leveraging CRISPR technology as a core
competency of our business. Around the world, our Life Science business sector holds 28 CRISPR-related
patents in methods and composition, including the fundamental technology of CRISPR Cas9 for gene editing
and integration in mammalian cells and paired Cas9 nickases. Two of the CRISPR-Cas9-assisted genome-editing
patents were approved in the United States in 2020. This gives us the opportunity to support US scientists and
researchers in their work to advance and protect gene therapy development programs. In the reporting year,
we also signed agreements licensing our CRISPR technology to two companies: panCELLa, a cell therapy
company based in Toronto, Canada, and Takara Bio USA, Inc., a biotechnology company based in Mountain
View, California, United States. The licenses are aimed at accelerating drug discovery leading to the
development of new treatments.
CRISPR technologies open up promising new avenues for medical research and potential solutions to treat some
of the most difficult diseases, including cancer as well as hereditary and rare diseases. Merck recognizes that
the growing potential of genome-editing technologies is accompanied by scientific, legal and societal concerns.
It supports research using genome editing under careful consideration of ethical and legal standards. Among
other things, it has established an independent, external Bioethics Advisory Panel to provide guidance for its
research.
-35
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We see huge opportunities arising from our innovative Directed Self Assembly (DSA) technique for advanced
lithography processing in Semiconductor Solutions. As semiconductor manufacturers continue to advance their
device technologies, the image processing steps are becoming increasingly complex and the production of high-
performance products is becoming more cost intensive. Our novel DSA platform and recent material
advancements enable improved wafer performance and reduce the cost of ownership (COO) for the customer.
This has helped Merck to secure its leading position as the "process of record" (POR) with several key
semiconductor customers. Adoption of this disruptive lithography platform is expected to completely change
how semiconductor manufacturing is conducted and could lead to a market leadership position for advanced
lithography over the next few years. Furthermore, we are developing new dielectric platforms in cooperation
with our key customers for 3D NAND applications. There has been a change in 3D NAND device architecture
and some of our customers are moving from floating gate to replacement gate technology. Therefore, we are
currently working with those customers on this new device architecture.
We are pursuing a strategy of leveraging our expertise as the global market leader in liquid crystals in order to
develop new fields of application for innovative liquid crystal technologies. For instance, we are pressing ahead
to capture the future markets for liquid crystal windows (LCWs) and mobile antennas. LCWs are creating new
architectural possibilities and solar shading that can be managed while maintaining transparency and color-
neutrality. In 2020, we entered into a strategic partnership with Guardian Glass, a leading international
manufacturer of float, coated, and other glass products. We intend for this partnership to boost commission
sales of dynamic liquid crystal windows from our eyrise® brand, which uses our Licrivision® technology. Mobile
antennas can receive signals transmitted in the high frequency range. As a result, mobile data exchange could
improve significantly in a wide variety of fields of application. Since novel liquid crystal materials for antennas
are currently being developed, we expect liquid crystal antennas to reach market maturity in the coming years.
Opportunities in the semiconductor industry
Opportunities are assessed in their respective specific business environment. General measures of the business
functions are quantified during operational planning, usually in relation to sales, EBITDA pre, and cash flow. Net
present value, internal rate of return, the return on capital employed (ROCE), and the amortization period of
the investment are primarily used to assess and prioritize investment opportunities. We use these indicators to
assess the opportunities arising from the investment opportunities. Similarly, scenarios are frequently set up to
simulate the influence of possible fluctuations and changes in the respective parameters on results. There is no
overarching, systematic classification of the probability of occurrence and impact of opportunities.
Internal control system for the Group accounting process
The objective of the internal control system for the accounting process is to implement controls that provide
assurance that the financial statements are prepared in compliance with the relevant accounting laws and
standards. This system covers measures designed to ensure the complete, correct, and timely conveyance and
presentation of information that is relevant for the preparation of the Consolidated Financial Statements and
the combined management report.
Key tools
The internal control system aims to ensure the accuracy of the consolidated accounting process through
functioning internal controls with reasonable assurance. The Group Accounting function centrally steers the
preparation of the Consolidated Financial Statements of Merck KGaA as the parent company of the Merck
Group. This Group function defines the reporting requirements that all Merck subsidiaries must meet. At the
same time, this function steers and monitors the scheduling and process-related requirements of the
Consolidated Financial Statements. Group Accounting centrally manages all changes to the equity holding
structure and correspondingly adapts the Group's scope of consolidation. The proper elimination of intragroup
transactions within the scope of the consolidation process is ensured. Group-wide accounting guidelines form
the basis for the preparation of the statutory financial statements of the parent company and of the
subsidiaries, which are reported to Group Accounting; the guidelines are adapted in a timely manner to reflect
changes in the financial regulatory environment and are updated in accordance with internal reporting
requirements. For special issues, such as the accounting treatment of intangible assets within the scope of
company acquisitions or pension obligations, external experts are additionally involved where necessary.
The individual companies have a local internal control system. Where financial processes are handled by a
Shared Service Center, the internal control system of the Shared Service Center is additionally applied. Both
ensure that accounting complies with IFRS (International Financial Reporting Standards) and with the Group
accounting guidelines.
Group Accounting provides support to the local contacts and ensures a consistently high quality of reporting
throughout the entire reporting process.
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116
For Group financial reporting purposes, most of our subsidiaries use standard SAP software. Consolidation
software from SAP is also used for the elimination of intragroup transactions. A detailed authorization concept
ensures the separation of duties with respect to both single-entity reporting and the Consolidated Financial
Statements. The accounting process is generally designed to ensure that all units involved adhere to the
principle of dual control.
The effectiveness of Merck's internal control system with regard to accounting and compliance with financial
reporting on the part of the individual companies is confirmed by both the local managing director and the local
chief financial officer by signing the single-entity reporting. For the accounting treatment of balance sheet
items, Group Accounting closely cooperates with Group Risk Management in order to correctly present potential
risks in the balance sheet. All the structures and processes described are subject to regular review by Group
Internal Auditing based on an annual audit plan set out by the Executive Board. The results of these audits are
dealt with by the Executive Board, the Supervisory Board, and the Finance Committee. The internal control
system at Merck makes it possible to lower the risk of material misstatements in accounting to a minimum.
However, no internal control system can entirely rule out a residual risk, whatever its design.
Business-related risks and opportunities
Political and regulatory risks and opportunities
As a global company, we face political and regulatory changes in a large number of countries and markets.
Risk of more restrictive regulatory requirements regarding drug pricing and reimbursement
> 80%
In the Healthcare business sector, the known trend toward increasingly restrictive requirements in terms of
drug pricing, reimbursement, and the expansion of high-rebate groups is continuing. These requirements can
negatively influence the profitability of our products, as can market referencing between countries, and the
success of market launches. Foreseeable effects are taken into account as far as possible in the business
sector's plans. Close communication with health and regulatory authorities serves as a preventive measure to
avert risks.
Risk of stricter regulations for the manufacturing, testing, and marketing of products
Likewise, in our Life Science and Performance Materials business sectors, we must adhere to a multitude of
regulatory specifications regarding the manufacturing, testing, and marketing of many of our products.
Specifically in the European Union, we are subject to the European chemicals regulation REACH. It demands
comprehensive tests for chemical products. Moreover, the use of chemicals in production could be restricted,
which would make it impossible to continue manufacturing certain products. We are constantly pursuing
research and development in substance characterization and the possible substitution of critical substances so
as to reduce the occurrence of this risk, and therefore view it as unlikely. Nevertheless, it is classified as a
medium risk given its critical negative impact on the net assets, financial position, and results of operations.
Risk of negative political and macroeconomic developments
The destabilization of political systems, and the possible establishment of trade barriers, sanctions, and foreign
exchange policy changes, can lead to declines in sales in certain countries and regions. These risks are taken
into account as much as possible in the business plans of the affected countries and regions, and mitigated
through product, industry, and regional diversification.
Potential negative macroeconomic developments can also impact our business. To minimize these impacts,
corresponding measures pertaining to the sales strategy have been initiated in these countries.
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117
The spread of the Corona virus since the beginning of 2020 is associated with risks in global macroeconomic
developments, likewise with the potential for negative effects on our businesses. The opportunities in
connection with combating the Covid-19 pandemic are described in the "Risks and opportunities of research
and development" section.
The net risk of negative political and macroeconomic developments is seen as possible and has critical negative
effects on the net assets, financial position, and results of operations. We thus rate this as a medium risk.
Market risks and opportunities
We compete with numerous companies in the pharmaceutical, chemical, and life science sectors. Rising
competitive pressure can have a significant impact on the quantities that can be sold and prices attainable for
our products.
Opportunities due to new technologies in the manufacturing of displays
We see major opportunities in significant market growth of organic light-emitting diode (OLED) materials in
high-quality display applications. According to industry estimates, the overall market volume for OLED materials
will exceed that for liquid crystal materials as of 2022. We have been performing research and development in
the area of organic light-emitting diode (OLED) technology for more than 15 years and have become one of the
leading material suppliers for OLEDs. We focus on the production of ultrapure, extremely stable materials that
are precisely tailored to customer requirements. To this end, we acquired the OLED patent portfolio for display
applications from Konica Minolta. Comprising over 700 patent families, the portfolio will allow us to further
expand our market position and advance our development pipeline.
Opportunities in liquid crystal distribution
Remaining risks beyond the current plans resulting from restrictive regulatory requirements are classified as a
medium risk owing to the possible critical negative impact.
-536
EBITDA pre¹ and change by quarter²
5.5%
€ million
2020
2019
€ million
%
EBITDA pre¹
1,024
803
221
27.5%
Investments in property, plant and equipment, software as well
as advance payments for intangible assets
-245
-158
-86
54.6%
Changes in inventories
55
-251
306
> 100.0%
Changes in trade accounts receivable as well as receivables
from royalties and licenses
49
-88
137
> 100.0%
Lease payments²
-18
-11
-7
Change
Business free cash flow¹
Performance Materials
The business free cash flow of the Performance Materials business sector rose by € 206 million or 32.1% to
€ 847 million in 2020 (2019: € 641 million). Higher EBITDA pre from the acquisition of Versum Materials and
lower inventories and receivables exceeded higher investments.
Opportunities in connection with combating the Covid-19 pandemic
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Report on Economic Position
Performance Materials
111
The development of EBITDA pre in the individual quarters in comparison with 2019 is presented in the following
overview:
Performance Materials
€ million/change in %
Q1
Q2
Q3
2020
286
238
60.9%
254
193
190
177
243
%
48.3%
25.2%
43.3%
Q4
246
1.3%
1 Not defined by International Financial Reporting Standards (IFRS).
2 Quarterly breakdown unaudited.
Development of business free cash flow
2019
Elimination first-time consolidations of Versum/Intermolecular
-19
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Combined Management Report
Report on Economic Position
Corporate and Other
112
Corporate and Other
Corporate and Other comprises administrative expenses for central Group functions that cannot be directly
allocated to the business sectors, such as Finance, Procurement, Legal, Communications, and Human
Resources. Corporate costs additionally encompass expenses for central, non-allocated IT functions, including
expenses related to the expansion and harmonization of IT systems within the Merck Group as well as research
and development costs spanning business sectors.
Corporate and other
Key figures
€ million
Operating result (EBIT)¹
EBITDA¹
EBITDA pre¹
Business free cash flow¹
1 Not defined by International Financial Reporting Standards (IFRS).
5.4%
Change
2019
€ million
%
-658
-617
-41
6.6%
-573
-537
-37
6.8%
-495
-469
-26
2020
-571
>100%
Q4
-365
> 100.0%
Business free cash flow¹
847
641
206
32.1%
1 Not defined by International Financial Reporting Standards (IFRS).
2 Excluding payments for low-value leases and interest components included in lease payments.
The development of business free cash flow in the individual quarters in comparison with 2019 is presented in
the following overview:
Performance Materials
Business free cash flow¹ and change by quarter²
€ million/change in %
2020
206
Q1
184
Q3
204
253
2019
172
153
121
195
%
7.0%
33.5%
1 Not defined by International Financial Reporting Standards (IFRS).
2 Quarterly breakdown unaudited.
24
Q2
As a science and technology company, we have helped to combat the global challenges resulting from Covid-19
in various ways. In Life Science, we are working with more than 50 vaccine developers around the world and
supporting more than 35 testing solutions and more than 20 projects involving monoclonal antibodies, plasma
products, and antiviral drugs. We are collaborating with numerous researchers and institutions to assist them
with process development of and the production process for potential Covid-19 vaccine candidates, as well as
development and preparations for the mass production of SARS-CoV-2 diagnostic tests. To meet the
unprecedented demand in our Life Science business sector, we expand our production capability with
Risk and opportunity assessment
Recruiting and retaining specialists and talent are therefore key priorities for the company and are managed
through the targeted use of, for instance, employer branding initiatives, global talent and succession
management processes, as well as competitive compensation packages. Nevertheless, employee-related risks
that affect business activities are possible, even though their impact is difficult to assess. We rate this as a
medium risk.
Citalopram: In connection with the divested generics business in 2007, Merck is accused of breaching EU
antitrust law through agreements concluded by its former subsidiary Generics (UK) Ltd., Denmark, relating to
the antidepressant Citalopram patented by Lundbeck A/S. In 2013, the EU Commission imposed a
corresponding fine in a double-digit euro amount. Merck filed a lawsuit against the Commission's decision with
the European Court in August 2013. The lawsuit was rejected in 2016. Merck subsequently filed an appeal with
the European Court of Justice (CJEU). In the course of these proceedings, the Advocate General of the CJEU
recommended that the European Court's verdict be confirmed. The Court announced that it will issue a ruling in
March 25, 2021. In light of the disadvantageous development in this matter, additional accounting measures
were taken for potential additional claims and the corresponding provision has increased by a double-digit
million euro amount as a result. This is currently classified as a medium risk with a probable substantial
negative impact on the financial position.
Paroxetine: In connection with the divested generics business, Merck is subject to antitrust investigations by
the British Competition and Market Authority (CMA) in the United Kingdom. In March 2013, the authorities
informed Merck of the assumption that a settlement agreement entered into in 2002 between Generics (UK)
Ltd. and several subsidiaries of GlaxoSmithKline plc, United Kingdom, in connection with the antidepressant
drug paroxetine, violated British and European competition law. Merck, the then-owner of Generics (UK) Ltd.,
was allegedly involved in the negotiations for the settlement agreement and is therefore liable. The
investigations into Generics (UK) Ltd. started in 2011, without this being known to Merck. On February 11,
2016, the CMA imposed a fine in this matter. Merck has taken legal action against this fine. The Appeals
Tribunal has since submitted the relevant legal questions to the European Court of Justice (CJEU) for a
preliminary ruling. The CJEU confirmed in January 2020 that such settlement agreements in general may
breach European competition law. The proceeding will now be continued at the UK Competition Appeal Tribunal
(CAT). A decision is pending. Appropriate accounting measures have been taken. A decision and an outflow of
resources within the next 12 months are considered possible. A provision in a low double-digit million euro
amount was recognized for these proceedings. This is currently classified as a medium risk with a moderate
negative impact on the financial position.
Risks in connection with a settlement agreement concluded by the divested Generics
group
This is currently classified as a medium risk with a probable substantial negative impact on the financial
position.
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Combined Management Report Report on Risks and Opportunities
On July 6, 2017, Merck received notice from the European Commission (EU Commission) in connection with the
antitrust review proceedings for the acquisition of Sigma-Aldrich, in which the EU Commission informed Merck
of its preliminary conclusion that Merck and Sigma-Aldrich allegedly transmitted incorrect and/or misleading
information within the scope of the acquisition of Sigma-Aldrich. The EU Commission received registration of
the merger on April 21, 2015, and granted clearance on June 15, 2015, subject to the condition that Merck and
Sigma-Aldrich divest parts of the European solvents and inorganic chemicals businesses of Sigma-Aldrich in
order to resolve antitrust concerns. According to the preliminary viewpoint of the EU Commission
communicated in a letter dated July 6, 2017, Merck and Sigma-Aldrich withheld related important information
about an innovation project. According to the EU Commission, the innovation project should have been included
in the remedies package. This resulted in an administrative procedure with the EU Commission. On July 1,
2020, the EU Commission informed Merck that the parts of the procedure relating to Merck were no longer
under investigation and that the procedure now related solely to the allegations against Sigma-Aldrich. Merck
again countered these remaining accusations at a hearing on November 13, 2020. The administrative procedure
could result in the issuance of a fine that would be open to appeal. In the second quarter of 2020, the existing
provision in a mid double-digit euro amount was reduced to a low double-digit euro amount. A potential outflow
of resources is considered possible for 2021.
RaptivaⓇ: In December 2011, the federal state of São Paulo, Brazil, sued Merck for damages because of alleged
collusion between various pharmaceutical companies and an association of patients suffering from psoriasis and
vitiligo. This collusion is alleged to have been intended to increase sales of the medicines from the companies
involved to the detriment of patients and state coffers. Moreover, patients are also suing for damages in
connection with the product Raptiva®. Merck has taken appropriate accounting measures for these issues,
which relate to various legal cases. Risks in excess of this with a substantial negative effect on the net assets,
financial position, and results of operations cannot be ruled out, but are considered unlikely. This is rated as a
medium risk.
Risks due to antitrust and other government proceedings
In the Performance Materials business sector, Merck is involved in a legal dispute with JNC Corporation, Japan
(JNC). JNC claims that by manufacturing and marketing certain liquid crystal mixtures, Merck has infringed JNC
patents in China, Taiwan and Korea. Merck maintains that the above mentioned patents are invalid owing to
relevant prior art. At the end of the second quarter of fiscal 2020, the actions in China and Taiwan were
concluded with legally binding effect in favor of Merck. In view of these developments, the provision was
reduced accordingly. In Korea however, a patent infringement action, a patent nullity action and a "correction
trial" are still pending ex parte JNC. In addition, new statutory rules were implemented in Korea that could
have an adverse effect on any potential amount of damage. Merck has taken appropriate accounting measures
according to the remaining litigation risk in Korea. A potentially considerable impact of the legal dispute on the
financial position cannot be ruled out. A cash outflow within the next 12 months is considered possible at
present.
Merck is involved in a patent dispute with Biogen Inc., Massachusetts, United States ("Biogen"), in the United
States. Biogen claims that the sale of RebifⓇ in the United States infringes on a Biogen patent. The disputed
patent was granted to Biogen in the United States in 2009. Subsequently, Biogen sued Merck and other
pharmaceutical companies for infringement of this patent. Merck defended itself against all allegations and
brought a countersuit claiming that the patent is invalid and not infringed by our actions. In the first instance, a
jury recognized the invalidity of the patent. This jury verdict was overturned by a judge in the same instance in
September 2018. For the time being, the patent is thus deemed to be legally valid and to have been infringed.
Merck already filed a complaint with the United States Court of Appeals for the Federal Circuit (second instance)
against the first-instance ruling in October 2018. On September 28, 2020, this court overturned the verdict of
the judge in the first instance, declared Biogen's patent to be invalid, and instructed the District Court to
reinstate the original jury verdict. A cash outflow is considered to be unlikely based on this decision.
Accordingly, the provision of € 365 million that was recognized at that point in time for potential compensation
payments for damages was reversed.
Risks from product-related and patent law disputes
126
Report on Risks and Opportunities
Human resources risks
Combined Management Report
Despite extensive precautionary measures, non-compliance with laws and regulations leading to related
consequences can never be completely excluded.
Due to long statutes of limitations or in some cases the absence thereof, it is not possible to rule out that we
will face third-party claims arising from the same issue despite the conclusion of legal proceedings. Court or
official rulings or settlements can lead to expenses with a significant impact on our business and earnings.
For instance, we are currently involved in litigation with Merck & Co. Inc., Kenilworth, NJ, United States
(outside the United States and Canada: MSD), against whom we have filed lawsuits in various countries. This
company has also sued us in the United States for trademark infringement, among other things.
Nevertheless, we are still exposed to risks from litigation or legal proceedings. In particular, these include risks
in the areas of product liability, competition and antitrust law, pharmaceutical law, patent law, trademark law,
data protection law, tax law, and environmental protection. As a research-based company, we have a valuable
portfolio of industrial property rights, patents, and brands that could become the target of attacks and
infringements. The outcome of future proceedings or those currently pending is difficult to foresee.
Generally, we strive to minimize and control our legal risks. To this end, we have taken the necessary
precautions to identify threats and defend our rights where necessary.
Legal risks
2020
2019
2018
2017
2016
2015
2014
2013
In our opinion, the lawsuits described below constitute the most significant legal risks. This should not be seen
as an exhaustive list of all legal disputes currently ongoing.
2012
Our future growth is highly dependent on our innovative strength. Therefore, the expertise and engagement of
employees in all sectors in which we operate are crucial to the success of the company. The markets relevant to
the company are characterized by intensive competition for qualified specialists and by the challenge of being
perceived by the public as an attractive employer. Fluctuation risks specific to countries and industries have to
be identified ahead of time and specifically addressed in order to keep the skills and expertise critical to success
and business within the company.
Report on Risks and Opportunities
As regards the Covid-19 pandemic and the negative effects thereof, we assume that the business recovery that
started in the second half of 2020 will continue in fiscal 2021. At present, we do not assume that further
disease waves will have a negative effect comparable to that seen in the first half, especially on the Healthcare
and Performance Materials business sectors. For Life Science, we expect significantly positive contributions
owing to the Covid-19 pandemic, particularly in the Process Solutions business unit. The increasing availability
of Covid-19 vaccines and the associated immunization of the population will contribute to a further stabilization
of the societal and economic situation. Nevertheless, this forecast is subject to a higher degree of estimation
uncertainty than was the case in previous years.
In the United States, Merck was involved in patent litigation with Biogen Inc., USA. Biogen sued Merck for
having allegedly infringed a patent in connection with Rebif®. On September 28, 2020, the U.S. Court of
Appeals for the Federal Circuit set aside the first-instance decision and declared Biogen's patent invalid.
Therefore, a provision amounting to € 365 million for this patent litigation was released. The income from the
release of the provision led to a corresponding increase in EBITDA pre in fiscal 2020. This forecast and in
particular, organic growth rates, relate to a year-earlier figure adjusted for the income from the release of the
provision.
Moreover, on December 22, 2020, Merck fully acquired AmpTec GmbH, Hamburg, a leading contract
development and manufacturing organization for mRNA, which is used in vaccines, treatments and diagnostics
in connection with Covid-19 and numerous other diseases. We do not expect this acquisition to have a material
portfolio effect either.
The divestment of Allergopharma to Dermapharm Beteiligungs GmbH ("Dermapharm") closed on
March 31, 2020. The allergy business of Merck in Europe was transferred to Dermapharm on March 31, 2020.
The transfer of the Allergopharma business in China closed on August 31, 2020. Accordingly, in 2021 we report
a portfolio effect from this transaction. As expected, however, this will not be material.
The following report provides a forecast for fiscal 2021 of the development of the Merck Group and its three
business sectors: Healthcare, Life Science and Performance Materials (to be renamed Electronics).
Combined Management Report
Report on Expected
Developments
130
Combined Management Report Report on Expected Developments
We pursue the opportunities that arise and specify their expected effects in the forecast development of net
sales, EBITDA pre, and cash flow. Furthermore, we will actively seek new opportunities, examine their
implementation, and drive them forward where appropriate. If opportunities arise in addition to the forecast
developments, or these occur more quickly than anticipated, this could have correspondingly positive effects on
our net assets, financial position, and results of operations.
In our view, business-related opportunities offer the greatest potential. An important element here is the
continuous expansion of our businesses. With the successful focusing and continued intensification of our
research and development activities, we want to be able to continue to offer our customers innovative products
and help shape markets. Moreover, we also consolidate our expertise in numerous alliances with industrial
partners as well as various universities and international organizations. We are making targeted investments in
future-oriented companies and start-ups via our Merck Ventures Investment Fund and our Accelerator
programs. The topic of innovation is at the forefront of all our activities. Externally, this is becoming particularly
apparent through our Innovation Center at Group headquarters in Darmstadt, Germany, which is to develop
into a nucleus of creativity at Merck. The activities listed hold significant opportunities for us in the medium to
long term, beyond the underlying forecast period.
The overall risk of the Group, which is derived from the probability-weighted aggregation of the identified risks,
leads to the assessment that we are not exposed to risks of a nature to threaten the existence of the Group as
a going concern, or for which coverage and financing of the losses are questionable. We are confident that we
will continue to successfully master the challenges arising from the above risks in the future as well. Our
company also benefits from diversification through our different products and markets.
With respect to high and medium risks, certain changes have occurred, as the assessment of the individual
risks has of course shifted over the fiscal year due to changing external and internal conditions while the overall
risk profile remained stable. Thanks to the risk reduction measures taken - such as the consistent
implementation of management action (organizational responsibility and process improvements), existing
insurance coverage, and accounting precautions - we were able to take counteraction, in particular against
significant individual risks.
The most significant individual risks in the businesses have been named in the report above, with business-
related risks being the most significant alongside IT and legal risks. These risks include already the risks
stemming from the recent developments regarding the Covid-19 pandemic. Most notably, the pandemic
increases existing risks related to more restrictive regulatory requirements regarding drug pricing and
reimbursement, the demand for our products, business interruptions at our production facilities, lack of
availability of good quality materials or services, risks related to research and development, and negative
macroeconomic developments.
Combined Management Report
Overall view of the risk and opportunity situation and management
assessment
Risks due to the divestment, acquisition, and integration of companies
and businesses
129
Report on Risks and Opportunities
Combined Management Report
As a company with global production operations, we are exposed to risks of possible damage to people, goods,
and our reputation. Those include physical risks stemming from exposure to droughts, storms and floods.
Audits, consulting, and training on environmental protection, and occupational health and safety minimize these
risks to people and the environment. In order to ensure the continuity of plant and equipment, we monitor
these risks both at our own sites as well as at suppliers and contract manufacturers. By adhering to high
technical standards, our rules of conduct, and all legal requirements in environmental protection and
occupational health and safety, we ensure the preservation of goods and assets. We have taken sufficient
appropriate accounting measures for the environmental risks known to us. We monitor regulatory risks in
connection with the transition to a low-carbon economy, which could materialize in the mid- and long-term
through rising carbon prices through emissions trading systems, taxes or energy legislation. We mitigate those
risks with our energy and carbon management measures. We classify these as a high risk since a critical
negative impact on the financial position cannot be ruled out.
Environmental, climate related and safety risks
Despite the mitigating measures taken and functional continuity plans, the effects of cybercrime or the failure
of business-critical IT applications and their influence on the net assets, financial position, and results of
operations are considered high risks owing to likely and potentially critical negative impacts.
Likewise, complications with the changeover of IT systems could negatively impact the earnings situation. Close
monitoring of critical IT projects serves to mitigate this risk.
The Merck Group operates an information protection management system based on ISO 27001 comprising
security guidelines as well as organizational and technical measures to prevent and address IT security
incidents. Globally used IT applications form the basis for the contractual delivery of products and solutions.
The failure of business-critical IT applications could therefore have a direct influence on our ability to deliver
and on the quality of our products. This also applies to the failure of a data center. To achieve the required
service quality, we use a quality management system certified to ISO 9001 that also applies to the provision of
IT. In addition, to reduce the risk of failure, we operate several redundantly designed data centers.
Furthermore, insurance solutions for cybercrime offenses are in place at Group level.
Increasing international networking and the related possibility of IT system abuse are resulting in cybercrime
risks for Merck, such as the failure of central IT systems, the disclosure or loss of the data integrity of
confidential data from research and business activities, the manipulation of IT systems in process control, or an
increased burden or adverse impact on IT systems as a result of virus attacks.
Risks due to cybercrime and the failure of business-critical applications
We use a variety of IT systems and processes in order to optimally support our globalization. Trends in
information technology offer various opportunities but also harbor risks.
Information technology risks
128
Irrespective of the fact that acquisitions made in the past have been successfully completed, the risk of
conducting acquisitions and subsequent integration exists for future transactions. This includes, among other
things, the inability to meet sales volume targets, and higher integration costs than expected, as well as the
failure to meet synergy goals. The divestment of companies and businesses can lead to liability vis-à-vis the
buyer or additional expenses, for instance through indemnity clauses and guarantee commitments or long-term
supply contracts. Through strong due diligence processes and closely managed integration processes, we seek
to reduce the probability of occurrence of this risk. Therefore, we classify this as a low risk with an unlikely
probability of occurrence and potentially moderate negative effects on the net assets, financial position, and
results of operations.
2011
Tax risks are reviewed regularly and systematically by Group Tax. Corresponding standards and guidelines are
used in order to identify tax risks at an early stage as well as to review, evaluate, and correspondingly minimize
them. Risk reduction measures are coordinated by Group Tax together with the subsidiaries abroad.
2009
As a corporate group that operates internationally, and due to our presence in the capital market, we are
exposed to various financial risks and opportunities. Above all, these are liquidity and counterparty risks,
financial market risks and opportunities, risks of fluctuations in the market values of operational tangible and
intangible assets, as well as risks and opportunities from pension obligations.
Financial risks and opportunities
Overall, we rate this as a low risk.
Nevertheless, reputational risks could result, for instance through public dialogues in social media.
Merck and its employees are active on numerous social media channels. The consistent and legally compliant
use of the channels and their content is important in terms of increasing awareness of our brand, among other
things. Merck takes precautions and implements processes to ensure awareness of the proper handling of social
media, controlling publication, and actively managing communication.
Risks and opportunities from the use of social media
123
Combined Management Report Report on Risks and Opportunities
To combat product-related crime, an internal coordination network covering all functions and businesses, the
Merck Anti-Counterfeiting Operational Network was set up several years ago. In addition, security measures are
in use to protect products against counterfeiting. Innovative technical security solutions and defined preventive
approaches are used to ward off dangers relating to cybercrime and espionage. Measures to prevent risks and
to prosecute identified offenses are conducted in all the relevant crime areas in close and trustworthy
cooperation with the responsible authorities. The impact of these risks on business operations depends on the
respective individual case, product-specific factors, the value chain, and regional aspects in particular. Our
Corporate Security department is responsible for the overall coordination of all measures in this area. Overall,
the threat resulting from crime in general is seen as being possible and is classified as a medium risk.
Owing to our portfolio, we are exposed to a number of sector-specific crime risks. This relates primarily to
products, including among other things, counterfeiting, illegal channeling, and misuse, as well as all types of
property crime, including attempts at these crimes. Crime phenomena such as cybercrime and espionage could
equally affect our innovations or innovation abilities as such.
Risks due to product-related crime and espionage
Companies in the chemical and pharmaceutical industries are particularly exposed to product liability risks.
Product liability risks can lead to considerable claims for damages, loss of reputation, and costs to avert
damages. We have taken out the liability insurance that is standard in the industry for such risks. However, it
could be that the insurance coverage available is insufficient for individual cases. Although the occurrence of
product liability claims in excess of the existing insurance coverage is considered unlikely, individual cases could
still have a critical negative effect on the net assets, financial position, and results of operations. We therefore
rate a potential product liability risk as a medium risk.
Product liability risks
2010
Risks of dependency on suppliers
Although the occurrence of these risks is considered unlikely, an individual event could have a critical negative
effect on the net assets, financial position, and results of operations, and they are therefore classified as a
medium risk.
Further risks include operational failures due to fire or force majeure, for example natural disasters such as
floods or earthquakes, which could lead to a substantial interruption or restriction of business activities. Insofar
as it is possible and economically viable, the Group limits its damage risks with insurance coverage, the nature
and extent of which is constantly adapted to current requirements. Likewise, we are exposed to risks of
production outages and the related supply bottlenecks that can be triggered by technical problems in
production facilities with very high-capacity utilization. Furthermore, there are risks of supply bottlenecks due
to a lack or disappearance of capacity. We are working to continuously mitigate the risks by making regular
investments, setting up alternative sourcing options, and maintaining inventory levels.
Report on Risks and Opportunities
121
investments in the US, Singapore and Germany. These investments will strengthen our manufacturing footprint
to meet demand for key-life saving products. Additionally, we acquired AmpTec, a leading Hamburg, Germany-
based, mRNA contract development and manufacturing organization (CDMO) to strengthen our capabilities
across the mRNA manufacturing chain. Combining our expertise in lipids manufacturing with AmpTec's PCR-
based technology will allow us to offer customers innovative technologies, products and services to help
advance life-enhancing therapeutics and vaccines for Covid-19.
In the Healthcare business sector, the FDA cleared the investigational new drug application (IND) for M5049 for
the treatment of patients with Covid-19 pneumonia. M5049 is a potentially first-in-class small molecule that
blocks the activation of the toll-like receptors TLR7 and TLR8. A Phase II randomized, controlled clinical study
evaluating the safety and efficacy of M5049 in this patient population began in late July. The results of the
study are expected by the second quarter of 2021.
Opportunities arising from the further integration of Sustainability in the Corporate Strategy
In 2020, we integrated sustainability more strongly in the corporate strategy, setting three goals in the areas of
science & technology, value chain and climate & environment. By considering the goals of the sustainability
strategy when making business decisions, Merck contributes to achieving the United Nations Sustainable
Development Goals. Additionally, the company is planning to also link the long-term variable compensation of
the Executive Board from 2022 onward with the progress made toward achieving the company's sustainability
goals.
Risk and opportunity management in relation to the use of financial instruments
Risks of discontinuing development projects and regulatory approval of developed medicines
Sometimes development projects are discontinued after high levels of investment at a late phase of clinical
development. Decisions - such as those relating to the transition to the next clinical phase - are taken with a
view to minimizing risk. We are currently not aware of any risks beyond general development risks that could
significantly affect the net assets, financial position, and results of operations.
Risks and opportunities related to the quality and availability of products
Risk of a temporary ban on products/production facilities or of non-registration of products due to
non-compliance with quality standards
We are required to comply with the highest standards of quality in the manufacturing of pharmaceutical
products (Good Manufacturing Practice or official pharmacopoeia). In this regard, we are subject to the
supervision of the regulatory authorities. Conditions imposed by national regulatory authorities could result in a
temporary ban on products/production facilities, and possibly affect new registrations with the respective
authority. We make the utmost effort to ensure compliance with regulations, regularly perform our own internal
inspections, and carry out external audits. Thanks to these quality assurance processes, the occurrence of a
risk with a critical negative impact is unlikely; however, it cannot be entirely ruled out. Depending on the
product concerned and the severity of the objection, such a risk can have a moderate negative impact on the
net assets, financial position, and results of operations. Therefore, we rate this as a medium risk.
Combined Management Report Report on Risks and Opportunities
122
Risks of production availability
Furthermore, there is the risk that regulatory authorities either do not grant or delay approval or grant only
restricted approval. Additionally, there is the risk that undesirable side effects of a pharmaceutical product
could remain undetected until after approval or registration, which could result in a restriction of approval or
withdrawal from the market. Well-advanced programs in our pipeline and those of our partners result in
potential new approvals; on the other hand, missing targets in this area may have critical negative effects on
our financial position and operating result, for example due to lower net sales or the non-occurrence of
milestone payments from collaboration agreements. These risks are considered to be medium overall, with
probabilities ranging from unlikely to possible.
In the area of financial risks and opportunities, we use an active management strategy to reduce the effects of
fluctuations in exchange and interest rates. The management of financial risks and opportunities by using
derivatives in particular is regulated by extensive guidelines. Speculation is prohibited. Derivative transactions
are subject to constant risk controls. The strict separation of functions between trading, settlement, and control
functions is ensured.
Quality controls along the entire value chain reduce the risks related to product quality and availability. This
starts with the qualification of our suppliers. Quality controls also include comprehensive quality requirements
for raw materials, purchased semi-finished products, and plants. We are dependent on individual suppliers for a
number of precursor products, packaging materials, and finished goods. In the event that one of these
suppliers curtails or discontinues production, or supply is disrupted, this could potentially have a critical impact
on the business concerned. With long-term strategic alliances for precursor products critical to supply and price
as well as alternative sourcing strategies, we reduce the probability of occurrence of these risks and rate them
as unlikely. Overall, these are classified as medium risks.
Overview of Rating Development
Liquidity risks
• Scope
• Moody's
S&P
BBB / Baa2
BBB+Baal
A- / A3
A / A2
S&P/Moody's / Scope
Report on Risks and Opportunities
The capital market uses the assessments published by rating agencies to help lenders assess the risks of a
financial instrument used by Merck. We are currently rated by Standard & Poor's, Moody's, and Scope.
Standard & Poor's has issued a long-term credit rating of A with a stable outlook, Moody's a rating of Baal with
a stable outlook, and Scope a rating of A-, likewise with a stable outlook. In line with market procedures, our
financing conditions are closely tied to our rating. The better the rating, the more favorably we can generally
raise funds on the capital market or from banks.
Assessment by independent rating agencies
125
We have commitments in connection with pension obligations. The present value of defined benefit obligations
can be significantly increased or reduced by changes in the relevant valuation parameters, for example the
interest rate or future salary increases. Pension obligations are regularly assessed as part of annual actuarial
reports. The obligations are covered by the pension provisions reported in the balance sheet based on the
assumptions as of the balance sheet date. Some of these obligations are funded by plan assets (further
information can be found in the note "Provisions for pensions and other post-employment benefits" in the Notes
to the Consolidated Financial Statements). To the extent that pension obligations are covered by plan assets
consisting of interest-bearing securities, shares, real estate, and other financial assets, decreasing or negative
returns on these assets can adversely affect the fair value of plan assets and thus result in further additions to
pension provisions. By contrast, rising returns increase the value of plan assets, thereby resulting in excess
cover of plan liabilities. We increase the opportunities of fluctuations in the market value of plan assets on the
one hand and reduce the risks on the other by using a diversified investment strategy. The unlikely risk due to
pension obligations could have moderate negative effects on the net assets, financial position, and results of
operations, and is classified as low.
Risks and opportunities from pension obligations
Combined Management Report Report on Risks and Opportunities
Report on Risks and Opportunities
Counterparty risks
Counterparty risks arise from the potential default by a partner in connection with financial investments, loans,
and financing commitments on the one hand and receivables in operating business on the other.
As for counterparty risks from financial transactions, we review all positions relating to trading partners and
their credit ratings on a daily basis. We manage financial risks of default by diversifying our financial positions
and through the related active management of our trading partners. Significant financial transactions involving
credit risk are entered into with banks and industrial companies that have a good credit rating. Moreover, our
large banking syndicate - the multi-currency revolving credit facility of € 2 billion was syndicated by 20 banks -
reduces possible losses in the event of default.
Combined Management Report
The carrying amounts of individual balance sheet items are subject to the risk of changing market and business
conditions and thus to changes in fair values as well. Necessary impairments could have a significant negative
non-cash impact on earnings and affect the accounting ratios. This applies in particular to the high level of
intangible assets including goodwill, which mainly derive from the purchase price allocations made in connection
with past acquisitions (further information can be found in the note "Intangible assets" in the Notes to the
Consolidated Financial Statements). All relevant risks were assessed during the preparation of the Consolidated
Financial Statements and taken into account accordingly. We rate risks beyond this as unlikely with a critical
negative impact. Therefore, this is seen as a medium risk.
124
Overall, the liquidity risk is unlikely and rated as low.
The solvency and operational development of trading partners are regularly reviewed as part of the
management of operational counterparty risks. Sovereign risks are also analyzed. The volume of receivables of
each customer is capped in line with their credit ratings. Risk-mitigating measures, such as credit insurance,
are utilized as appropriate. Nevertheless, defaults by isolated trading partners, even those with outstanding
credit ratings, cannot be entirely ruled out, although rated as unlikely (further information can be found in
"Credit risks" in the note "Management of financial risks” in the Notes to the Consolidated Financial
Statements).
Counterparty risk is classified as a medium risk overall owing to the unlikely probability of occurrence with a
potential critical negative effect.
Financial market risks and opportunities
As a result of our international business activities and global corporate structure, we are exposed to risks and
opportunities from fluctuations in exchange rates. These result from financial transactions, operating
receivables and liabilities, as well as forecast future cash flows from sales and costs in foreign currency. We use
derivatives to manage and reduce the aforementioned risks and opportunities (further information can be found
in the note "Derivative financial instruments" in the Notes to the Consolidated Financial Statements). Due to
their possible occurrence with a potentially critical negative effect on the net assets, financial position, and
results of operations, foreign exchange rate risks are rated as medium risk.
Variable interest and current financial liabilities are exposed to the risks and opportunities of interest rate
fluctuations. These are also managed and reduced using derivatives. Interest rate risks have a potentially
moderate negative impact, are considered unlikely, and pose low risks overall.
Risks of impairment of balance sheet items
In order to ensure its continued existence, a company must be able to fulfill its commitments from operating
and financial activities at all times. Therefore, to reduce potential liquidity risks, we have a central Group-wide
liquidity management system in place, and a balanced maturity profile. The maturities of our financial liabilities
are aligned with our planned free cash flow. Furthermore, we have a multi-currency revolving credit facility of
€ 2 billion with a term until 2025, which ensures continuing solvency if any liquidity bottlenecks occur. As our
loan agreements do not contain any financial covenants, these agreed lines of credit can be accessed even if
Merck's credit rating should deteriorate. Additionally, we have a commercial paper program with a maximum
volume of € 2 billion.
972.9
186.2
23,549.8
567.0
178.6
1,037.8
504.9
0.5
Cash and cash equivalents
1,726.6
1,721.8
46.6
25,323.0
46.6
23,549.8
25,318.2
0.5
22,457.6
C. Prepaid expenses
232.3
859.9
168.0
Total assets
Equity and liabilities
A. Net equity
Subscribed capital
General partner's equity
22,457.6
Capital reserves
Profit carried forward E. Merck KG
Net retained profit: shareholders
Merck KGaA
Dec. 31, 2019
Merck KGaA
Jan. 1, 2020
232.3
859.9
Retained earnings
397.2
Combined Management Report
168.0
397.2
3,813.7
Other liabilities
D. Deferred income
Total equity and liabilities
3,000.0
383.6
3,000.0
382.7
Trade accounts payable
15,604.8
18,988.4
18,987.4
13.7
25,323.0
13.7
25,318.2
Other receivables and other assets
15,604.7
Financial liabilities
C. Liabilities
979.5
701.6
62.6
194.5
5,337.7
701.6
62.6
194.5
5,337.7
B. Provisions
Provisions for pensions and other post-employment benefits
Other provisions
378.6
378.6
604.7
600.9
983.3
3,813.7
Trade accounts receivable
Report on Expected Developments
B. Current assets
6,639
Forecast for 2021
Key assumptions
.
Strong organic growth
•
Roughly stable organic development of the core business
•
Slight to moderately
negative foreign
Net Sales
exchange effect
• Substantial contribution to growth by MavencladⓇ and BavencioⓇ
.
Negative foreign exchange effects, in particular the U.S. dollar and
individual growth market currencies
Expected substantial earnings contribution especially from
MavencladⓇ can more than offset the effect from the expected
decline in sales of RebifⓇ
EBITDA pre¹ 2,267
.
•
Strongly negative foreign
exchange effect
Marketing and selling expenses as well as research and
development costs with decrease in percentage of sales due to
systematic cost management and strict pipeline prioritization
.
Strong organic growth
Negative foreign exchange effects, in particular the U.S. dollar and
individual growth market currencies
Actual results 2020
Forecast for the Healthcare Business Sector
Slight increase over the
previous year
• Solid to strong growth in Performance Materials
Realization of synergies totaling approximately € 83 million as
planned from the integration of Versum Materials into Performance
Materials
Negative foreign exchange effects from the U.S. dollar in particular
and individual growth markets
⚫ Rise in EBITDA pre
• Increase in net working capital and adverse impact from negative
foreign exchange effects
•
Payments in connection with the transformation and growth
program THRIVE commenced by Healthcare in 2020
• Higher fluctuation corridors than for net sales and EBITDA pre are
to be expected
€ million
1 EBITDA pre of fiscal 2020 included income from the release of a provision for patent litigation amounting to € 365 million. Including this amount in the
previous year, we expect slight to moderate organic growth.
For the Merck Group in fiscal 2021, we expect strong organic net sales growth, driven mainly by our Healthcare
and Life Science business sectors. For Performance Materials we forecast a solid organic increase. The
divestment of Allergopharma will be reported in the first three quarters of 2021 as a portfolio effect, which will
not be material for the Group. With regard to foreign exchange developments, we continue to expect a volatile
environment due to political and macroeconomic developments. We expect a negative foreign exchange effect
between -2% and -5%, These effects will result in particular from the development of the U.S. dollar as well as
individual growth market currencies. This forecast for 2021 is based on a euro-U.S. dollar exchange rate in a
corridor of 1.17 to 1.22.
EBITDA pre
EBITDA pre is our key financial indicator to steer operating business. For fiscal 2021, we expect organic growth
of EBITDA pre in a high single digit to low teens percentage range. All three business sectors will contribute to
this development with organic growth. Excluding the release of the provision for the patent litigation with
Biogen amounting to € 365 million, we expect that in fiscal 2021, the EBITDA pre margin will be higher than in
fiscal 2021. Including the income from the release of the provision in the previous year, we are forecasting
moderate organic growth and a margin below that of the previous year.
The expected foreign exchange development is forecast to adversely affect Group EBITDA pre by between -2%
and -5% compared with fiscal 2020; it is likely to be seen mainly in the Healthcare and Performance Materials
businesses. In this context, we assume that in particular, the euro-U.S. dollar exchange rate will impact foreign
exchange developments. These foreign exchange effects will be partly mitigated by currency hedging, although
we do not hedge all growth market currencies.
Combined Management Report
Report on Expected Developments
132
Operating cash flow
Apart from EBITDA pre, operating cash flow as of fiscal 2021 will represent one of our key performance
indicators at Group level and replace business free cash flow (BFCF) as a steering parameter. Operating cash
flow takes the cash-relevant variables before investments and financing into account and serves to manage
internal financing power and liquidity. In general, the forecast for operating cash flow is subject to a higher
fluctuation corridor than the forecast for net sales, EBITDA pre and the previous steering parameter BFCF.
The expected strong development of operating business in fiscal 2021 will be a main driver of operating cash
flow. However, in fiscal 2020 operating cash flow reflected the increasing receipt of payments from customers
in the fourth quarter of 2020. Since we do not expect a comparable effect in fiscal 2021, this will have a
negative impact on the steering parameter. We continue to expect payouts in the context of ongoing
restructuring programs on a larger scale in 2021. Among other things, this relates to the transformation and
growth program THRIVE that was launched in Healthcare in 2020. Negative foreign exchange effects will also
weigh on operating cash flow. Against this backdrop, overall we expect a slight increase in 2021.
Forecast for the Healthcare business sector
Net sales
-2% to -5%
1 EBITDA pre of fiscal 2020 included income from the release of a provision for patent litigation amounting to € 365 million. Including this amount in the
previous year, we expect a strong organic decline.
Following the significantly negative effects from the Covid-19 pandemic that impacted the Healthcare business
sector in fiscal 2020, we now expect to see strong organic growth of net sales in 2021. This will be driven
mainly by Mavenclad® and Bavencio®. We thus believe that both products will generate a further significant
increase in sales. For the core business, we forecast a roughly stable development. This reflects the continued
competitive pressure and the associated decline in sales of Rebif®. Although the negative impacts of the
volume-based procurement regulations that took effect in China in 2020 will now be seen in full in 2021, we
forecast a roughly stable organic development for our products in the General Medicine & Endocrinology
franchise. We assume that General Medicine & Endocrinology will resume its growth course as of 2022. The
performance of the Fertility franchise will have a mitigating effect. At present we do not assume that the Covid-
19 pandemic will have considerable negative effects on Healthcare sales. We forecast a slight to moderately
negative foreign exchange effect.
•
Organic earnings growth owing to the expected sales growth and
positive Covid-19 effects amid a slight margin improvement
•
Slightly negative foreign
exchange effects
.
Negative foreign exchange effects primarily owing to the
development of individual growth market currencies
Net sales
For the Life Science business sector in fiscal 2021, we forecast growth in the low teens percentage range. The
Process Solutions business unit will clearly remain the strongest driver of growth and will be further propelled
by significantly positive Covid-19 effects. Solid organic growth in Applied and Research Solutions will also
contribute positively to the overall performance of Life Science. We expect no material portfolio effects from the
acquisitions of AmpTec and Resolution Spectra Systems S.A.S., France. We forecast a slight to moderately
negative foreign exchange effect.
EBITDA pre
In 2021, the Life Science business sector is expected to show organic growth of EBITDA pre in the low teens
percentage range compared with the previous year. The persistently dynamic demand trend and clearly positive
Covid-19 effects will contribute to organic earnings growth. Based on our estimates, the foreign exchange
impact on earnings in fiscal 2021 should be only slightly negative.
• Negative foreign exchange effects from the U.S. dollar in particular
• Solid organic growth
134
Forecast for the Performance Materials business sector
Forecast for the Performance Materials Business Sector
€ million
Net sales
Actual results 2020 Forecast for 2021
Key assumptions
Strong growth momentum in Semiconductor Solutions
•
Inventories
Combined Management Report Report on Expected Developments
Net sales
Process Solutions remains the main driver of growth, followed by
Applied Solutions
•
EBITDA pre
For 2021, we expect EBITDA pre of the Healthcare business sector to see strong organic growth. The negative
earnings effects resulting from the expected decline in RebifⓇ sales should be more than offset by substantial
earnings contributions from MavencladⓇ. In addition, we will continue our rigorous cost management and strict
pipeline prioritization. We therefore expect marketing and selling expenses as well as research and
development costs to decline as a percentage of sales. Research and development costs will remain heavily
Combined Management Report Report on Expected Developments
133
dependent on the development of clinical data and further expected study results. We forecast the upfront cash
payment in the context of the global strategic alliance with GlaxoSmithKline for the joint development and
marketing of bintrafusp alfa to have a positive earnings effect in the higher double-digit euro millions, which will
be recognized in other operating income. The amount generally depends on the cost evolution. Development
milestones will no longer occur subsequent to the recently communicated discontinuation of the INTR@PID
Lung 037 trial. For fiscal 2021, we expect income from active portfolio management in a low to mid double-digit
million range as well as income from the realization of milestone payments within the scope of our strategic
alliance with Pfizer to develop and commercialize BavencioⓇ. By contrast, we expect foreign exchange effects to
weigh heavily on EBITDA pre.
Forecast for the Life Science business sector
Forecast for the Life Science Business Sector
€ million
Actual results 2020
Forecast for 2021
All businesses contribute to growth
7,515
EBITDA pre
2,405
.
Organic growth in the
low teens percentage
range
Slight to moderately
negative foreign
exchange effect
• Organic earnings growth
in the low teens
percentage range
Key assumptions
•
.
Net Sales
.
Additional Information on
Merck KGaA in accordance with
the German Commercial Code
(HGB)
138
Combined Management Report Additional Information on Merck KGaA in accordance with the German Commercial Code (HGB)
The company has not entered into any material agreements subject to a change of control pursuant to a
takeover offer nor has it entered into any compensation agreements with the members of the Executive Board
or employees in the event of a takeover offer.
The company is not authorized to acquire its own shares.
Moreover, the share capital is contingently increased by up to € 16,801,491.20 composed of up to 12,924,224
no par value bearer shares (Contingent Capital II). This increase in contingent capital is only to be implemented
insofar as the bearers or creditors of option or conversion rights, or with an obligation to convert or exercise
options on warrant bonds, option participation certificates, option participation bonds, convertible bonds,
convertible participation certificates, or convertible participation bonds issued against contributions that are
issued or guaranteed by the company or a subordinate Group company on the basis of the authorization
resolution of the Annual General Meeting of April 27, 2018, to April 26, 2023, utilize their option or conversion
rights, or to fulfill their conversion obligation or obligation to exercise options insofar as they are obliged to
fulfill their conversion or option exercise obligation, or insofar as the company exercises an option, wholly or in
part, of granting shares in the company instead of paying the sum of money due, and to the extent that in each
case a cash settlement is not granted, or own shares or other forms of fulfillment are used. Each issue of new
shares shall take place at the determined option or conversion price, pursuant to the aforementioned
authorization resolution. The new shares participate in the profit from the beginning of the fiscal year in which
they are created; insofar as this is legally permissible, the Executive Board may, with the approval of the
Supervisory Board, and in deviation from section 60 (2) AktG, stipulate that the new shares also participate in
the profit for a past fiscal year. The Executive Board is authorized, with the approval of the Supervisory Board
and of E. Merck KG, to stipulate the further details of the implementation of the increase in contingent capital.
137
Combined Management Report Report in accordance with Section 315a of the German Commercial Code (HGB)
The Articles of Association also encompass contingent capital. The share capital is contingently increased by up
to € 66,406,298.40 divided into 51,081,768 shares (Contingent Capital I). The contingent capital increase
serves to grant exchange rights to E. Merck KG in accordance with article 33 of the Articles of Association to
enable the conversion of its equity interest. The shares carry dividend rights from the beginning of the fiscal
year following the year in which the conversion option is exercised.
Furthermore, the Executive Board is authorized, with the approval of the Supervisory Board, to determine the
additional details of the capital increase and its implementation, including the content of rights attached to the
shares as well as the terms and conditions of the share issue.
The management report of Merck KGaA has been combined with the Group management report. The Annual
Financial Statements and the Combined Management Report of the Merck Group and Merck KGaA for 2020 are
being filed with the electronic German Federal Gazette (elektronischer Bundesanzeiger) and are available on the
website of the German company register.
To the extent that the subscription right is not excluded under the above provisions, it may also be granted to
the limited liability shareholders by way of an indirect subscription right pursuant to section 186 (5) AktG or, in
part, by way of a direct subscription right, and otherwise by way of an indirect subscription right pursuant to
section 186 (5) AktG.
Lastly, with the approval of the Supervisory Board, the subscription right of the limited liability shareholders can
be excluded in order to exclude fractional amounts from the subscription right.
Moreover, with the approval of the Supervisory Board, the subscription right of the limited liability shareholders
can be excluded if and to the extent this is necessary to grant the holders or creditors of conversion or option
rights, and/or the holders or creditors of financing instruments carrying conversion or option obligations, which
were or are issued by the company or by a domestic or foreign company in which the company directly or
indirectly holds the majority of the votes and capital, a subscription right to the extent to which they would be
entitled after the exercise of the conversion or option rights or after the performance of a conversion or option
obligation.
It is likewise possible to exclude, with the approval of the Supervisory Board, the subscription right of the
limited liability shareholders in order to enable E. Merck KG to exercise its right pursuant to article 33 of the
Articles of Association to convert, in full or in part, its equity interest into share capital.
It is likewise possible to exclude the subscription right of the limited liability shareholders with the approval of
the Supervisory Board in the case of capital increases through non-cash contributions, particularly for the
purpose of acquiring enterprises, parts of enterprises, or interests in enterprises. In addition, with the approval
of the Supervisory Board, the limited liability shareholders' subscription rights can be excluded in order to
enable E. Merck KG to exercise its right pursuant to article 32 (3) of the company's Articles of Association to
participate in a capital increase by issuing shares or freely transferable share subscription rights.
2017 under exclusion of the limited liability shareholders' subscription right by analogous application of section
186 (3) sentence 4 AktG.
136
Combined Management Report Report in accordance with Section 315a of the German Commercial Code (HGB)
The Executive Board is authorized to increase the company's share capital with the approval of the Supervisory
Board and of E. Merck KG once or repeatedly, up to and including April 27, 2022, by up to a total of
€ 56,521,124.19 by issuing new no-par value bearer shares against cash and/or non-cash contributions
(Authorized Capital 2017). Limited liability shareholders shall be generally granted the statutory right to
subscribe to the new shares. However, the Executive Board is authorized, with the approval of the Supervisory
Board, to exclude the limited liability shareholders' subscription right, in full or in part, in case of a capital
increase against cash contributions pursuant to or by analogous application of section 186 (3) sentence 4 AktG,
if the issue price of the new shares is not substantially lower than the stock exchange price of the company's
shares already listed and if the new shares, which are issued under exclusion of the subscription right, do not
exceed a proportional amount of 10% of the share capital either at the time of the Authorized Capital 2017
taking effect or at the time of the Authorized Capital 2017 being utilized. This restriction to 10% of the share
capital shall include the proportional amount of the share capital that is attributable to shares that are issued
under exclusion of the subscription right or sold during the term of the Authorized Capital 2017, based on an
authorization to issue new shares or sell own shares by direct or analogous application of section 186 (3)
sentence 4 AktG. Further, this restriction shall also include the proportional amount of the share capital that is
attributable to shares which may or must be issued in order to service bonds carrying a conversion or option
right or a conversion or option obligation, if the bonds are issued during the term of the Authorized Capital
The Articles of Association can be amended by a resolution at the Annual Meeting that requires the approval of
the general partners. Notwithstanding any statutory provisions to the contrary, the resolutions of the General
Meeting are adopted by a simple majority of the votes cast. Where the law requires a capital majority in
addition to the voting majority, resolutions are adopted by a simple majority of the share capital represented in
the vote. The Articles of Association of the company encompass authorized and contingent capital.
According to the Articles of Association of Merck, the general partners not holding an equity interest who form
the Executive Board are admitted by E. Merck KG with the consent of a simple majority of the other general
partners. A person may be a general partner not holding an equity interest only if he or she is also a general
partner of E. Merck KG. In addition, at the proposal of E. Merck KG and with the approval of all general partners
not holding an equity interest, further persons who are not general partners not holding an equity interest may
be appointed to the Executive Board.
The sum of shares issued on the basis of the Authorized Capital 2017 under exclusion of the limited liability
shareholders' subscription right must not exceed a proportional amount of 20% of the share capital, by taking
into account other shares of the company which, during the term of the Authorized Capital 2017, are sold or
issued under exclusion of the subscription right or are to be issued under bonds issued after April 28, 2017,
under exclusion of the subscription right; this limitation shall apply both at the time of this authorization taking
effect and at the time of this authorization being exercised.
Pursuant to the information on voting rights submitted to us in accordance with the German Securities Trading
Act (WPHG), on December 31, 2020, no shareholders owned direct or indirect investments exceeding 10% of
the voting rights.
Merck KGaA, headquartered in Darmstadt, Germany, is the parent company of the Merck Group. In addition to
its function as a holding company, Merck KGaA generates sales in the Healthcare, Life Science, and
Performance Materials business sectors. The Healthcare business sector has been run as a separate company,
Merck Healthcare KGaA, since April 1, 2019 (see Effects of material company agreements on the net assets,
financial position, and results of operations). Merck KGaA employs the majority of the 11,000-plus workforce in
Darmstadt.
Statement on Corporate Governance
Financial assets
Strong growth in Healthcare
Tangible assets
Intangible assets
A. Fixed assets
Assets
€ million
As the carrying amounts of the assets exceeded the carrying amounts of the liabilities, Merck Performance
Materials Germany GmbH made a settlement payment to Merck KGaA. In addition, the licenses for the
intangible assets and know-how of the distribution and sales function leased to Merck KGaA came to an end.
The table below shows the assets and debt of Merck KGaA immediately before and after the partial termination
of the business lease and the transfer of the assets and debt to Merck Performance Materials Germany GmbH.
and working relationships allocated to the function were also transferred to Merck Performance Materials
Germany GmbH.
140
The financial statements of Merck KGaA have been prepared in accordance with the provisions of the German
Commercial Code (HGB), as amended by the German Accounting Directive Implementation Act (BilRUG), and
the German Stock Corporation Act (AktG). The full version of the Annual Financial Statements of Merck KGaA
together with the unqualified auditor's opinion has been submitted to the operator of the electronic Federal
Gazette (elektronischer Bundesanzeiger), where they are published and forwarded to the company register.
Combined Management Report Additional Information on Merck KGaA in accordance with the German Commercial Code (HGB)
The business leasing contract under which the Healthcare business sector was leased back to Merck KGaA was
terminated on January 11, 2019, with economic effect as of 24:00 on March 31, 2019. The sector-specific ERP
system for the Healthcare business sector was introduced as planned on April 1, 2019. As a result of the end of
the business leasing contract, the leased objects allocated to the Healthcare business sector at the end of the
lease comprising current assets as well as certain liabilities and provisions, including the leased objects
acquired or created by means of maintenance, replacement, and expansion investments - were transferred to
Merck Healthcare KGaA at their carrying amounts under German commercial law and in a condition
commensurate with their continued and proper operational use up to the date the business leasing contract
ended. As the carrying amounts of the liabilities exceeded the carrying amounts of the assets, Merck KGaA
made a settlement payment to Merck Healthcare KGaA. In addition, the licenses for the intangible assets and
know-how leased to Merck KGaA came to an end.
-
The aforementioned spin-off and business leasing contracts form part of an overall entrepreneurial concept.
They were submitted to the General Meeting of Merck KGaA for approval on April 27, 2018, at the 2018 Annual
General Meeting, as a coherent restructuring measure and were approved. In 2018, the Healthcare OpCo
changed its legal form to that of a German corporation with general partners (Kommanditgesellschaft auf
Aktien) and has since been trading under the name of Merck Healthcare KGaA, Darmstadt.
Since the technical system requirements for the introduction of the sector-specific enterprise resource planning
(ERP) systems as regards the OpCos were not in place at the time of the spin-off, the business activities spun
off to the OpCos have been temporarily leased back by the relevant OpCos to Merck KGaA until sector-specific
ERP systems have been introduced. For this purpose, also on March 2, 2018, Merck KGaA entered into a
business leasing contract with each respective OpCo with economic effect as of 0:00 on January 1, 2018, to
lease back all the operating business previously spun off to the OpCo. Under the terms of the respective
business leasing contract, Merck KGaA leases the entire operation from the respective OpCo, as well as all fixed
assets in this context; it acquires the current assets as well as certain liabilities and provisions at their carrying
amounts under German commercial law. The business lease allowed the spin-off measures to be implemented
for all OpCos with economic effect at a uniform time, 0:00 on January 1, 2018, while retaining the flexibility of
transitioning the management of the relevant operating business in accordance with the sector-specific ERP
introduction at an individual time to the OpCo in question in a targeted manner. On the basis of the business
leasing contract, Merck KGaA will temporarily continue to operate the spun-off business as a leaseholder in its
own name and for its own account. Once the relevant ERP systems have been introduced for the respective
OpCo, the business lease with this OpCo will be terminated and the business previously leased out will pass to
the OpCo.
OpCos are each indirectly held by Merck KGaA via an intermediate holding company. The acquiring legal entities
within the scope of the holding company spin-off were Merck Healthcare Holding GmbH for the business shares
of Healthcare OpCo, Merck Life Science Holding GmbH for the business shares of Life Science OpCo, and Merck
Performance Materials Holding GmbH for the business shares of Performance Materials OpCo (referred to
individually as "HoldCo", independently of the sector, and jointly as "HoldCos"). To this end, Merck KGaA and
the Holdcos signed a notarized spin-off and takeover agreement on March 2, 2018. The holding company spin-
off took place with economic effect as of 0:00 on January 1, 2018.
Combined Management Report Additional Information on Merck KGaA in accordance with the German Commercial Code (HGB) 139
Immediately after the spin-off took effect, all shares held by Merck KGaA in the respective OpCos were
transferred to holding companies via a further spin-off (holding company spin-off), as a result of which the
As part of the strategic development of Merck KGaA, the existing operating activities of the Healthcare, Life
Science, and Performance Materials business sectors within Merck KGaA, together with the relevant assets and
liabilities (hereinafter: "operating sectors"), were spun off at their carrying amounts into three separate
companies (hereinafter: "OpCo" or plural "OpCos") with the legal form of a GmbH or German limited liability
corporation (operating spin-off). This operating spin-off is based on the spin-off and takeover agreement
concluded between Merck KGaA and the OpCos in notarized form on March 2, 2018. Following approval by the
2018 Annual General Meeting, the operating spin-off took place with economic effect as of 0:00 on January 1,
2018.
Effects of material company agreements on the net assets, financial position,
and results of operations
For the fiscal year 2020, Merck exercise the option to publish the corporate governance statement on the
Merck Group website in accordance with section 315d HGB in conjunction with section 289f (1) sentence 2 of
the HGB. The corporate governance declaration is available on the website
https://www.merckgroup.com/en/investors/corporate-governance/reports.
As planned, the business leasing contract between Merck Performance Materials Germany GmbH and Merck
KGaA for the distribution and sales function of the Performance Materials business sector was terminated on
November 18, 2019, with economic effect as of 24:00 on December 31, 2019. By way of an agreement dated
November 18, 2019, the business leasing contract for the other functions of the Performance Materials business
sector remains in place. Accordingly, the distribution and sales function of the Performance Materials business
sector moved to Merck Performance Materials Germany GmbH with economic effect as of 0:00 on January 1,
2020. The sector-specific ERP system for the distribution and sales function of the Performance Materials
business sector was introduced at Merck Performance Materials Germany GmbH as planned on January 1, 2020.
As a result of the partial termination of the business leasing contract, the leased objects allocated to the
distribution and sales function of the Performance Materials business sector at the end of the lease - comprising
current assets as well as certain liabilities and provisions - were transferred to Merck Performance Materials
Germany GmbH at their carrying amounts under German commercial law. The contractual, process, procedural,
The following information is provided in accordance with section 315a of the German Commercial Code (HGB)
and the explanatory report pursuant to section 176 (1) sentence 1 of the German Stock Corporation Act (AktG).
As of the balance sheet date, the company's subscribed capital is divided into 129,242,251 no-par value bearer
shares plus one registered share. Each share therefore corresponds to € 1.30 of the share capital. The holder of
the registered share is E. Merck Beteiligungen KG. It is entitled and obliged to appoint one-third of the
members of the Supervisory Board representing the limited liability shareholders. If the holder of the registered
share is a general partner, he or she has no such right of appointment. The transfer of the registered share
requires the company's approval. The approval is granted at the sole discretion of the personally liable general
partner with an equity interest, namely E. Merck KG.
End of the temporary business lease of the Healthcare and Performance Materials business
sectors
135
€ million
Actual results 2020
Forecast for 2021
Net sales
17,534
EBITDA pre¹ 5,201
Operating
Cash Flow
3,477
.
Strong organic growth
Key assumptions
•
Negative foreign ex-
change effect of
-2% to -5%
•
•
Organic growth in the
high single-digit to low
teens percentage range
Negative foreign ex-
•
change effect of
Report in accordance with section.
315a of the German Commercial
Code (HGB)
Negative foreign exchange effects from the U.S. dollar in particular
and individual growth markets
• Life Science with growth in the low teens range
Forecast for the Merck Group
Forecast for the Merck Group
• Organic growth driven by all three business sectors
•
Corporate and Other
131
For our Performance Materials business sector, we expect a solid to strong organic increase in EBITDA pre in
2021. The price decline in liquid crystals will be more than offset by anticipated growth in Semiconductor
Solutions and by active cost management. This forecast includes the planned realization of synergies amounting
to totaling around € 83 million from the integration of Versum Materials. We assume that the expected foreign
exchange development will have a significant to strongly adverse impact on EBITDA pre.
EBITDA pre
Following the successful realignment of our portfolio, we expect solid organic growth of net sales in our
Performance Materials business sector in fiscal 2021. Particularly for the Semiconductor Solutions business unit
we forecast strong growth dynamics, which will exceed market growth in the medium term. In addition to sales
by Semiconductor Materials, the project business of Delivery Systems & Services is expected to contribute
significantly to organic growth. We expect our Surface Solutions business to see a positive organic development
in 2021. Our Liquid Crystals business will still face continued price erosion owing price pressure common in this
industry. We forecast a slight to moderately negative foreign exchange effect.
Net sales
.
• Growth in Semiconductor Solutions can more than offset price
decline in Liquid Crystals supported by active cost management
Planned realization of synergies totaling around € 83 million from
the integration of Versum Materials
Negative foreign exchange effects from key Asian currencies and
the U.S. dollar
Combined Management Report Report in accordance with Section 315a of the German Commercial Code (HGB)
High organic growth in OLED materials
Negative foreign exchange effects from key Asian currencies and
the U.S. dollar
We expect that in fiscal 2021, Corporate and Other will be below the previous year's level. This is mainly due to
the positive effects expected from foreign currency hedging, which will partly offset negative foreign exchange
effects in the business sectors.
•
exchange effect
Significant to strongly
negative foreign
1,024.
EBITDA pre
• Solid to strong organic
growth
• Slight to moderately
negative foreign
exchange effect
•
3,380
Positive organic growth in Surface Solutions
Other income
Cost of materials
Personnel expenses
2020
3,176
2019
355
%
3,645
-12.9
215
Net sales
€ million
-469
406
-469
Change
Results of operations
Net sales in the Life Science business sector increased by a double-digit rate compared with the previous year,
mainly due to the Process Solutions business unit (+35.7%). The Applied Solutions (+3.0%) and Research
Solutions (+2.9%) business units also contributed to this development. Sales increased in the Europe, Asia-
Pacific and North America regions in particular. By contrast, a decline was recorded in Latin America.
In the Performance Materials business sector, sales in the Display Solutions business unit including OLED sales
declined by -16.7% year-on-year. A sharp increase in sales in the Surface Solutions business unit (+27.0%),
including Cosmetics sales, was not enough to offset this decline. This increase was largely due to the sale of
inventories to Merck Performance Materials Germany GmbH at their net carrying amount as of January 1, 2020.
From a regional perspective, sales declined in North America and Latin America in particular.
The decline in net sales of the Healthcare business sector is attributable to the fact that its business has been
continued in a separate company, Merck Healthcare KGaA, since April 1, 2019. Accordingly, the prior-year
figures included net sales from the operational Healthcare business in the first quarter.
Combined Management Report Additional Information on Merck KGaA in accordance with the German Commercial Code (HGB) 142
-12.9
60.9
3,645
3,176
667
-29.4
140
1,073
€ million
65.2
Financial result
-1,459
124
-875
641
765
Profit before profit transfers and taxes
51.4
-117
-228
-345
-0.7
-7
1,099
1,092
Investment income/write-downs of financial assets
-1,265
-24.2
-1,382
-1,047
Other operating expenses
7.4
-9
-122
-131
Depreciation, amortization, and write-downs
-5.1
58
-1,128
-1,070
-13.3
195
335
%
2019
2019
2,978
-6.9
-87
1,263
1,176
18.4
182
987
1,169
-53.9
-594
1,102
508
%
€ million
2020
Change
Total
Other sales
Performance Materials
Life Science
Healthcare
€ million
Merck KGaA's net sales decreased in 2020. The decline of € -469 million resulted primarily from the Healthcare
and Performance Materials business sectors. The Healthcare business sector has been held in a separate
company, Merck Healthcare KGaA, since April 1, 2019. Accordingly, the prior-year figures included net sales
from the operational Healthcare business in the first quarter. In addition, the Group services oncharged to the
Healthcare business sector are allocated to Healthcare. On the other hand, net sales of the Life Science
business sector rose, in particular.
Business development
With the agreement dated July 24, 2020, AB Pensionsverwaltung GmbH retired as complementary of AB
Allgemeine Pensions GmbH & Co. KG (hereinafter "AB Pensions GmbH & Co. KG") with effect from August 31,
2020. At the same time, the AB Pensions GmbH & Co. KG merged to its sole limited partner Merck KGaA. The
assets and liabilities were transferred to Merck KGaA at their carrying amounts. For a better comparability, the
main assets and liabilities are listed in the notes to the financial statements in the relevant financial statement
caption. The main captions affected by the merger were pension provisions, cash pool and financial assets as
well as other operating income in the income statement.
Merger of AB Pensions GmbH & Co. KG
141
Combined Management Report Additional Information on Merck KGaA in accordance with the German Commercial Code (HGB)
19.3
323
3,176
293
30
10.2
2,103
2020
Change
Total
Germany
Outside Germany
€ million
At 66.2% (2019: 81.7%), the share of exports in 2019 was below the previous year's level.
-12.9
-469
3,645
-17.9
-52
290
€ million
-12.4
%
€ million
2019
3,355
2020
2,938
238
3,176
Change
Total
Sales to third parties
Group sales
€ million
The share of sales with other Group companies (Group sales) amounted to 92.5% in the year under review
(2019: 92.0%).
Other sales mainly included the intragroup oncharging of IT services, rent, and the umbrella brand, as well as
other administrative services.
-12.9
-469
3,645
-417
Profit transfers
Provisions for pensions and other post-employment benefits
-456
599.5
Total
229
434
-206
-47.3
The ratio of research and development spending to sales was 7.2% (2019: 11.9%). Overall, the average
number of employees working in research and development was 1,076. The decline is mainly attributable to the
fact that the R&D activities of the research-intensive Healthcare business sector have been continued at Merck
Healthcare KGaA since April 1, 2019.
Dividend
For 2020, we are proposing to the General Meeting the payment of a dividend of € 1.40 per share.
Personnel
As of December 31, 2020, Merck KGaA had 8,578 employees, representing an increase as against the previous
year (2019: 8,474).
Combined Management Report Additional Information on Merck KGaA in accordance with the German Commercial Code (HGB)
145
11
The average number of employees by functional area is as follows:
Average number of employees during the year
Production
Administration
Research
Logistics
Marketing and sales
Other
Total
Risks and opportunities
2020
2019
3,222
3,164
Personnel
2
13
Other R&D spending that cannot be allocated to individual
business sectors
Financial assets increased due to the equity investment in Merck Capital Holding Ltd. acquired as part of the
accretion of AB Pensions GmbH & Co. KG.
Current assets (€ -280 million) decreased primarily as a result of the assets transferred to Merck Performance
Materials Germany GmbH (see "Effects of material company agreements on the net assets, financial position,
and results of operations"). In addition, other receivables and other assets declined in respect to affiliated
companies in particular.
Combined Management Report Additional Information on Merck KGaA in accordance with the German Commercial Code (HGB)
144
The provisions for pensions assumed in connection with the accretion of AB Pensions GmbH & Co. KG accounted
for the majority of the increase in provisions for pensions at Merck KGaA (€ +726 million).
The increase in financial liabilities was due to the issue of bonds as well as additional borrowings to finance the
Merck Group.
The decrease in other liabilities primarily resulted from the reduction in cash pool liabilities due to the cash pool
deposits acquired in connection with the accretion of AB Pensions GmbH & Co. KG as well as the issue of bonds
and additional borrowings.
Research and development
Research and development expenses
Change
€ million
Healthcare
Life Science
2020
2019
€ million
%
0
132
-132
-100.0
57
57
1
Performance Materials
159
244
-85
1.4
-34.9
3,119
3,143
1,076
1,678
General partners with no equity interest
Shareholders hold
share capital
€ 168,014,927.60
General partner
E. Merck KG
holds equity
interest
€ 397,196,314.35
Annual General
Meeting
Supervisory
Board
MONITORING
MONITORING
Board of Partners of
E. Merck KG
Further information can be found under "Merck KGaA" in the "Statement on Corporate Governance"
Corporate Governance Statement on Corporate Governance including Compensation Report
149
Statement on Corporate
Governance including
Compensation Report
The Statement on Corporate Governance contains the Declaration of Conformity, relevant
information on practices within the company, and a description of the procedures of the corporate
bodies, as well as targets for the percentage of positions held by women and the diversity policy.
Joint report of the Executive Board and the Supervisory Board including
Declaration of Conformity
The German Corporate Governance Code is geared toward the conditions found in a German stock corporation
("Aktiengesellschaft" or "AG") and does not take into consideration the special characteristics of a corporation
with general partners ("Kommanditgesellschaft auf Aktien" or "KGaA") such as Merck KGaA. Given the
structural differences between an AG and a KGaA, several recommendations of the German Corporate
Governance Code are to be applied to a KGaA only in a modified form. Major differences between the two legal
forms exist in terms of liability and management. While, in the case of an AG, only the AG is liable as a legal
entity, the general partners of a KGaA also have unlimited personal liability for the company's obligations
(section 278 [1] of the German Stock Corporation Act [AktG]). At Merck KGaA, this pertains to both E. Merck
KG - which pursuant to article 8 (5) of the Articles of Association is excluded from management and
representation - as well as to the managing general partners, who together make up the Executive Board of
Merck KGaA. The members of the Executive Board of Merck KGaA are therefore subject to unlimited personal
liability. Unlike an AG, their executive authority is not conferred by the Supervisory Board, but rather by their
status as general partners. Consequently, in addition to other responsibilities typical of the supervisory board of
an AG (see description of the procedures of the Supervisory Board), the supervisory board of a KGaA does not
have the authority to appoint the management board, draw up management board contracts, or specify
compensation of the management board. This legal form also involves special features with regard to the
General Meeting. For example, in a KGaA, many of the resolutions made require the consent of the general
partners (section 285 [2] AktG), including in particular the adoption of the annual financial statements (section
286 [1] AktG).
Merck KGaA applies the German Corporate Governance Code analogously where these regulations are
compatible with the legal form of a KGaA. In order to enable shareholders to compare the situation at other
companies more easily, to a broad extent we base corporate governance on the conduct recommendations
made by the Government Commission of the German Corporate Governance Code and forgo having our own,
equally permissible, code. The recommendations of the Code in the version dated February 7, 2017, the intent
and meaning of which are applied, have been complied with since the last Declaration of Conformity issued on
February 3, 2020, in the version updated on February 27, 2020, with one exception. In future, we aim to
comply with the recommendations of the Code in the version dated December 16, 2019.
For a clearer understanding, the following gives a general explanation of the application of German company
law at Merck KGaA with additional references to the General Meeting and shareholder rights.
Corporate Governance Statement on Corporate Governance including Compensation Report
150
Merck KGaA
The general partner E. Merck KG holds around 70% of the total capital of Merck KGaA (equity interest); the
shareholders hold the remainder, which is divided into shares (share capital). E. Merck KG is excluded from the
management of business activities. The general partners with no equity interest (Executive Board) manage the
business activities. Nevertheless, due to its substantial capital investment and unlimited personal liability,
E. Merck KG has a strong interest in the businesses of Merck KGaA operating efficiently in compliance with
procedures. Merck KGaA's participation in the profit/loss of E. Merck KG in accordance with articles 26 et seq. of
the Articles of Association further harmonizes the interests of the shareholders and of E. Merck KG. E. Merck KG
appoints and dismisses the Executive Board. In addition, E. Merck KG has created bodies - complementing the
expertise and activities of the Supervisory Board - to monitor and advise the Executive Board. This task applies
primarily to the Board of Partners of E. Merck KG.
Based on the provisions of the German Stock Corporation Act, the Articles of Association of Merck KGaA, and
the rules of procedure of the various committees, Merck KGaA has a set of rules for the Executive Board and its
supervision that meet the requirements of the German Corporate Governance Code. The investors, who bear
the entrepreneurial risk, are protected as provided for by the German Corporate Governance Code. We take
suggestions from the capital market on corporate governance seriously and hold discussions with investors and
shareholder representatives.
The General Meeting of Merck KGaA
The 25th Annual General Meeting of Merck KGaA was held on May 28, 2020, in Darmstadt, Germany. In
response to the coronavirus pandemic, the Executive Board decided, with the approval of the Supervisory
Board, to hold the 2020 Annual General Meeting in virtual form, i.e. without the shareholders and their proxies
attending in person. In doing so, it took the option provided by the legislation introduced by the act on
mitigating the consequences of the Covid-19 pandemic in civil, insolvency, and criminal procedure law (Gesetz
zur Abmilderung der Folgen der Covid-19-Pandemie im Zivil-, Insolvenz- und Strafverfahrensrecht).
Shareholders and shareholder representatives participated in the General Meeting virtually. The meeting was
broadcast audiovisually on the Internet in full. At 69.44%, the proportion of share capital represented at the
meeting (including postal votes) was slightly higher than in the previous year. In 2019, the proportion of share
capital represented was 66.96%. The Annual General Meeting service provider does not forward voting
instructions to Merck in advance of the Annual General Meeting, but keeps them in the system until the count
takes place.
In particular, the Annual General Meeting passes resolutions concerning the approval of the annual financial
statements, the appropriation of net retained profit, the approval of the actions of the Executive Board
members and the Supervisory Board members, as well as the election of the auditor. Changes to the Articles of
Association likewise require the adoption of a resolution by the General Meeting. The shareholders of Merck
KGaA exercised their rights at the virtual Annual General Meeting using the Internet-based General Meeting
system and via a prior question and answer process. They were able to exercise their voting rights personally,
through an authorized representative, or through a proxy appointed by the company. The proxies were in
attendance throughout the duration of the General Meeting. All the documents and information concerning
upcoming General Meetings (including a summary explanation of shareholder rights) are also posted on our
website. The introductory speech by the Chairman of the Executive Board was published in advance on the
Internet on May 25, 2020, in order to make it available to interested shareholders and members of the public
and thus satisfy the high transparency requirements of the Merck Group.
Executive Board of Merck KGaA
The partial termination of the business lease for the distribution and sales function of the Performance Materials
business sector resulted in a decline in the assets and liabilities attributable to this function (see "Effects of
material company agreements on the net assets, financial position, and results of operations").
€ 565,211,241.95
Capital Structure and Corporate
Bodies of Merck KGaA
633
620
470
510
16
23
8,536
9,138
Merck KGaA is largely subject to the same opportunities and risks as the Merck Group. More information can be
found in the Report on Risks and Opportunities.
Forecast for Merck KGaA
Deviations of actual business development in 2020 from the previously reported guidance
The Combined Management Report for 2019 initially forecast a substantial decline in net sales in 2020. This was
due to the planned termination of the business leasing contracts with Merck Life Science Germany GmbH and
Merck Performance Materials Germany GmbH as well as the resulting transfer of the operating business of the
Life Science and Performance Materials business sectors. In the updated forecast on May 12, 2020, net sales in
the Life Science and Performance Materials business sectors were expected to be at the same level as in 2019
based on the revised project planning and the development of the Covid-19 pandemic at the time of the
update. Net income was also expected to be the same as in the previous year.
In the Performance Materials business sector, sales in the Display Solutions business unit including OLED sales
declined by -16.7% year-on-year. A sharp increase in sales in the Surface Solutions business unit (+27.0%)
including Cosmetics sales, was not enough to offset this decline. This increase largely resulted from the sale of
inventories to Merck Performance Materials Germany GmbH at their net carrying amount as of January 1, 2020.
Net sales in the Life Science business sector increased by a double-digit rate compared with the previous year,
mainly due to the Process Solutions business unit (+35.7%). The Applied Solutions (+3.0%) and Research
Solutions (+2.9%) business units also contributed to this development.
The continuation of the Healthcare business sector in Merck Healthcare KGaA led to a fall in the associated net
sales and cost of materials and personnel, and other operating expenses at Merck KGaA as expected. Overall,
the net income for the year was at a comparable level to the previous year.
Combined Management Report Additional Information on Merck KGaA in accordance with the German Commercial Code (HGB)
146
Forecast 2021
In fiscal 2021, net sales are expected to be at a similar level to 2020.
As in the previous year, the financing costs of the Sigma-Aldrich acquisition and the Versum Materials
acquisition will continue to adversely affect net income. Nevertheless, net income for 2021 is expected to be at
a comparable level to 2020 due to the positive investment income and dividends from the subsidiaries.
Merck Financial Services GmbH, Darmstadt, will provide the company with sufficient financial resources and
thus ensure liquidity.
No risks that could jeopardize the continued existence of the company have been identified.
CORPORATE GOVERNANCE
148 Capital Structure and Corporate Bodies of Merck KGaA
149 Statement on Corporate Governance including Compensation Report
184 Report of the Supervisory Board
188 Objectives of the Supervisory Board with respect to
Its Composition and Profile of Skills and Expertise
Corporate Governance
Capital Structure and Corporate Bodies of Merck KGaA
148
Total capital of Merck KGaA
-520
The change in the net assets and financial position of Merck KGaA was mainly due to the accretion of AB
Pensions GmbH & Co. KG in August 2020 and the performance of additional financing measures for the Merck
Group. With total assets increasing by 0.2%, the equity ratio remained stable at 21.1% (2019: 21.1%).
59
€ million
Net equity
Provisions
Other provisions
Liabilities
Financial liabilities
Trade accounts payable
Other liabilities
Deferred income
Change
Dec. 31, 2020
Dec. 31, 2019
€ million
Equity and liabilities
%
23,550
232
333
1.4
-4
-1.5
862
860
2
0.2
22,793
22,458
335
1.5
23,883
229
Prepaid expenses
Cash and cash equivalents
Other receivables and other assets
-64
13.9
Taxes
-64
-16
-48
299.4
Profit after profit transfers and taxes
181
169
12
7.2
The increase in other income mainly resulted from the merger of AB Pensions GmbH & Co. KG. This was offset
by a negative effect from changes in inventories.
The cost of materials fell overall due to fact that the Healthcare business has been continued in a separate
company, Merck Healthcare KGaA, since April 1, 2019. Accordingly, the prior-year figures included the cost of
materials of the operational Healthcare business in the first quarter. The cost of materials in relation to sales
remained stable at 39.9% (2019: 40.0%).
The decline in personnel expenses was mainly attributable to the business transfer of almost 3,000
employees from the Healthcare business sector to Merck Healthcare KGaA. Accordingly, the prior-year figures
included the personnel expenses of the operational Healthcare business in the first quarter.
Depreciation, amortization, and write-downs rose as a result of the investments made in 2019 and 2020.
The continuation of the Healthcare business sector in a separate company since April 1, 2019, led to a fall in
other operating expenses, mainly in marketing, research and other external services and remuneration. The
prior-year figures included the other operating expenses of the operational Healthcare business in the first
quarter.
Investment income was at the same level as the previous year. An overall increase in profit transfers from
subsidiaries is offset by lower dividends from subsidiaries.
Combined Management Report Additional Information on Merck KGaA in accordance with the German Commercial Code (HGB)
143
The year-on-year downturn in the financial result was primarily due to higher interest expenses for the
financing of the Versum Materials acquisition and increased interest expenses resulting from the provisions for
pensions assumed in connection with the accretion of AB Pensions GmbH & Co. KG.
Net assets and financial position
Assets
€ million
Fixed assets
Intangible assets
Tangible assets
Financial assets
Current assets
Inventories
Trade accounts receivable
1,447
1,726
-280
-16.2
983
752
76.5
1,104
379
726
191.6
631
605
27
4.4
18,283
18,988
-706
-3.7
3,517
263
14,503
13
3,000
517
17.2
384
15,605
-120
-31.4
-1,102
-7.1
14
-1
-4.5
25,382
25,323
1,735
0.2
0.2
%
470
567
-97
-17.1
133
186
-53
-28.4
843
973
-130
-13.3
1
1
0
20.0
52
47
5
10.9
25,382
25,323
59
0.2
Change
Dec. 31, 2020
5,351
Dec. 31, 2019
5,338
€ million
13
In 2019, research and development expenditure totaled € 229 million (2019: € 434 million). A large portion
was also incurred by companies outside the Merck Group. The decline of € 206 million (47.3%) was mainly
attributable to the fact that the Healthcare business sector has been continued in a separate company, Merck
Healthcare KGaA, since April 1, 2019. Accordingly, the prior-year figures included the research and
development expenses of the operational Healthcare business in the first quarter. Further information can be
found in the "Research and Development" section in the Combined Management Report.
tax FY 2018
1,372
Plan
Member of the Executive Board
Stefan Oschmann
Udit Batra (left on: July 13, 2020)
Kai Beckmann
Belén Garijo
Marcus Kuhnert
1 Excluding additional benefits and company pension.
Maximum limit
for overall
compensation¹
1,400
4,810
5,638
9,800
1,100
3,640
4,263
Effective January 1, 2017, for the Executive Board members Kai Beckmann, Belén Garijo and Marcus Kuhnert,
the individual contractual pension agreements were changed from defined benefit to defined contribution
pension obligations, maintaining the direct commitment modality¹. A defined contribution pension agreement
was also in place with Udit Batra. Within the scope of these defined contribution pension obligations, every year
an amount of € 400,000 respectively € 450,000 is paid into a benefit account and interest is paid on this at
standard market interest rates. Once the respective Executive Board members reach the contractually agreed
age limit and are no longer employed by E. Merck KG, the amount in the benefit account is paid out either in
ten annual installments or as a one-time payment. The balance in the benefit account is disbursed as a one-
time payment, possibly topped up by additional contributions (maximally ten contributions, up to the age of 60)
in the event of permanent disability, or in the event of death to surviving dependents. The vested amount from
the former defined benefit pension agreement was credited to the benefit account when the changeover took
place.
Pension entitlements
8,000
3,300
3,120
8,000
Term Incentive
4,925
1,200
8,000
3,825
3,120
1,100
8,000
3,900
Fixed Maximum profit-
sharing limit
compensation
€ thousand
Merck Long-Term Incentive Plan (LTIP)
• Introduction of a mandatory personal investment as part of the new Share Ownership Guideline:
In the future, the members of the Executive Board of Merck KGaA will be obliged to invest one-third
of the profit-sharing payment (net) in Merck-Shares and to hold these shares for at least four years.
Consequently, the revised compensation system will comply with the German Corporate Governance
Code on share-based variable compensation (G. 10) in the revised version dated December 16, 2019.
The previous Share Ownership Guideline will be replaced by this new regulation.
A threshold value will be implemented for participating in the three-year average of the profit after
tax of the E. Merck Group. If the three-year average of the profit after tax of the E. Merck Group is
below this threshold, no payment will be made.
• Introduction of a threshold value and recalibration of the individual profit-sharing rates:
• Reduction of modifier range: In the future, the range of the modifier will be reduced to 0.8-1.2 (up to
and including 2020, the range was 0.7-1.3).
Profit sharing
• Extension to a period of four years by introducing an additional one-year holding period:
As before, target achievement will be determined after a three-year target achievement cycle. In
addition, a one-year holding period will be added at the end of this target achievement cycle. This
means that the LTIP is linked to the absolute share price performance of Merck's shares for a
performance cycle of four years in total. This ensures compliance with G. 10 of the German Corporate
Governance Code in the revised version dated December 16, 2019, while also maintaining a uniform
target achievement cycle for the LTIP for the members of the Executive Board and the other
executives eligible to participate in the LTIP. Furthermore, the additional one-year holding period
establishes an emphasized incentive regarding a sustainable increase of the Merck Share price in the long
term.
The compensation system of the Executive Board of Merck has been revised effective January 1, 2021, and at
the same time been integrated into the Agreements with the Executive Board members. The revised
compensation system aims to create a high long-term ambition for the members of the Executive Board and at
the same time to protecting against disproportionality. It will be presented to the Annual General Meeting on
April 23, 2021 and will be subject to a "Say on Pay" on the Annual General Meeting 2021. The adjustments of
the compensation system of the Executive Board include the following compensation components:
158
Corporate Governance Statement on Corporate Governance including Compensation Report
A Share Ownership Guideline was introduced in 2017. This obligates the Executive Board members, for the
duration of their employment relationship, to permanently hold Merck shares in an amount equal to 100% of
their annual gross fixed compensation. Owing to his position as Chairman of the Executive Board, Stefan
Oschmann is obligated to hold a higher amount, that is at least 200% of his annual gross fixed compensation,
in Merck shares. The duty to provide evidence of the complete number of shares must be met no later than on
expiration of four years after having joined the Executive Board or after the introduction of the rule. The Share
Ownership Guideline promotes even stronger alignment between the interests of the Executive Board members
and those of our shareholders, and it additionally raises the entrepreneurial responsibility of the Executive
Board members. Moreover, the introduction of the Share Ownership Guideline takes into account the
widespread practice of share ownership among management and executive board members in international
peer comparisons.
Share Ownership Guideline
To further increase the transparency of the Executive Board compensation system, the performance corridor for
the key performance indicators used in the Merck Long-Term Incentive Plan will subsequently be disclosed.
However, the company will continue to refrain from publishing this performance corridor in advance as this
could permit market-related and competitively relevant conclusions to be drawn about strategic objectives.
Through their status as personally liable general partners of Merck KGaA and E. Merck KG, the Executive Board
members bear a unique entrepreneurial responsibility. This is also reflected by the penalty criteria set forth in
profit sharing and by the German statutory regulations on liability for damages stipulated in section 93 AktG.
In order to take even greater account of the prominent position of entrepreneurial responsibility in
compensation, a clawback provision was included in the Long-Term Incentive Plan, effective January 1, 2018,
allowing amounts allocated from the Long-Term Incentive Plan but not yet paid out to be retained. Cases in
which the clawback provision may be applied include violations of internal rules and regulations (Merck Code of
Conduct), legislation, other binding external requirements in the area of responsibility, significant breaches of
duty of care within the meaning of section 93 AktG, and other grossly non-compliant or unethical behavior or
actions that are contradictory to our company values.
Outlook at the compensation system from 2021
There is a defined benefit pension obligation for Stefan Oschmann. The old-age pension is determined in
accordance with a certain percentage of pensionable compensation. The percentages can be found in the table
below. The individual contractual pension obligation grants Stefan Oschmann an entitlement to a lifelong old-
age pension or surviving dependents' pension in the event of reaching the individual contractually agreed age
limit, permanent disability, or death. As an alternative to an old-age pension, the promised pension may be
paid out as a one-time amount calculated on the basis of actuarial principles once the age limit stipulated in the
relevant contract has been reached.
Link to sustainability strategy
Fiscal year 2021
for Merck Long-
Maximum limit
Overall compensation limit
Compensation is capped with respect to its performance-related compensation elements of profit sharing and
the Merck Long-Term Incentive Plan, as well as having an overall cap. The maximum limits are presented in the
following table.
Overall compensation limit
Profit after
From 2021 onward, the sustainability strategy of Merck will also be integrated into the compensation system
for the Executive Board. The following steps are planned:
It is intended to integrate the sustainability strategy into the Merck Long-Term Incentive Plan from 2022
onward. The necessary concepts and performance indicators will be successively developed in fiscal year 2021.
The integration of the sustainability strategy into the Merck Long-Term Incentive Plan will be based on the
Group-wide sustainability targets and is intended to generate a corresponding incentive to achieve these goals.
159
Corporate Governance Statement on Corporate Governance including Compensation Report
• Reduction of our ecological Footprint
• Sustainable value chains
Human Progress
The sustainability strategy of Merck KGaA will be integrated into the compensation system for the Executive
Board via the modifier. The modifier, which will have a range of 0.8-1.2 in the future, also takes particular
account of the ambitious sustainability targets developed for the Merck Group in fiscal year 2020, which are
geared toward non-financial performance criteria:
Fiscal year 2022
Clawback provision
1 For accounting purposes, this corresponds to a defined-benefit obligation within the meaning of IAS 19.8.
160
400
414
409
3,419
3,860
1,650
1,590
1,388
14,811
16,366
IFRS
€ thousand
Pensionable
compensation
Percentage
entitlement
Service cost of pension obligations
earned in the current year
Present value of the defined contribution
pension obligation as of Dec.
Member of the Executive Board
The employment contracts of Stefan Oschmann and Kai Beckmann contain a post-contractual non-competition
clause, as did the employment contract with Udit Batra. During a two-year period, an amount totaling 50% of
the contractual average benefits received by the Executive Board member in question within the last twelve
months prior to their departure is provided as compensation for each year of the period of the non competition
clause. During the period of the non competition clause, other employment income and pension payments will
be credited against this compensation. Within certain time limits, E. Merck KG has the possibility to dispense
with adherence to the non competition clause with the consequence that the obligation to make the
compensation payments shall no longer exist. There was no payment of such compensation in the case of Udit
Batra. The contracts of the Executive Board members also provide for the continued payment of fixed
compensation to surviving dependents for a limited period of time in the event of death. Above and beyond
existing pension obligations, no further obligations exist in the event of the termination of the contractual
relationships of the Executive Board members.
In the event of the early termination of the employment relationship, without notice for good cause, the
employment contracts of the Executive Board members stipulate a cap on severance pay in accordance with the
recommendations of the German Corporate Governance Code in the version dated February 17, 2017. Pursuant
to this, payments in connection with the termination of an Executive Board member's duties shall not exceed
twice the annual total compensation, or constitute compensation for more than the remaining term of the
employment contract (severance cap). If an Executive Board member's duties prematurely end due to the
termination of the employment contract either by the company or the Executive Board member before the
performance cycle of an open tranche in the Merck Long-Term Incentive Plan expires, the obligations resulting
from the plan no longer apply as a matter of principle.
Benefits in the event of termination of duties as an Executive Board member
14,524
2019
1 The percentage entitlement increases until retirement by two percentage points per year of service up to 70%.
5,649
17,344
68
800
Stefan Oschmann¹
2020
2020
2019
1,611
5,119
440
391
Present value of the defined contribution
Service cost of pension obligations
IFRS
Defined benefit obligation
Total
Marcus Kuhnert
Contribution level
Belén Garijo
Udit Batra (left on: July 13, 2020)
Member of the Executive Board
€ thousand
Defined contribution obligations
The contribution amounts or pensionable compensation and the percentage obligation as well as the pension
provisions and service costs, are listed in the following tables:
Moreover, surviving dependents receive a surviving dependents' pension. For his spouse, this amounts to 60%
of the pension entitlement. Dependent children are entitled to either a half-orphan's or an orphan's pension
maximally until the age of 25.
Kai Beckmann
Corporate Governance Statement on Corporate Governance including Compensation Report
earned in the current year
2019
450
5,325
4,867
392
392
400
pension obligation as of Dec.
1,532
147
393
400
2020
2019
2020
1,406
Depending on the performance of the key performance indicators, after the three-year performance cycle,
between 0% and 150% of the provisionally promised MSUs are finally allocated. The value of these MSUs is
paid out to the Executive Board in the year after the three-year performance cycle has ended. For this, the final
allocated number of MSUS is multiplied by the definitive reference share price at the end of the performance
cycle. The maximum increase in the share price is limited to 200% of the reference price at the beginning of
the performance cycle, thus limiting participation in external effects that contribute to share price increases.
Apart from setting a limit on the final number of allocated MSUs and on the applicable share price increase, the
overall Merck Long-Term Incentive Plan payment is limited to 250% of the individual grant. If targets are
clearly missed, it is also possible that absolutely no payment is made from the Merck Long-Term Incentive Plan
(0%).
1,000
157
153
Long-term Group strategy
The execution of the long-term Group strategy is promoted through the selection of appropriate, ambitious key
performance indicators for performance-related compensation. Against this background, our performance-
related compensation components (profit sharing and Merck Long-Term Incentive Plan) are oriented toward the
key performance indicators of the Group.
Long-term interests of our shareholders
The long-term interests of our shareholders are taken into account through a significantly high amount of
variable, performance-related compensation as a proportion of total compensation as well as the compensation
system's strong focus on the share price. The performance of the Executive Board members should be properly
recognized, with the failure to meet targets leading to a noticeable reduction in performance-related
compensation (malus) or a potential reclaim (clawback).
In our company, unlike publicly listed German stock corporations, it is not the Supervisory Board, but the Board
of Partners of E. Merck KG that decides on the amount and composition of compensation received by our
Executive Board members. The Board of Partners has assigned this task to its Personnel Committee. The
Personnel Committee is thus primarily responsible for the followings topics as they relate to our Executive
Board and the compensation of its members:
Corporate Governance Statement on Corporate Governance including Compensation Report
Development and regular review of the compensation system
• Contract terms of members of the Executive Board
Assumption of honorary offices, board positions, or other sideline activities
• Distribution of responsibilities among Executive Board members
•
Granting of loans and salary advances
Our compensation system for the Executive Board was revised again in 2020 in view of another round of
regulatory changes resulting from the entry into force of the German Act Implementing the Second Shareholder
Rights Directive (ARUG II) and the German Corporate Governance Code reform. The revised compensation
system is expected to be submitted to the Annual General Meeting for approval in 2021. All mentions of the
German Corporate Governance Code in this Compensation Report refer to the version dated February 7, 2017.
• Structure and examination of the performance-independent and performance-related compensation
elements
Corporate Governance Statement on Corporate Governance including Compensation Report
The structure of the compensation system and the assessment of individual compensation are guided by the
German Stock Corporation Act (AktG) and, with regard to compensation for 2020, by the German Corporate
Governance Code in the version dated February 7, 2017, for the last time. The revised compensation system
for the Executive Board of Merck KGaA will take into account the recommendations of the German Corporate
Governance Code in the version dated December 16, 2019. Within the regulatory framework conditions, the
objective is to offer the Executive Board members a competitive compensation package in line with market
practice.
The following principles are followed or taken into account when it comes to the specific structure of the
compensation, the setting of individual compensation, the selection of the key performance indicators, and the
structure of payout and allocation terms:
In view of future compliance with the current recommendations of the Government Commission of the German
Corporate Governance Code, the Executive Board and the Supervisory Board declare the following: The
company will comply with the recommendations of the Code in the version dated December 16, 2019."
Darmstadt, February 26, 2021
For the Executive Board
signed Stefan Oschmann
For the Supervisory Board
signed Wolfgang Büchele
Regulatory requirements and principles of good corporate governance
Corporate Governance Statement on Corporate Governance including Compensation Report
Compensation Report
(This section is part of the Combined Management Report.)
Compensation philosophy
As the world's oldest pharmaceutical and chemical company, Merck attaches great importance to responsible
governance and entrepreneurship. This is also reflected by the compensation of the members of the Executive
Board of Merck KGaA. Unlike management board members of stock corporations, they are not merely employed
members of a corporate board. Rather, they are personally liable general partners of both Merck KGaA and the
general partner E. Merck KG, and in this capacity they receive profit sharing from E. Merck KG. Owing to the
legal form as a KGaA (corporation with general partners), the stipulations of the German Corporate Governance
Code concerning the compensation of management board members of publicly listed German stock corporations
as well as the individual disclosure thereof do not apply to the Executive Board members of Merck KGaA.
Nevertheless, we have decided to comply with the recommendations of the German Corporate Governance
Code in the version dated February 7, 2017. The Compensation Report for the coming fiscal year and on the
revised compensation system for the Executive Board will be based on the recommendations of the German
Corporate Governance Code in the version dated December 16, 2019.
The compensation paid to the members of the Executive Board takes into account the responsibilities and
duties of the individual Executive Board members, their status as personally liable partners, their individual
performance, and the economic situation, as well as the performance and future prospects of the company. At
the same time, the compensation should create a high long-term ambition for the members of the Executive
Board while also protecting against disproportionality.
Furthermore, Executive Board compensation is oriented toward the external peer environment of Merck KGaA,
meaning in comparison with other German blue-chip (DAX®) companies as well as international competitors.
The relationship between Executive Board compensation and the compensation of top management and the
workforce as a whole continues to be taken into account, also in a multi-year assessment. The Personnel
Committee regularly commissions an independent compensation consultant to review the appropriateness of
the compensation.
152
In accordance with section 161 AktG, applying the provisions of the German Corporate Governance Code
correspondingly, the Executive Board and the Supervisory Board issued the following Declaration of Conformity
with the recommendations of the Government Commission of the German Corporate Governance Code:
"Declaration of the Executive Board and the Supervisory Board of Merck KGaA on the recommendations of the
Government Commission of the German Corporate Governance Code pursuant to section 161 of the German
Stock Corporation Act (AktG). Since the last Declaration of Conformity on February 3, 2020, in the version
updated on February 27, 2020, we have complied with the recommendations of the Government Commission of
the German Corporate Governance Code in the version dated February 7, 2017, as published in the official
section of the German Federal Gazette, with the following exception: Contrary to section 5.3.2 of the German
Corporate Governance Code, the Supervisory Board has not established an audit committee. However, an audit
committee does exist in the form of the Finance Committee of the Board of Partners of E. Merck KG, which to a
large extent exercises the duties described in section 5.3.2 of the Code. Due to the relatively limited authority
of the supervisory board of a KGaA in comparison with that of an AG, this therefore satisfies the requirements
of the German Corporate Governance Code. In addition, as of March 20, 2020, Merck KGaA has not maintained
a D&O liability insurance policy for the members of the Supervisory Board with a corresponding deductible, as
the relevant recommendation was dropped in the current version of the Code dated December 16, 2019.
154
The compensation system for the Executive Board in the reporting year essentially comprises the three main
components of fixed compensation, profit sharing, and the Merck Long-Term Incentive Plan. It is complemented
by contributions to the company pension plan as well as additional benefits. The components of the
compensation system are as follows:
In addition, the members of the Executive Board receive non-performance-related additional benefits. These
consist mainly of contributions to insurance policies, personal security expenses, and a company car, which
they may use privately.
Performance-related compensation
Performance-related compensation comprises profit sharing as well as the Merck Long-Term Incentive Plan.
Both performance-related compensation components are based on multi-year steering parameters. The
regulatory requirements of the German Stock Corporation Act and the German Corporate Governance Code are
taken into account, and particular recognition is given for sustainable corporate development.
Corporate Governance Statement on Corporate Governance including Compensation Report
Profit Sharing
Key performance indicator
Additional benefits
Cycle
Limit
Individual absolute capped amount
155
As part of profit sharing, at the end of a fiscal year the members of the Executive Board receive an individual
per mille rate of the three-year average of profit after tax of the E. Merck Group. The current and the two
preceding fiscal years are included in the calculation. The use of profit after tax as the key performance
indicator, which also serves as the basis for dividend payments, ensures very close alignment with the
shareholder interests. The amount of the individual per mille profit-sharing rates is staggered at intervals.
Staggering means that achieving an average profit after tax of more than € 1 billion is more strongly
incentivized than amounts below € 1 billion. Insofar as the average profit after tax is more than € 1.5 billion,
however, the amount greater than € 1.5 billion is not taken into account when determining the profit-sharing
payment. To appropriately take into account the individual performance of the Executive Board members, since
fiscal year 2017 the Personnel Committee has been able to adjust the payment by applying a factor ranging
from 0.7 to 1.3. The performance factor makes it possible to recognize superb performance of a member of the
Executive Board by multiplying profit sharing by a value greater than 1.0 up to 1.3. Similarly, multiplying by a
value less than 1.0 down to 0.7 can lower profit sharing if the case calls for it. The maximum profit-sharing
payment is capped individually.
Individual
rate in %
Three-year average of the profit after
tax of the E. Merck Group
X
The Merck Long-Term Incentive Plan thus links two key performance indicators derived from the strategy with
an external, relative key performance indicator. In light of Merck's diversified business, the comparison of the
Merck share price performance with the DAX® as an external, relative key performance indicator is more
suitable than a comparison with an individual industry-specific index, as well as being more independent than a
comparison with a defined peer group of companies. On the one hand, the performance indicators create an
incentive to achieve strategic objectives. On the other hand, the strong share price orientation takes into
account the company's long-term development prospects and the expectations of our shareholders. To prevent
distortions as a result of exceptional factors as well as to directly reflect the performance of the Executive Board
members, the EBITDA pre margin is used.
Overview of the structure and the components of the compensation system
The fixed compensation received by the members of the Executive Board comprises fixed and non-
performance-related amounts that are paid in the form of 12 equivalent monthly installments.
Performance-independent compensation and additional benefits
Compensation elements and compensation structure¹
Performance-
related
compensation
Merck Long-Term Incentive Plan
• Performance Share Plan based on virtual shares (Merck Share Units)
• Key performance indicators: share price performance relative to the DAX®
(50%), EBITDA pre margin (25%), organic sales growth (25%)
• Absolute capped amount totaling 250% of the individual grant
Fixed compensation
Performance-
Profit sharing
• Key performance indicator: Three-year average of the profit after tax of
the E. Merck Group
• Consideration of individual performance via the performance factor in a
range from 0.7 to 1.3
Individual absolute capped amount
Fixed compensation
1 Excluding additional benefits and company pension
independent
compensation
Declaration of Conformity
Threeyear average of the profit after tax of the E. Merck Group
Three years
Corporate Governance Statement on Corporate Governance including Compensation Report
Reference
Merck share
price at the
beginning
Grant in €
⚫ b) the EBITDA pre margin, as a proportion of a defined target value with a weighting of 25%
c) the organic sales growth of the Merck Group as a proportion of a defined target value with a
weighting of 25%
•
• a) the performance of the Merck share price compared with the performance of the DAX® with a
weighting of 50%
At the beginning of the performance cycle, the Personnel Committee defines an individual grant in euros for
each Executive Board member. This grant is then divided by the definitive reference share price at the
beginning of the performance cycle, resulting in the number of MSUs they could be eligible to receive. The final
number of MSUs that are actually allocated to the Executive Board members after the performance cycle has
expired depends on the development of three weighted key performance indicators over the three-year
performance cycle:
FY 2020
The Long-Term Incentive Plan is based on a three-year future-oriented performance cycle. As part of the Long-
Term Incentive Plan, the members of the Executive Board are eligible to receive a certain number of virtual
shares - Merck Share Units (MSUs). The number of MSUS is calculated as follows:
Absolute capped amount totaling 250% of the individual grant
Three years
Organic sales growth (25% weighting)
•
• EBITDA pre margin (25% weighting)
• Share price performance relative to the DAX® (50% weighting)
Average closing price of Merck shares in XetraⓇ trading during the last 60 trading days prior to the
beginning or the end of the performance cycle
for conversion into numbers
or for payment)
FY 2021
Potential
number of
Corporate Governance Statement on Corporate Governance including Compensation Report
Amount paid
out in €
(0% - 250%
of the grant
in €)
151
actually
achieved
0% - 150%
Weighting: 25%
Weighting: 25%
FY 2022
Weighting: 50%
Organic
sales
growth
EBITDA
pre
margin
Performance cycle
of the Merck
share price
vs. the DAX®
Performance
MSUS for the
grant
Number of
MSUS
Reference price (share price
Reference
Merck
share price
at the end
0% - 200%
Cycle
Profit after
Profit after
tax FY 2019
Limit
tax FY 2020
Adjustment
factor for
individual
performance
0.7-1.3
Payout
2020 (€)
Since fiscal year 2018, the Personnel Committee has resolved to define criteria applicable to the adjustment of
profit sharing, for applying the factor in a range of between 0.7 and 1.3. Insofar as the adjustment increases or
decreases the profit sharing of a member of the Executive Board, this is to be published in the Compensation
Report.
Adjustment criteria for increasing profit sharing could include the following:
•
Extraordinary success in connection with M&A activities of the Merck Group
.
Extraordinary success in the sustainable strategic, technical, product-related, or structural further
development or reorganization of the Merck Group
.
.
3 years
Extraordinary performance leading to a clear over-achievement of targets for relevant key
• Clear failure to achieve targets for relevant key performance indicators in the area of responsibility
Extraordinary performance in the execution of especially important projects or the achievement of
other exceptionally important objectives in the area of responsibility
Merck Long-Term Incentive Plan (LTIP)
• Behaviors or actions that are contradictory to our company values
Significant breaches of duty of care within the meaning of section 93 AktG, or other grossly non-
compliant or unethical behavior
other binding external requirements in the area of responsibility
Key Performance Indicators
• Failure to implement particularly important projects or to reach other exceptionally important targets
in the area of responsibility
• Violations of internal rules and guidelines (for example, the Merck Code of Conduct), legislation, or
Adjustment criteria for lowering profit sharing could include the following:
156
Corporate Governance Statement on Corporate Governance including Compensation Report
performance indicators in the area of responsibility
Extraordinary contributions to the aspirations and targets of the Merck Group's stakeholders (for
example, employee satisfaction, customer satisfaction, Corporate Social Responsibility,
implementation of diversity requirements)
•
2019
Kai Beckmann
3,187
5,097
14,500
1,530
2,640
21
1,100
1,100
1,336
30
1,202
1,530
16,320
1,031
4,561
2020
1,200
66
3,299
1,970
18,670
1,720
4,065
Belén Garijo
2,400
6,285
3,493
1,368
2020
Udit Batra
1,859
8,451
1,520
24,054
636
2,255
721
1,400
2019
Stefan Oschmann
4,848
7,707
4,810
2020
4
1,705
5,056
1,149
18,187
1,705
2,800
7
1,364
1,100
2019
(left on: July 13,
2,575
2019
1,489
16,159
2020)
1,100
Marcus Kuhnert
3,000
5,642
833
15,294
8,680
92,588
5,850
27,619
7,058
1 Date of granting (date of legally binding commitment).
2 Number of potential MSUS subject to target achievement. The actual number of MSUS to be granted after the expiration of the three year performance
cycle may deviate from this.
3 Fair value on the grant date (date of the legally binding entitlement). This does not determine the amount of any payment. Payment is subject to target
achievement and is made on a specified date after the expiration of the three year performance cycle. The fair value of the obligations was calculated
using a Monte Carlo simulation based on the previously described KPIs. The expected volatilities are based on the implicit volatility of Merck shares and
the DAX® in accordance with the remaining term of the LTIP tranche. The dividend payments incorporated into the valuation model are based on
medium-term dividend expectations.
4 In accordance with IFRS, the expense recorded for 2020 includes the amounts for the 2018, 2019, and 2020 LTIP tranches. In accordance with IFRS,
the expense recorded for 2019 includes the amounts for the 2017, 2018, and 2019 LTIP tranches.
Corporate Governance Statement on Corporate Governance including Compensation Report
165
Information in accordance with the requirements of the German Corporate
Governance Code
In accordance with the requirements of the German Corporate Governance Code, the following tables present
the compensation granted for 2020, including additional benefits, contributions to the company pension plan,
and the achievable minimum and maximum values of the variable compensation components, as well as the
allocation of the respective compensation components for the fiscal year. The maximum amounts shown are
purely arithmetical values. When compensation is allocated to the members of the Executive Board, the
applicable overall compensation limit applies.
Benefits granted for the fiscal year
Stefan Oschmann
Udit Batra
Chairman of the Executive Board
Member of the Executive Board
(left on: July 13, 2020)
Benefits granted (€ thousand)
2019
Fixed compensation
1,400
Additional benefits
721
269
2020 2020 (min.)
1,400
1,400
269
17,513
49
27,400
83,210
1,870
19,947
1,260
5,409
1,541
2020
1,000
25
1,320
12,510
1,153
4,818
2,838
2019
942
26
2,284
1,320
14,080
890
4,142
1,088
Total
2020
2019
5,336
385
14,012
8,780
1,969
7,667
21,371
47,000.00
4,069
Kai Beckmann
Belén Garijo
Marcus Kuhnert
Average profit-sharing
rate in per mill in 2020
Performance factor for
individual performance
2020
1.88
1.2
0.63
1
1.22
1.2
1.52
1.2
Udit Batra (left on: July 13, 2020)
1.22
The adjustment factor for the profit-sharing amount for Stefan Oschmann, Belén Garijo, Kai Beckmann and
Marcus Kuhnert has been set to 1.2. This is to recognize the extraordinary contributions by these members of
the Executive Board to the aspirations and targets of the Merck Group's stakeholders during the Covid-19
pandemic. The extraordinary handling of the pandemic situation has led to a remarkable success in terms of
employee well-being, strong financial results, steady business operations as well as a very positive share price
development in the fiscal year 2020. Specifically, the aforementioned members of the Executive Board
distinguished themselves through the following achievements under the difficult conditions of the crisis.
In his role as CEO, Stefan Oschmann made the following objectives his top priority from the very beginning of
the pandemic: the health and safety of all employees, business continuity in all three sectors, and a
contribution to society via the provision of materials, e.g. for vaccine production. By establishing both a well-
organized global task force and local crisis teams and connecting them very efficiently, it was always ensured
that high safety standards were applied at all sites in all countries. Well thought-out hygiene measures were
introduced quickly and efficiently, applied and communicated transparently. As a result, both the health
situation at the Merck sites and the economic success of the Merck Group were always ensured. Additionally,
Stefan Oschmann took over the responsibility for the Life Science sector ad interim. In addition to his regular
duties, he successfully managed the business and ensured that the disproportionate increase in demand for life
science products for diagnostics and vaccination could be responded to in a timely and demand-oriented
manner.
Belén Garijo ensured that business operations could continue uninterrupted by setting clear priorities,
communicating transparently, planning flexibly, and networking the crisis teams on critical issues. As member
of the Executive Board being responsible for EQ (Environment, Health, Safety, Security and Quality), she held a
leading role in the global management of the crisis. In addition, the Healthcare sector, under her leadership,
ensured the supply of vital medicines to patients. The identification and development of drugs for the treatment
of Covid-19 was given special priority.
The pandemic decisively changed living and working conditions around the world - a crisis situation in which
the Performance Materials sector, with its materials for the electronics industry, was particularly important. In
order to meet this rapidly and significantly increased demand, Kai Beckmann set the decisive course in the
Performance Materials sector to be able to drive forward digitization in a new dimension worldwide. As the
Executive Board member responsible for Germany, Kai Beckmann played a key role in talks with government
representatives to initiate suitable measures in companies. In addition, within his area of responsibility for Site
Management worldwide, Kai Beckmann ensured that both the health and safety of employees and business
operations were always safeguarded.
Corporate Governance Statement on Corporate Governance including Compensation Report
163
In his role as Chief Financial Officer for the Merck Group, Marcus Kuhnert made the necessary decisions to
maintain the economic performance and liquidity of the Merck Group. Through his efforts, business operations
were able to continue steadily without the need for government financial support. Beyond his contributions as
CFO, Marcus Kuhnert, with his additional responsibilities for IT and the global Merck Shared Services
organization, has secured seamlessly the delivery of accounting, procurement and HR administrative and
transactional services throughout the pandemic on a global scale. Challenges in the procurement process as
securing critical materials to keep employees healthy and safe were handled efficiently and resolved quickly. In
the IT function measures were taken on quickly and efficiently in adjusting the infrastructure to ensure remote
working for a vast number of employees while keeping business processes running without disruptions. This has
allowed the businesses of Healthcare, Life Science and Performance Materials to continue to operate without
disruption and secured business continuity for customers and patients worldwide.
Merck Long-Term Incentive Plan
Until the beginning of fiscal 2017, payment from the Merck Long-Term Incentive Plan was based on the
achievement of specific targets with respect to the development of the Merck share price compared with the
DAX® as well as the development of the EBITDA pre margin during the three-year performance cycle. Since
fiscal year 2017, organic sales growth of the Merck Group has been included as an additional key performance
indicator. The tables below show the target values that lead to 100% target achievement relative to the
respective key performance indicator. Below the lower target corridor limit, target achievement for the
respective key performance indicator is 0%. Above the upper target corridor limit, target achievement no
longer increases. The performance corridor for the key performance indicators will be published retrospectively,
as publication in advance would allow market- and competition-relevant conclusions about strategic targets.
Key performance indicator¹
Share price performance relative to the DAX®
(external key performance indicator)
EBITDA pre margin
1.2
Stefan Oschmann
Member of the Executive Board
€ 1.5 billion is not taken into account when determining the profit-sharing payment. The average profit-sharing
rates in per mille for the members of the Executive Board in 2020 were as follows:
2020 (max.)
Corporate Governance Statement on Corporate Governance including Compensation Report
161
Loans and advances
The members of the Executive Board did not receive any advances or loans in fiscal 2020.
Payments to former Executive Board members and their surviving dependents
Payments to former members of the Executive Board or their surviving dependents are made for a limited
period of time and represent continued payment of fixed compensation in the event of death, as well as pension
payments. In fiscal 2020, these amounted to € 13,849 thousand (previous year: € 13,448 thousand). Pension
provisions amounted to € 177,037 thousand in 2020 (previous year: € 163,617 thousand).
Other
The total compensation of the Executive Board of Merck KGaA includes both the compensation received from
E. Merck KG as well as possibly also from subsidiaries consolidated in the Group financial statements. Should
members of the Executive Board be held liable for financial losses while executing their duties, this liability risk
is covered by a D&O insurance policy from Merck KGaA under certain circumstances. The D&O insurance policy
has a deductible in accordance with the legal requirements and the recommendations of the German Corporate
Governance Code.
Performance-related compensation in 2020
The compensation system for our Executive Board is geared to suitably rewarding the performance of Executive
Board members in terms of sustainable corporate development and the creation of shareholder value, whereas
the failure to meet targets leads to a noticeable decrease in performance-related compensation. In response to
the suggestions from our shareholders and to further increase the transparency of the Executive Board
compensation system, the following tables present the average individual profitsharing rates and the
performance corridors for the key performance indicators used in the Merck Long-Term Incentive Plan.
Profit sharing
As part of profit sharing, the members of the Executive Board receive an individual per mille rate of the three-
year average of profit after tax of the E. Merck Group at the end of the fiscal year. The three-year average is
based on the current year and the two preceding years.
Key performance indicator
(€ million)
2017
2018
162
Corporate Governance Statement on Corporate Governance including Compensation Report
The amount of the individual per mille profit-sharing rates is staggered at intervals. This staggering incentivizes
the achievement of an average profit after tax of more than € 1 billion more strongly than amounts below € 1
billion. However, insofar as the average profit after tax is more than € 1.5 billion, the amount greater than
2,165
Three-year average profit after tax of the E. Merck Group
(2018-2020)
2,376
(internal key performance indicator)
Three-year average profit after tax of the E. Merck Group
(2017-2019)
1,255
3,324
2,549
Profit after tax of the E. Merck Group
2020
2019
1,915
2,255
Lower target
corridor limit
Upper target
corridor limit
27.1%
80.0%
2.5%
5.5%
8.5%
5.0%
83.4%
Corporate Governance Statement on Corporate Governance including Compensation Report
164
Total compensation
According to the German Commercial Code (HGB), the total compensation of the members of the Executive
Board of Merck KGaA, broken down by performance-related and performance-independent compensation
components, is as follows:
Performance-independent
components
Performance-related components
Fixed
compensation
30.7%
Additional
benefits
effect)¹
Merck Long-Term Incentive Plan
(with long-term incentive effect)
Grant
value
(€ thousand) (€ thousand) (€ thousand) (€ thousand)
Number
of MSUS²
Fair value³
Expense
Total
recorded for
the period for
share-based
compensation4
(€ thousand) (€ thousand) (€ thousand)
Member of the
Executive Board
2020
1,400
269
Profit
sharing
(without long-
term incentive
27.7%
24.7%
52.5%
Actually achieved
value of Merck
LTIP tranche
2016
Target
achievement of
Merck LTIP
tranche 2016
-20.0%
0.0%
0.7%
24.0%
27.0%
28.1%
50.0%
30.0%
100.7%
118.4%
1The key performance indicator organic sales growth became a component of the Merck Long-Term Incentive Plan in 2017 and is therefore not relevant
for target achievement of the tranche in fiscal 2016.
Key performance indicator
Share price performancerelative to the DAX®
(external key performance indicator)
-9.5%
50.0%
0.0%
-20.0%
Merck LTIP
tranche 2017
Target
achievement of
Target
value of Merck
LTIP tranche
2017
Target
Lower target
corridor limit
Actually achieved
Organic sales growth
(internal key performance indicator)
EBITDA pre margin
Upper target
corridor limit
2019
2020
636
1,100
147
393
1,611
1,372
Service cost
4,820
5,147
3,266
5,615
7,408
9,192
Total
1,059
1,262
392
1,670
1,617
1,708
2,261
LTI 2016 (2016 to 2018)
compensation
Multi-year variable
2,640
2,400
1,364
2,800
4,069
4,810
Profit sharing
1,121
LTI 2017 (2017 to 2019)
1,130
392
10,564
3,000
Profit sharing
25
1,025
968
1,266
1,149
3,750.00
26
66
49
Additional benefits
1,000
942
1,200
Total compensation
1,100
2020
2019
2020
2019
Member of the Executive Board
Marcus Kuhnert
Member of the Executive Board
Belén Garijo
Allocation (€ thousand)
5,212
5,539
3,413
6,008
9,019
Fixed compensation
3,299
640
1,669
5,227
409
414
4,556
Total compensation
Service cost
7,445
1,025
4,818
4,142
Total
3,300
0
1,153
LTI 2020 (2020 to 2022)
409
1,434
890
compensation
Multi-year variable
Profit sharing
3,120
0
2,640
2,284
1,025
1,025
1,025
968
Total
25
1,000
25
LTI 2019 (2019 to 2021)
1,107
409
Allocation for the fiscal year
2,121
Total
21
30
4
7
269
721
Additional benefits
1,100
2020
2019
1,100
636
1,100
7,854
1,400
Fixed compensation
2020
2019
2020
2019
Allocation (€ thousand)
Member of the Executive Board
(left on: July 13, 2020)
Chairman of the Executive Board
166
Kai Beckmann
Member of the Executive Board
Udit Batra
Stefan Oschmann
1,400
2,284
2,640
Multi-year variable
47,000.00
Michael Kleinemeier (since April 26,
2019)
15,686.99
750.00
14,936.99
Siegfried Karjetta (until April 26,
April 26, 2019)
15,686.99
750.00
14,936.99
Michaela Freifrau von Glenck (until
35,191.78
50,000.00
32,191.78
3,000.00
32,191.78
47,000.00
Jürgen Glaser (since April 26, 2019)
50,000.00
50,000.00
3,000.00
3,000.00
47,000.00
47,000.00
Edeltraud Glänzer
50,750.00
50,000.00
3,750.00
3,000.00
3,000.00
47,000.00
3,000.00
50,000.00
47,000.00
Dietmar Oeter
2019)
35,191.78
50,000.00
3,000.00
3,000.00
32,191.78
47,000.00
Peter Emanuel Merck (since April 26,
15,686.99
750.00
14,936.99
Albrecht Merck (until April 26, 2019)
2,250.00
34,441.78
2,250.00
3,000.00
32,191.78
47,000.00
Anne Lange (since April 26, 2019)
35,191.78
50,000.00
3,000.00
3,000.00
32,191.78
47,000.00
Renate Koehler (since April 26, 2019)
2019)
34,441.78
50,000.00
47,000.00
Gabriele Eismann
15,686.99
2020
Wolfgang Büchele (Chairman)
€
Total compensation
Compensation for meeting
attendance
Fixed compensation
The compensation of the Supervisory Board members is defined by article 20 of the Articles of Association of
Merck KGaA. The members of the Supervisory Board receive fixed compensation of € 47,000 per year. The
Chairman receives double and the Vice Chairman receives one and a half times this amount. Moreover, the
members receive additional compensation of € 750 per meeting. The individual values are presented in the
following table:
Compensation for the Supervisory Board members of Merck KGaA
167
Corporate Governance Statement on Corporate Governance including Compensation Report
409
5,051
5,158
6,390
6,462
2019
Total compensation
440
391
Service cost
977
4,642
4,744
5,950
6,071
Total
1,385
LTI 2017 (2017 to 2019)
1,492
1,922
LTI 2016 (2016 to 2018)
compensation
414
2020
2019
2020
750.00
14,936.99
Mechthild Auge (until April 26, 2019)
2019)
15,686.99
750.00
14,936.99
Crocifissa Attardo (until April 26,
April 26, 2019)
35,191.78
73,500.00
3,000.00
3,000.00
32,191.78
70,500.00
Sascha Held (Vice Chairman) (since
(until April 26, 2020)
2019
94,000.00
94,000.00
3,000.00
3,750.00
97,000.00
25
97,750.00
19,057.53
70,500.00
1,500.00
3,750.00
20,557.53
74,250.00
Michael Fletterich (Vice Chairman)
26
Additional benefits
2020 (min.) 2020 (max.)
1,000
As a member of the corporate bodies of E. Merck KG, the Supervisory Board member Simon Thelen received an additional payment of € 140,000 for
performing this function in 2020 (2019: € 137,151).
Corporate Governance Statement on Corporate Governance including Compensation Report
168
Loans, advances or liabilities
The members of the Supervisory Board did not receive any loans or advances in the fiscal year 2020.
Similarly, no liability was entered into in favor of the members of the Supervisory Board in the fiscal
year 2020.
Ownership, purchase, or sale of shares in the company by members of the Executive
Board and the Supervisory Board
As of December 31, 2020, the members of the Executive Board and of the Supervisory Board held fewer than
1% of the issued shares of Merck KGaA. Transactions executed by members of the Executive Board and of the
Supervisory Board are disclosed on the Merck website at
https://www.merckgroup.com/en/investors/corporate-governance/directors-dealings.html.
Information on corporate governance practices
Reporting
It is Merck KGaA's objective to provide the latest information to all shareholders, media, financial analysts, and
interested members of the public, while creating the greatest possible transparency. For this reason, Merck
uses a wide range of communication platforms to engage in a timely dialogue with all interested parties about
the company's situation and business changes. Merck's principles include providing factually correct,
comprehensive, and fair information.
Information subject to disclosure requirements, as well as information that is not, can be accessed worldwide
on the Merck KGaA website (www.merckgroup.com), which is the company's most important publication
platform. In addition to a detailed financial calendar, quarterly statements and/or quarterly and half-year
financial reports covering at least the past three years are available there in German and English. In line with
the legal requirements, ad hoc announcements are also published on the website. These contain information on
circumstances and facts that could impact the Merck share price.
Regular press conferences, investor meetings on the occasion of investor conferences, and road shows offer
another platform for dialogue, the company presentations prepared for this purpose are also available on the
Merck KGaA website. In addition, the Investor Relations team is always available to private and institutional
investors who wish to receive further information. To ensure the greatest possible transparency, all documents
concerning the General Meeting are available on the company website. Additionally, some parts of the General
Meeting are generally webcast live on the Internet. The Annual General Meeting on May 28, 2020 was held
virtually and hence was webcast live on the Internet in full.
Dealing with insider information
As a member of the corporate bodies of E. Merck KG, the Supervisory Board member Daniel Thelen received an additional payment of € 140,000 for
performing this function in 2020 (2019: € 130,246).
Dealing properly with insider information is very important to us. Our Insider Committee examines the
existence of insider information, ensures compliance with legal obligations, and prepares any necessary
measures. The members of the Insider Committee are appointed by the Executive Board; at least two members
work in Group Legal & Compliance. The Insider Committee meets at regular intervals, yet also meets when
circumstances require. The Chief Financial Officer is vested with the authority to make the final decision on
handling potential insider information.
Corporate Governance Statement on Corporate Governance including Compensation Report
169
as well as specific training courses on insider law, all employees are instructed on the stipulations of insider
trading.
Accounting and audits of financial statements
Merck KGaA prepares its Consolidated Financial Statements and Combined Management Report in accordance
with International Financial Reporting Standards (IFRS), as applicable in the European Union, as well as the
supplementary German statutory provisions applicable under section 315e (1) of the German Commercial Code
(HGB). The Consolidated Financial Statements and the Combined Management Report are prepared by the
Executive Board and examined by an auditor, taking into account the German generally accepted standards for
the audit of financial statements promulgated by the Institute of Public Auditors in Germany (Institut der
Wirtschaftsprüfer, IDW).
The Supervisory Board commissioned KPMG AG Wirtschaftsprüfungsgesellschaft, Berlin, to audit the
Consolidated Financial Statements and the Combined Management Report for 2020. Moreover, the Supervisory
Board agreed with KPMG AG Wirtschaftsprüfungsgesellschaft, Berlin, that the auditor shall inform the
Supervisory Board without delay of any grounds for disqualification or bias occurring during the audit if these
cannot be immediately rectified. Additionally, the auditor shall immediately report to the Supervisory Board any
findings and issues that emerge during the audit that have a direct bearing upon the tasks of the Supervisory
Board. The auditor shall inform the Supervisory Board or note in the audit report any circumstances determined
during the audit that would render inaccurate the Declaration of Conformity made by the Executive Board and
the Supervisory Board. It has also been agreed with the auditor that in order to assess whether the Executive
Board has fulfilled its obligations in accordance with section 91 (2) of the German Stock Corporation Act (AktG),
the audit will also cover the company's early warning risk identification system. Moreover, the auditor is
required to examine and evaluate the accounting-relevant internal control system insofar as this is necessary
and appropriate for assessing the accuracy of financial reporting.
Since 1995, KPMG AG Wirtschaftsprüfungsgesellschaft, Berlin, has been the audit firm for the statutory audit of
the Annual Financial Statements and Consolidated Financial Statements of Merck KGaA. The auditor responsible
for auditing the Consolidated Financial Statements changes regularly. Dirk Janz is currently leading the audit
engagement. Mr. Janz has been the auditor in charge of the engagement since fiscal 2020, replacing Mr.
Rackwitz after the latter had performed this role for five years. The Supervisory Board had KPMG AG
Wirtschaftsprüfungsgesellschaft, Berlin, provide a statement regarding the scope of the business, financial,
personal, and other relationships between KPMG AG Wirtschaftsprüfungsgesellschaft, Berlin, its bodies and
head auditors, and Merck KGaA, its Group companies and the members of their bodies (independence
declaration). The statement also covers the scope of the services provided by KPMG AG
Wirtschaftsprüfungsgesellschaft, Berlin, in the previous fiscal year as well as the services (other than auditing
services) that are contracted for the upcoming year (especially consultancy services) for Merck KGaA and its
subsidiaries. Having examined the declaration, the Supervisory Board has found no grounds to doubt the
independence of KPMG AG Wirtschaftsprüfungsgesellschaft, Berlin. Neither party identified any conflicts of
interest. The Supervisory Board reviews the quality of the audit, including the performance of the auditor in
charge of the engagement, annually on the basis of objective indicators.
Due to the requirement to change auditors at regular intervals, Merck KGaA must appoint a new auditor
(different than the current one) no later than for fiscal 2024. In fiscal 2019, the Supervisory Board of Merck
KGaA therefore decided to prepare a public request for tender for the audit of the annual financial statements
and consolidated financial statements of Merck KGaA and to voluntarily change auditors for the fiscal 2023
audit, earlier than required. The public request for tender was published in the German Federal Gazette in
February 2020.
Corporate Governance Statement on Corporate Governance including Compensation Report
170
Further reports
The Combined Management Report of Merck KGaA and the Merck Group does not contain a non-financial
declaration. Instead, we issue a separate combined non-financial (Group) report in accordance with sections
289b-289e and 315b-315c HGB. This is available effective April 13, 2021, as an online version on our website
at https://www.merckgroup.com/en/sustainability-report/2020/. It is integrated into the 2020 Corporate
Responsibility Report in accordance with DRS 20 subsection 252 (b). We have compiled an overview of the
information contained in the combined non-financial (Group) declaration at www.merckgroup.com/nfr20.
Values and compliance
-
In order to ensure a high level of protection for insider information, the Executive Board issued internal insider
guidelines applicable throughout the Merck Group worldwide, which were most recently updated in fiscal 2020.
The guidelines inform employees about their responsibilities under insider trading laws and give clear
instructions for compliant behavior. In addition, they describe the function of the Insider Committee in detail.
Moreover, our Code of Conduct, which is binding on all employees, also contains an explicit, detailed reference
to the ban on using insider information. Within the scope of obligatory training courses on the Code of Conduct
First and foremost, responsible entrepreneurship means acting in accordance with the law also known as
compliance. All our activities are required to adhere to the applicable laws, regulations, and international ethical
standards around the world. Compliance violations would result not only in possible legal action but also could
seriously compromise our reputation as an employer and business partner.
As a member of the corporate bodies of E. Merck KG, the Supervisory Board member Peter Emanuel Merck received an additional payment of € 80,000 for
performing this function in 2020 (2019: € 80,000).
As a member of the corporate bodies of E. Merck KG, the Supervisory Board member Michael Kleinemeier received an additional payment of € 140,000 for
performing this function in 2020.
Theo Siegert (until April 26, 2019)
Daniel Thelen (since April 26, 2019)
Simon Thelen (since April 26, 2019)
Tobias Thelen (until April 26, 2019)
Veit Ulshöfer (until April 26, 2019)
Total
14,936.99
3,000.00
750.00
750.00
50,000.00
50,000.00
15,686.99
15,686.99
47,000.00
32,191.78
3,000.00
3,000.00
50,000.00
35,191.78
47,000.00
As a member of the corporate bodies of E. Merck KG, the Supervisory Board member Helene von Roeder received an additional payment of € 150,000 for
performing this function in 2020.
32,191.78
3,000.00
50,000.00
35,191.78
14,936.99
750.00
15,686.99
822,500.00
14,936.99
823,787.70
750.00
15,686.99
48,000.00
57,000.00 870,500.00 880,787.70
As a member of the corporate bodies of E. Merck KG, the Supervisory Board member Wolfgang Büchele received an additional payment of € 140,000 for
performing this function in 2020 (2019: € 140,000).
As a member of the corporate bodies of E. Merck KG, the Supervisory Board member Helga Rübsamen-Schaeff received an additional payment of € 150,000
for performing this function in 2020 (2019: € 150,000).
3,000.00
Our "Group Compliance & Data Protection" function is responsible for the core topics of anti-corruption, anti-
money laundering, business partner due diligence, data protection and transparency requirements, as well as
for compliance with healthcare regulations and dawn raids. Group-wide policies, procedures, and processes are
in place for these important compliance topics in order to ensure that our business activities are consistent with
the relevant laws, regulations, and international ethical standards.
Our compliance management system encompasses important core elements that make up our compliance
portfolio:
Elements of our compliance program
1149
1,520
LTI 2019 (2019 to 2021)
compensation
Multi-year variable
3,640
0
1,364
2,800
4,810
0
4,069
4,810
Profit sharing
LTI 2020 (2020 to 2022)
640
640
1,107
1,669
1,669
1,669
2,121
Total
4
4
4
7
2020 (max.)
636
2020 (min.)
636
3,000.00
640
1,969
0
A global framework for ethical and legally compliant business processes serves to minimize risk. We achieve
this by identifying specific compliance risks and requirements. Suitable policies and controls are implemented in
order to reduce risk. Our goals also focus on our employees: It is up to us. This serves to strengthen
Continuous Improvement
Based on and applying to all
Compliance Program Elements
Case Management
Timely response to reports of
misconduct and implementation
of corrective actions
8
7
Monitoring & Reporting
Tracking of Compliance-
related data; perform
internal & external
reporting
2
曲
6
The underlying principle of our compliance management system is living our values together. The Compliance
department adopts a specific brief in this respect.
Training & Awareness
Appropriate training and
additional measures to educate
and keep awareness high
related discussion and
decision making including
relevant key functions
Compliance Committee/Forum
Platform for Compliance-
Policies & Procedures
Global policies, procedures
and standards to mitigate
identified risks
Identifying internal and external critical
risks in regular business operations
14,936.99
Risk Assessment
contributing to internal controls
5
Programs & supporting tools
Comprehensive Compliance
3
Programs & Tools
and overall governance
1,400
269
Gregor Schulz (until April 26, 2019)
47,000.00
1031
LTI 2019 (2019 to 2021)
compensation
Multi-year variable
3,900
0
3,299
3,000
3,120
0
2,640
2,400
Profit sharing
1,200
66
1,266
1,260
1,266
1,149
1,200
66
66
49
1,200
1,100
1,100
21
1,121
1,121
1,121
1,130
Total
1,100
21
21
30
1,266
Additional benefits
LTI 2020 (2020 to 2022)
0
Member of the Executive Board
1,000
942
Fixed compensation
2020
2019
Benefits granted (€ thousand)
Marcus Kuhnert
Corporate Governance Statement on Corporate Governance including Compensation Report
440
10,531
4,925
10,091
1,266
440
1,706
440
6,725
391
5,800
1,336
6,285
8,066
392
8,458
392
1,513
392
5,489
4,953
Total compensation
392
Service cost
1,121
5,097
4,561
Total
0
1,720
3,825
5,409
2020 (min.) 2020 (max.)
Member of the Executive Board
2020
4,263
0
1,489
5,638
50,000.00
50,750.00
Alexander Putz (until April 26, 2019
and since May 28, 2020)
27,942.47
14,936.99
1,500.00
750.00
29,442.47
15,686.99
Total
Christian Raabe (since April 26, 2019)
32,191.78
3,000.00
3,000.00
50,000.00
35,191.78
Helene von Roeder (since April 26,
2019)
47,000.00
32,191.78
3,000.00
3,000.00
50,000.00
35,191.78
Helga Rübsamen-Schaeff
47,000.00
47,000.00
8,451
7,707
1,669
2019
2020 2020 (min.) 2020 (max.)
1,100
Member of the Executive Board
1,100
Fixed compensation
2019
Benefits granted (€ thousand)
Belén Garijo
Kai Beckmann
8,690
787
3,640
5,449
147
147
147
393
12,117
5,056
3,493
640
8,543
Service cost
3,000.00
1,372
1,611
Total compensation
9,823
9,318
3,280
1,611
13,728
1,611
Total
2,640
Pursuant to section 111 (5) AktG, the Supervisory Board of companies that are listed or subject to co-
determination stipulates binding targets for the percentage of positions on the Supervisory Board and on the
Management Board held by women. However, for Merck KGaA, stipulations pursuant to section 111 (5) AktG
need not be set for the following reasons: The statutory target of 30% pursuant to section 96 (2) AktG is
already applied to the Supervisory Board of Merck KGaA; this eliminates the obligation to stipulate a further
target for the percentage of positions held by women on the Supervisory Board (see section 111 [5] sentence
5 AktG). The obligation to stipulate a target for the percentage of positions held by women on the Management
Board pursuant to section 111 (5) AktG is not applicable to the legal form of a corporation with general partners
(Kommanditgesellschaft auf Aktien), as a corporation with general partners neither has a management board
comparable to that of a stock corporation, nor does the Supervisory Board have personnel authority over the
Executive Board. Instead, the Executive Board of Merck KGaA consists of personally liable general partners (see
also the description of Supervisory Board procedures).
The Executive Board provides the Supervisory Board with regular, up-to-date, and comprehensive reports
about all company-relevant issues concerning strategy, planning, business developments, the risk situation,
risk management, and compliance. The rules of procedure of the Executive Board and of the Supervisory Board,
as well as a Supervisory Board resolution, regulate further details on the information and reporting duties of the
Executive Board vis-à-vis the Supervisory Board.
The Executive Board informs the Board of Partners and the Supervisory Board at least quarterly of the progress
of business and the situation of the company. In addition, the Executive Board informs the aforementioned
boards at least annually of the company's annual plans and strategic considerations.
The Executive Board passes its resolutions in meetings that are normally held once a month.
Corporate Governance Statement on Corporate Governance including Compensation Report
176
Supervisory Board
The Supervisory Board has 16 members. The Supervisory Board was composed as follows in fiscal 2020:
Member
Wolfgang Büchele (Chairman of the Supervisory Board)
Römerberg, Chairman of Exyte GmbH, Stuttgart
Memberships of
(a) other statutory supervisory boards and
(b) comparable German and foreign supervisory bodies of
corporations
(a) - Gelita AG, Eberbach (Chairman) (not listed)
(b) - E. Merck KG, Darmstadt¹ (not listed)
- Wegmann Unternehmens-Holding GmbH & Co. KG,
Fürstenfeldbruck (Chairman) (not listed)
Member of the
Supervisory
Board since
The general partners with no equity interest (Executive Board) manage the business activities in accordance
with the laws, the Articles of Association, and the rules of procedure. They are appointed by E. Merck KG with
the approval of a simple majority of the other general partners. The members of the Executive Board are jointly
responsible for the entire management of the company. Certain tasks are assigned to individual Executive
Board members based on a responsibility distribution plan. Each Executive Board member promptly informs the
other members of any important actions or operations in his or her respective business area. Among other
things, the Executive Board is responsible for preparing the Annual Financial Statements of Merck KGaA and of
the Merck Group as well as for approving the quarterly and half-year financial statements of the Merck Group.
In addition, the Executive Board ensures that all legal provisions, official regulations, and the company's
internal policies are observed, and works to achieve compliance with them by all the companies of the Merck
Group. A Group-wide guideline defines in detail which transactions require prior approval by the Executive
Board.
01.07.2009
175
Corporate Governance
Udit Batra (until July 31, 2020)
Wellesley, Massachusetts, USA, CEO Life Science
Kai Beckmann
Darmstadt, CEO Performance Materials
(b) - Banco Bilbao Vizcaya Argentaria S.A., Bilbao, Spain (listed)
- L'Oréal S.A., Clichy, France (listed)
No board positions
(a)
- Bundesdruckerei GmbH, Berlin (not listed)
Marcus Kuhnert
Königstein, Chief Financial Officer
Peter Guenter
Frankfurt am Main, CEO Healthcare
No board positions
(b) Galapagos N.V., Mecheln, Belgium (listed)
-
Statement on Corporate Governance including Compensation Report
Michael Fletterich (until May 28, 2020)
Gernsheim, Chairman of the Merck Joint Works Council
Gabriele Eismann
Seeheim-Jugenheim, Senior Product Manager (currently
full-time member of the Merck Joint Works Council)
Jürgen Glaser
-
(b) E. Merck KG, Darmstadt¹ (not listed)
Transporeon GmbH, Ulm (not listed)
26.04.2019
Darmstadt, pharmacist and Manager of Engel-Apotheke
pharmacy, Darmstadt
No board positions
26.04.2019
Anne Lange
Riedstadt, Application Engineer (currently full-time
member of the Merck Joint Works Council)
No board positions
26.04.2019
Peter Emanuel Merck²
No board positions
26.04.2019
Hamburg, Managing Partner of Golf-Lounge GmbH, Hamburg
Dietmar Oeter
Seeheim-Jugenheim, Vice President Corporate Quality
26.04.2019
No board positions
28.03.2008
(a) B. Braun Melsungen AG, Melsungen (not listed)
Bingen, Regional Director of the German Mining,
Chemical, and Energy Industrial Union (IG BCE),
Darmstadt
Edeltraud Glänzer
Hanover, Chair of August-Schmidt-Stiftung, Bochum
Sascha Held
(Vice Chairman of the Supervisory Board)
Riedstadt, Application Consultant (currently full-time
member of the Merck Joint Works Council)
Michael Kleinemeier
Heidelberg, Managing Director of e-mobiligence GmbH,
Heidelberg
Renate Koehler
- Kemira Oyj, Helsinki, Finland (not listed)
-KNDS NV, Amsterdam, Netherlands (not listed)
Frankfurt am Main, Vice Chair
No board positions
No board positions
09.05.2014
(a) - SIRONA Dental Systems GmbH, Wals,
Austria (not listed)
-
HFC Prestige Service Germany GmbH
(Vice Chairman) (listed).
26.04.2019
(b) Merck BKK (not listed)
01.07.1998
Springer Nature AG & Co. KGaA (not listed)
-
(a)
Statement on Corporate Governance including Compensation Report
173
Our data protection department encompasses various elements that make up our data protection program
portfolio:
Elements of our data protection program
Continuous Improvement
Based on and applying to all
Data Privacy Program Elements
Incident Management
Response to reports of
misconduct and case
management
7
Monitoring & Reporting
2
Tracking of data privacy
Corporate Governance
Group data protection at Merck is integrated into the Group's Compliance organization. As required by law, this
department operates independently. The department regularly prepares data protection updates and produces
a comprehensive data protection report at regular intervals as part of our broader compliance reporting efforts.
In addition to the Group's central Data Protection Officer, many sites worldwide also have local data protection
officers.
Data protection
The Executive Board informs the supervisory bodies at least once a year about the key compliance issues.
171
employees' sense of responsibility and accountability. We achieve this by informing employees about the
applicable compliance rules and ethical standards and by giving them the responsibility for complying with
these requirements. As compliance is the second line of defense against risks, it is important that we
consistently safeguard what really matters. This is why we regularly implement key figures that allow us to
assess risks and the effectiveness of controls. Compliance not only contributes to company growth but also
creates targeted value added by allowing us to advise the business sectors and help them to navigate the
respective compliance requirements. The advice we provide takes account of changes in business requirements
and is adapted accordingly.
-
-
Based on a corporate culture that places the fundamental company values courage, achievement,
responsibility, respect, integrity, and transparency at the center of our entrepreneurial actions, our Code of
Conduct (www.merckgroup.com/company/responsibility/en/regulations-and-guidelines/code-of-
conduct.pdf) helps those involved in the business to implement the values when dealing with one another on a
daily basis.
With its Code of Conduct, which was revised in mid-2017, Merck has established a set of rules and regulations
intended to help our employees to act responsibly and to make the right decisions in their daily work.
The Code of Conduct explains the company principles for dealings with business associates, shareholders,
colleagues, and employees, and within the scope of our responsibility for society. Therefore, it supports all
employees in acting ethically - not only in their dealings with one another but also outside the company.
Accordingly, the Code of Conduct is also the main set of rules for our Compliance Program. Merck has aligned
the content of its Code of Conduct with the Merck values and integrated important topics such as data privacy,
healthcare compliance, and bioethics. To Merck, compliance means observing legal and internal regulations and
the basic ethical principles anchored in the company's values. With the Code of Conduct and the various unit-
specific ethical compliance rules, the values are integrated into daily work and business practice. The Code of
Conduct applies to all employees, both at headquarters and in the subsidiaries. We also expect our business
associates worldwide to accept these principles or to have their own comparable principles. While supplier
management ensures compliant behavior of suppliers, global business partner risk management encompasses
the relations with sales-related business associates such as distributors and wholesalers.
key metrics; internal
The Compliance department monitors observance of the Code of Conduct with support from corresponding
monitoring and training programs throughout the Group. All employees are called upon to report potential
compliance violations to their supervisor, Legal, HR, or other relevant departments. In cooperation with Group
Internal Auditing, the Compliance Office regularly reviews the implementation of Group-wide compliance
measures at the subsidiaries. The audits regularly focus on the local compliance structure, the compliance
measures taken, and the existence of corresponding compliance guidelines and processes.
A further focus area of the Compliance Program is ensuring legally and ethically correct dealings with medical
professionals and adhering to the transparency requirements. Since October 2013, the Group Compliance
Officer has agreed on extensive measures with the affected areas of the company in order to establish an
internal framework of rules as well as the corresponding processes for approving and documenting interactions
with experts that ensure correct publication. We, of course, also ensure compliance with the respectively valid
data protection regulations.
The role of the Group Compliance Officer is reflected in the subsidiaries, which ensure via country
representatives that compliance measures are implemented in the countries. Since 2013, Compliance tasks in
Corporate Governance Statement on Corporate Governance including Compensation Report
172
the countries and on a regional basis have largely been performed by full-time compliance officers. As a result,
a higher level of compliance expertise is based locally, and the increasing tasks in all business sectors are taken
into account. At the same time, the management structure was streamlined and the reporting lines for the
countries were consolidated regionally/globally. Since the end of 2016, the compliance officers in the countries
have been reporting to the dedicated compliance officers for the respective business sectors (Healthcare, Life
Science, and Performance Materials). A separate responsibility was also created for Group functions. Regular
regional and global compliance meetings are held to promote the exchange of information within the
Compliance organization. This is supplemented by a global concept for local compliance forums and global
compliance committees, at which compliance-related topics including the compliance priorities in the respective
countries or at a global level are discussed with senior management. These constitute an important element of
risk assessment and quality assurance.
Newcomer training seminars were introduced in 2010 for newly appointed compliance officers. These seminars
serve to build up compliance expertise and strengthen cooperation within the Compliance organization. This
Group-wide network is used to steer the global Compliance Program. Within the Group Compliance function in
Darmstadt, Germany, a center of excellence has been established with responsibility for the continuous
maintenance and further development of the Compliance Program and shaping the company's internal
compliance guidelines. The Compliance organization is also involved in the relevant due diligence processes for
the incorporation of new business units as well as possible divestments and acquisitions, and the subsequent
integration of companies. Within the scope of the global compliance program, a high degree of importance is
attached to regular compliance seminars of the Merck Compliance Training Plan, which are conducted as web-
based training courses and classroom sessions. By presenting various training topics, particularly on the Code
of Conduct, corruption, antitrust and competition law, as well as healthcare compliance and data privacy, they
serve to sensitize employees and management to the consequences of compliance violations and to show ways
of avoiding them. Since Merck set up a central whistleblowing hotline, the SpeakUp line, our employees, and
individuals outside of our company have been able to report compliance violations by telephone or via a web-
based application in their respective language. The SpeakUp line is available 24 hours a day, free of charge.
Case numbers enable anonymous, two-way communication. The reports received are individually reviewed. If a
compliance violation exists, corresponding corrective action is taken based on concrete action plans. If
necessary, disciplinary measures are taken. These can range from a simple warning up to the dismissal of the
employee who violated a compliance rule. In 2010, Merck set up a Compliance Case Committee to guide these
processes. The Compliance Case Committee consists of senior members from various Group governance
functions; they are involved in reviewing compliance violations and introducing countermeasures. The joint
work in the Compliance Case Committee enables processes between the various Group functions to be
optimally coordinated and designed efficiently.
The Compliance Office reports regularly to the Executive Board, the Finance Committee, and the Supervisory
Board, informing them of the status of compliance activities (including training status), compliance risks, and
serious compliance violations.
The Group Compliance Officer is responsible for the establishment, maintenance, and further development of
our global Compliance Program. Among other things, the Group Compliance Officer and his team, consisting of
a center of excellence and sector compliance officers, take appropriate measures to help lower the risk of
serious violations of antitrust law, anti-corruption rules, and legal regulations and requirements of industry
codes in the healthcare sector and support the business sectors with specific compliance input. Responsibility
for money laundering prevention was added in 2018, with Compliance coordinating the necessary
organizational measures, including training.
No board positions
and external reporting
incl. forum
3
174
In its report to the General Meeting, the Supervisory Board discloses any conflicts of interest involving its
members and how they were dealt with. Consultancy agreements as well as other service and work contracts of
a Supervisory Board member with Merck require the approval of the Supervisory Board. In fiscal 2020, there
were neither conflicts of interest, nor consultancy agreements or other service or work contracts with Merck
KGaA involving Supervisory Board members.
Adherence to environmental and safety standards
At Merck, environmental protection is based on closed-loop thinking and the integration of precautionary
measures into our process, procedural, and product development planning. The principles and strategies set out
in our Environment, Health and Safety Policy implement the guidelines formulated by the national and
international associations of the chemical industry in the Responsible Care guidelines. The Responsible Care
Global Charter, developed by the International Council of Chemical Associations (ICCA) in 2014, places even
greater emphasis on overall responsibility for products, supply chains, and the community. Merck signed this
expanded version of Responsible Care Global Charter for the entire Group in the same year. It is currently being
implemented by Merck at an international level. We report our ecological, economic and social performance
transparently in accordance with the internationally recognized principles of the Global Reporting Initiative
(GRI), taking into account the requirements of the German Sustainability Code and the principles of the UN
Global Compact. We are in the process of achieving the first major step toward climate protection, which is to
achieve a 20% reduction in our greenhouse gas emissions by 2020 measured against the 2006 baseline.
Among other things, Merck has also set itself the goal of climate-neutral business operations along the entire
value chain by 2040 in terms of Scope 1 and Scope 2 as well as our Scope 3 emissions.
Many guidelines specify how the sites and employees of the Merck Group are to observe the principles in their
daily work. The Group function Environment, Health, Safety, Security, Quality steers these global activities and
ensures compliance with statutory requirements, internal standards, and business needs throughout the entire
Group. In this way, Group-wide risks are minimized and continuous improvement is promoted in the areas of
environment, health, safety, security, and quality. Corporate Responsibility reports are also published at regular
intervals.
Procedures of the Executive Board, Supervisory Board, Board of Partners,
and its Committees
Members of the Executive Board of Merck KGaA
Information on memberships of statutory supervisory boards and comparable German and foreign supervisory
bodies (section 285 No. 10 HGB in conjunction with section 125 (1) sentence 5 AktG).
Member
Stefan Oschmann
Munich, Chairman
Belén Garijo
Memberships of
(a) statutory supervisory boards and
(b) comparable German and foreign supervisory bodies of corporations
Corporate Governance Statement on Corporate Governance including Compensation Report
Before an Executive Board member takes on honorary offices, board positions, or other sideline activities, this
must be approved by the Personnel Committee of the Board of Partners of E. Merck KG. The Chairman of the
Executive Board, Stefan Oschmann, and the Chief Financial Officer, Marcus Kuhnert, are both members of the
Executive Board of E. Merck KG. This does not, however, create conflicts of interest.
Within the framework of their work, all Executive Board and Supervisory Board members of Merck KGaA are
exclusively committed to the interests of the company and neither pursue personal interests nor grant
unjustified advantages to third parties.
Avoidance of conflicts of interest
Individuals' Requests
Responses to requests
for information and data
deletion by data subjects
5
4
Policies & Procedures
Global data privacy policies,
standards and procedures
6
Risk Assessment & Documentation
processing activities
Training & Awareness
Appropriate training and
additional measures to
educate and keep
awareness high
Programs & Tools
Systems, processes, templates
and workflows to enhance
Data Privacy compliance
Specific guidelines have been put in place to ensure that data protection processes comply with the relevant
regulations. The "Policy for Data Protection and Personal Data Privacy" defines the standards according to
which data is processed, stored, used, and transmitted at Merck. This enables us to provide a high level of
protection for the data of our employees, contract partners, customers, and suppliers as well as the data of
patients and participants in clinical trials. A central IT tool has also been established in order to comply with the
statutory documentation requirements. The tool serves as the basis for key data protection processes. In
addition to documenting processing activities, these include processing reports from the local data protection
officers, documenting video recordings, and reporting potential data protection violations. Our understanding of
data protection throughout the Group is based on European legislation in particular, including the provisions of
the EU's General Data Protection Regulation (EU GDPR), which has been in force since May 2018. However, we
also comply with and implement local data protection regulations.
Risk and opportunity management
The Executive Board, the Supervisory Board, and the Finance Committee are regularly informed about the
current risk portfolio of the Group and the individual companies. More detailed information can be found in the
Report on Risks and Opportunities.
Identify internal &
external risks; records of
Corporate Governance Statement on Corporate Governance including Compensation Report
Stipulations pursuant to section 111 (5) AktG (target for the percentage of positions on
the Supervisory Board held by women)
Assurance
1 Internal board position.
Corporate Governance Statement on Corporate Governance including Compensation Report
177
The Supervisory Board performs a monitoring function. It supervises the Executive Board's management of the
company. In comparison with the supervisory board of a German stock corporation, the role of the supervisory
board of a corporation with general partners (KGaA) is limited. This is due to the fact that the members of the
Executive Board are personally liable partners and therefore are responsible for the management of the
company. In particular, the Supervisory Board is not responsible for appointing and dismissing general partners
or for regulating the terms and conditions of their contracts. This is the responsibility of E. Merck KG. Nor does
the Supervisory Board have the authority to issue rules of procedure for the Executive Board or a catalog of
business transactions requiring approval. This authority likewise belongs to E. Merck KG (article 13 (3) sentence
1 and (4) sentence 1 of the Articles of Association).
However, the fact that the Supervisory Board has no possibilities to directly influence the Executive Board
restricts neither its information rights nor its audit duties. The Supervisory Board must monitor the Executive
Board in terms of legality, regularity, usefulness, and economic efficiency. In particular, the Supervisory Board
has the duty to examine the reports provided by the Executive Board. This includes regular reports on the
intended business policy, as well as other fundamental issues pertaining to corporate planning, especially
financial, investment and HR planning; the profitability of the Merck Group; the progress of business; the risk
situation; risk management (including compliance); and the internal auditing system. In addition, by means of
consultation with the Executive Board, it creates the basis for supervision of the management of the company
by the Supervisory Board in accordance with section 111 (1) AktG.
The Supervisory Board examines the Annual Financial Statements as well as the consolidated financial
statements and the Combined Management Report, taking into account in each case the reports of the auditor.
Moreover, the Supervisory Board discusses the quarterly statements and the half-year financial report, taking
into account in the latter case the report of the auditor on the audit review of the abridged financial statements
and the interim management report of the Group. The adoption of the Annual Financial Statements is not the
responsibility of the Supervisory Board, but of the General Meeting. The Supervisory Board normally meets four
times a year. Further meetings may be convened if requested by a member of either the Supervisory Board or
the Executive Board. As a rule, resolutions of the Supervisory Board are passed at meetings at the instruction
of the Chairman. In exceptional cases a resolution may be passed by other means, details of which are given in
the rules of procedure.
The members of the Board of Partners of E. Merck KG and of the Supervisory Board may be convened to a joint
meeting if so agreed by the chairpersons of the two boards.
The Supervisory Board has adopted rules of procedure for its activities that are available on the company's
website at www.merckgroup.com/company/who-we-are/management-and-company-structure/supervisory-
board/EN/Rules-of-Procedure-Supervisory-Board-EN.pdf.
The rules of procedure prescribe that the Supervisory Board may form committees. The Supervisory Board has
formed a Nomination Committee comprising three shareholder representatives. Its members are Wolfgang
Büchele, Helga Rübsamen-Schaeff, and Simon Thelen. The Nomination Committee is responsible for proposing
to the Supervisory Board suitable candidates for its proposal to the Annual General Meeting. Apart from legal
requirements and the recommendations of the German Corporate Governance Code, the "Objectives of the
Supervisory Board with respect to its composition," "Profile of skills and expertise," and the "Diversity Policy"
are to be taken into consideration as well. Owing to the aforementioned limited authority, and since a
corresponding need has not yet arisen, the Supervisory Board in fiscal 2020 had no further committees. In the
coming fiscal year, the Supervisory Board will address the formation of an Audit Committee at the Supervisory
Board level.
The German Stock Corporation Act prescribes that the Supervisory Board of a publicly listed company must
have at least one member who has professional expertise in accounting or auditing. Helene von Roeder has
particular knowledge and experience of the application of reporting principles and internal controls, is familiar
with auditing, and is also the Chair of the Finance Committee of the Board of Partners of E. Merck KG. A further
provision of the German Stock Corporation Act requires that the members of the Supervisory Board be
collectively familiar with the sector in which their company operates. This requirement is specifically addressed
Corporate Governance Statement on Corporate Governance including Compensation Report
178
in the Supervisory Board's profile of skills and expertise, which stipulates that the Supervisory Board have at
least four members who possess such knowledge of the sector. We currently meet this requirement (see also
"Objectives of the Supervisory Board with respect to Its Composition and Profile of Skills and Expertise").
Information on the independence of the shareholder representatives can be found under “Objectives of the
Supervisory Board with respect to Its Composition and Profile of Skills and Expertise".
The Supervisory Board carried out a self-assessment in fiscal 2020. The self-assessment of the Supervisory
Board took the form of an internal efficiency review based on an extensive questionnaire and resulted in a
positive opinion on all topics. Potential improvements to further optimize the work of the committees in
individual areas were disclosed and corresponding measures initiated. The next self-assessment of the
Supervisory Board is scheduled for 2022.
Board of Partners of E. Merck KG
Some of the responsibilities that lie with the supervisory board of a German stock corporation are fulfilled at
Merck by E. Merck KG. This applies primarily to the Board of Partners of E. Merck KG. Therefore, the Board of
Partners as well as the composition and procedures of its committees are described in the following.
The Board of Partners has nine members. The Board of Partners was composed as follows in fiscal 2020:
Member
Johannes Baillou
Vienna, Austria, Vice Chairman of the Executive
Board and General Partner of E. Merck KG, Chairman
Frank Stangenberg-Haverkamp
Darmstadt, Chairman of the Executive Board and
General Partner of E. Merck KG, Vice Chairman
Wolfgang Büchele
E. Merck KG, Darmstadt¹ (not listed)
Memberships of
(b)
Cologne, Senior Physician at the Clinic for Trauma and
Hand Surgery, University Hospital Düsseldorf
09.05.2014
Alexander Putz
28.05.2020
No board positions
Michelstadt, Laboratory Chemist (currently full-time
member of the Merck Joint Works Council)
Christian Raabe
Höchst, IT Business Partner Darmstadt Site
Helene von Roeder
Frankfurt am Main, Member of the Executive Board (CFO)
of Vonovia SE, Bochum
No board positions
26.04.2019
(b) - E. Merck KG, Darmstadt¹ (not listed)
- Vonovia Finance B.V., Amsterdam, Netherlands
(listed)
26.04.2019
- AVW Versicherungsmakler GmbH,
Hamburg (not listed)
Helga Rübsamen-Schaeff
Langenburg, Chair of the Advisory Board of AiCuris
Antiinfective Cures GmbH, Wuppertal
Daniel Thelen
(a) - 4SC AG, Martinsried (listed)
- Merck Healthcare KGaA¹ (Chair) (not listed)
(b) - E. Merck KG, Darmstadt¹ (not listed)
09.05.2014
Cologne, Head of Infrastructure Development for western
region at DB Netz AG, Frankfurt am Main/Duisburg
Simon Thelen²
(b) - E. Merck KG, Darmstadt¹ (not listed)
26.04.2019
(a)
Merck Healthcare KGaA¹ (not listed)
26.04.2019
(a) statutory supervisory boards and
2 Members delegated according to article 6 (5) of the Articles of Association.
No board positions
No board positions
(a) - Merck KGaA, Darmstadt (listed)
(b)
Vonovia Finance B.V., Amsterdam, Netherlands (listed)
- AVW Versicherungsmakler GmbH, Hamburg (not listed)
(a) - Merck KGaA, Darmstadt (listed)
(a) - Merck KGaA, Darmstadt (listed)
- Merck Healthcare KGaA (not listed)
Corporate Governance Statement on Corporate Governance including Compensation Report
179
The Board of Partners may delegate the performance of individual duties to committees. Currently, the Board of
Partners has three committees in place: the Personnel Committee, the Finance Committee, and the Research
and Development Committee.
Personnel Committee
The Personnel Committee has four members: Johannes Baillou (Chair), Wolfgang Büchele, Michael Kleinemeier,
and Frank Stangenberg-Haverkamp. The Personnel Committee meets at least twice a year. Additional meetings
are convened as and when necessary. Meetings of the Personnel Committee are attended by the Chairman of
the Executive Board of Merck KGaA unless the Committee decides otherwise. The Personnel Committee is
responsible for, among other things, the following decisions concerning members and former members of the
Executive Board: contents of and entry into employment contracts and pension contracts; granting of loans and
advance payments; changes to the compensation structure and adaptation of compensation; approval for
taking on honorary offices, board positions, and other sideline activities; and division of responsibilities within
the Executive Board of Merck KGaA. The Personnel Committee passes its resolutions by a simple majority; in
matters concerning the Chairman of the Executive Board, unanimity is required. The Chairman of the
Committee regularly informs the Board of Partners of its activities.
Finance Committee
The Finance Committee has four members: Helene von Roeder (Chair), Johannes Baillou, Wolfgang Büchele,
and Daniel Thelen. The Finance Committee holds at least four meetings a year, at least one of which is a joint
meeting with the auditor of Merck KGaA. Further meetings are convened as and when necessary. Meetings of
the Finance Committee are attended by the Chief Financial Officer of Merck KGaA. Other members of the
Executive Board of Merck KGaA may attend the meetings upon request of the Finance Committee. These
meetings regularly include the Chairman of the Executive Board. The Finance Committee is responsible for,
among other things, analyzing and discussing the Annual Financial Statements, the Consolidated Financial
Statements, and the respective reports of the auditor, as well as the half-year financial report (including the
report of the auditors for the audit review of the abridged financial statements and interim management report
contained in the half-year report) and the quarterly statements. The Finance Committee also reviews the
performance of the auditing firm, particularly the auditor in charge of the engagement. Moreover, the Finance
Committee recommends to the Chairman of the Supervisory Board annual audit focuses for the auditors of the
Annual Financial Statements. It also recommends to the Supervisory Board an auditor for the Annual Financial
Statements as well as auditors for the audit review of the abridged financial statements and interim
management report contained in the half-year financial report for the Supervisory Board's corresponding
suggestion to the General Meeting. In addition, the Finance Committee is concerned with the net assets,
financial position, results of operations, and liquidity of Merck, as well as accounting, internal auditing, risk
management, and compliance issues. Upon request of the Board of Partners, the Finance Committee examines
investment projects that must be approved by the Board of Partners and provides recommendations pertaining
thereto. It passes its resolutions with a simple majority. The Committee Chairman regularly informs the Board
of Partners of the activities of the Finance Committee.
Corporate Governance Statement on Corporate Governance including Compensation Report
180
Research and Development Committee
The Research and Development Committee has four members: Helga Rübsamen-Schaeff (Chair), Johannes
Baillou, Katharina Kraft, and Simon Thelen. The Research and Development Committee is convened as and
when necessary, but holds at least two meetings a year. Meetings of the Research and Development Committee
are attended by members of the Executive Board of Merck KGaA upon request of the Committee. These
meetings regularly include the Chairman of the Executive Board as well as the CEO Healthcare, the CEO Life
Science, and the CEO Performance Materials. The Research and Development Committee is responsible for,
among other things, reviewing and discussing the research activities of the Healthcare, and Life Science and
Performance Materials business sectors. It passes its resolutions with a simple majority. The Chair of the
Committee reports to the Board of Partners on the insights gained from the meetings.
Stipulations to promote the percentage of management positions held by
women pursuant to section 76 (4) and section 111 (5) of the German Stock
Corporation Act (AktG)
Stipulations pursuant to section 76 (4) AktG (target for the percentage of positions held
by women on the two upper management levels below the Executive Board)
We foster diversity within the company, which also includes ensuring a balance of genders in management. To
this end, we pursue both voluntary and statutory objectives, and we work continuously and sustainably on
achieving them. On December 15, 2016, the Executive Board of Merck KGaA set the new targets for the
percentage of positions held by women on the two management levels of Merck KGaA below the Executive
Board as follows:
• First management level of Merck KGaA below the Executive Board: 21% of positions held by women
• Second management level of Merck KGaA below the Executive Board: 26% of positions held by women
(b) comparable German and foreign supervisory bodies of corporations
The deadline set for reaching the new targets is December 31, 2021. The first management level comprises all
managers of Merck KGaA with a direct reporting line to the Executive Board of Merck KGaA or who belong to
the global executive group. The second management level comprises all managers of Merck KGaA who report to
managers with a direct reporting line to the Executive Board of Merck KGaA or the global executive group. In
addition, as a global company with correspondingly aligned leadership structures, Merck continues to pursue a
voluntary global target of maintaining the proportion of leadership positions held by women (managers,
experts, and project managers in roles 4 and above) ¹ at a stable level of 30% in the period until 2021.
1 The group in question accounts for around 6% of the total workforce; see the description of "Diversity and management".
-
(b)
The Board of Partners supervises the Executive Board in its management of the company. It informs itself
about the business matters of Merck KGaA and may inspect and examine the company's accounts, other
business documents, and assets for this purpose. According to article 13 (4) of the Articles of Association of
Merck KGaA, the Executive Board requires the approval of E. Merck KG for transactions that are beyond the
scope of the Group's ordinary business activities. For such transactions, approval must first be obtained from
the Board of Partners of E. Merck KG. The Board of Partners convenes as and when necessary; however, it
normally meets four times a year. The members of the Executive Board of Merck KGaA are invited to all
meetings of the Board of Partners, unless the Board of Partners resolves otherwise in individual cases. The
members of the Board of Partners may convene a joint meeting with the Supervisory Board of Merck KGaA if so
agreed by the chairpersons of the two boards.
- 4SC AG, Martinsried (listed)
-
(a) - Merck KGaA, Darmstadt (listed)
Transporeon GmbH, Ulm (not listed)
(b) - Travel Asset Group Ltd., London, United Kingdom (Chairman)
(not listed)
(a)
-
Merck KGaA, Darmstadt (listed)
Munich, Chairman of Exyte GmbH, Stuttgart
- Gelita AG, Eberbach (Vice Chairman) (not listed)
(b)
-
Wegmann Unternehmens-Holding GmbH & Co. KG,
Fürstenfeldbruck (Chairman) (not listed)
Helga Rübsamen--Schaeff
Langenburg, Chair of the Advisory Board of AiCuris
Antiinfective Cures GmbH, Wuppertal
Michael Kleinemeier
(a) Fortas GmbH, Rösrath (Chairman) (not listed)
- Merck Healthcare KGaA (not listed)
Katharina Kraft
Mannheim, Senior Strategy Manager at BASF SE,
Ludwigshafen
Helene von Roeder
Frankfurt am Main, Member of the Executive Board
of Vonovia SE, Bochum
Daniel Thelen
Cologne, Head of Infrastructure Development for
Western Region at DB Netz AG, Frankfurt am Main
Simon Thelen
Cologne, Senior Physician at the Clinic for Trauma
and Hand Surgery, University Hospital Düsseldorf
- Kemira Oyj, Helsinki, Finland (not listed)
- KNDS NV, Amsterdam, Netherlands (not listed)
(a) - Merck KGaA, Darmstadt (listed)
-
Merck Healthcare KGaA (Chair) (not listed)
Heidelberg, Managing Director of e-mobiligence
GmbH, Heidelberg
Seven Supervisory Board members are university graduates and hold doctorates.
Moreover, the members of the Supervisory Board have a background in one or more of the following fields of
specialization: chemistry, biochemistry, pharmaceutics, mathematics, law, human medicine, business
administration and economics, physics, education, and computer sciences, among others.
The members of the Executive Board contribute knowledge of various fields including veterinary medicine,
economic sciences, medicine (pharmacology, physical education), and information technology. In addition, the
majority of members of the Executive Board hold a university degree and a doctorate from a German or foreign
university.
In order to translate the tremendous innovative potential of a science and technology company into sustainable
business success, interdisciplinary educational backgrounds are a key element of our diversity policy both for
the Executive Board and for the Supervisory Board. The current composition of both boards illustrates this
interdisciplinary aspect to a very high degree.
183
The Executive Board will have the full breadth of the sector-specific experience required when Matthias Heinzel
joins the Executive Board by April 1, 2021. Christos Ross currently reports to the Chairman of the Executive
Board as the interim head of Life Science.
To efficiently lead and manage the Group, the Executive Board must have in-depth knowledge of the key
industries and business sectors that the company operates in. In accordance with the diversity policy, there
should be at least one member of the Executive Board with in-depth expertise of Healthcare, Life Science, or
Performance Materials.
Industry experience
Corporate Governance Statement on Corporate Governance including Compensation Report
Educational background
Corporate Governance
The cooperation with the Executive Board was characterized by intensive, trustworthy exchange. During fiscal
2020, the Executive Board provided the Supervisory Board with regular written and verbal reports on the
business development of Merck KGaA and the Merck Group. In particular, the Supervisory Board was informed
about the current and potential impact of the Covid-19 pandemic, the market and sales situation of the
company against the background of macroeconomic development, and the financial position of the company
and its subsidiaries, along with their earnings development and corporate planning. Within the scope of
quarterly reporting, the sales and operating results were presented for the Merck Group as a whole, and broken
down by business sector. Aside from the Supervisory Board meetings, the Chairman of the Supervisory Board
also maintained, and continues to maintain, a regular exchange of information with the Chairman of the
Executive Board.
184
Report of the Supervisory Board
The Supervisory Board again properly executed its duties in 2020 in accordance with the law as well as the
company's Articles of Association and rules of procedure. In particular, the Supervisory Board monitored the
work of the Executive Board diligently and regularly.
Cooperation with the Executive Board
Key topics of the Supervisory Board meetings
Four Supervisory Board meetings were held in fiscal 2020. At these meetings, the Supervisory Board intensely
discussed the reports of the Executive Board as well as, together with the Executive Board, company
developments and strategic issues.
At the meeting held on February 28, 2020, the Executive Board first intensively addressed the Annual Financial
Statements and Consolidated Financial Statements for 2019, the Combined Management Report, the audit
report of the auditor on the separate non-financial (Group) report for fiscal 2019, and the proposal for the
appropriation of the net retained profit. The auditor explained the audit reports including the focus areas of the
audit. The Executive Board and the Head of Accounting reported on the financial statements and discussed the
impact of the acquisition of Versum Materials in particular. Furthermore, the Supervisory Board resolved upon
the report and the objectives of the Supervisory Board with respect to its composition and the profile of skills
and expertise, the Declaration of Conformity with the German Corporate Governance Code, and the Statement
on Corporate Governance, which simultaneously includes the joint report on Corporate Governance of the
Executive Board and Supervisory Board. The Supervisory Board also approved the proposals to be made to the
Annual General Meeting. The Executive Board reported on business performance in 2019 and presented the
plans for fiscal 2020 as well as the forecast impact of the Covid-19 pandemic on Merck's global business, which
it discussed in detail with the Supervisory Board. The Supervisory Board also took note of the written risk
report as well as the report from Group Internal Auditing for 2019. In addition, the Supervisory Board discussed
the mandatory change of auditor.
The meeting held on May 13, 2020, again focused on the Covid-19 pandemic. In particular, the Executive Board
reported on the global pandemic situation, Merck's crisis strategy (safety and business continuity) and the
impact in terms of the financial forecast, which also required the preparation of supplementary reports on the
Annual Financial Statements and Consolidated Financial Statements for fiscal 2019 and the Combined
Management Report. After intensively addressing the current and potential impact of the Covid-19 pandemic
and the supplementary reports, the Supervisory Board approved the supplementary reports and drew up the
proposed resolution to be made to the Annual General Meeting recommending the adoption of the Annual
Financial Statements (including the supplementary report). The Executive Board also discussed the current
business development in the first quarter of 2020 and provided an outlook concerning the expected business
development in 2020 as a whole. The report of the Research and Development Committee of the Board of
Partners of E. Merck KG for Life Science/Performance Materials was a further focus of the meeting. The
Corporate Governance Report of the Supervisory Board
185
Supervisory Board also discussed the Compliance and Data Protection Report for 2019. Another special topic
discussed was the organization of the Annual General Meeting on May 28, 2020, in virtual form. Finally, the
Supervisory Board dealt with the pre-selection of potential auditors in connection with the mandatory change of
auditor.
The current Executive Board fulfills both of the aforementioned objectives: All required aspects of the
competency profile are covered by at least one member of the Executive Board. Likewise, three members of the
Executive Board possess multiple years of experience working within the Merck Group prior to their
appointment to the Executive Board.
Report of the Supervisory Board
The key prerequisites for high-performance leadership teams are both the diversity of the individual
competency profiles and a balance between a Group-internal and external management perspective. Therefore,
as a whole the Executive Board must have in-depth knowledge and experience in the following key areas of
importance to the company: strategy and planning, finance and accounting, sales and operations, human
resources, and legal and compliance, as well as information technology. In addition, for the composition of the
Executive Board it is important to ensure a good balance of members from within and outside the company.
Our diversity policy seeks to derive inspiration and innovation from outside the company and to identify the
latest trends of relevance to the core businesses of the company, while ensuring sustainability and continuity in
line with our corporate culture. We have therefore set ourselves the global objective of filling two-thirds of our
leadership positions with candidates from within the company.
Corporate Governance Statement on Corporate Governance including Compensation Report
1 Each country with at least one active employee is included as a separate country.
At the meeting on July 30, 2020, the Executive Board provided an overview of the continued development of
the Covid-19 pandemic and Merck's strategies, concepts, projects, and partnerships for dealing with the
pandemic, which it discussed with the members of the Supervisory Board. The Supervisory Board elected
Sascha Held as Vice Chairman of the Supervisory Board after Michael Fletterich stepped down as a member of
the Supervisory Board and Vice Chairman during the Annual General Meeting on May 28, 2020. At the meeting,
the Supervisory Board also focused intensively on the report of the Executive Board on business performance in
the second quarter of 2020. In addition, the auditors reported on the results of their review of the half-yearly
financial report. Risk management within the company was a further topic. The Head of Risk Management
presented the status report for the first half of 2020. No risks that could threaten the continued existence of the
company were identified. Moreover, the list of permitted non-audit services was updated, and an external audit
of the non-financial declaration was resolved upon. In addition, a formal amendment to the Articles of
Association of Merck KGaA was resolved to reflect the departure of the former Executive Board member Udit
Batra. The Head of Legal informed the Supervisory Board about new legal provisions concerning transactions
with related parties and recapitulated the organization of the virtual Annual General Meeting.
181
Diversity policy pursuant to section 289f (2) No. 6 of the German Commercial
Code (HGB)
Merck is pursuing a Group-wide, global diversity program. At Merck, diversity stands for a culture of inclusion,
mutual esteem, and respect. To demonstrate this open and dynamic company culture, we promote diversity
throughout the Group - and do so at all levels, including the Executive Board and Supervisory Board.
We believe that a diverse workforce boosts the innovative strength of the Merck Group and contributes
materially to our business success. That is why we are furthering a culture of diversity independent of age,
gender, disability, ethnic or cultural background, religion, industry experience, and educational background. The
diversity policy to strategically steer the topics of diversity and inclusion at Merck thus focuses on the following
key criteria:
Gender
Management
experience
Age
Industry
knowledge
Internationality,
global mindset
Educational
background
Management experience
Our Group-wide diversity policy encompasses both voluntary as well as legally defined objectives that we
continuously and sustainably work to achieve. In this context, it should be noted that with respect to the
Executive Board of Merck KGaA, many rules can only be applied correspondingly. This is because the Executive
Board comprises personally liable general partners of Merck KGaA and is not a management board with
employed members of a corporate body (for details, please also see the "Joint Report of the Executive Board
and the Supervisory Board").
Age
Our boards are to have a balanced age structure. This permits future-oriented and consistent succession
planning and is a key element of sustainable company management and monitoring. Our diversity policy aims
for an age range of at least 10 years between the youngest and the oldest member of the respective board.
In their current composition, both boards meet this objective. The age range of the Executive Board is
11 years, while the age range of the Supervisory Board is over 30 years. In addition, maximum age limits apply
to both boards. A maximum age of 70 applies to members of the Executive Board, while the standard age limit
for Supervisory Board members is 75.
Corporate Governance Statement on Corporate Governance including Compensation Report
182
Gender
Gender diversity also plays a crucial role since it enables us to benefit from a larger talent pool, and allows us
as a company to develop a better understanding of important customer groups. We have set a global strategic
objective of maintaining the proportion of women in leadership positions (managers, experts, and project
managers in role 4 and higher) 1 at a stable level of 30% by 2021 (please also refer to the description under
"Diversity and Management").
Additionally, Merck continues to pursue representation of both genders as an objective for the Executive Board.
The Board of Partners of E. Merck KG has appointed Belén Garijo, currently the Vice Chair of the Executive
Board and Vice CEO of Merck and former CEO of Healthcare, as the new Chair of the Executive Board and CEO
of Merck effective May 1, 2021, making it the first time a woman has been appointed to these positions. The
statutory target of 30% pursuant to section 96 (2) AktG already applies to the Supervisory Board of
Merck KGaA and is currently met.
1 Merck also has employees at sites that are not fully consolidated subsidiaries. These figures refer to all people directly employed by Merck and therefore
may deviate from figures in the financial section of this report.
Internationality and global mindset
As a science and technology company with global operations and major markets on five continents with around
58,000 employees at locations in 66¹ countries, internationality and the associated global mindset is one of our
key success factors. According to our diversity policy, the Executive Board's internationality derives from
leadership experience or national origin, relative to our key sales markets or those locations that are
organizationally and culturally relevant to our employee development efforts. For both criteria, Europe, North
America, and Asia-Pacific are currently the key regions. The Executive Board meets this objective with
management experience in the named regions, e.g. in the following countries: France, Spain, the United States,
Singapore, and Malaysia. In addition, more than one-third of the Executive Board members are not German
citizens.
In addition to the aspects presented in the following, reference is made to the objectives of the Supervisory
Board with respect to its composition and the profile of skills and expertise of the Supervisory Board (see the
information on the "Objectives of the Supervisory Board with respect to its composition and profile of skills and
expertise"). The statements made there are part of the diversity policy for the Supervisory Board presented
here.
At its fourth meeting on November 11, 2020, the Supervisory Board started by discussing the current
development of the Covid-19 pandemic and the report of the Executive Board on the third quarter of 2020.
Additional topics focused on by the meeting were the 2020 status reports of Group Internal Auditing, status
reports on compliance and data protection, and the report of the Research and Development Committee for
Healthcare. Merck KGaA's transactions with related parties within the meaning of section 111a et seq. of the
German Stock Corporation Act (AktG) were also presented and discussed by the Supervisory Board. A
procedure was established to regularly assess whether the conditions of section 111a (2) sentence 1 AktG have
been met for such transactions. There were no transactions requiring the approval of the Supervisory Board in
accordance with section 111b (1) AktG. Furthermore, the Group Executive Conference and the status of the
mandatory change of auditor were discussed. A resolution on preparing for the mandatory change of auditor for
Merck KGaA for the fiscal 2023 audit was adopted. In addition, a transformation project in the Healthcare
business sector was discussed. Finally, the results of the self-assessment of the Supervisory Board were
presented by the Head of Legal and discussed by the Supervisory Board.
The Supervisory Board shall have at least four members with in-depth knowledge of and experience in fields
that are important to the company, including at least one expert for the Healthcare and Life Science/
Performance Materials sectors, respectively. This requirement is met at the present time. At present, the
Supervisory Board has more than four members who have in-depth knowledge of and experience in the
Healthcare and Life Science/Performance Materials business sectors. More than four Supervisory Board
members also have executive experience in companies that also or specifically operate in the Healthcare and/or
Life Science/Performance Materials business sectors.
Annual Financial Statements
189
Objectives of the Supervisory Board with respect to its composition
According to recommendation C. I of the German Corporate Governance Code in the version dated December
16, 2019, the Supervisory Board specified the following objectives regarding its composition, and reports below
on their status of implementation.
Internationality
The Supervisory Board shall have at least three members with business experience in the main sales markets of
Merck KGaA. Currently, the main sales markets of Merck KGaA are Europe, America, and Asia-Pacific. The
present composition of the Supervisory Board satisfies this objective. More than three Supervisory Board
members have entrepreneurial experience in a wide range of European countries. More than three Supervisory
Board members have experience in management positions in companies that operate globally.
Women on the Supervisory Board
Six women are currently members of the Supervisory Board of Merck KGaA. Accordingly, women make up
37.5% of the Supervisory Board. When nominating candidates for election to the Supervisory Board or making
proposals for delegations, the Supervisory Board shall examine whether the percentage of women can be
increased by suitable candidates. The Supervisory Board considers the 37.5% share of female members to be
satisfactory at the present time. This is due to the percentage of women in leadership positions at Merck and in
consideration of the composition of the supervisory boards of other companies of comparable size.
Independence
The Supervisory Board shall have an appropriate number of independent shareholder representatives as
members. In any case, at least five of the shareholder representatives on the Supervisory Board shall be
independent. According to the Articles of Association of Merck KGaA, six members representing the
shareholders are to be elected by the General Meeting, and two members are to be delegated. Taking this and
the special ownership structure of Merck KGaA into account, the shareholder representatives consider five
shareholder representatives to be an appropriate number of independent members. In the opinion of the
shareholder representatives, the objectives concerning independent members are met at the present time. The
shareholder representatives consider the following members to be independent: Wolfgang Büchele, Michael
Kleinemeier, Renate Koehler, Peter Emanuel Merck, Helene von Roeder, Helga Rübsamen-Schaeff, Daniel
Thelen, and Simon Thelen. In particular, the shareholder representatives do not believe that membership of the
Board of Partners of E. Merck KG conflicts with independence. The Board of Partners exists complementary to
the competencies and the activities of the Supervisory Board. It is not to be expected that this will lead to
material and not merely temporary conflicts of interest. It should also be taken into account that due to its
substantial capital investment and unlimited personal liability, E. Merck KG has a strong interest in the
businesses of Merck KGaA operating efficiently and in compliance with procedures, counteracting from the
outset conflicts of interest between E. Merck KG and Merck KGaA and thus also corresponding conflicts of
interest between the members of the respective corporate boards.
No material conflicts of interest
Moreover, no one shall be proposed for election to the Supervisory Board who simultaneously serves on a board
of or advises a major competitor of the company, or who, owing to another function, such as advisor to major
contract partners of the company, could potentially become involved in a conflict of interest. No Supervisory
Board member serves on a board of or advises a major competitor. No Supervisory Board member performs a
function that could lead to a lasting conflict of interest.
Corporate Governance
Objectives of the Supervisory Board with respect to its Composition and Profile of Skills and Expertise 190
Age limit
As a rule, the members of the Supervisory Board shall not exceed the age of 75. This objective is met at the
present time.
Regular limit on the length of Supervisory Board membership
The objective of the Supervisory Board regarding its composition is that, as a rule, all members belong to the
board for an uninterrupted period of no more than 15 years (corresponding to three regular terms of office).
This objective is also met at the present time. The length of membership of the Supervisory Board members is
set out in the Statement on Corporate Governance in the "Procedures of the Executive Board, Supervisory
Board, Board of Partners, and its Committees" section.
Profile of skills and expertise
Additionally, in accordance with recommendation C. I of the German Corporate Governance Code in the version
dated December 16, 2019, the Supervisory Board has prepared a profile of skills and expertise and reports on
the status of implementation below.
In-depth knowledge of the fields relevant to the company
Management experience
Knowledge of business administration
The Supervisory Board must have at least four members who have in-depth knowledge of business
administration and at least one member who has professional expertise in accounting or auditing. This
requirement is met at the present time.
Experience in other supervisory or control bodies
Lastly, the Supervisory Board shall have at least four members who have experience as members of other
supervisory or control bodies (whereby possible membership of the Board of Partners of E. Merck KG is not
taken into account). This requirement is also met at the present time.
Corporate Governance Objectives of the Supervisory Board with respect to its Composition and Profile of Skills and Expertise
In parts of its meetings, the Supervisory Board regularly meets without the members of the Executive Board
being present.
For the Supervisory Board of Merck KGaA, professional qualifications and personal expertise are the two most
important prerequisites for appointments to seats on the Supervisory Board. When proposing Supervisory
Board candidates for election or delegation, the Supervisory Board will always give top priority to these
prerequisites, which are essential for fulfilling its legal duties. Overall, the Supervisory Board's policy is to
optimally meet its monitoring and advisory duties by having diversity among its members. Diversity includes, in
particular, internationality as well as different experience backgrounds and career paths. The proportion of
women on the Supervisory Board is also considered to be an aspect of diversity. When preparing proposals for
election or delegation to the Supervisory Board, the Supervisory Board shall consider in each case to what
extent different, complementary specialist skills; professional and life experience; and an appropriate
representation of both genders benefit the work of the Supervisory Board. Additionally, the Supervisory Board
shall support the Executive Board in its efforts to increase diversity within the company.
General notes on the composition of the Supervisory Board
The Annual Financial Statements of Merck KGaA, the Consolidated Financial Statements of the Merck Group,
and the Combined Management Report for Merck KGaA and the Merck Group, including the accounts, were
audited by KPMG AG Wirtschaftsprüfungsgesellschaft, Berlin.
The auditors issued an unqualified audit opinion on the Annual Financial Statements of Merck KGaA in
accordance with German Auditing Standards.
For the Consolidated Financial Statements prepared in accordance with International Financial Reporting
Standards and for the Combined Management Report, the auditors issued the unqualified auditor's report
reproduced in the Annual Report of the Merck Group.
Corporate Governance Report of the Supervisory Board
186
In addition, the auditor audited the calculation of Merck KGaA's participation in the profit of E. Merck KG in
accordance with article 27 (2) of the Articles of Association, as well as the separate combined non-financial
(Group) report. The annual financial statements of Merck KGaA, the Consolidated Financial Statements of the
Merck Group, the Combined Management Report for Merck KGaA and the Merck Group, the proposal of the
Executive Board for the appropriation of net retained profit, and the separate combined non-financial (Group)
report were submitted to the Supervisory Board together with the auditor's report.
In accordance with article 14 (2) of the Articles of Association, the Supervisory Board also examined the Annual
Financial Statements of Merck KGaA, the proposal for the appropriation of net retained profit, and the auditor's
report presented in accordance with article 27 (2) of the Articles of Association. It also examined the
Consolidated Financial Statements of the Merck Group as well as the Combined Management Report for Merck
KGaA and the Merck Group, and took note of the auditor's report of KPMG AG Wirtschaftsprüfungsgesellschaft,
Berlin. It focused particularly on the key audit matters of particular importance in the audit opinion, on the
resulting risks for the financial statements, the approach adopted during the audit as described, and the
conclusions drawn by the auditor. Furthermore, the Supervisory Board also examined the separate combined
non-financial (Group) report and the memorandum on a limited assurance engagement prepared by the auditor
on behalf of the Supervisory Board. The discussion of the relevant agenda item at the Supervisory Board's
meeting on February 26, 2021, to approve the financial statements was also attended by the auditors who sign
the audit opinion on the Annual Financial Statements of Merck KGaA and the Consolidated Financial Statements
of the Merck Group as well as the separate combined non-financial (Group) report. The auditors also reported
on their audit at this meeting. The Supervisory Board took note of and approved the results of the audit. On
completion of its examination, the Supervisory Board raised no objections and thus approved the Annual
Financial Statements for Merck KGaA, the Consolidated Financial Statements of the Merck Group, the Combined
Management Report of Merck KGaA and the Merck Group prepared by the Executive Board, the report
presented by the auditor in accordance with article 27 (2) of the Articles of Association, and the separate non-
financial (Group) report. The Supervisory Board gave its consent to the proposal of the Executive Board for the
appropriation of net retained profit after conducting its own review.
Corporate governance and Declaration of Conformity
Corporate governance is a topic of high priority for the Supervisory Board. In its own estimation, the
Supervisory Board has an adequate number of independent members. There were no conflicts of interest, as
defined by the German Corporate Governance Code, involving Supervisory Board members during the year
under review. In fiscal 2020, the Chairman of the Supervisory Board was prepared to hold talks with investors
on topics pertaining to the Supervisory Board as appropriate, and remains willing to do so. In fiscal 2020, the
Chairman of the Supervisory Board conducted an investor discussion with the shareholders' association
Deutsche Schutzvereinigung für Wertpapierbesitz (DWS) on the nomination of new candidates for the
Supervisory Board. No other discussions were requested by investors. Following the most recent self-
assessment in fiscal 2020, the next self-assessment of the Supervisory Board is scheduled to take place in fiscal
2022.
After discussing corporate governance issues in detail, the Executive Board (on February 16, 2021) and the
Supervisory Board (on February 26, 2021) adopted the updated Declaration of Conformity and issued it jointly
on February 26, 2021, in accordance with section 161 AktG. The statement is permanently available on the
website of Merck KGaA (www.merckgroup.com/en/investors/corporate-governance/reports.html).
More information about corporate governance at Merck KGaA, including the compensation of the Executive
Board and Supervisory Board, is given in the Statement on Corporate Governance of the Annual Report.
Corporate Governance
Report of the Supervisory Board
The Supervisory Board of Merck KGaA currently comprises 16 members, eight of whom represent the
shareholders and a further eight who represent the employees. The eight employee representative members
are elected by employee delegates pursuant to the provisions of the German Co-determination Act
(Mitbestimmungsgesetz, MitbestG). These consist of six company employees, including a senior executive, as
well as two union representatives. The Supervisory Board has no statutory proposal right with respect to
electing the delegates or employee representatives. Two of the eight shareholder representatives are specified
by a delegation right of E. Merck Beteiligungen KG. The Supervisory Board likewise has no statutory proposal
right with respect to exercising this delegation right. The other six shareholder representatives are elected by
the General Meeting. In accordance with section 124 (3) sentence 1 AktG, the Supervisory Board shall propose
to the General Meeting Supervisory Board members for election. These proposals require a majority of the
votes of the shareholder representative members of the Supervisory Board. The next scheduled election to the
Supervisory Board shall take place at the 2024 Annual General Meeting. The General Meeting is not required to
follow the election proposals. The appointment objectives and competency requirements that the Supervisory
Board sets forth below therefore do not represent requirements to be met by those eligible to elect or to
delegate members. Instead, they are intended to express the objectives pursued by the Supervisory Board in
office with regard to its advisory and monitoring functions.
187
Apart from the Nomination Committee, the Supervisory Board of Merck KGaA currently has no further
committees on account of the special features that apply to the Supervisory Board of a corporation with general
partners (KGaA) under German company law, and because a corresponding need for this has not emerged to
date. In the coming fiscal year, the Supervisory Board will address the formation of an Audit Committee at
Supervisory Board level. The members of the Nomination Committee did not convene in fiscal 2020. No report
is required on the work of other committees.
Personnel matters
All the Supervisory Board meetings were attended by all Supervisory Board members. The composition of the
Supervisory Board changed as follows in 2020: Michael Fletterich stepped down as a member of the
Supervisory Board during the Annual General Meeting on May 28, 2020, and was replaced by Alexander Putz as
a substitute employee representative. Mr. Putz was inducted by Merck KGaA with onboarding activities and
continuing education on topics such as corporate governance, the internal organization, and applicable
regulations and legal requirements. The members of the Supervisory Board are responsible for undertaking the
training and continuing education required for their tasks, such as on changes in the legal framework, with
regular support from the company.
Darmstadt, February 26, 2021
The Supervisory Board of Merck KGaA
Wolfgang Büchele
Chairman
Corporate Governance Objectives of the Supervisory Board with respect to its Composition and Profile of Skills and Expertise
188
Objectives of the Supervisory
Board with respect to its
Composition and Profile of
Skills and Expertise
Initial situation
According to recommendation C. I of the German Corporate Governance Code in the version dated December
16, 2019, the Supervisory Board shall specify concrete objectives regarding its composition as well as prepare a
profile of skills and expertise for the entire board. In its composition the Supervisory Board shall take into
account the number of independent members, consider the principle of diversity, specify an age limit, and
disclose the term of Supervisory Board membership.
Committees
The Supervisory Board shall have at least three members who have experience in managing or supervising a
medium- or large-sized company. The Supervisory Board has more than three members who have the
corresponding experience. They include Supervisory Board members who were or still are members of the
management or executive board at relevant companies, as well as Supervisory Board members who have
gained experience in supervisory bodies of German or foreign companies of this size.
1.40
28.8%
1.30
€
€
140.35
109.75
Share price low
Year-end share price
• We donated units of our drug RebifⓇ to the World Health Organization (WHO), the French Institute for
Health and Medical Research (INSERM) and the U.S. National Institute of Allergy and Infectious
Diseases (NIAID) for investigation in Covid-19 clinical trials.2
• Our Life Science products and services are supporting pharma and biotech companies in the
development of Covid-19 vaccines and treatments, including more than 50 potential Covid-19
vaccines, more than 35 solutions for testing, and more than 20 monoclonal antibodies, plasma
products, and antiviral drugs.
15
Merck
Combined Management Report Fundamental Information about the Group
The contents of this chapter or section are voluntary and therefore not audited. However, our auditor has read the text critically.
*
1 Merck also has employees at sites that are not fully consolidated subsidiaries. These figures refer to all people directly employed by Merck and
therefore may deviate from figures in the financial section of this report.
We are part of the European CARE (Corona Accelerated R&D in Europe) consortium, which aims to
accelerate the discovery and development of urgently needed medicines to treat SARS-CoV2, the virus
that causes Covid-19.
• We are collaborating with other healthcare and life sciences companies as well as the Bill & Melinda
Gates Foundation to accelerate the development, manufacture, and delivery of vaccines, diagnostics,
and treatments for Covid-19 and to enhance access for everyone around the world.
•
As a science and technology company, we are convinced that we can help to combat the global challenges
resulting from Covid-19. Our top priority is ensuring the health and safety of our employees and their families
and continuing our business activities for the benefit of the many patients, scientists, and customers who
depend on us. In specific terms, our commitment takes various forms:
Our contributions to combating Covid-19*
Apart from our three business sectors, our financial reporting presents five regions: Europe, North America,
Asia-Pacific, Latin America, and the Middle East & Africa. As of December 31, 2020, we had 58,127 employees
worldwide¹. This compares with 57,071 employees as of December 31, 2019.
We hold the global rights to the Merck name and brand. The only exceptions are Canada and the United States.
In these countries, we operate as EMD Serono in the biopharmaceutical business, as MilliporeSigma in the life
science business, and as EMD Performance Materials in the high-tech materials business.
Everything we do is fueled by a belief in science and technology as a force for good - a belief that has driven
our work since 1668, and will continue to inspire us to find more joyful and sustainable ways to live. We are
curious minds dedicated to human progress.
In the Healthcare business sector, we accompany people in every phase of their life and help them to shape,
improve, and prolong it. We enable personalized treatments for serious illnesses and help many couples to
realize their wish to have children. The digital platform and the products and services in our Life Science
business sector make precision research simpler and help to speed up scientific breakthroughs. They enable
quicker access to healthcare and ensure that analyses are accurate and medications are trustworthy. The
developments we make in our Performance Materials business sector sit inside the technologies that are
changing the way we use information and shaping our future. They make mobility safer, houses and devices
more intelligent, and technologies more sustainable.
We are Merck, a vibrant science and technology company. Science is at the heart of everything we do. It drives
the discoveries we make and the technologies we create. We make a positive difference in the lives of millions
of people every day.
Merck
Fundamental Information about
the Group
14
14
Merck
Share price high
Combined Management Report Fundamental Information about the Group
Dividend²
2020
-10%
-20%
-30%
-40%
• Merck
DAX®
11
• MSCI European Pharma Index
• Dow Jones European Chemical Index
Jan.
Feb.
Mar
Apr.
May
June
July
Aug.
Sept.
Oct.
Nov.
Dec.
Merck shares
Key share price data¹
33.22%
8.21%
3.55%
-7.76%
2019
0%
For reasons of better readability, we do not use gender-specific formulations in this annual report. The chosen male form represents all genders.
The Statement of Corporate Governance according to section 15d HGB in conjunction with section 289f (1) sentence 2 HGB is available at
https://www.merckgroup.com/en/investors/corporate-governance/reports.
50
Sustainability
41
Internal Management System
35
Strategy
26
14 Merck
Fundamental Information about the Group
14
MANAGEMENT REPORT*
COMBINED
GARP (Growth At
Reasonable Price)
20%
33%
Growth
1%
Others
Source: Nasdaq Shareholder Identification
19%
Value
21%
Index
6%
Hedge
Identified investors by type as of November 2020
United Kingdom
Source: Nasdaq Shareholder Identification; Total Shares Outstanding: 129.2 million
12.2%
United States
Research and Development
The separate, combined non-financial (Group) report of Merck KGaA, which we issue pursuant to sections 289b-289e and 315b-315c HGB, is available as an
online version on our website as of April 13, 2021 at www.merckgroup.com/en/sustainability-report/2020/. It is integrated into the 2020 Sustainability Report.
We have compiled an overview of the information contained in the combined non-financial (Group) declaration at https://www.merckgroup.com/nfr20.
67 People at Merck
Macroeconomic and Sector-Specific Environment
The figures presented in this combined management report have been rounded. This may lead to individual values not adding up to the totals presented.
This combined management report contains certain financial indicators such as operating result (EBIT), EBITDA, EBITDA pre, business free cash flow (BFCF),
free cash flow, net financial debt and earnings per share pre, which are not defined by International Financial Reporting Standards (IFRS). These financial
indicators should not be taken into account in order to assess the performance of Merck in isolation or used as an alternative to the financial indicators
presented in the consolidated financial statements and determined in accordance with IFRSS.
* The management report of Merck KGaA has been combined with the Group management report and published in the 2020 Merck Annual Report as well as in
the annual financial statements of Merck KGaA. The 2020 Annual Report is an additional, non-official publication, which does comply with the requirements of
the European Single Electronic Format (ESEF). The official annual financial report for fiscal 2020, prepared in accordance with the ESEF format, has been filed
with the electronic German Federal Gazette (elektronischer Bundesanzeiger) and is available on the website of the German company register.
with the German Commercial Code (HGB)
Additional Information on Merck KGaA in accordance
Report in accordance with Section 315a (1)
of the German Commercial Code (HGB)
138
135
130 Report on Expected Developments
113 Report on Risks and Opportunities
112 Corporate and Other
Performance Materials
108
Life Science
104
Healthcare
98
Merck Group
88
88
80
76
76
Course of Business and Economic Position
Review of Forecast against Actual Business Developments
Report on Economic Position
10%
20%
30%
Rest of World
12
12
The contents of this chapter or section are voluntary and therefore not audited. However, our auditor has read the text critically.
*
In addition, we are tapping into our existing collaborations to support projects that target Covid-19 vaccine and
therapy development. As part of our collaborations with Oxford University in the United Kingdom and Baylor
College of Medicine in Houston, Texas, USA, we supported the process development, manufacturing, and scale
up of their respective Covid-19 vaccines candidates. In May, we began a new collaboration with the
Massachusetts Institute of Technology's (MIT) Center for Collective Intelligence and Community Biotechnology
Initiative focused on driving innovative pandemic response efforts, which included the release of a new report
detailing potential paths to solutions to combat Covid-19 and future pandemics. Additionally, in October, we
announced our collaboration with Mammoth Biosciences Inc., of South San Francisco, California, USA, for the
development, scale-up, and commercial production of their CRISPR-based SARS-CoV-2 diagnostic test.
The Life Science business sector is responding to the Covid-19 pandemic with products and solutions that
empower scientists to detect and characterize viruses and to develop vaccines and therapies. We support more
than 35 testing solutions, 50 vaccines, and 20 therapeutic Covid-19 programs for our customers across the
globe. Our e-commerce platform, www.sigmaaldrich.com, continues to grow and connect customers globally
with the products needed to advance their research, development, and production efforts, and our newly
consolidated offering of relevant Covid-19 products, services, and necessary raw materials allows scientists and
researchers to detect and characterize viruses and to develop vaccines and therapies.
Our Response to Covid-19*
In 2020, the Life Science business sector generated 43% of Group sales as well as 42% of EBITDA pre
(excluding Corporate and Other).
Our strategy includes strengthening our core business by expanding our leading positions and capabilities as
well as establishing new pillars of growth in scientific areas including gene editing, cell and gene therapies,
contract development and manufacturing services, and digitization. The Life Science business sector is a top-
three player by revenue in the global life science market, with leading positions across many of our portfolios.
Our complete portfolio comprises more than 300,000 products, ranging from lab water systems to genome-
editing tools, antibodies, and cell lines, as well as end-to-end bioprocessing systems to support the
manufacturing needs of both emerging biotech and large pharma companies. We have and will continue to play
a critical role in aiding the ongoing response to the Covid-19 pandemic, supporting our customers working on
combatting the novel virus through our products, services, and expertise.
Our purpose is to solve the toughest challenges in the life science industry in collaboration with the global
scientific community. With our Research Solutions, Process Solutions, and Applied Solutions business units, we
are a leading worldwide supplier of tools, high-grade chemicals, and equipment for academic labs, biotech, and
biopharmaceutical manufacturers, as well as the industrial sector. Research Solutions provides our academic
customers with the chemicals and biological tools needed to make scientific discovery easier and faster. Process
Solutions provides drug manufacturers with process development expertise and technologies, such as
continuous bioprocessing. Applied Solutions offers analytical workflows and both lab connectivity and
digitization solutions to empower the labs of the future.
Life Science
20
20
Merck
Combined Management Report Fundamental Information about the Group
The contents of this chapter or section are voluntary and therefore not audited. However, our auditor has read the text critically.
*
On February 19, 2020, Merck signed an agreement to sell its allergy business Allergopharma to Dermapharm
Beteiligungs GmbH, Grünwald, Germany. The transaction was completed effective March 31, 2020, following
regulatory approval and satisfaction of other customary closing conditions. Only the transfer of the business in
China, which is to be considered immaterial, was completed on August 31, 2020. Allergopharma is a leading
provider of specific immunotherapies for type 1 allergies. In addition to the Allergopharma business in Europe
and Asia with its broad portfolio of therapeutic and diagnostic products, the transaction includes the production
site in Reinbek near Hamburg. An existing adrenaline autoinjector development project for the treatment of
anaphylactic reactions was not part of the transaction and remained with Merck.
Divestment of the allergy business Allergopharma*
Right from the start of the Covid-19 pandemic and all throughout 2020, we have been continuously making
every effort to proactively handle the situation and minimize the impact of the pandemic on the supply of our
medicines locally and globally through three main levers: the thorough implementation of our business
continuity plans across our network, the active management of our stocks, and the assessment of alternative
transportation routes to reach our customers and patients. As we continue to navigate the Covid-19 pandemic,
we are thinking about the most vulnerable people with chronic diseases such as diabetes and cardiovascular
diseases. Through our collaboration with the nonprofit organization Direct Relief, we provided over 8.3 million
tablets of Glucophage® (metformin) and GlucovanceⓇ (glibenclamide/metformin), 5.5 million tablets of ConcorⓇ
(bisoprolol) and Concor Plus® (bisoprolol/hydrochlorothiazide), and over 2.7 million tablets to people affected
by poverty or emergency situations. Direct Relief has estimated that our donation has helped more than 32,000
patients in crisis areas.
Further contributions against Covid-19 *
In endocrinology, we differentiate ourselves from competitors through leadership in the e-health space, both by
building evidence and by leveraging the meaningful use of technology to provide breakthrough solutions for
patient engagement, partnership with healthcare practitioners and better payer value proposition.
such as injection times, dates, and doses to the web-based software system Easypod® Connect, making it
easier for healthcare practitioners and patients to manage adherence and reach their treatment goals. Since
2019, Aluetta® (the new SaizenⓇ pen) has been rolled out to select markets with the objective of expanding the
reach of SaizenⓇ, offering additional options for healthcare practitioners and patients and expanding our devices
portfolio.
19
4.6%
Merck
Undisclosed
20.5%
€
81.26
86.46
€
140.35
105.35
Daily average number of Merck shares traded³
Number
566,911
504,934
Market capitalization (at year-end)
€ million
61,021
45,804
Market value of authorized shares 5 (at year-end)
€ million
18,139
13,616
1 Share price-relevant figures relate to the closing price in Xetra® trading on the Frankfurt Stock Exchange.
2 2020 dividend subject to approval by the Annual General Meeting.
3 Based on the floor trading systems of all German exchanges and the regulated market on Xetra®.
4 Based on the theoretical number of shares (434.8 million).
5 Based on the number of shares in free float (129.2 million). Source: Bloomberg, Thomson Reuters.
Merck Shares
Identified investors by region as of November 2020
10.8%
Germany
German Retail/
Combined Management Report Fundamental Information about the Group
The contents of this chapter or section are voluntary and therefore not audited. However, our auditor has read the text critically.
*
update for women living with MS who wish to start or expand their family, not having to choose between
treating their disease or becoming pregnant.
16
16
Merck
Combined Management Report Fundamental Information about the Group
The contents of this chapter or section are voluntary and therefore not audited. However, our auditor has read the text critically.
*
To date, RebifⓇ is not approved by any regulatory authority for the treatment of Covid-19 or for use as an antiviral agent.
2
MavencladⓇ (cladribine tablets) is now approved in more than 80 countries worldwide, including those of the
European Union, United States, Australia, Canada, and Switzerland. We view MavencladⓇ as a complementary
oral treatment option in our MS product portfolio. Rebif® (interferon beta-1a), a disease-modifying drug used to
treat relapsing forms of MS (RMS), is and remains a well-established therapy. RebifⓇ has been a standard
treatment in RMS for more than 20 years, and has more than 1.6 million patient-years of therapy since
approval. Following the European Union approval of the Rebif® label update last year, making it a treatment
option for RMS that may be continued into pregnancy if clinically needed and while breastfeeding, the U.S. Food
and Drug Administration (FDA) followed in May of this year by approving the inclusion of new safety data on
pregnancy and breastfeeding in the prescribing information for Rebif® in the United States. This is an important
Neurology & Immunology*
In 2020, Healthcare generated 38% of Group sales and 40% of EBITDA pre (excluding Corporate and Other).
Europe and North America generated 55% of Healthcare's net sales in 2020. In recent years, we have steadily
expanded our presence in growth markets. In 2020, Asia-Pacific and Latin America accounted for 38% of sales.
Healthcare discovers, develops, manufactures, and markets innovative pharmaceutical and biological
prescription drugs to treat cancer, multiple sclerosis (MS), infertility, growth disorders, and certain
cardiovascular and metabolic diseases. Healthcare operates in four franchises: Neurology and Immunology,
Oncology, Fertility, and General Medicine & Endocrinology. Our R&D pipeline positions us with a clear focus on
becoming a global specialty innovator in oncology, immuno-oncology, neurology, and immunology.
Healthcare
https://www.merckgroup.com/en/company/press/press-kits/corona-pandemic.html.
You can find more information on our contribution to combating the global challenges resulting from Covid-19
in the following sections on the business sectors and on our website:
• Above and beyond this, we are supporting many who are doing great things in the fight against the
pandemic with donations in-kind and financial donations. To that end, we approved more than € 8
million in Covid-19-related donations in 2020, including two million FFP2 respiratory masks and more
than 240,000 liters of disinfectant, among other things.
• We are particularly proud of the exceptional performance of our employees during these pandemic
times. Thanks to their contribution, we succeeded in staying on course and achieving good results in
2020. To honor this contribution, around 46,000 Merck employees worldwide received a one-time
bonus payment.
• We are producing electronic materials that allow the global scientific community to interact intensively
and share the results of their important work, among other things.
• We are conducting a Phase II study to evaluate the safety and efficacy of M5049 in patients with
Covid-19 pneumonia. The aim of the study is to investigate if M5049 may prevent or ameliorate the
hyper-inflammatory response in these patients and prevent progression to 'cytokine storm'.
To our Shareholders
Merck Shares
Merck shares
Share price development from January 1, 2020, to December 31, 2020, in %
40%
RebifⓇ has also played an important role in our company support to fight the Covid-19 pandemic, which
includes in-kind contributions, product donations, resources, and expertise in consortia and partnerships aimed
at fighting the pandemic. As part of the global effort to investigate potential Covid-19 therapeutics and our
support of independent research, we worked with the World Health Organization (WHO) and INSERM (the
French National Institute of Health) on a donation of up to 300,000 units Rebif® (interferon beta-1a) for their
important global Covid-19 clinical trials known as SOLIDARITY and DISCOVERY, respectively. This donation was
followed by a collaboration with the US National Institute of Allergy and Infectious Diseases (NIAID), part of the
U.S. National Institutes of Health (NIH) with a contribution of 3,000 units of Rebif® for the Adaptive Covid-19
Treatment Trial 3 (ACTT 3), which is currently enrolling hospitalized adults with Covid-19 in the United States
and in other countries. The NIAID-led study is evaluating treatment with Rebif® in combination with remdesivir,
compared with remdesivir alone, in over 1,000 hospitalized adults diagnosed with Covid-19 and will evaluate
time to recovery in the combination therapy group relative to the remdesivir-only group.
Generating data around our MS treatments and the risk of respiratory viral infections has been important to
help support clinicians as they make treatment decisions for their patients living with MS. At MSVirtual2020:
8th Joint ACTRIMS-ECTRIMS Meeting, which took place virtually from September 11-13, we presented a total of
54 abstracts across our MS portfolio, including data providing insights on how Mavenclad® and RebifⓇ do not
affect the risk of respiratory viral infections and Covid-19 outcomes in MS patients. We also presented data
demonstrating investigational treatment evobrutinib is the first and only Bruton's tyrosine kinase inhibitor
(BTKI) to demonstrate high and sustained efficacy through 108 weeks in clinical studies (for further details see
"Research & Development").
Oncology & Immuno-Oncology*
Erbitux® (cetuximab) is the third best-selling drug in terms of revenue in the portfolio of our Biopharma
business and is our flagship product in oncology. Treating more than 1 million patients since authorization, the
product is a standard of care for patients with epidermal growth factor receptor (EGFR)-expressing, RAS
wildtype metastatic colorectal cancer (mCRC), as well as both recurrent and/or metastatic and locally advanced
squamous cell carcinoma of the head and neck (SCCHN). During the last year, encorafenib in combination with
cetuximab has received regulatory approval in several markets worldwide for mCRC BRAF mutant patients. In
December, ErbituxⓇ was once again officially included in the China National Drug Reimbursement List (NDRL)
for the treatment of RAS wild-type mCRC. This achievement will enable more patients with mCRC in need of
innovative targeted therapies to benefit from the use of ErbituxⓇ.
SaizenⓇ, with its active ingredient somatropin, is our main endocrinology product and is indicated for the
treatment of growth hormone deficiency in children and adults. SaizenⓇ can be delivered with the EasypodⓇ
electromechanical injection device, the only growth hormone injection device able to wirelessly transfer data
We help to raise awareness and education in the areas we operate in, such as thyroid diseases and diabetes.
This is well demonstrated by our active role in International Thyroid Awareness Week and our partnership with
the International Diabetes Federation (IDF), which serves as a basis for implementation of education and
communication activities that emphasize the importance of type 2 diabetes prevention.
ConcorⓇ/Concor Cor®, containing bisoprolol, is the leading beta-blocker worldwide in volume shares for treating
hypertension and cardiovascular diseases such as coronary heart diseases and chronic heart failure. In addition
to the plain preparations, the ConcorⓇ family offers fixed-dose combinations such as Concor PlusⓇ/Lodoz®
(bisoprolol with hydrochlorothiazide) and Concor AM® (bisoprolol with amlodipine). Euthyrox®, with the active
ingredient levothyroxine, is the worldwide market leader with a market share of 39% in volume for the
treatment of hypothyroidism, a disease with high prevalence but still low diagnosis rates in most emerging
markets. GlucophageⓇ, containing the active ingredient metformin, is the drug of choice for first-line treatment
of type 2 diabetes. During 2020, multiple health authorities worldwide continued to approve GlucophageⓇ in
prediabetes when intensive lifestyle changes have failed. This indication for GlucophageⓇ is now registered in
64 countries. Overall, considering the high prevalence of prediabetes and diabetes, we continue seeing great
potential for GlucophageⓇ.
Every day, more than 80 million patients around the world use our trusted general medicine and endocrinology
(GM&E) medications. ConcorⓇ, Euthyrox®, Glucophage®, and SaizenⓇ are highly valued brands and market
leaders in many key markets worldwide. As a result, GM&E is the largest business franchise of the Healthcare
business sector in terms of sales, with strong growth in all major therapeutic areas of focus, contributing
significantly to the overall profitability of Healthcare and Merck. Although no longer patent-protected, the brand
equity of our products, built up over decades, makes them cornerstones for the treatment of chronic
cardiovascular, metabolic, and endocrine diseases.
General Medicine & Endocrinology*
On the occasion of the annual meeting of the European Society of Human Reproduction and Embryology
(ESHRE), we launched the Merck Digital Congress Center (DCC). Merck DCC provides opportunities to leverage
the interaction in a digital way and to reach the customers, especially during pandemic times. Merck DCC allows
digital means for collaboration, bringing together internal and external expertise.
The PergoverisⓇ Pen is the first product with a combination of recombinant follicle-stimulating hormone (FSH)
and recombinant luteinizing hormone (LH) in a ready-to-use liquid version, eliminating the need for mixing. It
thus provides an improved and convenient treatment option for women with severe deficiency of both FSH and
LH. Launches around the globe will continue in order to provide patients with access to this therapeutic.
To date, an estimated 4 million babies have been born with the help of our fertility portfolio. Being the global
market leader in fertility drugs and treatments, with a unique and broad portfolio from therapeutics to lab
technologies, our Fertility franchise is an important growth driver for our Biopharma business. Infertility
represents an increasing challenge globally due to demographic changes and growing lifestyle adjustments like
delayed childbearing. In this highly specialized market, we enable treatment individualization including digital
health solutions and technologies in assisted reproductive technologies (ART) for patient convenience. With our
current portfolio, we are well equipped to be the Fertility partner of choice for our customers and to further
improve ART through innovative solutions across therapeutics, lab technologies, services, and digital health
solutions.
Fertility*
Merck
Combined Management Report Fundamental Information about the Group
18
Europe (ex-Germany/UK)
Our broad portfolio of small-molecule DNA Damage Response (DDR) inhibitors represents multiple development
paths as monotherapies or in combination with immunotherapy, chemotherapy, or radiotherapy (for further
details see "Research & Development").
In February 2019, Merck entered a global strategic alliance with GlaxoSmithKline (GSK) to jointly develop and
commercialize the investigational bifunctional fusion protein, bintrafusp alfa (M7824), discovered as a result of
our own research. Bintrafusp alfa is a potential first-in-class investigational bifunctional fusion protein designed
to simultaneously block two immunosuppressive pathways, TGF-ẞ and PD-L1, within the tumor
microenvironment. This bifunctional approach is thought to control tumor growth by potentially restoring and
enhancing anti-tumor responses. In preclinical studies, bintrafusp alfa has demonstrated antitumor activity both
as monotherapy and in combination with chemotherapy. Based on its mechanism of action, bintrafusp alfa
offers a potential targeted approach to addressing the underlying pathophysiology of difficult-to-treat cancers
(for further details see "Research & Development").
On August 25, 2020, the U.S. FDA accepted and granted Priority Review to our New Drug Application for once-
daily, orally dosed tepotinib for the treatment of patients with metastatic NSCLC whose tumors have a mutation
that leads to mesenchymal-epithelial transition exon 14 (METex14) skipping. Tepotinib was granted
Breakthrough Therapy Designation by the FDA in September 2019. On November 26, 2020, the EMA validated
our tepotinib application for the treatment of advanced NSCLC with METex14 skipping alterations. On
February 3, 2021, we announced that the FDA has approved Tepmetko® (tepotinib) following Priority Review for
the treatment of adult patients with metastatic NSCLC harboring mesenchymal-epithelial transition (MET) exon
14 skipping alterations.
On March 25, tepotinib was approved in Japan for the treatment of patients with unresectable, advanced or
recurrent non-small cell lung cancer (NSCLC) with METex14 skipping alterations. The treatment, known as
TepmetkoⓇ in Japan, was the first oral MET inhibitor to have received a regulatory approval for NSCLC
with MET gene alterations.
23.1%
112
17
Merck
Combined Management Report Fundamental Information about the Group
The contents of this chapter or section are voluntary and therefore not audited. However, our auditor has read the text critically.
*
On June 30, the FDA approved Bavencio® for the maintenance treatment of patients with locally advanced or
metastatic urothelial carcinoma (UC) that has not progressed with first-line platinum-containing chemotherapy,
based on the results of JAVELIN Bladder 100. On December 11, 2020, the Committee for Medicinal Products for
Human Use (CHMP) of the European Medicines Agency (EMA) adopted a positive opinion recommending
approval of BavencioⓇ as monotherapy for the first-line maintenance treatment of adult patients with locally
advanced or metastatic UC who are progression-free following platinum-based chemotherapy. The CHMP's
positive opinion will now be reviewed by the European Commission (EC), with a decision expected in early
2021.
Together with Pfizer Inc., we have made progress in sharing new data, securing additional regulatory approvals
and reimbursement decisions with our anti-PD-L1 antibody BavencioⓇ (avelumab) (for further details see
"Research & Development").
In June 2020, the Japanese Ministry of Health, Labour and Welfare (MHLW) granted SAKIGAKE 'fast-track'
designation for the investigational bifunctional fusion protein bintrafusp alfa, as a potential treatment for
patients with BTC. Bintrafusp alfa was previously granted orphan drug designation by both the FDA as well as
the EMA in BTC in December 2018. Bintrafusp alfa is being studied in more than 15 different cancers and 11
alliance-led clinical studies, each exploring distinct mechanistic hypotheses related to the action of TGF-ẞ in
supporting cancer growth. To date, more than 1,300 patients have been dosed globally in the bintrafusp alfa
INTR@PID clinical development program.
Other highlights from our development pipeline included the advancement of several potential first-in-
class/best-in-class compounds. The development program for tepotinib, our oral MET inhibitor designed to
inhibit the oncogenic MET receptor signaling caused by MET (gene) alterations, has continued to see pivotal
clinical, regulatory, and commercial milestones in 2020. Discovered in-house, tepotinib underscores our
strategic focus on delivering innovative precision medicines to patients with cancer.
To our Shareholders
1,365
Profit
transfer
to/from
E. Merck KG
including
changes in
reserves
Transactions
with no
change of
control
Change
in scope of
consolidation
Dec. 31,
/Other
2020
Equity capital
565
565
General partner's equity
397
397
Subscribed capital
168
168
Dividend
payments
Capital reserves
equity
Profit after recognized in
1,902
Changes in cash and cash equivalents
Changes in cash and cash equivalents due to currency translation
615
-40
-1,395
5
Cash and cash equivalents as of January 1
781
2,170
Cash and cash equivalents as of December 31 (consolidated balance sheet)
35
1,355
781
Consolidated Financial Statements Consolidated Statement of Changes in Net Equity
Consolidated Statement of Changes in Net Equity
For details see Note (34) "Equity".
Comprehensive income
196
Gains/losses
€ million
Jan. 1,
2020
tax
3,814
3,814
Retained earnings
equity instruments
Gains/losses recognized
1,980
-1,790
I
189
in equity
Fair value reserve for
-1
I
debt instruments
Cash flow hedge reserve
-118
69
Cost of cash flow hedge
-33
-1
-49
-34
reserve
Currency translation
105
-91
I
116
11,483
1,987
-357
-168
-567
12,378
Retained earnings/net
13,134
1,987
-168
-1,522
-567
14,453
retained profit
Remeasurement of
defined benefit plans
-1,729
-473
23
-2,179
Fair value reserve for
79
68
2,131
41
-4,166
-391
-98
-57
39
53
16
3,477
2,856
-150
-208
Payments from the disposal of intangible assets
88
Payments for investments in property, plant and equipment
-1,413
23
-813
Payments from the disposal of property, plant and equipment
35
31
Payments for investments in financial assets
-278
-196
-123
Payments for acquisitions less acquired cash and cash equivalents (net)
153
201
Changes in trade accounts receivable
Changes in trade accounts payable/refund liabilities
Changes in provisions
Changes in other assets and liabilities
Neutralization of gains/losses on disposal of fixed assets and other disposals
Other non-cash income and expenses
Net cash flows from operating activities
thereof: from discontinued operations
Payments for investments in intangible assets
Note
2020
2019
1,994
1,324
1,938
1,944
-85
-324
-84
-47
7
-110
-11
-5,020
Proceeds from the disposal of other financial assets
Repayment of bonds
Proceeds from the issuance of bonds
Payments from new borrowings of other current and non-current financial debt
Repayment of other current and non-current financial debt
Net cash flows from financing activities
thereof: from discontinued operations
-168
-162
-7
-512
-12
-515
390
406
-382
-418
-2,724
-1,290
2,486
3,482
3,561
1,193
Repayment of financial debt to E. Merck KG
Proceeds from new borrowings of financial debt from E. Merck KG
Profit withdrawal by E. Merck KG
Dividend payments to Merck KGaA shareholders
340
140
Payments for the acquisition of non-financial assets
-500
-500
Proceeds from the disposal of non-financial assets
501
501
Payments for the disposal of assets held for sale
-8
-782
-130
55
20
Net cash flows from investing activities
23
-1,340
-6,153
-8
-129
Dividend payments to non-controlling interests
thereof: from discontinued operations
Proceeds from the disposal of assets held for sale less transferred cash and cash
equivalents
-1,859
273
difference
1,324
41
-173
-510
17,914
1 Previous year's figures have been adjusted, see Note (2) "Reporting principles".
Consolidated Financial Statements
Notes
General Disclosures
198
Notes to the Consolidated
Financial Statements
General Disclosures
(1) Company information
The accompanying consolidated financial statements for the year ended December 31, 2020, were prepared for
MERCK Kommanditgesellschaft auf Aktien (Merck KGaA), Frankfurter Strasse 250, 64293 Darmstadt, Germany,
entered in the commercial register of the Darmstadt Local Court under HRB 6164. The ultimate parent company
of the Group is the parent company of Merck KGaA, E. Merck Kommanditgesellschaft (E. Merck KG), Darmstadt,
Germany. The consolidated financial statements of E. Merck KG can be accessed at www.bundesanzeiger.de.
(2) Reporting principles
These consolidated financial statements have been prepared in accordance with the International Financial
Reporting Standards (IFRS and IAS) as issued by the International Accounting Standards Board (IASB) and
announcements by the IFRS Interpretations Committee (IFRIC and SIC) in force on the reporting date and as
adopted by the European Union, as well as the additionally applicable provisions of section 315e of the German
Commercial Code (HGB). The fiscal year corresponds to the calendar year. These consolidated financial
statements have been prepared in euros, the reporting currency. The figures presented in the consolidated
financial statements have been rounded. This may lead to individual values not adding up to the totals
presented.
The accounting and measurement policies used in the consolidated financial statements are presented in the
following Notes and are marked there.
Standards, interpretations and amendments applicable for the first time in the year
under review
The following regulations are binding as of fiscal 2020:
• Amendment to IAS 1 "Presentation of Financial Statements"
• Amendment to IAS 8 "Accounting Policies, Changes in Accounting Estimates and Errors"
17,233
• Amendment to IAS 39 "Financial Instruments: Recognition and Measurement"
Total equity
73
Currency translation
1,790
341
2,131
difference
Equity attributable to
Merck KGaA
17,200
1,320
39
-162
-510
-45
17,841
shareholders¹
Non-controlling
33
3
2
-12
45
interests¹
• Amendment to IFRS 3 "Business Combinations"
• Amendment to IFRS 7 "Financial Instruments: Disclosures"
• Amendment to IFRS 9 "Financial Instruments"
To improve comparability and ensure further harmonization with the requirements of the IFRS taxonomy, the
presentation of provisions and liabilities in connection with employee benefits was adjusted with effect from
January 1, 2020. The balance sheet at the start of the comparative period is presented accordingly.
Provisions for employee benefits previously reported in other non-current provisions were reclassified
(January 1, 2019: € 204 million/December 31, 2019: € 237 million) and reported in the item non-current
provisions for employee benefits together with provisions for pensions and other post-employment benefits.
The category of current liabilities was expanded to include the item current provisions for employee benefits.
This resulted in reclassifications from other current provisions (January 1, 2019: € 112 million/
December 31, 2019: € 110 million).
Without the change in the disclosure of provisions for employee benefits as at December 31, 2020 the other
non-current provisions would have amounted to € 566 million and the other current provisions to € 613 million.
Adjustments to the prior-year consolidated balance sheet due to completed purchase price
allocations in fiscal 2020
Purchase price allocations for two company acquisitions in 2019 were completed in fiscal 2020, resulting in
changes to the fair values of the assets and liabilities acquired. In accordance with IFRS 3, this required the
adjustment of the consolidated balance sheet as of December 31, 2019. Further information can be found in
Note (6) "Acquisitions and divestments".
Consolidated Financial Statements
Notes
General Disclosures
200
Change of the discount factor for defined benefit pension plans in the eurozone
As of December 31, 2020, Merck changed the way in which it determines the discount factor for defined benefit
pension plans in the eurozone. This constitutes a change in an accounting estimate within the meaning of IAS
8. Further information can be found in Note (33) "Provisions for employee benefits".
Accounting and measurement policies
Currency translation
Functional currency
To a predominant extent, the subsidiaries of Merck KGaA conduct their business independently so that the
functional currency is normally the respective local currency.
Some subsidiaries, particularly in the Performance Materials business sector, use the U.S. dollar as a functional
currency in deviation from the local currency.
Transactions in non-functional currency
When the financial statements of consolidated companies are prepared, business transactions that are
conducted in currencies other than the functional currency are translated using the exchange rate on the date
of the transaction.
Translation of financial statements into the reporting currency (euro)
The financial statements of consolidated companies not using the euro as their functional currency are
translated into the reporting currency, the euro. Assets and liabilities are measured at the closing rate, and
income and expenses are translated at average rates. Any currency translation differences arising during
consolidation of Group companies are recognized in equity.
Hyperinflation
Adjustment to the presentation of provisions for employee benefits
From today's perspective, the new regulations are not expected to have any material effects on the
consolidated financial statements.
• Annual Improvements to IFRS 2018-2020 Cycle
• Amendment to IFRS 17 "Insurance Contracts"
• Amendment to IFRS 16 "Leases"
• Amendments to References to the Conceptual Framework in International Financial
Reporting Standards
The new regulations applicable for the first time in fiscal 2020 did not have a material impact on the
consolidated financial statements.
Consolidated Financial Statements
Notes
General Disclosures
199
Standards, interpretations and amendments applicable for the first time in fiscal 2021
The following regulations are binding as of fiscal 2021:
• Amendment to IAS 39 "Financial Instruments: Recognition and Measurement"
reserve
• Amendments to IFRS 4 "Insurance Contracts"
• Amendment to IFRS 9 "Financial Instruments"
• Amendment to IFRS 16 "Leases"
We did not opt for early application of any of these regulations. These regulations are not expected to have a
material effect on the consolidated financial statements.
Regulations published but not yet endorsed by the European Union
As of the balance sheet date, the following regulations were published by the IASB but not yet endorsed by the
European Union:
• IFRS 17 "Insurance Contracts"
• Amendment to IAS 1 "Presentation of Financial Statements"
• Amendment to IAS 16 "Property, Plant and Equipment”
• Amendment to IAS 37 "Provisions, Contingent Liabilities and Contingent Assets"
• Amendment to IFRS 3 "Business Combinations"
• Amendment to IFRS 7 "Financial Instruments: Disclosures"
-33
-118
-1
Profit after recognized in
€ million
Jan. 1, 2019
tax
equity
Dividend
payments
Profit
transfer
to/from
E. Merck KG
including
changes in
reserves
Transactions
with no
change of
control
Change
in scope of
consolidation
/Other
Dec. 31,
2019
Equity capital
565
565
General partner's equity
397
397
Gains/losses
197
Comprehensive income
Consolidated Financial Statements Consolidated Statement of Changes in Net Equity
Equity attributable to
Merck KGaA
17,841
1,987
-2,147
-168
-567
-1
16,946
shareholders
Subscribed capital
Non-controlling interests
Total equity
17,914
7
1,994
-2,149
-2
-7
-175
-567
71
17,017
73
Changes in inventories
168
Capital reserves
76
I
I
-4
79
Gains/losses recognized
1,629
350
in equity
Fair value reserve for
-1
I
I
I
1,980
debt instruments
Cash flow hedge reserve
-128
9
Cost of cash flow hedge
-33
7
Fair value reserve for
equity instruments
defined benefit plans
-1,729
3,814
3,814
Retained earnings¹
11,192
1,320
-312
-162
-510
-45
11,483
168
Retained earnings/net
1,320
-162
-510
-40
13,134
retained profit¹
Remeasurement of
-1,340
-388
-2
12,525
thereof: attributable to Merck KGaA shareholders
thereof: attributable to non-controlling interests
Depreciation/amortization/impairment losses/reversals of impairment losses
€ million
Finance income
2,120
2,985
-735
-863
14
715
838
13
Operating result (EBIT)¹
Other operating expenses
Other operating income
-8
-6
42
Impairment losses and reversals of impairment losses on financial assets (net)
-2,268
-2,288
12
Research and development costs
-1,154
Finance costs
-1,188
Profit before income tax
44
34
1,320
1,987
thereof: attributable to Merck KGaA shareholders (net income)
thereof: attributable to non-controlling interests
1,324
1,994
Profit after tax
28
6
Profit after tax from discontinued operation
-440
1,296
1,994
Profit after tax from continuing operations
-637
15
Income tax
1,735
2,630
97
-481
-398
40
40
Administration expenses
-4,576
-4,207
216 Operating Activities
204 Group Structure
198 General Disclosures
198 Notes
196 Consolidated Statement of Changes in Net Equity
195 Consolidated Cash Flow Statement
194 Consolidated Balance Sheet
193 Consolidated Statement of Comprehensive Income
192 Consolidated Income Statement
FINANCIAL STATEMENTS
CONSOLIDATED
1,359
34
5
6
Comprehensive income
thereof: from continuing operations
thereof: from discontinued operation
-155
-155
1,365
1,337
235 Operating Assets, Liabilities, and Contingent Liabilities
260 Employees
271 Capital Structure, Investments, and Financing Activities
310 Other Disclosures
11
10,145
10,699
-6,006
-6,835
10
16,152
17,534
9
2019
3
2020
Marketing and selling expenses
Gross profit
Cost of sales
Net sales
€ million
Consolidated Income Statement
192
Consolidated Income Statement
Consolidated Financial Statements
313 Scope of Consolidation
Note
28
Earnings per share (in €)
from continuing operations
-20
45
-15
54
39
Comprehensive income
Other comprehensive income
Changes recognized in equity
Reclassification to profit or loss
Changes taken directly to equity
Currency translation difference
Changes recognized in equity
Tax effect
Reclassification to profit or loss
Reclassification to assets
Fair value adjustments
Cost of cash flow hedge reserve
Changes recognized in equity
Tax effect
Reclassification to assets
Reclassification to profit or loss
Fair value adjustments
60
Cash flow hedge reserve
-30
69
-155
41
-2,149
353
-1,792
344
-1,860
-6
4
349
-1,864
-1
-24
1
21
-8
12
11
-13
39
9
-16
-312
-356
76
Note
Profit after tax
€ million
Consolidated Statement of Comprehensive Income
193
Consolidated Financial Statements Consolidated Statement of Comprehensive Income
0.07
2.97
4.57
3.04
4.57
0.07
2.97
4.57
3.04
4.57
-160
1 Not defined by International Financial Reporting Standards (IFRS).
from discontinued operation
from continuing operations
from discontinued operation
Diluted
2020
2019
1,994
1,324
116
-
Items of other comprehensive income that may be reclassified to profit or
loss in subsequent periods
Changes recognized in equity
Tax effect
Fair value adjustments
76
116
36
-388
Basic
-473
130
-488
-602
Equity instruments
Changes recognized in equity
Tax effect
Changes in remeasurement
33
Net defined benefit liability
Items of other comprehensive income that will not be reclassified to profit
or loss in subsequent periods
100
Consolidated Financial Statements
Consolidated Balance Sheet
194
8,644
6,681
Other non-current financial liabilities
38
62
43
33
Other non-current non-financial liabilities
29
100
93
19
Deferred tax liabilities
15
1,441
1,825
1,288
15,548
14,053
11,138
Current liabilities
9,785
Current provisions for employee benefits
37
577
12,378
189
16,946
71
11,483
11,192
1,980
1,629
17,841
17,200
17,017
73
17,914
33
17,233
Non-current liabilities
Non-current provisions for employee benefits
33
3,880
3,194
2,540
Other non-current provisions
27
281
254
Non-current financial debt
33
152
110
Income tax liabilities
15
1,460
1,402
1,176
Other current non-financial liabilities
29
1,360
1,211
1,211
9,231
Total equity and liabilities
1 Previous year's figures have been adjusted, see Note (2) "Reporting principles".
41,796
11,842
43,808
8,517
36,888
Consolidated Financial Statements
Consolidated Cash Flow Statement
195
Consolidated Cash Flow Statement
472
565
666
9
112
Other current provisions
27
461
823
488
Current financial debt
37
2,357
4,550
3,814
2,215
38
1,008
1,127
1,077
Trade and other current payables
30
1,768
2,054
1,766
Refund liabilities
Other current financial liabilities
565
565
3,814
565
3,814
Other non-current non-financial assets
Deferred tax assets
3221
36
822
738
656
25
25
22
17
91
97
76
15
1,543
1,421
1,091
32,516
34,805
27,652
Other non-current receivables
Other non-current financial assets
2
Investments accounted for using the equity method
Consolidated Balance Sheet¹
€ million
Non-current assets
Goodwill
Note
Dec. 31, 2020
Dec. 31, 2019
Jan. 1, 2019
18
15,959
Current assets
17,114
Other intangible assets
19
7,653
9,221
7,237
Property, plant and equipment
20
6,421
6,192
4,811
13,764
Profit after tax
Inventories
3,294
460
Cash and cash equivalents
35
1,355
781
2,170
9,280
9,003
9,236
Total assets
41,796
43,808
36,888
Total equity
34
Equity capital
Capital reserves
Retained earnings
Gains/losses recognized in equity
Equity attributable to Merck KGaA shareholders
Non-controlling interests
589
520
15
Income tax receivables
3,342
2,764
Trade and other current receivables
25
3,221
3,488
3,226
Contract assets
26
169
24
156
Other current financial assets
36
125
57
29
Other current non-financial assets
22
597
591
536
52
17
After adjusting the figures for inflation, the balance sheet items and income and expenses are translated into
the reporting currency, the euro, at the closing rate in accordance with IAS 21.42. Prior-year comparative
figures are not restated.
Since 2018, Argentina's economy has been classified as hyperinflationary in accordance with IAS 29 "Financial
Reporting in Hyperinflationary Economies". Accordingly, business activities in Argentina are no longer disclosed
at historical cost but are presented adjusted for inflation. For this purpose, Merck uses a combination of the
wholesale index IPIM (Índice de precios internos al por mayor) and the consumer price index IPC (Índice de
precios al consumidor). The index applied as of the balance sheet date stood at 4,896.2 (December 31, 2019:
3,722.0/January 1, 2019: 2,462.1). The loss on the net monetary position is reported in other operating
expenses (see Note (14) "Other operating expenses").
-24
20
IAS 12
high
carryforwards
Assets held for sale
no
no
6
Date on which assets and liabilities are classified as
"held for sale"
IFRS 5
medium
Consolidated Financial Statements
Notes
General Disclosures
203
(4) Subsequent events
Additions
Fully consolidated companies as of Dec. 31, 2019
The scope of consolidation changed as follows in the reporting period:
Overall, the impact of subsidiaries not consolidated due to immateriality on net sales, profit after tax, assets,
and equity was less than 1% relative to the entire Merck Group. The shares in these companies are reported in
non-current financial assets (see Note (36) "Other financial assets").
Changes in the scope of consolidation
Accounting and measurement policies
Recognition of deferred tax assets from tax loss
(5) Changes in the scope of consolidation
204
Group Structure
Notes
Consolidated Financial Statements
Subsequent to the balance sheet date, no further events of special importance occurred that could have a
material impact on the net assets, financial position or results of operations.
Effective January 1, 2021, Mr. Peter Guenter was appointed as a new member of the Executive Board and CEO
of the Healthcare business sector.
Group Structure
medium
IAS 12
Recognition and measurement of deferred taxes from
temporary differences
high
and contingent liabilities
Determination of parameters for the valuation of fair
values of share-based payment programs
IFRS 2
medium
Collaboration agreements
yes
no
7
Revenue recognition for upfront and milestone
medium
payments in collaboration agreements
Revenue recognition
Retirements
yes
9
Measurement of sales deductions and refund
666
IFRS 15
high
liabilities
Income tax
no
no
15
Recognition and measurement of income tax
liabilities
1,460
IAS 12
high
no
IAS 37
Fully consolidated companies as of Dec. 31, 2020
Subsidiaries rated at-equity as of Dec. 31, 2019
Subsidiaries rated at-equity as of Dec. 31, 2020
Non-consolidated subsidiaries as of Dec. 31, 2019
Non-consolidated subsidiaries as of Dec. 31, 2020
Materiality
Other current provisions
110
110
Current provisions for employee benefits
Current liabilities
14,053
1
-4
14,056
1,825
1
-4
1,828
Deferred tax liabilities
823
93
Other non-current non-financial liabilities
43
43
Other non-current financial liabilities
254
8,644
8,644
Non-current financial debt
254
Other non-current provisions
3,194
3,194
Non-current provisions for employee benefits
Non-current liabilities
17,914
93
823
Current financial debt
4,550
Liquidations/mergers
Divestments
Immateriality
Loss of control
335
4
2
-8
-5
-2
17,865
43,808
43,811
Total equity and liabilities
11,842
11,842
1,211
1,211
4,550
Other current financial liabilities
1,127
1,127
Trade and other current payables
2,054
Companies established
Acquisitions
2,054
565
565
Income tax liabilities
1,402
1,402
Other current non-financial liabilities
Refund liabilities
Recognition and measurement of other provisions
27, 28, 33
no
34.578
1.121
1,300.959
1.112
122.314
121.756
1.070
1,344.968
33.589
1.141
7.740
7.872
Dec. 31, 2020
2019
2020
Closing rate
Average rate
U.S. dollar (USD)
Taiwan dollar (TWD)
8.000
126.801
South Korean won (KRW)
Japanese yen (JPY)
Chinese renminbi (CNY)
€ 1 =
The exchange rates of the most significant currencies in these consolidated financial statements were as
follows:
Exchange rates of most significant currencies
201
General Disclosures
Notes
Consolidated Financial Statements
In-licensing of intangible assets
7,653
yes
yes
6, 19
Swiss franc (CHF)
IFRS 3
1.083
1,336.094
1.230
high
IAS 36
Determination of recoverable amount
18
yes
yes
15,959
Goodwill
Note
Increased
uncertainty due
Sensitivity to the Covid-19
analysis
pandemic
Discretionary
scope/
estimation
uncertainty
IFRS
€ million
Accounting matter
34.548
2020 in
The accounting matters with the most significant discretionary decisions as well as the most comprehensive
assumptions relating to the future and sources of estimation uncertainty are described below:
Overview of significant discretionary decisions and sources of estimation uncertainty
202
General Disclosures
Notes
Consolidated Financial Statements
Merck is continuously examining the impact of the Covid-19 pandemic on its business and the resulting effects
for the Group's accounting. To date, the Fertility franchise in the Healthcare business sector and the Surface
Solutions and Display Solutions business units in the Performance Materials business sector have been most
negatively affected by the Covid-19 pandemic. By contrast, the Process Solutions business unit in the Life
Science business sector in particular is benefiting from increased demand, while all the other areas have seen
either a slight negative impact or been largely unaffected by the pandemic. Based on the course of business
and current planning, there was nothing to suggest that the going concern assumption should not have been
applied in preparing these consolidated financial statements. As a preventive measure, however, Merck had
increased its cash and cash equivalents in order to secure its liquidity in the meantime. There was no risk of a
liquidity bottleneck at any time. Due to the high dynamics of the pandemic and the lack of historical experience,
the estimates in these consolidated financial statements are subject to a greater degree of uncertainty than
would usually be the case. Where making estimates involved particular challenges as a result of the Covid-19
pandemic, this is discussed in the following overview and the respective notes.
Increased uncertainty due to the Covid-19 pandemic
The preparation of the consolidated financial statements requires Merck to make discretionary decisions and
assumptions as well as estimates to a certain extent. The discretionary scope and estimation uncertainty are
assessed in a Merck-specific manner. Discretion describes the need to make assumptions concerning
recognition or measurement. Estimation uncertainty denotes the degree of availability and reliability of
historical experience and external data for future developments.
Dealing with discretionary decisions and sources of estimation uncertainty
(3) Discretionary decisions and sources of estimation uncertainty
Dec. 31, 2019
7.803
121.765
1.121
1.086
1,295.177
33.608
Carrying
amount as
of Dec. 31,
high
Determination of amortization
IAS 38
IAS 38
yes
25, 42
Determination of loss allowance
IFRS 9
medium
Other financial assets
yes
no
36, 43
Determination of fair values of contingent
260
IFRS 13
considerations
high
yes
Determination of fair values of equity instruments
IFRS 9,
IFRS 13
medium
Provisions for pensions and other post-employment
benefits
yes
yes
33
Determination of parameters for the valuation of
present value of defined-benefit obligations
6,352
IAS 19
medium
Other provisions and contingent liabilities
741
no
10
499
3,221
Trade and other receivables
impairments
medium
medium
Identification of impairments or reversal of
impairments
IAS 36
high
Property, plant, and equipment
6,421
no
no
20
Determination of depreciation
IAS 16
medium
Identification of impairments or reversal of
impairments
IAS 36
medium
Leases
medium
IAS 2
Identification of impairments or reversal of
24
yes
no
17,914
3,294
IFRS 16
Recognition and measurement of lease arrangements
Inventories
21
no
yes
429
medium
73
Other intangible assets
48
3,121
5,198
Purchase price for the acquisition of shares in accordance with IFRS 3
Positive difference (goodwill)
2,076
Net assets acquired
2,123
345
161
122
61
1,778
759
81
938
4,199
737
87
270
155
224
3,463
62
512
2,889
Versum
Consolidated Financial Statements
date
Notes
208
Goodwill on December 31, 2020
Exchange rate effects
Goodwill on December 31, 2019¹
€ million
Amortization of the intangible assets acquired amounted to € 220 million in fiscal 2020 (2019: € 55 million).
If customer relationships were one year longer, the fair value of the customer relationships recognized in
intangible assets would be € 44 million higher on the date of their acquisition. A shortening of the customer
relationships by one year would reduce their fair value by € 46 million. The positive difference of € 3,121 million
was recognized as goodwill. It includes expected synergies resulting from the integration of Versum into the
Merck Group, expected revenues from technical innovations and developments that go beyond the current
product, development, and customer portfolios, and unrecognized intangible assets such as the expertise of the
workforce. The goodwill was allocated in full to the Performance Materials business sector. The goodwill is
expected to be non-tax deductible. The change in goodwill valued in foreign currency between initial recognition
and December 31, 2020 is broken down as follows:
6,010
indefinite
3,121
2,889
12
7
5-9/indefinite
7-19
2,356
467
44
22
Useful life
Fair value at the acquisition date
Total
Goodwill
Total
Other intangibe assets
Trademarks
Technology (patented and unpatented)
Customer relationships
€ million/years (preliminary)
The following overview shows the intangible assets identified within the scope of final purchase price allocation
and recognized at the acquisition date:
Material contingent liabilities were not identified as part of final purchase price allocation. The inventories
measured at fair value were recognized in the cost of sales over a period of six months. The property, plant and
equipment is depreciated over a period of up to 29 years. This resulted in depreciation of € 79 million in fiscal
2020 (2019: € 15 million).
Group Structure
1 Previous year's figure have been adjusted.
Fair value at the acquisition
Other currrent liabilities and provisions
Acquisitions in the previous year
The deal strengthens Merck's capabilities to develop and manufacture mRNA. The acquisition adds to Merck's
lipid manufacturing expertise and creates an integrated offering across the entire mRNA value chain. The
company will be integrated into the Process Solutions business unit, which is part of the Life Science business
sector. The preliminary purchase price comprised a payment of € 7 million and milestone payments of up to
€ 18 million for the achievement of technological development targets and sales- and profit-based targets.
Valuation of the contingent purchase price payments resulted in a purchase price of € 13 million in accordance
with IFRS 3. As the transaction took place just a few days before the reporting date, purchase price allocation
had not yet been performed as of December 31, 2020. Accordingly, the difference between the purchase price
and the carrying amounts of the net assets acquired is reported in full as goodwill in the amount of € 13 million.
AmpTec has more than 40 employees and generated sales of € 2 million in fiscal 2020. The impact on the
Group's net assets, financial position, and results of operations has been negligible both since actual inclusion
in the consolidated financial statements and on the basis of notional consolidation from January 1, 2020.
On December 22, 2020, Merck acquired all of the shares in AmpTec GmbH (AmpTec), Hamburg, one of the
leading contract development and manufacturing organizations for mRNA (messenger ribonucleic acid).
Acquisition of AmpTec GmbH, Hamburg
On June 30, 2020, Merck completed the acquisition of all of the shares in Resolution Spectra Systems S.A.S., a
leading provider of systems for real-time analysis and monitoring of bioprocesses. The acquisition strengthens
Merck's bioprocessing product portfolio within the Life Science business sector. The purchase price comprised a
fixed compensation of € 4 million and future sales-based milestone payments of up to € 4 million. The purchase
price allocation was completed as of December 31, 2020. The intangible assets identified within the scope of
purchase price allocation and recognized as of the initial consolidation date were attributable to technology-
related intangible assets of € 4 million. Goodwill amounted to € 5 million. The impact on the Group's net assets,
financial position, and results of operations has been negligible both since actual inclusion in the consolidated
financial statements and on the basis of notional consolidation from January 1, 2020.
Acquisition of Resolution Spectra Systems S.A.S., France
Acquisitions in the fiscal year
206
Group Structure
Notes
Consolidated Financial Statements
•
⚫ the discount factor, which is applied for maturity- and risk-based discounting of expected cash inflows,
the useful life and the degree of technical obsolescence which depend, among other things, on
assumptions about technological trends.
⚫ the license rate for technologies, which estimates royalty savings on the basis of comparable
transactions of similar technologies,
⚫ the customer churn rate, which indicates how existing customer relationships will change in the future,
• planning of future cash flows,
In particular, estimation uncertainty and discretionary decisions exist regarding:
The recognition and measurement of assets, liabilities, and contingent liabilities at fair value within the context
of purchase price allocations are associated with significant estimation uncertainty.
Business combinations
Significant discretionary decisions and sources of estimation uncertainty
Results from foreign currency hedging of expected business combinations, if they meet the requirements for
hedge accounting, are offset against the carrying value of the net assets acquired.
Measurement method for determining fair value
Multi period excess earnings method
Relief from royalty method
Relief from royalty method
Trademark
Customer relationships
Technology
24
Acquisition of Versum Materials, Inc., United States
Total liabilities
On April 12, 2019, Merck announced the conclusion of a final agreement to acquire all issued and outstanding
shares of Versum Materials, Inc, (Versum) for US$ 53 per share in cash. The transaction closed on October 7,
2019. Its completion followed previous approvals issued by the relevant authorities, the approval of the
shareholders of Versum and the fulfillment of other customary closing conditions.
Versum was one of the world's leading providers of process chemicals, gases, and equipment for semiconductor
manufacturing. In fiscal 2018, the company generated annual sales of around € 1.2 billion in accordance with
U.S. GAAP. It had around 2,300 employees and operated 14 production sites and seven research and
development facilities in Asia and North America. The former Versum business was integrated into the
Semiconductor Solutions business unit, which is part of the Performance Materials business sector. The
objective of the transaction is to develop Merck as a leading player in the field of electronic materials for the
semiconductor and display industries.
Income tax liabilities
Trade payables and other liabilities
Current liabilities
Deferred tax liabilities
Other non-current provisions and liabilities
Non-current financial debt
Non-current liabilities
Total assets
Other current assets
Cash and cash equivalents
Trade and other current receivables
Inventories
Current assets
Other non-current assets
Property, plant and equipment
Intangible assets (excluding goodwill)
Non-current assets
€ million
Determining the fair values required extensive analyses and calculations by an external professional. This
process was completed in September 2020 and resulted in adjustments to intangible assets, property, plant
and equipment and the associated deferred tax liabilities compared with the preliminary purchase price
allocation in the 2019 financial statements. The changes in fixed assets were due in particular to the country-
specific allocation of intangible assets, which in addition resulted in changes in the deferred taxes as a result of
different national tax rates. There were also reclassifications within fixed assets. The final fair values at the
acquisition date were as follows:
Purchase price allocation
207
Group Structure
Notes
Consolidated Financial Statements
Due to the acquisition date, the Versum business acquired in fiscal 2019 contributed to the net income of the
Group only from October 7, 2019.
Versum's business activities
Change in
.
3,058
591
Other current non-financial assets
57
57
Other current financial assets
156
156
Contract assets
3,488
3,488
Trade and other current receivables
3,342
326
1
33
33
The list of non-consolidated subsidiaries mainly comprises non-operating shelf companies as well as entities
subject to liquidation procedures, which are subsequently measured at fair value through other comprehensive
income. The company accounted for using the equity method is Syntropy Technologies LLC, United States,
which was formed in fiscal 2020. This company generated sales of € 1 million in the year under review.
The list of shareholdings presents all the companies included in the consolidated financial statements as well as
all of the shareholdings of Merck KGaA (see Note (50) “List of shareholdings”).
Consolidated Financial Statements
Notes
Group Structure
205
(6) Acquisitions and divestments
Accounting and measurement policies
Business combinations
591
The balance sheet items goodwill, other intangible assets and deferred taxes are significantly influenced by
purchase price allocations implemented within the scope of business combinations. Because prices observable
on the market are mostly not available for the acquired other intangible assets, Merck relies on the expertise of
external professionals for all material company acquisitions. The following overview shows the methods
routinely used to measure intangible assets within the scope of purchase price allocations:
Income tax receivables
589
Non-controlling interests
goodwill
17,841
Equity attributable to Merck KGaA shareholders
1,980
1,980
Gaines/losses recognized in equity
-24
11,507
Retained earnings
565
3,814
3,814
Capital reserves
565
Equity capital
Equity
43,808
-4
43,811
Total assets
9,003
9,003
781
781
Cash and cash equivalents
589
3,342
11,483
Current Assets
BSSN
Versum
Dec. 31, 2019
Adjustments for
Adjustments for
Dec. 31, 2019 as
reported
Non-current assets
€ million
The preliminary purchase price allocations for Versum and BSSN were completed in fiscal 2020. The
consolidated balance sheet as of December 31, 2019 was retrospectively adjusted as follows:
Adjustments to the prior-year consolidated balance sheet due to completed purchase price
allocation in fiscal 2020
210
Group Structure
Notes
Consolidated Financial Statements
Merck completed the acquisition of FloDesign Sonics, Inc., United States, on October 10, 2019. The company
developed a platform for industrial manufacturing of cell and gene therapies that allows cells to be manipulated
using ultrasonic waves. It forms part of the Life Science business sector. The purchase price included fixed
compensation of € 32 million. Future milestone payments of up to € 30 million for the achievement of
technological development targets and an additional sales-based milestone payment were agreed as further
elements of the purchase price. Taking into account the contingent purchase price payments, this resulted in a
purchase price of € 46 million in accordance with IFRS 3. Final purchase price allocation did not result in any
changes compared with the preliminary purchase price allocation presented in the previous year's annual
report.
Identification and measurement of intangible assets
within the scope of business combinations
Merck completed the acquisition of Intermolecular, Inc., United States, on September 20, 2019, for US$ 1.20
per share in cash (the equivalent of € 56 million for 100% of shares). Intermolecular possesses application-
specific materials expertise and platforms for accelerated learning and experimentation with a powerful analysis
infrastructure that complements Merck's business and technology portfolio in the Semiconductor Solutions
business unit, which is part of the Performance Materials business sector. In fiscal 2018, Intermolecular
generated sales of US$ 34 million and had around 90 employees. Final purchase price allocation did not result
in any changes compared with the preliminary purchase price allocation presented in the previous year's annual
report.
On June 17, 2019, Merck acquired the laboratory informatics provider BSSN Software GmbH, Darmstadt,
(BSSN). BSSN develops and markets software for managing and integrating data, which unifies data from
laboratory instruments and data systems and makes them available for analyzing, processing, and sharing. The
business was integrated into the Applied Solutions business unit, which is part of the Life Science business
sector. The purchase price amounted to € 16 million, including milestone payments amounting to € 6 million for
reaching technological development targets. The first milestone payment of € 2 million was made in June 2020.
The intangible assets identified within the scope of purchase price allocation and recognized as of the initial
consolidation date were attributable to technology-related intangible assets of € 6 million.
Other acquisitions in the previous year
209
Notes
Consolidated Financial Statements
Inventories
-271
2,787
adjusted
Goodwill
Group Structure
Property, plant and equipment
Other intangible assets
34,808
1,421
97
22
22
738
738
34,805
Deferred tax assets
Other nun-current non-financial assets
Other non-current receivables
97
6,192
17,141
-23
Other nun-current financial assets
-4
9,175
6,213
1,421
-22
372
17,114
40
9,221
6
20,145
9,735
4,558
41,796
Liabilities by business sector
-2,494
-1,589
-666
-20,030
-24,780
Investments in property, plant and
480
653
230
1,413
equipment³
Investments in intangible assets³
43
51
7,358
46
10
49
EBITDA pre (segment result)²
29.7%
1,756
183
Reversals of impairment losses
150
EBITDA²
2,184
2,387
925
-573
4,923
Adjustments²
83
18
99
78
2,267
2,405
1,024
-495
279
5,201
EBITDA pre margin (in % of net sales)²
34.1%
32.0%
30.3%
Assets by business sector
Non-cash changes in provisions4
-21
-13
-617
2,120
713
784
328
80
1,905
34
6
2
307
42
Impairment losses
Reversals of impairment losses
EBITDA²
Adjustments²
1,896
2,070
637
-537
123
4,066
Depreciation
1,280
1,149
21
18
75
-213
1 Excluding intersegment sales.
2 Not defined by International Financial Reporting Standard (IFRS).
3 According to the consolidated cash flow statement.
4 Excluding provisions for pensions and other post-employment benefits.
Consolidated Financial Statements
Notes
Operating Activities
217
Information by business sector - 2019
€ million
Net sales¹
Intersegment sales
Operating result (EBIT)²
Healthcare
Life Science
6,714
6,864
Performance
Materials
2,574
Corporate and
Other
Group
16,152
-294
3
On November 17, 2014, Merck formed a global strategic alliance with Pfizer to co-develop and co-commercialize
the anti-PD-L1 antibody avelumab. Avelumab received its first regulatory approvals in 2017 under the trade
name Bavencio®. This antibody is also being studied in multiple broad-based clinical trials as a potential
treatment for further tumor types as a single agent as well as in combination with a wide array of approved or
still investigational active ingredients. The overriding objective of the strategic alliance is to share the
development risks and to expand the two companies' presence in immuno-oncology. The execution of the
collaboration agreement is not being structured through a separate vehicle.
84
Merck is a contract partner in two joint arrangements in the Performance Materials business sector. In both
cases, Merck has joint control with the respective partner. Although they are legally separate from the partners,
these joint arrangements are classified as joint operations in line with IFRS 11.B31. Merck and the contract
partner ensure their contractually agreed access to the production outputs by preventing third party access.
Assets, liabilities, income, and expenses from these joint arrangements allocated to Merck are accounted for in
accordance with the IFRS applicable to the respective assets, liabilities, income and expenses.
Consolidated Financial Statements
Notes
Group Structure
213
Significant discretionary decisions and sources of estimation uncertainty
Collaboration and licensing agreements
As part of the accounting treatment of collaboration and licensing agreements, significant discretionary
decisions have to be made in the following areas:
• Classification of joint arrangements as joint operations or joint ventures,
• Identification of an appropriate income recognition method, and
Joint arrangements in the Performance Materials business sector
• Determination of the appropriate timing of income recognition.
Strategic alliance with GlaxoSmithKline plc, United Kingdom, to co-develop and co-
commercialize active ingredients in immuno-oncology
On February 5, 2019, Merck entered into a global agreement in the field of immuno-oncology with a subsidiary
of GSK to co-develop and co-commercialize the drug candidate Bintrafusp alfa (formerly M7824). The
bifunctional fusion protein, Bintrafusp alfa, is currently an investigational candidate for several types of cancer.
The overriding objective of the strategic alliance is to share the risks of development and commercialization.
The execution of the collaboration agreement is not being structured through a separate vehicle.
After fulfilling the agreed conditions, Merck received an upfront payment of € 300 million in fiscal 2019, which
was recognized as deferred income on the balance sheet and reported in other liabilities. In addition, Merck can
receive future payments of up to € 2.5 billion (2019: up to € 2.9 billion) for achieving certain milestones related
to approval and commercialization. Merck recognizes the upfront payment as income over time in accordance
with the fulfillment of performance obligations existing on the basis of contractual agreements. A cost-based
method is used to recognize these payments.
Merck and GSK are jointly responsible for the development and potential commercialization further down the
line. According to the collaboration agreement, during the development period each company bears one half of
the development expenses. While Merck would realize the net sales in the United States and GSK in all other
countries in the event of regulatory approval, the partners would evenly split the net results of net sales less
defined expense components.
In fiscal 2020, Merck recognized research and development costs amounting to a low three-digit million euro
figure (2019: double-digit million euro figure). In addition, Merck recognized € 85 million of the upfront
payment collected within other operating income (2019: € 92 million) If the percentage of completion had been
10% higher, this would have increased other operating income and profit before tax by € 30 million (while a
10% lower percentage of completion would have meant a reduction of € 30 million).
On January 20, 2021, Merck announced the discontinuation of the INTR@PID Lung 037 clinical study on the
first-line treatment of patients with non-small cell lung cancer following the review of clinical data by the
independent data monitoring committee. The impact of this adjusting event is included in these consolidated
financial statements in a low double-digit million euro amount.
Consolidated Financial Statements
Notes
Group Structure
214
Estimates are to be made especially when it comes to determining the transaction price and progress on the
performance obligation.
Merck recognizes the consideration received in the course of collaboration agreements for bundled obligations
arising from granting rights to intellectual property as well as other goods and services promised as income
over a period of time, in line with industry practice. Income is caught up cumulatively upon receipt of uncertain
future milestone payments attributable to contractual obligations which have already been fulfilled. This refers
especially to milestone payments subsequent to regulatory approval. Furthermore, collaboration agreements in
the Healthcare business sector typically allocate the sales generated in specific markets, or with specific
products, to the respective collaboration partners in the event of a successful approval; in turn, specific income
and expense items are carried by the collaboration partners according to predefined allocation ratios. Under
these circumstances, Merck recognizes the sales from the commercialization of products to third-party
customers, if Merck takes on the role of a principal within the meaning of IFRS 15. Expenses resulting from
payments made to collaboration partners in connection with profit share agreements are recognized in other
operating expenses.
In addition to out-licensing agreements for selling intellectual property, Merck enters into collaboration
agreements in the Healthcare business sector in which the Group works with partners to develop
pharmaceutical drug candidates and, if regulatory approval is granted, to commercialize them. Because the
partner companies do not have customer characteristics, these collaboration agreements do not fall directly
within the scope of IFRS 15 and the associated income from upfront payments, milestone payments, and
royalties is shown under other operating income. Reimbursements of research and development costs made
between the collaboration partners are recognized on a net basis in research and development costs. The two
most significant collaborations are the agreements with GlaxoSmithKline plc, United Kingdom, (GSK) and Pfizer
Inc., United States, (Pfizer) in the field of immuno-oncology.
Collaboration agreements
25
Consolidated Financial Statements
Notes
Group Structure
211
The completion of purchase price allocation for the acquisitions made in previous year did not have any material
effect on the consolidated income statement.
Divestments in the fiscal year
| Significant discretionary decisions and sources of estimation uncertainty
Divestments
The assessment as to when a non-current asset, disposal group, or discontinued operation meets the
prerequisites of IFRS 5 for classification as "held for sale" is subject to discretionary judgment. Even in the case
of an existing management decision to review a disposal, an uncertain assessment has to be made as to the
probability of whether a corresponding disposal will occur during the year.
Divestment of the Allergopharma allergy business
On February 19, 2020, Merck signed an agreement to sell its Allergopharma allergy business to Dermapharm
Beteiligungs GmbH, Grünwald, Germany. Following approval by the relevant regulatory authorities and other
customary closing conditions, the transaction was closed effective March 31, 2020 with the exception of the
immaterial business in China, which was closed separately on August 31, 2020. Allergopharma is a leading
provider of specific immunotherapy for type 1 allergies. Allergopharma products were available in 18 countries.
The transaction encompassed the Allergopharma business in Europe and Asia, including a wide range of
therapeutic and diagnostic products, as well as the production site in Reinbek. An existing adrenaline
autoinjector development project for the treatment of anaphylactic reactions did not form part of the
transaction and remained with Merck. The final purchase price was € 70 million. After deducting the cash
transferred, Merck received € 56 million. This was reported in the cash flow statement in cash flows from
investment activities in the year under review. The gain on disposal in the amount of € 35 million was reported
in other operating income in the consolidated income statement.
In the management's estimation, the conditions for classification as a disposal group within the meaning of
IFRS 5 were met only when the agreement on the divestment of the Allergopharma business was signed.
Divestment of Litec-LLL GmbH, Greifswald
Merck sold Litec-LLL GmbH on August 31, 2020 as part of a management buyout. The company specializes in
lighting materials. The selling price was € 3 million; the gain on disposal and the cash received amounted to
less than € 1 million.
Consolidated Financial Statements
Notes
Group Structure
212
(7) Collaboration and licensing agreements
Accounting and measurement policies
Out-licensing agreements
Merck concludes material out-licensing agreements for intellectual property in the Healthcare business sector in
particular. In the vast majority of cases, the granting of a license constitutes a distinct performance obligation
that must usually be recognized at a point in time. Due to the uncertainty of development results and
regulatory events, the recognition of contingent consideration usually does not take place until the result in
question has materialized. In principle, sales-based and usage-based royalties are recognized only after the
contract partner makes the corresponding sales or uses the intellectual property. As out-licensing transactions
in the Healthcare business sector do not form part of ordinary activities, the corresponding income from upfront
payments, milestone payments, and royalties is reported in other operating income (see Note (13) "Other
operating income").
Strategic alliance with Pfizer Inc., United States, to jointly co-develop and co-
commercialize active ingredients in immuno-oncology
Upon entry into the agreement in 2014, Pfizer made an upfront cash payment of US$ 850 million (€ 678
million) to Merck. Pfizer also committed to making further payments of up to US$ 2 billion to Merck subject to
the achievement of defined development and commercial milestones. Based on the collaboration agreement,
Merck was also granted the right to co-commercialize Xalkori® (crizotinib) with Pfizer for multiple years. Both
the upfront payment and the value of the right to co-commercialize XalkoriⓇ were recognized in the income
statement until the end of fiscal 2019 and reported in other operating income. The residual book value of the
intangible asset as of December 31, 2020 amounted to € 10 million (December 31, 2019: € 45 million).
According to the collaboration agreement, during the development period each company bears one half of the
development expenses. In the commercialization phase, Merck recognizes the majority of sales from the
commercialization of BavencioⓇ while Merck and Pfizer evenly split the net amount of sales less defined
expense components. Net sales from the commercialization of BavencioⓇ amounted to € 156 million in the year
under review (2019: € 103 million). As in the previous year, Merck recognized research and development costs
in a low three-digit million euro amount in fiscal 2020, as well as profit share expenses in the amount of € 63
million (2019: € 42 million). Merck also realized other operating income of € 281 million in the previous year.
This resulted from the achievement of three approval milestones as well as the recognition in the income
statement of both the upfront payment and the value of the right to co-commercialize Xalkori®. For further
information, please refer to Note (13) "Other operating income".
Restructuring of the collaboration with F-star Delta Ltd., United Kingdom, in the field of
immuno-oncology in the previous year
In June 2017, Merck announced a strategic collaboration with F-star Delta Ltd, United Kingdom, (F-star) for the
development and commercialization of bispecific immuno-oncology antibodies. In 2019, the existing licensing
and collaboration agreement with F-star was restructured due to the reprioritization of resources and programs,
meaning that all rights to the original drug candidate FS118 reverted to F-star. The option to acquire F-star
Delta Ltd. was terminated. In the course of the realignment, Merck in-licensed an innovative bispecific antibody
and, in addition, holds an option to in-license a further bispecific antibody from F-star's antibody platform. Both
bispecific antibodies were handled under the previous collaboration. As a result of the aforementioned changes,
impairment losses totaling € 72 million were recognized in 2019 for an intangible asset and the reverted option.
Operating result (EBIT)²
Depreciation
Impairment losses
Healthcare
Life Science
Performance
Materials
Corporate and
Other
Group
6,639
7,515
3,380
17,534
18
-18
1,804
1,599
240
-658
2,985
324
786
561
Intersegment sales
56
Net sales¹
Information by business sector - 2020
Out-licensing of the rights to a drug candidate in the area of osteoarthritis to Novartis AG,
Switzerland
On October 1, 2020, Merck concluded an agreement with Novartis AG, Switzerland, (Novartis) on the out-
licensing of M6495, a Phase II-ready drug candidate for the treatment of osteoarthritis. Merck received an
upfront payment of € 50 million and is entitled to potential additional payments of up to € 400 million subject to
the achievement of certain sales and development milestones, as well as royalties on future net sales. Novartis
will assume full responsibility for the development and commercialization of M6495. The income from the out-
licensing of intellectual property in the amount of € 27 million was reported in other operating income.
Consolidated Financial Statements
Notes
Group Structure
215
Out-licensing of the rights to the investigational therapy atacicept to Vera Therapeutics,
Inc., United States
On November 9, 2020, Merck concluded an agreement with the biotechnology company Vera Therapeutics,
Inc., United States, (Vera Therapeutics) on the out-licensing of the rights for the investigational therapy
atacicept. Vera Therapeutics will initiate a Phase IIb study with atacicept in IgA nephropathy (IgAN). As part of
the agreement, Merck received a 10% equity interest in Vera Therapeutics and the right to future milestone
payments totaling up to € 605 million depending on the achievement of certain development and sales
milestones, as well as royalties on future net sales. On initial recognition, the equity instruments received had a
fair value of € 11 million. Vera Therapeutics will assume full responsibility for the development and
commercialization of the atacicept program in all indications. The income from the out-licensing of intellectual
property in the amount of € 27 million was reported in other operating income. This included a payment
received in December 2020 for the achievement of a development milestone.
Collaboration with Artios Pharma Limited, United Kingdom, in the area of DNA repair
mechanisms
On December 3, 2020, Merck and Artios Pharma Limited, United Kingdom (Artios) announced the conclusion of
a global strategic cooperation in the area of DNA repair mechanisms. The aim of the collaboration is the
development of therapies for the personalized treatment of cancers. Under the terms of the agreement, the
partners will use Artios's platform to jointly identify multiple target molecules and lead structures. Merck has
the option of acquiring control over the exclusive worldwide rights to develop and commercialize selected drug
candidates resulting from the collaboration. In exchange, Artios will receive an upfront payment as well as
near-term payments totaling US$ 30 million. If Merck chooses to exercise the option, Artios will receive up to
US$ 860 million for each of the products commercialized by Merck in addition to staggered royalty payments on
future net sales.
Arrangements in the Performance Materials business sector
Upon acquiring Versum Materials, Inc., United States, (Versum), Merck became an equal 50% partner in
Hydrochlor, LLC, United States, (Hydrochlor) under a joint arrangement with Linde plc, Ireland. Hydrochlor was
founded with the aim of supplying hydrogen chloride exclusively to the two partner companies. Also upon
acquiring Versum, Merck became a partner under an agreement with Showa Denko K.K., Japan. The aim of the
agreement is to manufacture a supplier product to supply to the two partner companies exclusively. Even
though both agreements are legally separate from the respective partner companies, each agreement was
classified as a joint operation since the respective arrangements are designed to provide output to the contract
partners and each agreement is the sole source of funding for settling liabilities.
Consolidated Financial Statements
Notes
Operating Activities
216
Operating Activities
(8) Segment Reporting
| Accounting and measurement policies
Segment Reporting
The internal organizational and reporting structure of the Merck Group forms the basis of the segmentation of
its business operations. It is founded on the business models of the business sectors, which led to
homogeneous risk structures within the segments. Resource allocation and the assessment of the segments'
business development are performed by the Executive Board of Merck KGaA as the chief operating decision-
maker.
Corporate and Other includes income and expenses, assets and liabilities, as well as cash flows that cannot be
allocated to the reportable segments presented. They originate mainly from the central Group functions.
Moreover, the column serves the reconciliation to the Group figures. As these are managed at Group level,
financial expenses and financial income, which include interest expenses and interest income, as well as income
tax expenses and income are also disclosed under Corporate and Other.
Apart from sales, the success of a segment is mainly determined by EBITDA pre (segment result) and business
free cash flow. EBITDA pre and business free cash flow are performance indicators not defined by International
Financial Reporting Standards (IFRS). However, they represent important variables used to steer the Merck
Group. To enable operational performance to be controlled using the performance indicator EBITDA pre, this is
calculated excluding depreciation and amortization, impairment losses and reversals of impairment losses, and
adjustments.
€ million
59
-469
68
selling
thereof:
thereof:
thereof:
marketing and
thereof:
2020
The adjustments are disclosed in the consolidated income statement as part of the respective functional costs
and allocated to them as follows:
220
Notes Operating Activities
Consolidated Financial Statements
€ million
Acquisition-related adjustments resulted in income of € 10 million (2019: expenses of € 84 million). This
resulted in particular from the adjustment of the provision for the EU Commission's competition law review of
the Sigma-Aldrich acquisition (Note (27) "Other provisions") in the mid double-digit million euro range. This
was offset by expenses of € 22 million (previous year: € 80 million) in connection with the acquisition of
Versum, mainly resulting from the consumption of inventories revalued at the time of acquisition.
Restructuring expenses in the amount of € 162 million (2019: € 120 million) primarily relate to the Thrive
transformation program in the Healthcare business sector that was initiated in the year under review (2020:
€ 88 million/2019: €0 million). Restructuring expenses were incurred for the Bright Future program in the
Performance Materials business sector in the amount of € 20 million (2019: € 50 million) and the relocation of
various tasks to the shared service organization in the amount of € 9 million (2019: € 26 million). Further
expenses of € 15 million related to various restructuring measures in the Life Science business sector (2019:
€ 9 million).
1 Not defined by International Financial Reporting Standard (IFRS).
-328
-407
Adjustments (total)¹
Reversals of impairment losses
-9
-128
-318
-279
Integration and IT expenses in the amount of € 108 million (2019: € 95 million) primarily resulted from the
introduction of new ERP systems (2020: € 50 million/2019: € 57 million) and the integration of Versum
Materials, Inc., United States (Versum) (2020: € 37 million/2019: € 12 million). Impairment losses on
intangible assets increased to € 128 million (2019: € 9 million) and are primarily related to intangible assets in
the Performance Materials business sector.
Restructuring expenses
Integration expenses/IT expenses
Gains (+)/losses (-) on the divestment of
businesses
-10
-10
-108
-30
-1
-71
-5
-1
-162
-21
-25
-28
-55
-33
Total
expenses
expenses
income and
other
operating
thereof:
research and
development
administration
expenses
expenses
cost of sales
Adjustments before impairment losses/reversals of impairment losses¹
Impairment losses
Acquisition-related adjustments
-13
-84
2,120
2,985
Operating result (EBIT)¹
-318
-279
Adjustments¹
-1,946
-1,938
Depreciation/amortization/impairment losses/reversals of impairment losses
4,385
Financial result
5,201
-469
-495
Corporate and Other
4,854
5,696
EBITDA pre of the operating businesses¹
2019
2020
€ million
The following table presents the reconciliation of Segment results of all operating businesses to the profit before
income tax of the Merck Group:
EBITDA pre of the Merck Group¹
-354
-385
Profit before income tax
10
-6
-10
-95
-108
-120
-162
2019
2020
Other adjustments
Acquisition-related adjustments
Gains (+)/losses (-) on the divestment of businesses
Integration costs/IT costs
Restructuring costs
€ million
The adjustments comprised the following:
219
Operating Activities
Notes
Consolidated Financial Statements
1,735
2,630
1 Not defined by International Financial Reporting Standard (IFRS).
-9
-19
29
10
-577
Changes in trade accounts receivable as well as receivables from royalties and licenses
Lease payments²
144
-259
-144
-136
Elimination of acquisitions/divestments
Business Free Cash Flow¹
-45
346
48
3,765
1 Not defined by International Financial Reporting Standard (IFRS).
2 Excluding payments for low-value leases and interest components included in lease payments.
-29
-109
-10
-56
Adjustments before impairment
-13
-13
Other adjustments
2,732
Changes in inventories
-1,026
-1,439
-114
-318
losses/reversals of impairment losses¹
Impairment losses
-9
-9
Reversals of impairment losses
Adjustments in the operating result (total)¹
-56
-10
-109
-29
-123
-328
1 Not defined by International Financial Reporting Standards (IFRS).
Business free cash flow was determined as follows:
€ million
2020
2019
EBITDA pre¹
5,201
4,385
Investments in property, plant and equipment, software as well as advance payments for
intangible assets
-84
-49
-35
Acquisition-related adjustments
-169
-27
-98
-60
-53
2019
1 Not defined by International Financial Reporting Standards (IFRS).
Adjustments in the operating result (total)¹
Reversals of impairment losses
-128
-128
Impairment losses
losses/reversals of impairment losses¹
-279
-41
-27
-98
-60
-53
Adjustments before impairment
-9
-9
Other adjustments
-407
No single customer accounted for more than 10% of Group sales in fiscal 2020 or 2019. Transfer prices for
intragroup net sales were determined on an arm's-length basis. The intersegment sales reported in the above
table are valued at group production cost.
€ million
thereof:
cost of sales
-6
-6
1
Gains (+)/losses (-) on the divestment of
businesses
-95
-25
-70
Integration expenses/IT expenses
-120
-22
-29
-40
-10
-20
Total
expenses
expenses
expenses
income and
thereof:
other
operating
thereof:
research and
development
thereof:
administration
thereof:
marketing and
selling
expenses
Restructuring expenses
166
The Merck Group divides its business activities into three business sectors: The Healthcare business sector
contains the business with prescription pharmaceuticals. The customers mainly comprise wholesalers, hospitals,
and pharmacies. The Life Science business sector comprises products for scientific institutions and research and
analytical laboratories in the pharmaceutical/biotechnology industry and applications for customers
manufacturing chemical and biological pharmaceuticals. In line with the product portfolio, customers in this
business sector primarily include companies of the pharmaceuticals and biotechnology sector as well as retailers
and universities. The Performance Materials business sector consists of the entire specialty chemicals business
and primarily services industrial companies. The fields of activity of the individual segments are described in
detail in the sections on the business sectors in the combined management report.
2 Previous year's figure have been adjusted, see Note (6) "Acquisitions and divestments".
462 4,830
1,501
5,515
Net sales by company
17,534
581
910
2,529
6,313
4,524
location¹
4,739
979
4,991
location¹
Net sales by customer
Group
East and
Africa
Latin
America
thereof:
China
Asia-
Pacific
USA
292
4,639
5,962
2,224
343
973
1,664 1,657
equipment
877
1,610
3,581
Property, plant and
23,612
1
63
63
804
17,866
17,876
1,628
1,585
4,930
intangible assets²
Goodwill and other
17,534
361
868
North thereof:
America
147
thereof: thereof:
Germany Switzerland
€ million
-20,605
-716
-1,519
-3,055
Liabilities by business sector³
43,808
3,867
10,785
21,596
7,560
-25,894
Assets by business sector³
31.2%
31.0%
28.6%
EBITDA pre margin (in % of net sales)²
4,385
803
2,129
1,922
EBITDA pre (segment result)²
318
27.1%
Payments for investments in property, plant
and equipment4
343
296
Middle
Information by country and region - 2020
5 Without provisions for pensions and other post-employment benefits.
4 According to the consolidated cash flow statement.
3 Previous year's figure have been adjusted, see Note (6) "Acquisitions and divestments".
2 Not defined by International Financial Reporting Standard (IFRS).
1 Excluding intersegment sales.
112
38
25
208
19
12
813
49
222
6
44
Non-cash changes in provisions5
86
91
Payments for investments in intangible assets4
125
Europe
56
6,421
Research and development
1,594
746
1,590
3,386
Property, plant and
26,335
2
77
1,054
20,154
1,586
20,165
1,644
5,113
intangible assets 2,3
Goodwill and other
16,152
373
965
2,048
5,298
4,283 4,101
1,682
996
353
159
1 Excluding intersegment sales.
57,036
1,335
3,430
4,110
12,728
-2,268
-11
-18
-34
-79
-160
-164
-945
2,337 12,829 12,648
13,806
26,714
Number of employees
-923
-1,997
Research and development
costs
equipment2
6,192
57
389
1,475
5,233
location¹
1 Excluding intersegment sales.
58,096
1,296
3,384
4,275
13,518
13,131
13,312
2,383
13,292
26,586
Number of employees
-2,288
costs
-10
-14
-21
-63
-269
-269
-905
-884
-1,931
2 Goodwill and other intangible assets show an allocation by currency area.
3 Goodwill and other intangible assets show an allocation by currency area.
Consolidated Financial Statements
Operating Activities
Net sales by company
16,152
location¹
591
1,012
2,275
5,599
4,214 4,011
212
1,010
4,735
Net sales by customer
Group
Middle
East and
Africa
thereof:
China
Asia-
Pacific
USA
North thereof:
America
thereof: thereof:
Germany Switzerland
Europe
€ million
Information by country and region 2019
218
Notes
Latin
America
Utilizations
1,116
Total
6,639
100%
358353
2,583
35%
250
8%
7%
4,991
2,701
36%
484
14%
4,739
27%
1,900
25%
29%
2,582
455
10%
100%
3,380
100%
17,534
100%
Net sales by region
(customer location)
Europe
Middle East and Africa
2,158
North America
1,554
23%
Asia-Pacific
1,831
28%
Latin America
641
32%
76%
6,313
36%
Goods
6,531
97%
5,972
87%
2,497
97%
15,000
Group
93%
7
397
6%
50
2%
454
3%
Services
Equipment
Performance Materials
Life Science
Healthcare
3%
28
1%
910
5%
1%
37
1%
581
3%
7,515
100%
3,380
100%
17,534
100%
2019
€ million
Net sales by product type
7,515
100
100%
Total
33%
1,256
49%
370
11%
438
17%
1
34%
2
100%
2,574
100%
1 Previous year's figures have been adjusted due to an internal realignment.
Notes Operating Activities
224
The following tables present a more detailed breakdown of net sales by business sector from contracts with
customers.
2020
3,380
€ million
878
1,901
1,108
2,170
31%
1,704
23%
1,692
25%
7,515
100%
56%
6,864
€ million
2020
20191
Semiconductor Solutions
Display Solutions
Surface Solutions
Other
Total
100%
Net sales by product type
Healthcare
Life Science
535
7%
96
3%
686
4%
License income
9
1%
1
Commission income
18
18
Income from co-
65
1%
65
commercialization agreements
10
56
Services
4%
Performance Materials
Group
Goods
Equipment
6,496
98%
Disposals due to divestments/Reclassification
to assets held for sale
6,585
88%
3,029
90%
16,111
92%
5
386
5%
254
7%
645
6,639
29%
2%
7%
States
Total
Jan. 1, 2020
522
315
43
29
565
Total
Additions due to business combinations
1,713
1,234
41
20
1,754
Disposals due to divestments/Reclassification
to assets held for sale
Utilizations
Cumulative increase (-)/decrease (+) in net
sales
Other additions
thereof: attributable to performance
States
€ million
2021
2022 or later fiscal years
3,892
376
Total
4,268
Year of expected revenue recognition
€ million
As of Dec. 31, 2019
Total
2020 2021 or later fiscal years
2,018
145
2,163
The significant increase compared with the previous year resulted, in particular, from the positive performance
of the Process Solutions business unit in the Life Science business sector.
The following table shows the change in refund liabilities:
2020
Rebates/Bonus payments
Rights of return
thereof: United
thereof: United
Total
-8
-8
-1,501
Dec. 31, 2020
1
1
622
368
44
26
666
Other
2019
Rights of return
€ million
Total
Jan. 1, 2019
423
thereof: United
States
274
Total
thereof: United
States
Rebates/Bonus payments
-42
-3
-4
-1,081
-33
-17
-1,534
-66
-67
2019
-3
-4
-69
-48
-48
-3
-3
-51
obligations satisfied in prior periods
Currency translation difference
-39
-35
Year of expected revenue recognition
486
As of Dec. 31, 2020
The table below shows future net sales from concluded contracts:
2,574
100%
16,152
100%
Net sales by region
(customer location)
Europe
2,241
100%
33%
33%
217
9%
4,735
29%
North America
1,474
22%
2,277
2,474
6,864
6,714
25
1%
611
4%
License income
8
8
Commission income
100%
18
1
21
Income from co-
58
1%
58
commercialization agreements
Total
2
36%
267
10%
7%
100%
92
1%
17
1%
591
4%
6,864
482
6,714
100%
100%
16,152
100%
Group net sales amounted to € 17,534 million in fiscal 2020 (2019: € 16,152 million), out of which
€ 697 million (2019: € 683 million) was recognized over time. This related mainly to net sales from
services and from customer-specific equipment in the Applied Solutions and Process Solutions business
units in the Life Science business sector and in the Semiconductor Solutions business unit in the
Performance Materials business sector.
Consolidated Financial Statements
Notes
Operating Activities
225
2,574
Total
Middle East and Africa
6%
4,214
26%
Asia-Pacific
1,816
27%
1,743
26%
2,041
79%
5,599
35%
Latin America
702
11%
278
4%
32
1%
1,012
€ million
2,215
Consolidated Financial Statements
3,002
2019
424
18
229
557
97
44
5
2020
3
8
81
84
838
715
Income from the reversal of provisions for litigation totaling € 424 million (2019: € 18 million) primarily related
to the legal dispute with Biogen Inc., United States, concerning the sale of the product Rebif®, as well as the
adjustment of the provision for the EU antitrust proceedings in connection with the acquisition of Sigma-Aldrich
Corporation, United States. Additional information can be found in Note (27) "Other provisions".
Income from upfront payments, milestone payments, and royalties totaling € 229 million (2019: € 557 million)
resulted in particular from the collaboration agreement with GlaxoSmithKline plc, United Kingdom (2020:
€ 85 million/2019: € 92 million). The prior-year figure also included income from the strategic alliance with
Pfizer Inc., United States, in the amount of € 281 million. For further information see Note (7) "Collaboration
agreements". License income primarily resulted from interferon beta products (Biogen Inc., United States) in
the amount of € 74 million (2019: € 89 million) and a license for the antidepressant ViibrydⓇ (AbbVie Inc.,
United States) in the amount of € 38 million (2019: €0 million). It also included a milestone payment in
connection with the out-licensing of atacicept to Vera Therapeutics, Inc., United States, in the amount of
€ 14 million.
The income from the disposal of businesses and non-current assets was largely attributable to the sale of the
Allergopharma allergy business to Dermapharm Beteiligungs GmbH, Grünwald (€ 35 million), the out-licensing
of the osteoarthritis drug candidate M6495 to Novartis AG, Switzerland (€ 27 million), and the sale of atacicept
to Vera Therapeutics, Inc., United States (€ 13 million).
1
As in the previous year, other operating income included income from services performed in connection with
the Consumer Health business that was divested in 2018.
Other operating income
Income from miscellaneous services
The net income from repayments of subsidies received and reimbursements recognized within research and
development costs amounted to € 127 million in 2020 (2019: € 99 million). The increase was mainly due to the
strategic alliance with GlaxoSmithKline plc, United Kingdom, in the field of immuno-oncology (see Note (7)
"Collaboration agreements").
Net income from repayments of subsidies received and reimbursements included reimbursements from
governmental institutions as well as repayments of previously recognized governmental subsidies, which
amounted to net income of € 2 million in total (2019: net expenses of € 5 million).
(13) Other operating income
Accounting and measurement policies
Other operating income
Other operating income comprises all income that cannot be allocated to net sales or finance income on account
of its character.
Income from upfront payments, milestone payments, and royalties
Income from upfront and milestone payments, royalties, and license payments comprises consideration
received by Merck from contract partners that are not customers. This relates in particular to collaboration and
out-licensing agreements in the Healthcare business sector (see Note (7) "Collaboration agreements").
Income from the revaluation of contingent considerations
Remaining other operating income
Income from the revaluation of contingent considerations
Consolidated Financial Statements
Notes
Operating Activities
228
Other operating income was broken down as follows:
€ million
Income from the reversal of provisions for litigation
Income from upfront payments, milestone payments and royalties
Income from disposal of businesses and non-current assets
The accounting treatment of contingent consideration agreed at the sale of a business as defined in IFRS 3 is
shown in Note (36) "Other financial assets".
(14) Other operating expenses
Accounting and measurement policies
Other operating expenses
-112
-80
-60
-57
-98
-56
-55
-52
-93
-60
-33
-29
-24
-17
-8
-15
-16
-5
-36
-42
-183
2019
Other operating expenses comprise all expenses that cannot be reasonably allocated to a functional cost type or
finance costs.
Consolidated Financial Statements
Notes
Operating Activities
44%
The breakdown of other operating expenses was as follows:
€ million
Impairment losses on non-financial assets
Project expenses (including integration and IT projects)
Profit share agreements
Currency effects from operating activities
Non-income related taxes
Expenses from litigation
Premiums, fees and contributions
Restructuring expenses
Expenses on revaluation of contingent considerations
Expenses for miscellaneous services
Expenses for disposal of businesses and non-current assets
2020
For information on the capitalization of development costs, see Note (19) "Other intangible assets".
Cost reimbursements for research and development are offset against research and development costs.
The item comprises the costs of the Group's own research and development departments, the expenses
incurred as a result of research and development collaborations as well as the costs of clinical trials in the
Healthcare business sector (both before and after approval is granted).
Research and development costs
Accounting and measurement policies
-9
-9
Dec. 31, 2019
522
315
43
29
565
Other
The development of contract assets and contract liabilities is shown in Note (26) "Contract assets" and in Note
(29) "Other non-financial liabilities".
Consolidated Financial Statements
Notes
Operating Activities
226
Accounting and measurement policies
Cost of sales
The cost of sales primarily includes the cost of manufactured products sold as well as the merchandise sold.
Cost comprises the following items: directly attributable costs, such as cost of materials, personnel, and energy
costs, depreciation and amortization, overheads attributable to the production process, inventory impairment
losses and their reversals.
(10) Cost of sales
9
1
1
-1,344
-1,067
-41
-25
-1,385
Cumulative increase (-)/decrease (+) in net
sales
-44
-43
-2
-46
thereof: attributable to performance
-43
-43
-2
-45
obligations satisfied in prior periods
Currency translation difference
8
6
Cost of sales included amortization of intangible assets (excluding amortization of internally generated or
separately acquired software) in the amount of € 210 million (2019: € 188 million). Material costs amounted to
€ 3,074 million in 2020 (2019: € 2,743 million) and were largely reported under cost of sales.
-14
Impairment losses on inventories in 2020 amounted to € 312 million (previous year: € 275 million); reversals
of impairment losses came to € 97 million (previous year: € 74 million).
(11) Marketing and selling expenses
-899
-794
-636
-923
-164
-200
-324
-339
-521
-4,207
The reduction in expenses for the sales force and sales promotion is largely due to the lockdown in a number of
jurisdictions in order to combat the Covid-19 pandemic. The increase in logistics expenses was due in particular
to modified transportation routes and higher freight rates as a result of the Covid-19 pandemic.
Consolidated Financial Statements
Notes
Operating Activities
227
The lower level of amortization of intangible assets was due to the end of the scheduled amortization of assets
recognized in connection with the acquisition of Serono SA, Switzerland.
Of the royalty and license expenses, € 51 million (2019: € 68 million) related to license expenses for
Glucophage in China with the distribution partner Bristol-Myers Squibb, Corp., United States, and € 41 million
(2019: € 41 million) related to the commercialization of ErbituxⓇ in Japan.
(12) Research and development costs
-4,576
-413
-845
-862
Accounting and measurement policies
Marketing and selling expenses
Marketing and selling expenses within logistics costs also include expenses for transportation services
performed on behalf of customers. The corresponding income from these services is presented under net sales.
Amortization of the intangible assets under marketing and selling expenses is mainly attributable to customer
relationships, marketing authorizations, licenses and similar rights, brands, and trademarks, which can be
functionally allocated to Marketing and selling.
Marketing and selling expenses comprised the following items:
€ million
Sales force
Internal sales services
Sales promotion
Logistics
Amortization of intangible assets¹
Royalty and license expenses
Other marketing and selling expenses
Marketing and selling expenses
1 Excluding amortization of internally generated or separately acquired software.
2020
2019
-910
-954
The increase in impairments compared with the previous year was primarily attributable to the Life Science
business sector. Falling demand for part of the product portfolio due to the Covid-19 pandemic led to an
increased need for impairments.
-240
229
-863
1,273
19%
531
8%
321
5%
Fertility
1,079
17%
16%
19%
thereof: Gonal-fⓇ
630
9%
-212
11%
General Medicine & Endocrinology
2,585
1,247
39%
1,131
1,594
17%
1,030
15%
thereof: ErbituxⓇ
891
13%
871
13%
24%
thereof: BavencioⓇ
2%
103
2%
Neurology & Immunology
thereof: RebifⓇ
thereof: MavencladⓇ
1,662
25%
156
2,557
38%
thereof: GlucophageⓇ
287
4%
6,639
100%
6,714
100%
Life Science
€ million
3%
Process Solutions
Applied Solutions
Total
1 Previous year's figures have been adjusted due to an internal realignment.
Performance Materials
2020
20191
3,596
48%
Research Solutions
197
4%
238
903
14%
877
13%
thereof: ConcorⓇ
529
8%
530
8%
thereof: Euthyrox®
thereof: SaizenⓇ
Other
Total
455
7%
402
6%
234
4%
(9) Net sales
Consolidated Financial Statements
743
Operating Activities
Deferred tax assets resulting from deductible temporary differences that exceed deferred tax liabilities relating
to the same taxation authority and the same taxable entity are recognized if it is considered likely that taxable
profit will be available in the future to apply such tax assets. This corresponds to the procedure for recognizing
deferred tax assets on unused tax credits and tax loss and interest carryforwards.
The recognition of deferred tax assets requires an estimate of the probability of future use. The influencing
factors considered as part of this assessment include the following:
•
temporary differences relating to the same taxation authority and the same taxable entity that will be
subject to taxation in the future
⚫ results history,
results planning, and
.
existing tax planning of the respective Group company.
Deferred taxes
Deferred tax liabilities are recognized for projected dividend payments of subsidiaries. If no dividend payments
are projected in the foreseeable future, no deferred tax liability is recognized for the difference between
proportional equity and the investment value determined for tax purposes.
Income tax
The calculation of the reported assets and liabilities from current and deferred income taxes requires extensive
discretionary judgments, assumptions, and estimates.
When assessing income tax claims and liabilities, the interpretation of tax provisions may be subject to
particular uncertainty. The possibility that the relevant tax authorities will take a different view concerning the
correct application and interpretation of tax standards cannot be ruled out. Changes to the assumptions
underlying the correct interpretation of tax standards, for example as a result of changes in legislation, affect
the accounting treatment of uncertain income tax assets and liabilities in fiscal 2020.
1,524
23
36
1,145
1,488
Significant discretionary decisions and sources of estimation uncertainty
Other additions
Assessments relating to specific matters are made to calculate uncertain income tax claims and liabilities.
Uncertain income tax matters are recognized depending on the likelihood that the responsible tax authorities
will accept the respective income tax treatment. If recognition by the tax authorities is considered unlikely, the
respective uncertain tax asset or uncertain tax liability is measured at the most likely amount. Uncertain
income tax liabilities are disclosed within income tax liabilities. Expected income tax-related penalties and
interest that do not fall within the scope of IAS 12 are treated as provisions in line with the relevant provisions
of IAS 37.
Current income taxes for the reporting period and, where applicable, for prior periods are calculated in the
amounts that the tax authorities are expected to demand or reimburse. The calculation is based on the
company-specific tax rate applicable in the relevant tax year.
-735
Remaining other operating expenses
Other operating expenses
Impairments of non-financial assets in the amount of € 160 million (2019: € 33 million) were attributable to
intangible assets (see Note (19) "Other intangible assets") and in the amount of € 23 million (2019:
Notes
Expenses from profit share agreements amounting to € 80 million (2019: € 60 million) were primarily incurred
in connection with the strategic alliance with Pfizer Inc., United States, in the field of immuno-oncology (see
Note (7) "Collaboration agreements"), as well as the cooperation with Bristol Myers Squibb Co., United States,
in Japan to a significantly lesser extent.
Information on litigation expenses is included in Note (27) "Other provisions".
Restructuring expenses totaling € 29 million (2019: € 24 million) related in particular to advisory expenses in
connection with the THRIVE program (see Note (27) "Other provisions") in the Healthcare business sector that
it was not possible to allocate to the respective functions.
Uncertain income tax claims and liabilities
Expenses for the revaluation of contingent considerations in the amount of € 17 million in fiscal 2020 (2019:
€ 8 million) resulted from the remeasurement of contingent consideration arising in connection with the sale of
the shares in Prexton Therapeutics SA, Switzerland, to Lundbeck A/S, Denmark, in 2018. They also included
adjustments of contingent considerations from the divestment of the biosimilars business to subsidiaries of
Fresenius SE & Co. KGaA, Bad Homburg vor der Höhe, in 2017 and the KuvanⓇ business to BioMarin
Pharmaceutical Inc., United States, in 2016.
Remaining other operating expenses also included the loss on the net monetary position in connection with
hyperinflation accounting in Argentina in the amount of € 9 million (2019: € 10 million).
(15) Income tax
Consolidated Financial Statements
Notes
Operating Activities
230
Accounting and measurement policies
Current income taxes
Remaining other operating expenses included, among other things, environmental protection costs and
personnel expenses that it was not possible to reliably allocate to the functional areas. This item also contained
the expense for donations of Cesol® 600 tablets containing the active ingredient praziquantel to the World
Health Organization (WHO).
Additions due to business combinations
€ 8 million) to property, plant and equipment (see Note (20) "Property plant and equipment").
Project expenses of € 93 million (2019: € 112 million) were primarily incurred on advisory services in
connection with the integration of Versum Materials, Inc., United States, as well as expenses for the global
Covid-19 crisis team and for masks, tests and donations. Consulting and personnel expenses were also incurred
in connection with the Syntropy joint venture with Palantir Technologies, Inc., United States, and advisory
services relating to the divested Consumer Health business, as well as for the global harmonization of the IT
landscape.
31
Notes
Consolidated Financial Statements
The measurement of sales deductions and refund liabilities resulting from rights of return takes into account
historical rates of return for individual product groups, information from distributors on inventory levels, and
publicly available information on product sales from sector-specific service providers (in the Healthcare business
sector).
expected sales volume growth rates.
.
• pricing information, and
past experience,
.
The measurement of sales deductions and refund liabilities resulting from expected rebates and discounts
considers the following:
Sales deductions provided on the invoice as price-reducing items, which will likely be applied by customers
when making the respective payments, are recognized as reduction of trade accounts receivable. Expected
refunds, such as bonus payments, reimbursements for rights of return, or rebates from health plans and
programs, are recognized in the separate item "refund liabilities" on the consolidated balance sheet.
Merck grants customers various kinds of rebates and discounts. These, as well as anticipated customer refund
claims, state compulsory charges, and rebates from health plans and programs are deducted from sales. The
most significant portion of these deductions from sales is attributable to the Healthcare business sector.
Determining the transaction price
Net sales from contracts comprising several separate performance obligations are recognized when the
respective performance obligation has been fulfilled. This affects, in particular, the sale of goods in combination
with services. Multiple-element arrangements of this nature exist to a limited extent in the Applied Solutions
business unit in the Life Science business sector and in the Semiconductor Solutions business unit in the
Performance Materials business sector.
Intellectual property is out-licensed to a limited extent in the Healthcare and Life Science business sectors. In
the Healthcare business sector, these transactions do not usually form part of ordinary activities, meaning that
the corresponding income is reported in other operating income (see Note (7) "Collaboration agreements" and
Note (13) "Other operating income”).
For service contracts, and customer-specific contract manufacturing of goods and equipment, Merck recognizes
revenue over time based on the progress towards complete satisfaction of the performance obligation, if there
is a contractual claim for payment against the customer for the services already performed. Input- and output-
oriented methods are used to appropriately determine progress on a contract-specific basis. Specifically, this is
largely performed on the basis of the costs incurred, the time elapsed, or the milestones achieved as of the
reporting date.
Net sales are recognized when (or as) the customer obtains control of the asset. For sales of goods, the
customer typically obtains control as soon as delivery is made, given that the customer is generally not able to
obtain any benefits from the asset before that point in time. To a lesser extent, Merck generates net sales from
the sale of goods based on bill-and-hold arrangements. In these cases, net sales are recognized before the
goods are delivered to the customer, as soon as Merck has invoiced the products and the additional criteria laid
out in IFRS 15.B81 are fulfilled. In the case of equipment sales, the criteria for revenue recognition are only
met after installation has been successfully completed - to the extent that the installation requires specialized
knowledge, does not represent a clear ancillary service and the relevant equipment can only be used by the
customer once successfully set up.
Accounting and measurement policies
221
472
Operating Activities
222
Nature and timing of revenue recognition
Given that the Merck Group generates the large majority of its sales through transactions with simple
structures, the company usually has an enforceable right to payment after the performance obligation has been
fulfilled. The payment targets contractually agreed between Merck Group and its customers usually range
between 30 and 60 days. For some service contracts, the company receives the contractually agreed
consideration before the service is delivered; in such cases, the consideration received is presented as a
contract liability on the consolidated balance sheet until the revenue has been recognized.
Contractual payment terms
Total
Oncology
€ million
Healthcare
The following tables present a breakdown of net sales by key product lines/products:
223
Notes Operating Activities
2020
If the carrying amount of refund liabilities had been 10% higher as of the reporting date, this would have
resulted in a € 67 million (2019: € 57 million) reduction in profit before tax.
Practical expedients
Consolidated Financial Statements
Merck uses the practical expedient of IFRS 15 in which the promised amount of consideration is not adjusted for
the effects of a significant financing component if the period between the fulfillment of a performance obligation
and the payment by the customer only amounts to up to one year.
Significant discretionary decisions and sources of estimation uncertainty
49
Sales deductions
The measurement of sales deductions and the corresponding refund liabilities requires extensive estimates.
Uncertainties exist in particular concerning the extent to which past experience serves as a reliable basis for
estimating the future development of expected refunds, such as bonus payments, reimbursements for rights of
return, or rebates from health plans. External information from distributors and industry services outside of
Merck's control, which are also subject to uncertainty, are used to determine sales deductions.
Due to a lack of past experience, the estimate uncertainty referenced above is particularly relevant for product
launches in the Healthcare business sector.
Any changes in estimates of the parameters listed above have a cumulative impact on the net sales recognized
in the respective adjustment period.
-147
-16
-28
-933
11,015
1,086
944
Accumulated depreciation and
downs
impairment losses as of Jan. 1, 2020
-2,829
-634
-503
-13,820
-741
9,148
Depreciation, amortization, and write-
22,193
-9,853
-6
5
906
Impairment losses
23,040
4
4
26
33
-5
97
-2
-12
Reclassification to assets held for sale
-11
-27
-25
-63
157
-577
Currency translation difference
-82
104
1
21
-3,211
-10,091
-695
-543
217
343
-14,540
5,937
924
391
401
7,653
1 Previous year's figures have been adjusted, see (6) "Acquisitions and divestments".
1,101
Net carrying amounts as of Dec. 31, 2020
-281
Dec. 31, 2020
29
-940
-26
-68
-62
-4
-160
Reversals of impairment losses
Transfers
Disposals due to divestments/
2
Reclassification to assets held for sale
Other disposals
5
1
7
24
4
11,141
8
Dec. 31, 2020
Current and non-current receivables/Other assets
19
6
29
6
Provisions for pensions and other post-employment benefits
697
546
6
Current and non-current other provisions
251
27
212
24
Current and non-current liabilities
94
22
1,811
1,849
1,951
Deferred taxes (before offsetting)¹
71
73
17
48
27
20
Tax refund claims/Other
Tax loss carryforwards
6
93
51
2,215
657
679
243
260
The majority of the tax loss carryforwards either has no expiry date or can be utilized for up to 20 years. In
2020, the income tax expense was reduced by € 5 million (December 31, 2019: € 16 million) due to the
utilization of tax loss carryforwards from prior years for which no deferred tax asset had been recognized in
previous periods.
Unused tax credits amounted to € 31 million as of December 31, 2020 (December 31, 2019: € 42 million). No
deferred tax assets were recognized for € 17 million of these unused tax credits (December 31, 2019:
€ 16 million).
Consolidated Financial Statements
Notes
Operating Activities
233
Deferred taxes according to consolidated balance sheet
Deferred tax assets and liabilities corresponded to the following balance sheet items:
Dec. 31, 2020
Dec. 31, 2019
€ million
Intangible assets¹
Property, plant and equipment¹
Assets
Liabilities
Inventories
1
6
26
Current and non-current financial assets
1,965
119
13
25
27
141
1,600
114
Liabilities
Assets
101
Offset deferred tax assets and liabilities
-408
-408
Operating Assets, Liabilities, and Contingent Liabilities
235
Operating Assets, Liabilities and Contingent
Liabilities
(18) Goodwill
Accounting and measurement policies
Goodwill
In the course of business combinations, goodwill is recognized on the acquisition date. The option to measure
non-controlling interests at fair value on the date of their acquisition (full goodwill me thod) is not utilized.
Method for impairment testing
Impairment testing for goodwill takes place at the level of the Healthcare, Life Science and Performance
Materials business sectors. These groups of cash-generating units (CGUs) are the lowest level at which goodwill
at Merck is monitored for internal management purposes.
Impairment testing is performed annually and on an ad hoc basis where there are indications of impairment.
The existence of indications of impairment may be analyzed using various factors, particularly changes in short-
term and medium-term planning, sector studies, analyst forecasts, validation multiples based on peer group
information, Merck's average market capitalization compared with its balance sheet equity, and the
development of its order books.
In the second quarter of 2020, an analysis was conducted to determine the extent of which the impact of the
Covid-19 pandemic could indicate potential impairment losses affecting non-financial assets. This analysis found
that individual indicators of impairment within the meaning of IAS 36 were considered to have been fulfilled in
the Performance Materials CGU (primarily due to negative impacts in the Display Solutions and Surface
Solutions business units) and the Healthcare CGU (primarily due to negative impacts in the Fertility and
Neurology franchises). This assessment was based in particular on reductions in short-term and medium-term
internal earnings and cash flow forecasts as well as published analyst forecasts. The significant assumptions for
determining value underlying the impairment tests and the results of the sensitivity analyses are presented
below.
For both value in use and fair value, the recoverable amount is calculated less costs of disposal in accordance
with the discounted cash flow method (Level 3 in the IFRS 13 fair value hierarchy). The determination of the
recoverable amount for the Life Science CGU and Healthcare CGU was based on the value in use in fiscal 2020
and in the previous year. The impairment test of Performance Materials CGU was based on the fair value less
costs of disposal in fiscal 2020 and in previous year. The last medium-term plan approved by the Executive
Board, with a detailed planning period of four years, served as the basis for planning. The value of the net cash
flows was determined on the basis of the following principles:
Sales growth in the detailed
planning period
Profit margins in the detailed
planning period
Value in use
Based on plans approved by the Executive
Board, taking into account internal past
experience and largely non-observable input
factors in the market, for example regarding
future market shares, selling prices and
volumes, and excluding new products from the
development pipeline and other expansion
investments
Based on a combination of different estimating methods; e.g.
historical and implied stock yields
Derived from the respective peer group
Derived from the returns of long-term government bonds
Cost of debt and capital structure
Market risk premium
Beta factor
Notes
Risk-free interest rate
236
Operating Assets, Liabilities, and Contingent Liabilities
Notes
Consolidated Financial Statements
Based on past experiences, adjusted for expected profitability developments
Fair value less costs of disposal
Based on plans approved by the Executive
Board, taking into account internal past
experience and largely non-observable input
factors in the market, for example regarding
future market shares, selling prices and
volumes, and including new products from the
development pipeline and other expansion
investments
The discount factor after taxes is derived on the basis of the following input parameters:
Consolidated Financial Statements
As in the previous year, equity capital remained unchanged in fiscal 2020. The weighted average (basic)
number of shares was 434,777,878 and thus corresponded to the number of theoretical shares outstanding. In
fiscal 2020, there were no shares with a potential diluting effect; as a result, the diluted earnings per share
were equivalent to basic earnings per share. The earnings per share attributable to discontinued operations in
fiscal 2019 resulted from the divestment of the Consumer Health business as of December 1, 2018.
Basic earnings per share is calculated by dividing the profit after taxes attributable to the shareholders of Merck
KGaA (net income) by the weighted average number of theoretical shares outstanding. The calculation of the
theoretical number of shares is based on the fact that the general partner's equity is not represented by shares.
Corresponding to the division of the subscribed capital of € 168 million into 129,242,252 shares (see Note (34)
"Equity"), the general partner's equity of € 397 million equates to 305,535,626 theoretical shares. Overall,
equity capital thus amounted to € 565 million or 434,777,878 theoretical shares outstanding.
Income tax receivables amounted to € 530 million (December 31, 2019: € 600 million). Of this figure,
€ 10 million (December 31, 2019: € 11 million) are disclosed in other non-current non-financial assets.
Income tax receivables resulted primarily from tax prepayments that exceeded the actual amount of tax
payable for 2020 and prior fiscal years as well as from refund claims for prior years. As of December 31,
2020, income tax liabilities, including liabilities for uncertain tax obligations, amounted to € 1,505 million
(December 31, 2019: € 1,402 million). Of this figure, € 45 million related to the non-current income tax
liabilities included in other non-current non-financial liabilities (December 31, 2019: €0 million).
Income tax receivables and income tax liabilities
Deferred tax liabilities from outside basis differences for planned dividend payouts were recorded in the amount
of € 46 million (December 31, 2019: € 51 million). Temporary differences relating to the retained earnings of
subsidiaries, for which no deferred taxes are recognized, amounted to € 12,609 million as of December 31,
2020 (December 31, 2019: € 10,238 million).
An excess of deferred tax assets in the amount of € 34 million (December 31, 2019: € 27 million) was
recognized for Group companies that reported losses in the last two years, as these are expected to be
realizable on the basis of the positive earnings forecasts.
The reduction in deferred tax liabilities is primarily due to the reversal of deferred tax liabilities in connection
with the scheduled amortization of intangible assets identified and recognized in the course of purchase price
allocations made in connection with past acquisitions.
The changes in deferred tax assets and liabilities are primarily attributable to items recognized in profit or loss.
Items not recognized in profit or loss related to deferred tax effects resulting from items recognized through
other comprehensive income such as the remeasurement of the net defined benefit obligation and other benefit
commitments, changes in the fair value of financial assets and derivatives held for hedging purposes, and
currency translation effects. In fiscal 2020, the latter were attributable in particular to deferred tax liabilities
recognized for temporary differences on intangible assets. Deferred tax assets and liabilities recognized or
derecognized in connection with changes in the scope of consolidation in fiscal 2020 primarily related to
deferred tax assets for temporary differences on provisions for pensions and other post-employment benefits.
Consolidated Financial Statements
1 Previous year's figure have been adjusted, see Note (6) "Acquisitions and divestments".
1,421
1,441
1,543
Deferred taxes (consolidated balance sheet)¹
-390
-390
1,825
17
Notes
234
Earnings per share
Accounting and measurement policies
(17) Earnings per share
The decline in changes in other assets and liabilities was due to the end of the recognition in profit or loss of the
initial consideration for the strategic alliance with Pfizer, Inc., United States (see Note (7) "Collaboration
agreements").
The change in provisions in fiscal 2020 was largely due to the reversal of the provision for the patent dispute
with Biogen Inc., United States (see Note (27) "Other provisions").
Interest paid totaled € 340 million (2019: € 316 million). Interest received amounted to € 11 million (2019:
€ 60 million).
Operating Activities
Tax payments totaled € 1,006 million in fiscal 2020. Tax payments amounted to € 1,018 million in the previous
year, of which € 130 million was attributable to cash flows from investing activities in connection with the
divestment of the Consumer Health business. Tax refunds amounted to € 140 million (2019: € 160 million).
• The option to recognize interest received and interest payments made is exercised to the extent that
such transactions are recognized in cash flow from operating activities.
• The presentation of cash flows from operating activities is determined using the indirect method based
on the profit after taxes.
The calculation and presentation of cash flows from operating activities are based on the following principles:
Net cash flows from operating activities
Accounting and measurement policies
(16) Net cash flows from operating activities
• Tax payments are generally presented in the cash flow from operating activities. Only significant
transactions where the associated tax payments can be practically calculated are recognized in the
relevant item of the consolidated cash flow statement.
Derived from the market data of the respective peer group companies
264
27
2,630
1,735
Tax rate
31.7%
31.7%
Theoretical income tax expense
-834
-550
Tax rate differences
307
192
Tax effect of companies with a negative contribution to consolidated profit
Income tax for previous periods
-31
-26
-11
-59
Tax credits
Income taxes consisted of corporation and trade taxes for the companies domiciled in Germany as well as
comparable income taxes for foreign companies. Income taxes relating to other periods recognized in fiscal
2020 resulted mainly from completed tax audits and mutual agreement procedures as well as from additions to
liabilities for risks from tax audits.
25.4%
24.2%
Tax ratio according to consolidated income statement
-440
-637
2019
4
Tax effect of non-deductible expenses/tax-free income/other tax effects
Income tax expense according to consolidated income statement
16
5
Tax effect on tax loss carryforwards
-17
-32
-41
Consolidated Financial Statements
2020
€ million
Consolidated Financial Statements
Notes
Operating Activities
231
Regarding deferred tax items, there were degrees of uncertainty concerning the date on which an asset is
realized or a liability settled and concerning the tax rate applicable on this date. This applies in particular to
deferred taxes recognized in the course of acquisitions. Assessing the recoverability, particularly of tax credits
and tax loss and interest carryforwards, requires assumptions and estimates concerning the future taxable
income of the respective Group company. Furthermore, the extent to which a subsidiary's planned dividend
distribution is probable in the foreseeable future is discretionary.
Income taxes in the consolidated income statement were broken down as follows:
€ million
Current income taxes in the period
Income taxes for previous periods
Deferred taxes in the period
thereof: from temporary differences
thereof: from tax losses carried forward
thereof: from changes in tax rates
Income taxes
2020
2019
-959
-834
The following table presents the reconciliation from the theoretical income tax expense to the income tax
expense according to the consolidated income statement. The theoretical income tax expense is determined by
applying the statutory tax rate of a corporation headquartered in Darmstadt of 31.7% (2019: 31.7%).
Tax reconciliation
-440
-637
-7
6
Profit before income tax
-6
466
334
453
333
-59
-11
-7
Notes
Operating Activities
232
1,204
57
1,168
1,225
4
161
165
198
198
Tax loss carryforwards for which a deferred
tax asset is recognized
Tax loss carryforwards for which no deferred
tax asset is recognized
90
949
1,039
57
970
1,027
Not recognized deferred tax assets on tax loss
carryforwards
27
27
20
20
Recognized deferred tax assets on tax loss
carryforwards
1,110
carryforwards
270
17
284
257
27
Potential deferred tax assets for tax loss
287
94
Total
Outside
Germany
384
330
121
2019
2020
1 Previous year's figures have been adjusted, see Note (6) "Acquisitions and divestments".
-537
Deferred taxes (consolidated income statement)
Deferred taxes credited/debited to equity
Change in deferred tax liabilities (consolidated balance sheet) 1
Change in deferred tax assets (consolidated balance sheet)
€ million
The reconciliation between deferred taxes on the consolidated balance sheet and deferred taxes on the
consolidated income statement is presented in the following table:
Deferred taxes according to consolidated income statement
Changes in scope of consolidation/currency translation/other changes¹
237
-116
-58
Germany
Total
Outside
Germany
Germany
Dec. 31, 2019
Dec. 31, 2020
-67
Tax loss carryforwards
Tax loss carryforwards were structured as follows:
Changes in tax loss carryforwards
The item "Changes in scope of consolidation/currency translation/other changes" primarily comprised exchange
rate effects between the euro and the U.S. dollar. In the previous year, it mainly included deferred taxes
recognized in connection with the acquisition of Versum Materials, Inc., United States.
453
333
727
€ million
9,893
The long-term growth rate after the detailed planning period is determined taking into account expected long-
term growth and long-term inflation expectations.
Due to the planning uncertainty concerning the further progress of the Covid-19 pandemic, the planning used in
impairment testing in fiscal 2020 is based on two scenarios condensed to form a probability-weighted expected
value. In the base scenario ("V" scenario), it is assumed that the sharp downturn in global economic growth in
2020 will be followed by a recovery at a similar speed, with growth rates subsequently returning to the levels
recorded prior to the outbreak of the pandemic. In addition to the base scenario, a negative scenario (extended
"U" scenario) was included with a probability of occurrence of just under 20%. This scenario assumes a slower
recovery from the impact of the Covid-19 pandemic and a prolonged reduction in average global GDP growth
across the entire detailed planning period. The planning applied in the previous year was based solely on a base
scenario.
brands and
trademarks¹
Marketing authorizations,
patents, licenses, similar rights,
and other items
Software and
software in
development¹
Advance
payments
Total¹
€ million
Finite useful
life¹
Not yet
available for
use
Cost as of Jan. 1, 2019
7,402
10,739
885
755
19,780
Additions due to business combinations
-19
-2
Other disposals
Reclassification to assets held for sale
Disposals due to divestments/
2,944
208
Customer
relationships,
122
46
Other additions
23
181
339
2,401
40
-4
240
Notes
1 Previous year's figures have been adjusted, see (6) "Acquisitions and divestments".
The changes in goodwill caused by foreign exchange rates resulted almost exclusively from translating the
goodwill from the acquisitions of the Sigma-Aldrich Corporation, the Versum Materials, Inc., the AZ Electronic
Materials S.A., and the Millipore Corporation, which were partially denominated in U.S. dollars, into the
reporting currency.
See Note (6) "Acquisitions and divestments" for further information on the additions.
The recoverable amount exceeded the respective carrying amount in all ad hoc impairment tests in the second
quarter of 2020 as well as the scheduled impairment tests on October 31, 2019 and August 31, 2020.
(19) Other intangible assets
Accounting and measurement policies
Recognition and initial measurement of purchased intangible assets
In the course of in-licensing, the portion of the consideration paid by Merck to acquire intellectual property is
recognized as an intangible asset. If development services are also acquired from the selling contract party, an
appropriate portion of the consideration is recognized as deferred income and allocated to research and
development costs in line with the service performance if capitalization is not possible.
Contingent consideration in the form of milestone payments in connection with the purchase of intangible
assets arising outside a business combination is capitalized as an intangible asset and recognized as a financial
liability once the milestone is reached.
Intangible assets acquired in the course of business combinations are recognized at fair value on the acquisition
date. This also includes contingent considerations.
Recognition and initial measurement of internally generated intangible assets
Owing to the high risks until pharmaceutical products are approved, the criteria for the capitalization of
development costs in accordance with IAS 38 are not met in the Healthcare business sector for the
development of drug candidates. Costs incurred after regulatory approval are insignificant and are therefore not
Consolidated Financial Statements
Notes
Operating Assets, Liabilities, and Contingent Liabilities
239
Consolidated Financial Statements
Discretionary decisions are required in the identification of objective evidence of impairment as well as in
identifying the need to reverse impairment of other intangible assets.
Identification of a need to recognize impairment loss and reverse impairment loss
If the amortization of intangible assets from customer relationships, brands, trademarks, marketing
authorizations, patents, licenses and similar rights and other had been 10% higher, for example due to
shortened useful lives, profit before income tax would have been € 86 million lower in fiscal 2020 (2019:
€ 112 million).
Substantial assumptions and estimates are required to determine the appropriate level of amortization of other
intangible assets. This relates in particular to the determination of the underlying useful life.
In connection with in-licensing agreements in the Healthcare business sector, a discretionary estimate is made
of the extent to which upfront payments and milestone payments represent remuneration for services received
or whether such payments result in an in-licensing of an intangible asset that has to be capitalized.
Operating Assets, Liabilities, and Contingent Liabilities
The identification and measurement of intangible assets acquired in the course of business combinations are
subject to significant discretion and estimation uncertainty.
Significant discretionary decisions and sources of estimation uncertainty
An impairment test is performed if there are indications of impairment. Indications of impairment and the need
to reverse impairment losses are determined once a year and on an ad hoc basis with the involvement of the
responsible departments and taking external and internal information into consideration. Merck examines the
existence of indications of impairment using various factors, particularly deviations from forecasts and the
analysis of changes in medium-term planning. In the event of impairment, an impairment loss is recorded
under other operating expenses. Impairment losses are reversed to the amortized cost and presented in other
operating income if the original reasons for impairment no longer apply. Intangible assets with indefinite useful
lives and intangible assets not yet available for use are tested for impairment when a triggering event arises or
at least once a year. Amortization does not begin until the product is ready for economic use and is recognized
on a straight-line basis over the shorter of the patent or contract term and the estimated useful life.
Intangible assets with a finite useful life are amortized using the straight-line method. The useful lives of
customer relationships, brand names, and trademarks as well as marketing authorizations, acquired patents,
licenses and similar rights, and software are between three and 24 years. In determining these useful lives,
Merck considers factors including the typical product life cycles for each asset and publicly available information
about the estimated useful lives of similar assets.
In the course of subsequent measurement, the option to remeasure intangible assets at fair value is not
exercised.
Subsequent measurement
recognized as intangible assets. In the Life Science and Performance Materials business sectors, development
expenses are capitalized as soon as the criteria have been met. This includes expenses that arose as part of
registration for REACH. Furthermore, development expenses for internally developed software are capitalized
provided that the relevant criteria have been fulfilled.
Purchased intangible assets
-26
Transfers
-1
Other disposals
2
17
4
23
Transfers
6
-5
Currency translation difference
-39
-26
-4
Dec. 31, 2019
-2,829
-9,853
-634
-503
Currency translation difference
Transfers
Other disposals
Disposals due to divestments/
Other additions
Additions due to business combinations
Reclassification to assets held for sale
Cost as of Jan. 1, 2020
403
467
1,287
7,064
Net carrying amounts as of Dec. 31, 2019
-69
-13,820
9,221
Disposals due to divestments/
Reversals of impairment losses
-33
1,101
11,141
9,893
Dec. 31, 2019
129
5
906
-4
94
Currency translation difference
5
5
-1
1
34
15,959
23,040
-2,326
-1
-33
Impairment losses
downs
-1,197
-77
Accumulated amortization and
-654
Depreciation, amortization, and write-
impairment losses as of Jan. 1, 2019
-12,544
-426
-596
-9,195
-466
Significant measurement assumptions
4,146
1,525
6.0%
7.1%
7.4%
8.9%
1.00%
1.00%
5.8%
5.7%
6.3%
7.2%
7.1%
8.0%
1 The figures for impairment testing in Q2 2020 relate to the ad hoc tests performed in response to the Covid-19 pandemic.
2 In 2019 including Versum Materials Inc., United States, on the basis of the preliminary purchase price allocation.
Net cash flows were discounted using cost of capital after tax. The aforementioned cost of capital before tax
was subsequently derived iteratively.
Significant discretionary decisions and sources of estimation uncertainty
Goodwill
The determination of the recoverable amount is subject to discretion and significant estimation uncertainty.
Assumptions regarding the amount of net cash flows, long-term growth rates, and discount factors are
considered a material source of estimation uncertainty due to their inherent uncertainty. This is particularly true
in fiscal 2020 due to the uncertainty in connection with the Covid-19 pandemic.
>10
>10
Healthcare
2019
Increase in cost of capital after tax
percentage points
2020
2019
1.75%
2020
2020
Decrease in long-termgrowth rate
percentage points
%
Decrease in net cash flows
In addition, sensitivity analyses of the key assumptions were performed as part of the impairment tests. As a
result, no change of a significant assumption deemed possible by management would have resulted in an
impairment. Even an increase in the probability of occurrence of the negative scenario presented above
(extended "U" scenario) to 100% would not have resulted in the need to recognize impairment losses for any of
the CGUS. The following table presents the minimum amount by which key assumptions would have to change
before the impairment test would trigger the recognition of an impairment loss. The figures for fiscal 2020
apply to both the ad hoc and scheduled impairment tests:
In all the impairment tests performed, the recoverable amount in both 2020 and the previous year was more
than 15% higher than the carrying amount of the respective CGU. Regardless of this, the planning data used
was checked for plausibility against external analyst assessments and the recoverable amounts determined
were validated using validation multiples based on peer group information.
2019
>2
1.75%
7.5%
As in the previous year, the calculation of the fair value less costs of disposal of the Performance Materials CGU
in the base scenario included expected average sales growth in the detailed planning period amounting to a mid
single-digit percentage rate. Taking into account Group costs allocated on a pro rata basis, the EBITDA pre
margin applied in the detailed planning period in fiscal 2020 was unchanged as against the previous year at
around 30%.
In the base scenario, the expected average sales growth used to determine the value in use in the Life Science
CGU in the detailed planning period amounted to a high single-digit percentage rate (2019: middle single-digit
percentage rate). The EBITDA pre margin in the detailed planning period, taking into account Group costs
allocated on a pro rata basis, was around 30% in both fiscal 2020 and the previous year.
In the base scenario, the expected average sales growth in the Healthcare CGU in the detailed planning period
amounted to a low single-digit percentage rate as in the previous year. In line with the value-in-use concept,
this did not include net sales from the launch of new products.
Compared with the base scenario, the negative scenario for the Performance Materials CGU assumed a
reduction in annual net sales of 6-7% (Life Science CGU: 2-3%; Healthcare CGU: 1-7%) and a reduction in
annual EBITDA pre of 10-13% (Life Science CGU: 2-3%; Healthcare CGU: 1-10%).
The additional significant assumptions for determining value underlying the goodwill impairment tests are
quantified below.
Consolidated Financial Statements
Notes
Operating Assets, Liabilities, and Contingent Liabilities
237
in %
Healthcare¹
Life Science
Performance Materials 1, 2
Long-term
growth rate
Discount factor
Weighted cost of capital after tax
Weighted cost of capital before tax
7.5%
5.8%
5.5%
5.6%
0.00%
0.00%
7.8%
2019
Q2 2020
2019
Q3 2020
Q2 2020
2019
Q2/Q3 2020
Q3 2020
>2
>2
>2
13,764
3,121
3,121
36
17
53
Currency translation difference
Dec. 31, 2019
Cost as of Jan. 1, 2020
Additions
Disposals due to divestments/Reclassification to assets held
for sale
-9
1,534
199
11,130
-23
4,449
175
17,114
Dec. 31, 2020
-1,165
-303
-862
Currency translation difference
Impairment losses
1,334
Transfers
18
18
17,114
4,449
11,130
1,534
-9
Total¹
Performance
Materials¹
Goodwill
>1.5
>1.5
>2
> 2
> 10
>10
1 In 2019 considering Versum Materials Inc., United States, on the basis of the preliminary purchase price allocation.
Performance Materials¹
> 2
> 1
>2
>10
>10
Life Science
>1
10,287
Goodwill shown below was incurred mainly in the course of the acquisitions of the Versum Materials
Inc., United States, the Sigma-Aldrich Corporation, United States, the AZ Electronic Materials S.A.,
Luxembourg, the Millipore Corporation, United States, and the Serono SA, Switzerland.
Consolidated Financial Statements
10,896
1,534
Life Science¹
Healthcare
Impairment losses
Transfers
€ million
for sale
Other additions
Additions due to Versum Materials, Inc.
Cost as at Jan. 1, 2019
238
Operating Assets, Liabilities, and Contingent Liabilities
Notes
Disposals due to divestments/Reclassification to assets held
Determination of the useful life
The 30 largest leases accounted for around 50% of total lease liabilities. The subject matter of the leases
essentially comprised right-of-use assets for office, warehouse, and laboratory buildings. If options to renew
these leases were exercised in future, which is not yet considered likely, this would result in additional potential
cash outflows of up to € 200 million (2019: € 279 million).
Impairment losses on inventories amounted to € 545 million as of December 31, 2020 (December 31, 2019:
€ 526 million). Impairment losses that are included in the cost of sales are shown in Note (10) "Cost of sales".
10
2
-1
9
-1
-1
-144
487
-39
-100
-24
-2
-22
200
24
2
-6
13
58
557
Interest expenses for lease liabilities
Total
Income from sale-and-lease-back transactions
Income from subleasing right-of-use assets
Expenses for leases with variable lease payments
Expenses for leasing low-value assets
Reversals of impairment losses
Impairment losses
Depreciation
Right-of-use assets
€ million
The expenses and income and the payments under the leases in accordance with IFRS 16 were reported in the
consolidated income statement and the consolidated statement of cash flows as follows:
248
Operating Assets, Liabilities, and Contingent Liabilities
Notes
Consolidated Financial Statements
The disposals under land, land rights, and buildings in fiscal 2020 primarily resulted from the acquisition of the
previously leased land and buildings of the Life Science Campus in Burlington, United States.
The net carrying amounts of other facilities, operating and office equipment mainly include the right-of-use
assets for vehicles.
175
42
5
1
58
11
360
Net carrying amounts as of Dec. 31, 2020
Other
-32
-3
2
-30
Reversal of impairment losses
-153
-42
-107
-129
-9
-1
-119
429
€ million
€ million
Changes in the scope of consolidation
36
476
67
17
391
Total
Other facilities,
operating and
office equipment
Plant and
machinery
Land, land rights
and buildings
Right-of-use assets
Net carrying amounts as of Dec. 31, 2019
Other
Reversal of impairment losses
Impairment losses
Depreciation
Disposals
Additions
Net carrying amounts as of Jan. 1, 2019
187
Net cash flows from operating activities
Future lease payments will be incurred in the following periods:
Additions
363
49
87
1,031
1,530
Reclassification to assets held for sale
2
189
5 years
1-5 years
319
Within 1 year
119
After more than
436
81
246
Total
1
1
Changes in the scope of consolidation
-1,854
-3,390
-1,097
-4
-6,345
Net carrying amounts as of Dec. 31, 2019
2,962
1,520
435
1,274
6,192
Cost as of Jan. 1, 2020
4,816
4,910
1,532
1,278
12,537
110
-31
-7
-16
21
1
-22
-18
-144
-1
-153
2019
2020
Present value of future lease payments
Future lease payments
€ million
Dec. 31, 2019
Present value of future lease payments
Interest portion of future payments
Future lease payments
€ million
Dec. 31, 2020
-15
-186
Net cash flows from financing activities
Total
-14
2020
-8
468
88
262
118
Total
5 years
1-5 years
Within 1 year
After more than
-169
-178
-136
-144
-33
-34
2019
-160
55
2
130
6,421
1 Previous year's figure have been adjusted, see Note (6) "Acquisitions and divestments".
The changes in the scope of consolidation in fiscal year 2020 primarily related to the sale of the Allergopharma
allergy business, the sale of Litec-LLL GmbH, Greifswald, and the acquisition of AmpTec GmbH, Hamburg.
Detailed information can be found in Note (6) "Acquisitions and divestments”.
Consolidated Financial Statements
Notes Operating Assets, Liabilities, and Contingent Liabilities
245
The largest individual addition was the acquisition of the previously leased land and buildings of the Life Science
Campus in Burlington, United States. Other major individual additions to assets in fiscal year 2020 related to
the investment projects shown below:
1,348
Business sector
Healthcare
Healthcare
Life Science
Life Science
Life Science
Life Science
Investment project
Healthcare
460
1,640
2,972
1
174
Transfers
1
-1
Currency translation difference
56
65
32
153
Dec. 31, 2020
-1,997
-3,605
-1,189
-17
-6,808
Net carrying amounts as of Dec. 31, 2020
Biotech development system
Filling and packaging center
Expansion of research center
Production plant
Filling and logistics center
Production plant
Country
Basically, right-of-use assets are depreciated over the lease term. If it is considered sufficiently probable that
an existing purchase option will be exercised or ownership will be automatically transferred at the end of the
lease term, however, depreciation is applicable over the same period to corresponding assets under property,
plant and equipment (see Note (20) "Property, plant and equipment").
Determining the incremental borrowing rate
If the interest rate for the lease can not be reliably determined, the incremental borrowing rate is applied in
measuring the lease liability. At Merck, the incremental borrowing rate is determined on the basis of the risk-
free interest rate of the respective Group company over a similar term and in the same currency. This interest
rate is adjusted using a risk surcharge specific to Merck. Merck applies the repayment model to determine the
current portion of the lease. The current portion of the lease corresponds to the repayment share of the next 12
months.
Consolidated Financial Statements
Notes
Operating Assets, Liabilities, and Contingent Liabilities
246
Determining the lease term
Where renewal or termination options are available, their exercise is assessed on a case-by-case basis,
considering factors such as location strategies, leasehold improvements, and the degree of specificity.
Significant discretionary decisions and sources of estimation uncertainty
Identification of a lease
Discretionary decisions can arise during the identification of leases in answering the question of whether a
lessor's right of substitution is substantive. Merck classifies rights of substitution as not substantive if the facts
and circumstances of the case do not support a different assessment.
Measurement of lease and non-lease components
In the case of leases for land, land rights, and buildings, separating the lease into lease and non-lease
components is subject to discretion and estimation uncertainty if observable prices are not available from the
contract partner or other potential lessors.
Determining the lease term
When determining the lease term, existing renewal and termination options must be evaluated to determine the
probability that such options will be exercised.
These assessments may be discretionary even though they rely on existing and material information on the
general economic context, such as location strategies, leasehold improvements, or the degree of specificity. If
the available information does not allow a reliable assessment, Merck uses historical experience for comparable
situations.
Depreciation of the right-of-use assets arising from leases
43
Leases for land, land rights, and buildings are separated into lease and non-lease components. Merck otherwise
elects to exercise the option not to separate non-lease components from lease components.
If the provision of company cars to employees qualifies as an employee benefit within the meaning of IAS 19,
IFRS 16 is not applied. In this case, its balance-sheet treatment is governed solely by IAS 19.
Switzerland
Switzerland
United States
United States
Germany
Germany
Production plant
Ireland
Life Science
Performance Materials
Performance Materials
Production plant
Laboratory and office building
Research center
United States
United States
Germany
Impairment losses of € 23 million (2019: € 8 million) were recognized in fiscal year 2020. These primarily
related to assets under construction and production facilities in the Performance Materials business sector in
Germany and Japan.
(21) Leasing
Accounting and measurement policies
IFRS 16 scope
Merck exercises the option of not recognizing leases of intangible and low-value underlying assets in the
context of IFRS 16. Right-of-use assets under leases are reported in the balance sheet item "Property, plant
and equipment" (see Note (20) "Property, plant and equipment”).
Separation of lease and non-lease components
44
85
Disposals
Notes
Consolidated Financial Statements
In measuring right-of-use assets under leases, Merck is subject to estimation uncertainty regarding any
demolition obligations and their resulting payments.
assessing the probability that existing purchase and termination options and renewal options will be
exercised.
•
• measuring any payments in the course of promised residual value guarantees and
In measuring the lease liability, there is discretionary scope and significant estimation uncertainty regarding:
Initial measurement of the lease liability and the right-of-use asset
Determining the risk-free interest rate and determining the risk surcharge are both discretionary.
Determining the incremental borrowing rate
-66
-44
-7
-1
-117
Disposals
-217
Operating Assets, Liabilities, and Contingent Liabilities
-62
247
€ million
-2
-1
557
58
13
487
Total
Other facilities,
operating and
office equipment
Plant and
machinery
Land, land rights
and buildings
Right-of-use assets
Impairment losses
Depreciation
Disposals
Additions
Changes in the scope of consolidation
Net carrying amounts as of Jan. 1, 2020
The reconciliation of net carrying amounts of right-of-use assets from leases was as follows:
-44
-53
-336
-6,345
Depreciation
-297
-346
-175
-818
Impairment losses
-5
-5
-13
-23
Reversals of impairment losses
Disposals due to divestments/Reclassification to
assets held for sale
17
27
7
51
-4
-4
-1,097
-1,854
Transfers
249
510
142
-901
Currency translation difference
-177
-119
-52
Dec. 31, 2020
4,969
5,245
1,649
-39
1,365
-386
13,229
Accumulated depreciation and impairment losses
January 1, 2020
-3,390
-10
-19
-14
Operating Assets, Liabilities, and Contingent Liabilities
241
Additions/disposals due to company acquisitions and divestments
Additions due to business combinations in fiscal 2019 mainly included additions to intangible assets due to the
acquisition of Versum Materials, Inc., United States. The changes in the scope of consolidation in fiscal 2020
resulted from the acquisition of Resolution Spectra Systems S.A.S., France, and the sale of the Allergopharma
allergy business to Dermapharm Beteiligungs GmbH, Grünwald. See Note (6) "Acquisitions and divestments"
for detailed information on the acquisitions and divestments and the related effects.
The additions to market authorizations, patents, licenses, similar rights, and other items with finite useful lives
in fiscal 2020 in the amount of € 26 million (2019: € 46 million) were mainly attributable to the Performance
Materials business sector.
The additions to marketing authorizations, patents, licenses, similar rights, and other items not yet available for
use amounted to € 33 million in fiscal 2020 (2019: € 40 million) and were mostly attributable to the Healthcare
business sector.
The additions to software and software in development in the amount of € 97 million (2019: € 122 million)
resulted mainly from development costs in connection with new ERP programs.
Notes
Loss allowances
€ 68 million was attributable to technology-related intangible assets, the majority of which were acquired as
part of the acquisition of AZ Electronic Materials S.A., Luxembourg.
In addition, impairment losses were recognized on an ad hoc basis for market authorizations, patents, licenses,
similar rights, and other items not yet available for use in the amount of € 62 million (2019: € 33 million). Of
this figure, € 54 million related to the Healthcare business sector, with around € 36 million resulting from the
discontinuation of two pre-clinical research projects.
Consolidated Financial Statements
Notes
Operating Assets, Liabilities, and Contingent Liabilities
242
Overview of material other intangible assets
In the second quarter of 2020, an analysis was conducted of the extent to which the impact of the Covid-19
pandemic could also indicate potential impairment losses affecting non-financial assets. This analysis found that
individual indicators of impairment within the meaning of IAS 36 were considered to have been fulfilled for
intangible assets in the Performance Materials and Healthcare business sectors in the second quarter of 2020.
The impairment tests performed as a result identified impairment of intangible assets in the Performance
Materials business sector in the amount of € 96 million in the second quarter of 2020. Of this figure,
Consolidated Financial Statements
627
-12
Other non-financial assets are broken down as follows:
Other non-financial assets are carried at amortized cost. Impairments are recognized for any credit risks.
Other non-financial assets
Accounting and measurement policies
(22) Other non-financial assets
249
Operating Assets, Liabilities, and Contingent Liabilities
Notes
Consolidated Financial Statements
To date, Merck has taken advantage of reduced lease payments to the extent that these were prescribed as
government assistance for lessees. Their amount was immaterial. Accordingly, the amendment to IFRS 16
regarding rent concessions published by the IASB in May 2020 did not have a significant impact for Merck.
None of the options provided were exercised.
565
169
289
107
-61
-20
-30
The carrying amounts of customer relationships, brands, and trademarks as well as marketing authorizations,
patents, licenses, similar rights, and other items were attributable to the business sectors as follows:
€ million
Customer relationships, brands and trademarks
Customer relationships
2,088
5,937
7,064
0.5-17.8
3,279
2,050
5,329
6,291
15.9-16.9
2,893
129
3,023
3,520
5.8-17.8
1,921
1,921
2,267
3,849
Dec. 31, 2020
Total
Dec. 31, 20191
Materials
thereof from the following acquisitions:
Sigma-Aldrich Corporation
Versum Materials, Inc.
Millipore Corporation
Brands and trademarks
thereof from the following acquisition:
Sigma-Aldrich Corporation
Marketing authorizations, patents, licenses and
similar rights and other
Finite useful life
Marketing authorizations
XalkoriⓇ
Other marketing authorizations
Remaining
useful life in
Performance
years
Healthcare Life Science
Total
Dec. 31, 2020
Dec. 31, 2019
€ million
Current
Inventories are tested for impairment using a business sector-specific method. Under this method, cost is
compared to the net realizable values. The net realizable value corresponds to the expected sale proceeds less
any costs for completing and distributing the product. If the net realizable value is lower than the amortized
cost, the asset is written down by a corresponding amount which is recognized as an expense in the cost of
sales.
250
Operating Assets, Liabilities, and Contingent Liabilities
Notes
Consolidated Financial Statements
In addition to directly attributable unit costs, the cost of sales also includes overheads attributable to the
production process, which are determined on the basis of normal capacity utilization of the production facilities.
Goods for resale are recognized at cost. When determining amortized cost, the "first-in, first-out" (FIFO) and
weighted average cost formulas are used.
Inventories
Accounting and measurement policies
(24) Inventories
The proceeds from the disposal of assets held for sale less transferred cash and cash equivalents resulted
largely from the sale of the Allergopharma allergy business. The payments made in connection with the disposal
of assets held for sale reported in the previous year were primarily due to tax payments relating to the divested
Consumer Health business.
As in the previous year, the payments made and received in connection with the acquisition and disposal of
other non-financial assets resulted from the short-term investment of available funds.
Payments for investments in property, plant and equipment included the payment for the acquisition of the
previously leased land and buildings of the Life Science Campus in Burlington, United States.
Net cash inflows from the disposal of other financial assets in the amount of € 340 million (2019: € 140 million)
related primarily to the sale of short-term investments in securities not classified as cash and cash equivalents,
as well as the sale of the equity interest in Progyny, Inc., United States.
In the previous year, net cash outflows from acquisitions less cash and cash equivalents acquired included
primarily the payments made for the acquisition of Versum Materials, Inc., United States, in the amount of
€ 4,928 million.
Net cash outflows from investments in financial assets amounting to € 278 million (2019: € 196 million) mainly
resulted from short-term investments in securities not classified as cash and cash equivalents.
(23) Net cash flows from investing activities
688
In addition to the impairment derived from the sales market, impairment losses may also be necessary for
quality reasons or due to a lack of usability of the items, or their remaining shelf life. If the reason for
impairment no longer applies, the carrying amount is adjusted to the lower of cost and the applicable new net
realizable value.
97
Since inventories are for the most part not manufactured within the scope of long-term production processes,
borrowing costs are not included.
Significant discretionary decisions and sources of estimation uncertainty
The reduction of the inventories versus the previous year was primarily driven by the stock decrease of the
unfinished-, as well as finished goods and merchandise. While in the Healthcare business sector a slight build-
up occurred to ensure the supply demand, in the Display Solutions business unit of the Performance Materials
sector, the changes in the market demand patterns led to a stock decrease.
3,342
3,294
1,776
1,756
622
943
905
Dec. 31, 2019
Dec. 31, 2020
633
Inventories
Finished goods/goods for resale
Work in progress
Raw materials and supplies
€ million
Inventories consisted of the following:
Discretionary decisions are required in the identification of impairment as well as in identifying the need to
reverse impairment of inventories. There are estimation uncertainties with respect to the calculation of the net
realizable value. In particular, changes in selling prices and expected costs of completion are considered in
calculating this value.
Identification of impairment losses or reversal of impairment losses
Inventory prepayments are recognized under other non-financial assets.
0.5-6.5
591
91
153
164
14
151
Prepaid expenses
344
4
340
372
4
368
Receivables from non-income related taxes
Total
Non-current
Current
Total
Non-current
14
687
167
10
597
Other non-financial assets
161
67
94
139
63
76
Remaining other assets
4
4
2
2
Assets from defined benefit plans
11
11
10
Non-current income tax receivables
As of the balance sheet date, no inventories were pledged as security for liabilities.
362
470
45
57
812
Total¹
11,019
529
1,104
Disposals due to divestments/Reclassification to
assets held for sale
Other Disposals
-81
190
-88
-8
-223
Transfers
299
327
100
-713
-46
Other Additions
84
35
Notes
Operating Assets, Liabilities, and Contingent Liabilities
244
€ million
Cost at January 1, 2019
Land, land rights
and buildings¹
Plant and
machinery¹
Other facilities,
operating and
office equipment¹
Construction in
progress and
advance
payments to
vendors and
contractors
4,222
4,330
1,372
1,096
Additions due to business combinations
139
270
14
Currency translation difference
47
26
Impairment losses
-6
-8
Reversals of impairment losses
Disposals due to divestments/Reclassification to
assets held for sale
Disposals
Transfers
Currency translation difference
Dec. 31, 2019
48
85
41
1
176
1
-21
-20
-708
Consolidated Financial Statements
-150
-273
13
8
95
Dec. 31, 2019
Where individual contracts include termination options, it was considered unlikely that these would be exercised
so that additional lease payments were already considered in the corresponding lease liability.
4,910
1,532
1,278
12,537
Accumulated depreciation and impairment losses as of
-1,609
-3,150
-977
-4
-5,740
Jan. 1, 2019
Depreciation
-284
Discretionary decisions are required in the identification of objective evidence of impairment as well as in
identifying the need to reverse impairment of property, plant and equipment.
Identification of a need to recognize impairment loss and reverse impairment loss
Assumptions and estimates are required in determining the appropriate useful life and the expected residual
value in order to calculate the level of amortization of property, plant and equipment. This applies in particular
to the determination of the underlying remaining useful life. In making these estimates, Merck considers the
useful lives of the property, plant and equipment derived from past experience.
7
7
13
241
599
840
1,151
Patents, licenses and similar rights
0.3-12.3
thereof from the following acquisitions:
AZ Electronic Materials S.A.
0.3-12.3
333
333
516
Versum Materials, Inc.
3.8-5.8
45
206
10
1.0
2.5-6.9
570
38
608
773
6.9
450
450
563
62
245
617
924
1,287
17
17
58
10
362
206
Others
Subsequent measurement
Subsequent measurement is based on amortized cost. Property, plant and equipment is depreciated using the
straight-line method over the useful life of the asset concerned and depreciation expenses are allocated to the
respective functional costs. Depreciation of property, plant and equipment is based on the following useful
lives:
Consolidated Financial Statements
Notes
Operating Assets, Liabilities, and Contingent Liabilities
243
Production buildings
Administration buildings
Plant and machinery
Operating and office equipment, other facilities
The useful lives of the assets are reviewed regularly and adjusted if necessary.
Useful life
No more than 33 years
No more than 40 years
6 to 25 years
3 to 10 years
An impairment test is performed if there are indications of impairment. External and internal information is
used in this context. In the event of impairment, an impairment loss is recorded under other operating
expenses. Impairment losses are reversed to the amortized cost and presented in other operating income if the
original reasons for impairment no longer apply.
Significant discretionary decisions and sources of estimation uncertainty
Determination of the useful life and residual value
In the course of determining cost, government grants received within the scope of IAS 20 are deducted. Grants
receivable for financial support that are no longer linked to future costs are recognized in profit or loss.
268
Recognition and initial measurement
(20) Property, plant and equipment
45
4
18
67
78
Not yet available for use
212
18
161
391
467
thereof from the following acquisition:
Versum Materials, Inc.
1 Previous year's figures have been adjusted, see (6) "Acquisitions and divestments".
151
151
177
Accounting and measurement policies
4,816
Interest portion of future payments
4,293
631
408
373
-15
-62
-4
-8
-34
-123
-31
-1
-12
-10
-83
-589
11
8
19
-5
-1
-2
-8
-16
-1
-1
Reclassification to assets held for sale
357
5,771
5,281
Personnel expenses comprised expenses of € 162 million (2019: € 152 million) for defined contribution plans
which are funded exclusively using external funds and therefore do not represent any obligation for Merck other
than making contribution payments. In addition, employer contributions amounting to € 85 million (2019:
Release
Interest effect
Currency translation difference
Changes in scope of consolidation/other
Litigation
Restructuring
Environmental
protection
Acceptance
and follow-on
obligations
Interest and
penalties
related to
income taxes
Other
Total
548
Dec. 31, 2020
135
21
51
179
1,077
65
128
3
46
40
91
694
€ 86 million) were transferred to the German statutory pension insurance system and € 77 million (2019:
€ 68 million) to statutory pension insurance systems abroad.
143
Utilizations
155
148
⚫the duration of proceedings in pending legal disputes,
⚫ the applicable license rate plus an expected infringement surcharge,
⚫ the usual damages and fines for comparable legal disputes, and
⚫ the discount factor to be used.
Provisions for restructuring
Merck uses formal restructuring plans to assess recognition obligation for provisions for restructuring projects
and the amount of the expected outflow of resources.
The main parameters in determining the amount of the provision are
⚫ the planned implementation date of the restructuring plan, and
⚫ the anticipated expenses arising from the change in or termination of the employment relationships of
the affected employees.
Provisions for environmental protection
To assess a recognition obligation in relation to provisions for environmental protection and to quantify future
outflows of resources, Merck draws on appraisals by independent external experts and the knowledge of in-
house specialists.
The following are key parameters in calculating the present value of the future settlement amount of provisions
for environmental protection:
⚫ the future settlement date,
⚫ the extent of environmental damage,
.
the applicable remediation methods,
⚫ the associated future costs, and
⚫ the discount factor.
Provisions for acceptance and follow-on obligations
The assessment of the recognition obligation for provisions for acceptance and follow-on obligations and the
quantification of future outflows of resources is based on internal project plans as well as on the assessment of
the respective matters by in-house and external specialists.
Consolidated Financial Statements
Notes
Operating Assets, Liabilities, and Contingent Liabilities
254
The main parameters in determining the amount of the provision are
The following factors are also relevant in measuring provisions for litigation:
• the legal situation and current court rulings in comparable proceedings in the jurisdiction in question.
⚫ the validity of the arguments brought forward by the opposing party and
Assessing the need for recognizing provisions for litigation is based on the likelihood of possible outcomes for
proceedings. In particular, the factors influencing this likelihood are:
47
78
146
741
thereof: current
137
86
13
37
78
109
461
168
thereof: non-current
81
134
10
37
281
Consolidated Financial Statements
Notes
Operating Assets, Liabilities, and Contingent Liabilities
253
Accounting and measurement policies
Provisions for litigation
To assess a recognition obligation in relation to provisions for litigation and to quantify future outflows of
resources, Merck draws on the knowledge of the legal department as well as outside counsel.
18
⚫ the ability to use or potential for modification of secured manufacturing capacities at third-party
providers, particularly for pharmaceutical compounds,
Additions
€ million
income
3,106
196
19
Total
3,125
amortized cost
income
Total
3,227
25
3,251
Gross trade and other receivables
3,302
19
196
3,321
340
340
3,567
25
3,591
Loss allowances on trade accounts
receivable
-73
I
-73
-77
-77
comprehensive
other
Subsequently
measured at fair
value through
Dec. 31, 2019
Consolidated Financial Statements
Notes
Operating Assets, Liabilities, and Contingent Liabilities
251
(25) Trade and other receivables
Accounting and measurement policies
Trade and other receivables
Trade accounts receivable without significant financing components that are not the subject of a factoring
agreement are measured at the amount of the unconditional claim for consideration on initial recognition. For
additions to trade accounts receivable, loss allowances are recognized to allow for expected credit losses.
At initial recognition, other receivables are measured at fair value plus the direct transaction costs incurred
upon acquisition of the asset.
Trade accounts receivable that are potentially designated to be sold on account of a factoring agreement are
measured at fair value through other comprehensive income.
The measurement policies applied in determining loss allowances for trade and other receivables are shown in
Note (42) "Management of financial risks" in the "Credit risks" section.
Loss allowances and reversals of loss allowances are presented under the item “Impairment losses and
reversals of impairment losses on financial assets (net)" in the consolidated income statement if the asset can
be characterized as operational. If the asset can be characterized as financial, it is recognized in financial
income or financial expenses.
Loss allowances on other receivables
Net trade and other receivables
Further information on the accounting and measurement policies governing financial assets can be found in
Note (36) "Other financial assets".
Trade and other receivables
Information on the significant discretion and estimation uncertainty concerning trade and other receivables can
be found in Note (42) "Management of financial risks".
Trade and other receivables were measured as follows:
€ million
Gross trade accounts receivable
Gross other receivables
Subsequently
measured at
amortized cost
Dec. 31, 2020
Subsequently
measured at fair
value through
other
comprehensive
Subsequently
measured at
Significant discretion and sources of estimation uncertainty
Jan. 1, 2020
-2
-4
2020
2019
156
52
Additions due to business combinations
53
Other additions
420
311
thereof: attributable to performance obligations satisfied in prior periods
Disposals due to divestments/Reclassification to assets held for sale
Reclassification to trade accounts receivable
15
7
Currency effects
Other
Dec. 31
-402
-270
-5
10
-1
169
156
Contract assets resulted in particular from rendering services and manufacturing of customer-specific
equipment in the Life Science and Performance Materials business sectors.
(27) Other provisions
Other provisions developed as follows:
Jan. 1
€ million
The following table shows the change in contract assets:
Contract assets represent contractual claims to receive payment from customers for whom the contractual
performance obligation has already been fulfilled although an unconditional claim to payment has yet to arise.
-4
3,227
19
3,246
3,485
24
3,510
therof: current
therof: non-current
3,202
19
25
-2
3,221
25
24
3,488
22
22
Consolidated Financial Statements
Notes
Operating Assets, Liabilities, and Contingent Liabilities
252
In fiscal 2020, trade accounts receivable in Italy with a nominal value of € 31 million (2019: € 22 million) were
sold for € 30 million (2019: € 22 million). These receivables did not involve any further rights of recovery
against Merck.
(26) Contract assets
Accounting and measurement policies
Contract assets
3,463
⚫ the number and duration of continued treatments of affected patients in clinical development
programs,
-451
• the expectations concerning future events influencing the obligations.
Notes
Consolidated Financial Statements
As of January 1, 2020, contract liabilities amounted to € 379 million (January 1, 2019: € 336 million), of which
a total of € 232 million (2019: € 328 million) was recognized through profit or loss in fiscal 2020.
379
87
291
351
47
304
Dec. 31
2
-1
-1
Other
Operating Assets, Liabilities, and Contingent Liabilities
2
-9
Currency translation
-122
122
-39
39
Reclassification from non-current to current
19
-2
21
Cumulative catch-up adjustments to revenue
-864
-3
-9
259
(30) Trade and other payables
Accounting and measurement policies
16,455
17,624
2019
2020
Personnel expenses
Compulsory social security contributions and other costs
Pension expenses
Wages and salaries
€ million
Personnel expenses comprised the following:
(32) Personnel expenses
Average number of employees
Other
Marketing and sales
Supply chain
Research and development
Administration
Production
The following table shows the average number of employees broken down by function.
As of December 31, 2020, the number of employees at Merck Group was 58,096 (December 31, 2019: 57,036
employees).
(31) Number of employees
Employees
Notes
Consolidated Financial Statements
260
Employees
Trade and other payables amounted to € 1,768 million (December 31, 2019: € 2,054 million). This item
included accrued amounts of € 673 million (December 31, 2019: € 673 million) from outstanding invoices.
Trade and other payables are subsequently measured at amortized cost.
Trade and other payables
-861
-888
⚫ the expected date or period of the outflow of resources, and
-888
291
87
379
Liabilities from non-income related taxes
157
1
158
207
5
212
Non-current income tax liabilities
45
45
Other accruals
76
7
82
32
1
33
Other non-financial liabilities
1,360
100
1,460
1,211
93
1,304
The following table shows the development of contract liabilities in the period under review:
2020
351
11,338
47
Contract liabilities
Recognition of income/reversal
Disposals due to divestments/Reclassification to
assets held for sale
902
209
4
4
693
850
849
Other additions
1
336
4
332
379
87
291
1
Additions due to business combinations
Jan. 1
Total
Non-current
Current
Total
Non-current
Current
Accruals for personnel expenses
823
823
681
681
304
10,338
7,503
7,559
The restructuring provisions also included obligations from the Life Science business sector, which will carry out
relocations and gradually close operations at various German sites by 2022; further additions were made to
provisions in fiscal 2020 for this purpose. Furthermore, they contained obligations for the ongoing expansion of
shared service activities and the related relocation of activities. These provisions were already recognized in
previous years.
Outflows of resources under the restructuring provisions are expected within the next five years.
Environmental protection
Provisions for environmental protection resulted in particular from obligations for soil remediation and
groundwater protection in connection with the crop protection business in Germany and Latin America that was
discontinued in 1987.
Acceptance and follow-on obligations
Provisions for acceptance and follow-on obligations primarily considered costs in connection with discontinued
development projects as well as obligation surpluses from onerous contracts. Utilizations and releases were
mainly attributable to development projects discontinued in previous years.
Additions mainly resulted from the termination of a clinical trial in the Healthcare business sector.
Interest and penalties related to income taxes
Provisions for interest and penalties related to income taxes mainly comprised interest payables associated with
or resulting from tax payables.
Consolidated Financial Statements
Notes
Operating Assets, Liabilities, and Contingent Liabilities
257
Miscellaneous other provisions
Miscellaneous other provisions mainly comprised provisions related to remaining risks from the divestment of
the Consumer Health business, for warranty obligations, and for uncertain commitments from contributions,
fees, and other duties.
(28) Contingent liabilities
Accounting and measurement policies
Contingent liabilities
To identify contingent liabilities from litigation and tax matters, Merck draws on the knowledge of the legal
department and the tax department as well as the opinions of external consultants and attorneys.
The key factors in the assessment to identify contingent liabilities are:
⚫ the validity of the arguments brought forward by the opposing party or the tax authority and
⚫ the legal situation and current court rulings in comparable proceedings in the jurisdiction in question.
The amount of the contingent liability is based on the best possible estimate which in turn is based on likelihood
of possible outcomes of proceedings and on the applicable license rate in patent disputes.
Significant discretionary decisions and sources of estimation uncertainty
Contingent liabilities
The identification and the measurement of contingent liabilities are both subject to considerable uncertainty.
This applies with regard to assessing the likelihood of an outflow of resources as well as determining its
amount.
Contingent liabilities were composed as follows:
€ million
Contingent liabilities from litigation and tax matters
Other contingent liabilities
Dec. 31, 2020
The additions to the restructuring provisions in the amount of € 128 million resulted in particular from the
reorganization of the global distribution structures, research and development activities and individual
production areas in the Healthcare business sector that began in fiscal 2020. The addition is also due to the
ongoing reorganization measures in the Performance Materials business sector.
Dec. 31, 2019
The restructuring provisions recognized as of December 31, 2020 primarily relate to obligations for workforce
reduction measures in connection with communicated restructuring projects.
Versum merger agreement: In 2019, some Versum shareholders accused Versum Inc., United States, (Versum)
and the Board of Directors of having breached their fiduciary duties in connection with the acquisition
negotiations with Entegris, Inc., United States, and of having initiated a shareholder rights agreement. After
Versum announced the termination of the shareholder rights agreement on April 2, 2019, the plaintiffs
withdrew their claims and requested that the court impose a "mootness fee" on Versum, which would require
Versum to pay the legal costs incurred. On July 16, 2020, the court set this fee at US$ 12 million (€ 10 million).
Versum appealed this ruling and is awaiting a court decision. A provision in a low double-digit million euro
amount was recognized for this matter in fiscal 2020. The provision included the "mootness fee" plus interest
and additional legal costs for the appeal and was still recognized as of December 31, 2020. The costs are
covered in full by the D&O insurance that has been concluded. A corresponding receivable is recognized in other
receivables. A cash outflow within the next 12 months is considered possible.
Significant discretion and sources of estimation uncertainty
Provisions for litigation
Like the measurement of provisions, the assessment of a recognition obligation for provisions for litigation is to
a particular extent subject to a degree of estimation uncertainty. The uncertainties relate, in particular, to the
assessment of the likelihood and the amount of the outflow of resources.
Provisions for restructuring
Estimation uncertainty about the provisions for restructuring primarily relate to determining the amount of the
expected outflow of resources. This is largely influenced by the assumptions made concerning the change in or
termination of the employment relationships of the affected employees and the planned implementation date of
the restructuring plan.
Provisions for environmental protection
The assessment of a recognition obligation and the measurement of the provisions for environmental protection
are subject to discretionary decisions and estimation uncertainties to a particular degree.
The estimation uncertainties relate in particular to the assessment of the timing and likelihood of a future
outflow of resources and assessment of the extent of necessary remediation measures and the related
calculation of the amount of the liability.
Provisions for acceptance and follow-on obligations
Estimation uncertainty regarding the provisions for acceptance and follow-on obligations primarily relates to
determining the amount of the expected outflow of resources.
The estimation uncertainties primarily involve assessing future events that will influence the obligation.
The legal matters described below represented the most significant legal risks.
Product-related and patent disputes
RebifⓇ: Merck is involved in a patent dispute with Biogen Inc., United States (Biogen), in the United States.
Biogen claims that the sale of RebifⓇ in the United States infringes on a Biogen patent. The disputed patent was
granted to Biogen in the United States in 2009. Subsequently, Biogen sued Merck and other pharmaceutical
companies for damages due to the infringement of this patent. Merck defended itself against all allegations and
brought a countersuit against Biogen claiming that the patent was invalid and not infringed by Merck's actions.
In the first instance (district court), a jury found the patent to be invalid. This jury verdict was overturned by
the judge in the same instance in September 2018. For the time being, the patent was thus deemed to be
legally valid and to have been infringed. Merck filed a complaint with the United States Court of Appeals for the
Federal Circuit (second instance) against the first-instance ruling in October 2018. On September 28, 2020, this
court overturned the verdict of the judge in the first instance, declared Biogen's patent to be invalid, and
instructed the District Court to reinstate the original jury verdict. A cash outflow is considered to be unlikely
Consolidated Financial Statements
Notes
Operating Assets, Liabilities, and Contingent Liabilities
255
based on this decision, and the provision of € 365 million recognized at this date for potential compensation
payments for damages was reversed. The resulting income was reported in other operating income. Only a
remaining low single-digit million euro amount is still recognized for outstanding legal costs.
PS-VA liquid crystals mixtures: In the Performance Materials business sector, Merck is involved in a legal
dispute with JNC Corporation, Japan, (JNC). JNC claims that, by manufacturing and marketing certain liquid
crystal mixtures, Merck has infringed JNC patents in China, Taiwan, and Korea. Merck maintains that these
patents are invalid owing to relevant prior art. At the end of the second quarter of fiscal 2020, the actions in
China and Taiwan were concluded with legally binding effect in favor of Merck. The provision was reduced to
reflect this development. In Korea, however, the patent infringement action on the part of JNC, the patent
nullity action on the part of Merck and an additional "correction trial" are all still pending. In addition, a new
statutory provision has come into force in Korea that could have a potentially negative impact on the amount of
any damages. The provision was reduced in fiscal 2020 to reflect the remaining litigation risk in Korea. After the
adjustment, the remaining provision amounts to a low double-digit million euro sum. A cash outflow within the
next 12 months is considered possible at present.
Antitrust and other proceedings
Antitrust review proceedings for the acquisition of Sigma-Aldrich Corporation, United States, (Sigma-Aldrich):
On July 6, 2017, Merck received notice from the European Commission (EU Commission) in connection with the
antitrust review proceedings for the acquisition of Sigma-Aldrich, in which the EU Commission informed Merck
of its preliminary conclusion that Merck and Sigma-Aldrich allegedly transmitted incorrect and/or misleading
information within the scope of the acquisition of Sigma-Aldrich. The EU Commission received registration of
the merger on April 21, 2015, and granted clearance on June 15, 2015, subject to the condition that Merck and
Sigma-Aldrich divest parts of the European solvents and inorganic chemicals businesses of Sigma-Aldrich in
order to resolve antitrust concerns. According to the preliminary viewpoint of the EU Commission
communicated in a letter dated July 6, 2017, Merck and Sigma-Aldrich withheld related important information
about an innovation project. According to the EU Commission, the innovation project should have been included
in the remedies package. This resulted in an administrative procedure with the EU Commission. On July 1,
2020, the EU Commission informed Merck that the parts of the procedure relating to Merck were no longer
under investigation and that the procedure now related solely to the allegations against Sigma-Aldrich. The
procedure could result in the issuance of a fine that would be open to appeal. In the second quarter of 2020,
the existing provision in a mid double-digit euro amount was reduced to a low double-digit euro amount. A
potential outflow of resources is considered possible for 2021.
Citalopram: In connection with the generics business that was divested in 2007, Merck is accused of breaching
EU antitrust law through agreements concluded by its former subsidiary Generics (UK) Ltd., United Kingdom,
relating to the antidepressant Citalopram patented by Lundbeck A/S, Denmark. In 2013, the EU Commission
imposed a corresponding fine in a double-digit euro amount. Merck filed a lawsuit against the Commission's
decision with the European Court in August 2013. The lawsuit was rejected in 2016. Merck subsequently filed
an appeal against this decision with the European Court of Justice (CJEU). In the course of these proceedings,
the Advocate General of the CJEU recommended that the European Court's verdict be confirmed. In light of the
disadvantageous development in this matter, additional accounting measures have been taken for potential
additional claims and the existing provision has increased by a double-digit million euro amount as a result. A
decision on the fine in the first half of 2021 is considered possible.
Paroxetine: In the United Kingdom, Merck was subject to antitrust investigations by the British Competition and
Market Authority (CMA) in connection with the generics business that was divested in 2007. In March 2013, the
authorities informed Merck of the assumption that a settlement agreement entered into in 2002 between
Generics (UK) Ltd. and several subsidiaries of GlaxoSmithKline plc, United Kingdom, in connection with the
antidepressant drug paroxetine, violated British and European competition law. They stated that Merck was
liable as the then owner of Generics (UK) Ltd. and because it was involved in the negotiations for the
settlement agreement. The investigations into Generics (UK) Ltd. started in 2011, without this being known to
Merck. On February 11, 2016, the CMA imposed a fine in this matter. Merck has taken legal action against this
fine. The United Kingdom Competition Appeal Tribunal (CAT) submitted the relevant legal questions to the
Consolidated Financial Statements
Notes
Operating Assets, Liabilities, and Contingent Liabilities
256
European Court of Justice (CJEU) for a preliminary ruling. The CJEU confirmed in January 2020 that such
settlement agreements may breach European competition law as a matter of principle. The action is now
ongoing with the CAT. A decision is still outstanding. Merck has recognized a provision in a low double-digit
million euro amount. A cash outflow within the next 12 months is considered possible.
Restructuring
2019
87
1
Total
Current
Non-current
Total
128
4,669
2019
Non-current
2020
57,580
1,207
2,716
13,939
14,101
4,109
4,298
53,607
Current
€ million
Dec. 31, 2019
€ million
Accounting and measurement policies
(29) Other non-financial liabilities
Contingent liabilities from tax matters primarily related to the determination of earnings under tax law, customs
regulations, and excise tax matters.
been sued by MSD in the United States. An outflow of resources except costs for legal defense - was not
deemed sufficiently probable as of the balance sheet date to justify the recognition of a provision. Since the
contingent liability from these legal disputes could not be reliably quantified as of the balance sheet date, this
matter was not considered in the table presented above.
258
Operating Assets, Liabilities, and Contingent Liabilities
Notes
-
In addition, there are contingent liabilities from various legal disputes with Merck & Co., Inc., United States, of
the United States (outside the United States and Canada: MSD), among other things due to breach of the co-
existence agreement entered into between the two companies and/or trademark/name right infringement
regarding the use of the designation "Merck". In this context, Merck has sued MSD in various countries and has
Other non-financial liabilities
Contingent liabilities from litigation mainly related to obligations under labor law and tort law. In addition to
exchange rate effects, the decline compared with the previous year is primarily due to changes in estimates of
potential civil law obligations. Merck now believes it is more likely that a fine imposed in legal proceedings
under antitrust law will ultimately be confirmed in court. The assertion of additional claims by third parties is
therefore expected. These potential claims, which were previously reported as contingent liabilities, are now
included in the measurement of the provision for the corresponding proceedings.
Accruals for personnel expenses included in other non-financial liabilities comprise, in particular, liabilities
resulting from vacation entitlements, bonuses, and social security contributions.
Contract liabilities include payments received by Merck prior to completion of contractual performance. In
addition to consideration received within the scope of collaboration agreements, this applies particularly to
service agreements.
Other non-financial liabilities comprise the following:
Dec. 31, 2020
Consolidated Financial Statements
56
-49
-25
-550
460
96
28
6
155
-210
the expected rate of future pension increase
were 50 basis points lower
were 50 basis points higher
305
8
18
-16
640
232
-160
-11
-7
-142
the expected rate of future salary increase
were 50 basis points lower
175
14
the expected rate of future pension increase
47
-6
-391
Consolidated Financial Statements
Notes
Employees
The calculation of the defined benefit obligations was based on the following actuarial parameters and
durations:
262
Germany
Switzerland
United Kingdom
Other countries
2020
2019
2020
2019
2020
2019
2020
2019
Discount rate
0.70%
1.30%
Future salary increases
2.51%
2.50%
0.06%
1.57%
0.17%
1.74%
1.43%
2.06%
1.75%
2.36%
Apart from the net balance of interest expense on the defined benefit obligations and interest income from the
plan assets, which is reported in financial income and financial expenses, the expenses for defined benefit
pension systems are allocated to the individual functional areas in the consolidated income statement.
2.92%
The other actuarial assumptions used as the basis for calculating the defined benefit obligation, such as rates of
salary increases and pension trends, were determined on a country-by-country basis in line with the economic
conditions prevailing in each country. The latest country-specific mortality tables are also applied (Germany:
Heubeck 2018G, Switzerland: BVG 2015G, United Kingdom: S3PA and S2PA). The potential effects of the
Covid-19 pandemic were not taken into account.
As of December 31, 2020, Merck changed the way in which it determines the discount factor for defined benefit
pension plans in the eurozone. This constitutes a change in an accounting estimate within the meaning of IAS
8. The discount factor was previously determined internally by Group Treasury by reference to external rating
information on the yields of high-quality bonds with similar maturities. As of December 31, 2020, the discount
factor was determined by reference to the discount rates for similar maturities calculated by a globally active
external actuary. As previously, this was based on bonds with ratings of at least "AA" or a comparable rating
from one of the leading rating agencies as of the reporting date.
-8
837,658
261
Consolidated Financial Statements
Notes
Employees
(33) Provisions for employee benefits
Provisions for employee benefits are composed as follows:
€ million
Provisions for pensions and other post-employment benefits
Non-current other employee benefit provisions
Non-current provisions for employee benefits
Current provisions for employee benefits
Provisions for employee benefits
Dec. 31, 2020
3,594
286
Dec. 31, 2019
2,957
237
3,880
3,194
152
110
4,032
Provisions for other employee benefits include provisions for share-based payments, which are discussed in
greater detail in the section on share-based payments in this note.
Provisions for pensions and other post-employment benefits
Accounting and measurement policies
3,303
Provisions for pensions and other post-employment benefits
In addition to retirement benefit obligations, provisions for pensions and other post-employment benefits
include obligations for other post-employment benefits, such as medical care.
The present value of the defined benefit obligation is determined by expert third parties according to the
actuarial projected unit credit method. The discount rates are generally determined on the basis of the yields of
high-quality corporate bonds with similar maturities and currencies.
If the discount rate had still been determined using the previous method as of December 31, 2020, the discount
rate for the eurozone would have been 23 basis points lower. Without the change in the accounting estimate,
the present value of the defined benefit obligation would have been € 270 million higher, current service cost in
2021 would have been a low double-digit million euro amount higher, and interest expenses in 2021 would
have been a single-digit million euro amount lower.
-85
3.22%
1.75%
180
7
14
201
the expected rate of future salary increase
were 50 basis points lower
-163
-12
-181
the expected rate of future pension increase
272
50
21
7
350
were 50 basis points higher
the expected rate of future pension increase
were 50 basis points lower
-245
-20
-7
-272
Dec. 31, 2019
€ million
Increase (+)/decrease (-) in present value of
all defined benefit obligations if
Germany
Switzerland
United Kingdom
Other countries
Total
the discount rate were 50 basis points higher
the discount rate were 50 basis points lower
the expected rate of future salary increase
were 50 basis points higher
the expected rate of future salary increase
were 50 basis points higher
Future pension increases
Duration
763
62
24
1.74%
23
2.77%
19
19
20
2.65%
20
1.48%
14
1.56%
16
These were average values weighted by the present value of the respective defined benefit obligation.
Significant discretionary decisions and sources of estimation uncertainty
Provisions for pensions and other post-employment benefits
The determination of the present value of the obligation from defined benefit pension plans primarily requires
discretionary judgment as regards the selection of methods to determine the discount rate and to select
suitable mortality tables, as well as estimates of future salary and pension increases.
The following overview shows how the present value of all defined benefit obligations would have been
impacted by changes to relevant actuarial assumptions.
Dec. 31, 2020
€ million
Increase (+)/decrease (-) in present value of
all defined benefit obligations if
Germany
Switzerland
United Kingdom Other countries
Total
the discount rate were 50 basis points higher
the discount rate were 50 basis points lower
-480
-88
-54
-25
-647
569
102
30
-234
The value of the provisions as of December 31, 2020, was € 213 million (December 31, 2019: € 113 million).
Net expenses of € 149 million were incurred in fiscal 2020 (2019: net expenses of € 60 million). The three-year
tranche issued in 2017 ended at the end of 2019; an amount of € 48 million was paid out in 2020. The three-
year tranche issued in fiscal 2018 ended at the end of 2020; a payout of € 112 million is expected for 2021.
Notes
3
113
Employee contributions
Payment transactions
Changes in the scope of consolidation
-30
6
Reclassification to liabilities directly related to
assets held for sale
Currency translation recognized in equity
-42
110
37
5
-5
Other
-67
38
December 31, 2019
-5,644
2,692
-24
-5
-29
Other changes
15
-15
37
-727
arising from changes in financial assumptions
Actuarial gains (+)/losses (-)
35
arising from experience adjustments
Remeasurements of plan assets
Actuarial gains (+)/losses (-)
arising from experience adjustments
Changes in the effects of the asset ceilings
Actuarial gains (+)/losses (-)
Actuarial gains (+)/losses (-)
Pension payments
Employer contributions
5
-727
35
199
199
-687
199
-488
125
-49
76
37
-1
-2,953
The actual income from plan assets amounted to € 108 million in the year under review (2019: € 245 million).
Covering the benefit obligations with financial assets represents a means of providing for future cash outflows,
which are required in some countries (for example Switzerland and the United Kingdom) on the basis of legal
requirements and in other countries (for example Germany) on a voluntary basis.
1,273
1,273
Direct investments in real
125
125
121
121
estate
Investment funds
285
208
493
395
1
396
Insurance contracts
72
72
-
77
77
Other
23
5
28
1,317
Actuarial gains (+)/losses (-)
1,317
609
Consolidated Financial Statements
Notes
Employees
267
The fair value of the plan assets can be allocated to the following categories:
Dec. 31, 2020
Dec. 31, 2019
Quoted market
price in an active
€ million
market
No quoted market
price in an active
market
Quoted market
price in an active
Total
market
No quoted market
price in an active
market
Total
Cash and cash equivalents
80
80
191
191
Equity instruments
645
645
609
Debt instruments
19
arising from changes in demographic assumptions
Actuarial gains (+)/losses (-)
78
1
1
-682
78
1
-602
Employer contributions
Employee contributions
Payment transactions
134
-678
-53
81
38
-16
16
Consolidated Financial Statements
1
119
Changes in the scope of consolidation
72
72
Reclassification to liabilities directly related to
assets held for sale
38
-4
78
Pension payments
-197
-69
30
-3
-1
-1
-1
-269
27
-242
Remeasurements of defined benefit obligations
Actuarial gains (+)/losses (-)
-4
arising from changes in demographic assumptions
Actuarial gains (+)/losses (-)
-678
arising from changes in financial assumptions
Actuarial gains (+)/losses (-)
arising from experience adjustments
Remeasurements of plan assets
Actuarial gains (+)/losses (-)
arising from experience adjustments
Changes in the effects of the asset ceilings
Actuarial gains (+)/losses (-)
Actuarial gains (+)/losses (-)
Currency translation recognized in equity
49
-34
15
-2,329
-93
46
-2
-3
-162
-93
46
-2
-3
-
-21
17
-4
-2
-2
-281
61
-220
Past service cost
Gains (+) or losses (-) on settlement
Currency effects recognized in income
Other effects recognized in income
Items recognized in income
Remeasurements of defined benefit obligations
Net defined
benefit liability
5
Effects of the
asset ceilings
-1
Fair value of the
plan assets
Other changes
4
-4
Other
125
-38
87
December 31, 2020
-6,352
2,760
-3,592
2019
€ million
January 1, 2019
Current service cost
Interest expense
266
Consolidated Financial Statements
Notes
Employees
Interest income
Plan administration costs recognized in income
Present value of
the defined
benefit
obligations
-4,719
-162
2,391
-2,953
6
Fair value of the plan
Provisions are recognized for the share-based compensation program with cash settlement at Merck ("Merck
Long-Term Incentive Plan") and reported in other employee benefit provisions.
The fair value of the obligations is calculated by an external expert using a Monte Carlo simulation on each
balance sheet date. The main parameters in the measurement of the share-based compensation programs with
cash-settlement are long-term indicators of company performance and the price movement of Merck shares in
relation to the DAX®.
The expected volatilities are based on the implicit volatility of Merck shares and the DAX® in accordance with
the remaining term of the respective tranche. The dividend payments incorporated into the valuation model are
based on medium-term dividend expectations.
Changes to the intrinsic value of share-based compensation programs are allocated to the respective functional
costs according to the causation principle. Time value changes are recognized in financial income or finance
costs.
Significant discretionary decisions and sources of estimation uncertainty
Share-based payments
The measurement of long-term share-based compensation programs implies extensive estimation uncertainty.
The following overview shows the amounts by which the non-current provisions (carrying amount as of
December 31, 2020: € 99 million/carrying amount as of December 31, 2019: € 63 million) would have been
impacted by changes in the DAX® or the closing price of the Merck share on the balance sheet date. The
amounts stated would have led to a corresponding reduction or increase in profit before income tax.
€ million
Variation of Merck share price
Change in the DAX®
Consolidated Financial Statements
Share-based payments
Notes
269
10%
-10%
10%
-10%
Increase (+)/decrease (-) of the provision
Dec. 31, 2020
17
-16
-6
6
Dec. 31, 2019
Employees
Accounting and measurement policies
Share-based payments
438
Dec. 31,
2020
Non-current other employee benefit
provisions
237
176
-30
-32
1
-12
-53
286
Current other employee benefit
provisions
110
138
-79
-66
-5
53
152
Total
347
314
-108
-98
1
-17
16
-16
-9
9
12,971.22
Potential number offered for the first time in 2018
Forfeited
891,345
37,953
Transferred as part of the divestment of the Consumer
Health business
23,760
Dec. 31, 2018
829,632
Potential number offered for the first time in 2019
Forfeited
52,957
876,061
37,122
Dec. 31, 2019
776,675
838,939
Potential number offered for the first time in 2020
Forfeited
39,996
Paid out
832
Dec. 31, 2020
735,847
47,622
1,417
789,900
871,700
33,825
217
105.52
scope of
consolidation
/other
3 Years
11,304.33
Sensitivities were determined on the basis of the respective parameters in question, with all other
measurement assumptions remaining unchanged. The 2018 tranche reported under current provisions will not
be subject to any value fluctuations between December 31, 2020, and the payout date and was therefore
excluded from the sensitivity analysis (December 31, 2019: exclusion of 2017 tranche).
These share-based compensation programs with cash settlement in place at Merck are aligned with target
achievement based on key performance indicators as well as the long-term performance of Merck shares.
Certain employees are eligible to receive a certain number of virtual shares – Merck Share Units (MSUs) - at
the end of a three-year performance cycle. The number of MSUs that could be received depends on the
individual grant defined for the respective person and the average closing price of Merck shares in Xetra®
trading during the last 60 trading days prior to January 1 of the respective performance cycle (reference price).
When the three-year performance cycle ends, the number of MSUs to then be granted is determined based on
the development of defined key performance indicators (KPIs).
These KPIs are the performance of the Merck share price compared to the performance of the DAX® with a
weighting of 50%, the development of the EBITDA pre margin during the performance cycle as a proportion of
a defined target value with a weighting of 25%, and the development of organic sales growth as a proportion of
a defined target value, also with a weighting of 25%.
Depending on the development of the KPIs, at the end of the respective performance cycle the eligible
participants are granted between 0% and 150% of the MSUs they could be eligible to receive. A cash payment
is made based on the MSUs granted after the three-year performance cycle has ended. The value of a granted
MSU, which is relevant for payment, corresponds to the average closing price of Merck shares in Xetra® trading
during the last 60 trading days prior to the end of the performance cycle. The payout amounts of the respective
tranches are limited to two and a half times the individual grant.
The Executive Board members have their own Long-Term Incentive Plan, the conditions of which largely
correspond to the Long-Term Incentive Plan described here. A description of the plan for the Executive Board
can be found in the compensation report, which is part of the Combined Management Report.
The following table presents the key parameters as well as the development of the potential number of Merck
Share Units (MSUs) for the individual tranches.
270
Consolidated Financial Statements
Notes
Employees
Performance cycle
Term
Reference price of Merck shares in € (60-day average
Merck share price prior to the start of the performance
cycle)
DAX® value (60-day average of the DAX® prior to the
start of the performance cycle)
Potential number of MSUS
2018 tranche
2019 tranche
Jan. 1, 2018
Dec. 31, 2020
Jan. 1, 2019
Dec. 31, 2021
3 Years
91.73
13,089.39
3 Years
93.75
2020 tranche
Jan. 1, 2020
Dec. 31, 2022
25
Currency
translation
difference
Release
Other countries
Total
72
19
18
23
132
78
19
18
27
United Kingdom
142
19
18
19
135
82
20
19
19
140
86
19
79
Expected payments of undiscounted benefits
Switzerland
Germany
2025-2029
2,350
410
2,760
2,487
205
2,692
assets
Plan assets did not directly include financial instruments issued by Group companies or real estate used by
Group companies.
Employer contributions to plan assets and direct payments to plan beneficiaries are expected to amount to
€ 32 million (2019: € 37 million) and € 81 million (2019: € 79 million) respectively, next year.
The expected payments of undiscounted benefits are as follows:
Dec. 31, 2020
€ million
2021
2022
2023
2024
2025
2026-2030
Dec. 31, 2019
€ million
2020
2021
2022
2023
2024
19
25
149
485
29
149
22
21
144
23
20
147
125
128
821
The weighted duration of defined benefit obligations amounted to 22 years (2019: 22 years).
Other employee benefit provisions
Accounting and measurement policies
Other employee benefit provisions
Other employee benefit provisions include obligations from share-based compensation programs. More
information on these compensation programs can be found below.
Consolidated Financial Statements
Notes
Employees
268
Obligations for partial retirement programs and other severance payments not recognized in connection with
restructuring programs as well as obligations in connection with long-term working hour accounts and
anniversary bonuses are also included in other employee benefit provisions.
Other employee benefit provisions developed as follows:
Changes in
€ million
Jan. 1, 2020 Additions Utilizations
22
Interest
effect
133
21
95
106
121
807
Expected payments of undiscounted benefits
Germany
Switzerland
19
77
19
79
19
82
19
85
19
476
92
22
1117
United Kingdom
Other countries
Total
23
135
16
benefit liability
118
174
1,704
Lump sum
6
38
44
Installments
6
6
Other
10
10
Medical plan
29
29
Present value of defined benefit
3,765
943
942
677
Annuity
Benefit not based on final salary
€ million
Germany
Switzerland
Dec. 31, 2019
United Kingdom
Other countries
Total
Benefit based on final salary
Annuity
536
3,081
530
Lump sum
Installments
1
99
139
3,711
139
1
1
2,760
400
obligations
Other effects recognized in income
Items recognized in income
Present value of
the defined
benefit
obligations
-5,644
Fair value of the
plan assets
Effects of the
asset ceilings
2,692
-1
-197
-69
30
-3
-1
-1
-1
Net defined
Gains (+) or losses (-) on settlement
Currency effects recognized in income
Past service cost
Plan administration costs recognized in income
Interest income
Fair value of the plan assets
1,222
778
518
2,692
The vast majority of defined benefit obligations of German entities were attributable to plans that encompass
old-age, disability, and surviving dependent pensions. These obligations were based on benefit rules comprising
benefit commitments dependent on years of service and final salary, as well as a direct commitment for
employees newly hired since January 1, 2005 that is not based on the final salary. The benefit entitlement
resulted from the cumulative total of annually determined pension components that were calculated based on a
defined benefit expense and an age-dependent annuity table. Statutory minimum funding obligations did not
exist.
Pension obligations in Switzerland mainly comprised old-age, disability, and surviving dependent benefits
regulated by law. The employer and the employees made contributions to the plans. Merck had to observe the
existing statutory minimum funding obligations.
Pension obligations in the United Kingdom resulted primarily from benefit plans which are based on years of
service and final salary and were closed to newly hired employees in 2006. The agreed benefits comprised old-
age, disability, and surviving dependent benefits. The employer and the employees made contributions to the
plans. Merck had to observe the existing statutory minimum funding obligations.
5,644
Consolidated Financial Statements
Employees
265
The following table shows the development of the net defined benefit liability:
2020
€ million
January 1, 2020
Current service cost
Interest expense
Notes
174
85
820
3,592
2,953
Net defined benefit liability
Assets from defined benefit plans
2
Provisions for pensions and other post-employment benefits
3,594
4
2,957
Consolidated Financial Statements
Notes
Employees
264
The defined benefit obligations were based on the following types of benefits provided by the respective plan:
Dec. 31, 2020
€ million
Germany
1
2,952
3,592
516
Employees
263
Sensitivities are determined on the basis of the respective parameters in question, with all other measurement
assumptions remaining unchanged.
Both the benefit obligations as well as the plan assets are subject to fluctuations over time. The reasons for
such fluctuations could include changes in market interest rates and thus the discount rate, as well as
adjustments to other actuarial assumptions (such as life expectancy or expected future increases in pension).
This could lead to - or cause an increase in - underfunding. Depending on statutory regulations, it may become
necessary in some countries to reduce underfunding through additions of liquid assets.
In order to minimize fluctuations of the net defined benefit liability, in managing its plan assets, Merck also
pays attention to potential fluctuations in liabilities. The portfolio is structured in such a way that, in the ideal
scenario, plan assets and defined benefit obligations develop in opposing directions when exposed to exogenous
factors. This applies in particular to interest rate fluctuations.
Depending on the legal, economic, and fiscal circumstances prevailing in each country, different retirement
benefit systems are provided for the employees. Generally, these systems are based on the years of service
and salaries of the employees. Pension obligations comprise both obligations from current pensions and accrued
benefits for pensions payable in the future.
In order to limit the risks of changing capital market conditions and other developments, for the past number of
years newly hired employees have been offered plans that are not based on final salary.
The value recognized in the consolidated balance sheet for pensions and other post-employment benefits was
derived as follows:
Switzerland
€ million
Fair value of the plan assets
Funded status
Effects of the asset ceilings
Dec. 31, 2020
Dec. 31, 2019
6,352
5,644
-2,760
Present value of all defined benefit obligations
United Kingdom
-2,692
Total
33
39
Installments
7
Other
5
5
Medical plan
6
27
4,375
1,003
577
397
6,352
Fair value of the plan assets
1,250
Other countries
Present value of defined benefit
obligations
Lump sum
27
83
Benefit based on final salary
2,139
Annuity
3,313
1
571
Installments
1
108
Lump sum
3,993
141
141
1
Benefit not based on final salary
Annuity
1,054
1,002
Other financial liabilities
1,008
62
1,070
43
1,127
The liabilities to related parties primarily consist of liabilities to E. Merck KG.
1,170
46
317
46
55
2
45
Liabilities from derivatives (operational)
119
119
55
thereof: interest accruals
512
€
512
47
1,350
Dec. 31, 2020
March 2020
Dec. 2074¹
Capital Structure, Investments and Financing Activities
558
278
The composition of financial debt as well as a reconciliation to net financial debt are presented in the following
table:
Nominal value
Dec. 31, 2019
Interest rate
€ million
USD bond 2015/2020
Eurobond 2010/2020
4.500
2.625
Hybrid bond 2014/2074
€ million
669
Maturity
%
March 2020
2.400
€ million
750
Currency
USD
1,350
315
Bonds (current)
558
50
1,124
There are no indications that the availability of extended credit lines was restricted.
4,085
1,266
3,820
1,085
552
266
250
250
250
(38) Other financial liabilities
1,017
111111
2022
2025
variable
Interest commitments
variable
Maturity of
financing
1,017
Utilization
2,000
Notes
569
thereof: liabilities to related parties
Accounting and measurement policies
250
43
1,081
1,023
60
963
Miscellaneous other financial liabilities
Total
Non-current
Current
Total
Other financial liabilities
Non-current
in Mio. €
Dec. 31, 2019
Dec. 31, 2020
Other financial liabilities comprised the following:
With the exception of liabilities from derivatives and contingent considerations, which are recognized in the
context of business combinations according to IFRS 3, other financial liabilities are initially measured at fair
value and in subsequent periods at amortized cost, applying the effective interest method. The accounting and
measurement policies of derivatives are presented in Note (39) "Derivative financial instruments”.
2022
<1 year
variable
variable
1,587
320
Current
Consolidated Financial Statements
1
Except for lease liabilities and derivatives with negative market values, financial debt is initially recognized at
fair value and subsequently measured at amortized cost using the effective interest method.
Subsequent measurement at fair value through
other comprehensive income
5
504
509
29
408
438
Equity instruments
499
499
Other
399
Debt instruments
5
4
9
29
9
39
Subsequent measurement at fair value through
23
312
399
335
9
1
Financial income
Other operating income
Financial income
Dec. 31, 2020
Dec. 31, 2019
€ million
current
non-current
Total
current
8
non-current
Subsequent measurement at amortized cost
1
7
7
Financing
commitments
from banks
8
9
Loans against third parties
7
7
Total
The accounting and measurement policies for lease liabilities and derivatives are presented in Notes (21)
"Leasing" and (39) "Derivative financial instruments".
20
342
Derivatives with a hedging relationship
(operational)
Financial assets
96
96
7
7
125
822
947
(operational)
57
795
As in the previous year, contingent consideration included claims arising from the divestments of the biosimilars
business to Fresenius SE & Co. KGaA, Bad Homburg vor der Höhe, in 2017 and the KuvanⓇ business to
BioMarin Pharmaceuticals Inc., United States, in 2015.
Consolidated Financial Statements
Notes
Capital Structure, Investments and Financing Activities
277
Equity instruments with subsequent measurement at fair value through other comprehensive income included
the shares held in Precigen Inc., United States, and M Ventures portfolio companies in particular. Please refer to
Note (50) "List of shareholdings" for a detailed list of all investments made in equity instruments with
subsequent measurement at fair value through other comprehensive income.
(37) Financial debt/Capital management
Accounting and measurement policies
Financial debt/capital management
738
322
1
8
profit and loss
Equity instruments
Contingent consideration
Other debt instruments
Derivatives without a hedging relationship
16
(financial transactions)
10
260
260
8
258
34
41
50
50
10
26
20
14
33
Derivatives without a hedging relationship
258
Dec. 31, 2019
transactions)
569
July 2031
796
796
Eurobond 2019/2031
€
750
0.500
July 2028
746
Eurobond 2020/2028
0.875
€
0.375
July 2027
596
597
Eurobond 2019/2027
€
750
0.125
July 2025
745
600
Eurobond 2020/2025
800
Hybrid bond 2014/2074
995
996
Hybrid bond 2019/2079
€
500
1.625
June 20793
495
496
Hybrid bond 2019/2079
€
€
3.375
Dec. 2074²
498
499
Hybrid bond 2014/2074
€
1,000
2.625
Dec. 2074¹
997
500
June 20794
USD
3.250
2,357
Current financial debt
109
112
19
62
Lease liabilities (IFRS 16)
transactions)
Liabilities from derivatives (financial
debt
4,550
53
Loans from third parties and other financial
809
817
Liabilities to related parties
1,337
835
Bank loans
205
200
Commercial paper
15
1,600
USD bond 2015/2022
891
March 2025
1,419
1,295
USD bond 2015/2025
€
600
0.005
Dec. 2023
600
600
812
Eurobond 2019/2023
550
1.375
Sept. 2022
549
549
Eurobond 2015/2022
USD
1,000
2.950
March 2022
€
Utilization
2.875
€
1.625%
ויוןוין
2.625%
852
0.005%
1,363
500
0.500%
0.375%
0.875%
1.625%
2.875%
IIIIIIIII
2031
2030
2029
2028
2027
2026
2025
2024
2023
800
2022
3.375%
0.125%
3.250%
2,000
Financing
commitments
from banks
Dec. 31, 2020
Various bank credit lines
Bilateral credit agreement with banks
Loan agreement with banking syndicate
for acquisition financing
Syndicated loan
€ million
Loan agreements represent a further source of financing for Merck. At the balance sheet date, the bank
financing commitments vis-à-vis the Merck Group were as follows:
Traditionally, the capital market represents a major source of financing for Merck, for instance via bond issues.
As of December 31, 2020, there were liabilities of € 4.05 billion from a debt issuance program most recently
renewed in 2020 (December 31, 2019: € 3.90 billion). In addition, Merck had access to a commercial paper
program to meet short-term capital requirements with a volume of € 2 billion, of which € 200 million had been
utilized as of December 31, 2020 (December 31, 2019: € 205 million).
1.375%
2.950%
The objective of capital management is to ensure the necessary financial flexibility in order to maintain long-
term business operations and realize strategic options. Maintaining a stable investment grade rating, ensuring
liquidity, limiting financial risks, as well as optimizing the cost of capital are the objectives of our financial policy
and set important framework conditions for capital management. The responsible committees decide on the
target capital structure of the balance sheet, the appropriation of net retained profit, and the dividend level. In
this context, net financial debt is one of the leading capital management indicators.
280
Capital Structure, Investments and Financing Activities
Notes
Consolidated Financial Statements
Information on liabilities to related parties can be found in Note (45) "Related party disclosures".
The financial debt was not secured by liens or similar forms of collateral. The loan agreements do not contain
any financial covenants. The average borrowing cost as of the balance sheet date was 1.6% (December 31,
2019: 2.5%).
68.3% of the tranche of the hybrid bond 2014/2074 with an original nominal value of € 1 billion with a first
optional redemption date in June 2021 was repaid ahead of schedule in the fiscal year.
The hybrid bonds issued by Merck KGaA are bonds for which the rating agencies Standard & Poor's, Moody's,
and Scope have given equity credit treatment to half of the issuances, thus making the issuances more
favorable to Merck's credit rating than traditional bond issues. The bonds are recognized in full as financial
liabilities in the balance sheet.
2 For the hybrid bonds repayment is assumed at the earliest possible date.
1 The nominal volumes of bonds denominated in U.S. dollars were converted into euros at the closing rate on December 31, 2020.
Capital management
1,000
2021
USD Bond¹
327
56
40
Non-current financial debt
Lease liabilities (IFRS 16)
Other operating income
Liabilities from derivatives (financial
44
42
Loans from third parties and other financial
debt
458
250
Bank loans
7,835
9,126
Bonds (non-current)
€
1,000
1.625
Sept. 20805
996
Hybrid bond 2020/2080
250
Hybridbond²
9,785
Financial debt
Eurobond
The repayment profile of the bonds was as follows:
279
Capital Structure, Investments and Financing Activities
Notes
Consolidated Financial Statements
6 Not defined by International Financial Reporting Standard (IFRS).
5 Merck has the right to prematurely repay this hybrid bond issued in September 2020 for the first time in September 2026.
4 Merck has the right to prematurely repay this tranche of the hybrid bond issued in June 2019 for the first time in December 2029.
2 Merck has the right to prematurely repay this tranche of the hybrid bond issued in December 2014 for the first time in December 2024.
3 Merck has the right to prematurely repay this tranche of the hybrid bond issued in June 2019 for the first time in December 2024.
8,644
1 Merck has the right to prematurely repay this tranche of the hybrid bond issued in December 2014 for the first time in June 2021.
10,758
€
781
1,355
28
13,194
12,142
Net financial debt6
Current financial assets
Cash and cash equivalents
less:
12,363
Other financial assets were composed as follows:
Financial assets are initially measured at fair value and recognized as of the settlement date. For financial
assets not subsequently measured at fair value through profit or loss in subsequent periods, initial
measurement also includes directly attributable transaction costs.
Foreign currency gains
and losses recognized
directly in equity
-181
27
63
-430
-474
194
208
26
61
26
63
169
431
Merck KGaA
E. Merck KG
Merck KGaA
181
475
E. Merck KG
2019
2020
Profit carried forward
Dividend proposal
Withdrawal by E. Merck KG
Retained earnings Merck KGaA
Profit carried forward previous year
Withdrawal from revenue reserves
Transfer to revenue reserves
Net income
€ million
The result of E. Merck KG on which the appropriation of profits adjusted for trade tax is based amounted to
€ -44 million (2019: € -25 million). This resulted in a profit/loss transfer to Merck KGaA of € -13 million (2019:
€-7 million). Merck KGaA's net income adjusted for corporation tax, on which the appropriation of its profit is
based, amounted to € 721 million (2019: € 639 million). Merck KGaA transferred a profit in the amount of
€ 506 million to E. Merck KG (2019: € 449 million). In addition, an expense from corporation tax charges
amounting to € 20 million resulted (2019: expense of € 14 million).
169
431
-168
181
63
A dividend of € 1.30 per share was distributed for fiscal 2019. The dividend proposal for fiscal 2020 will be
€ 1.40 per share. The proposed dividend payment to shareholders amounts to € 181 million (2019:
2
Transfer to revenue reserves
-7
-7
-13
-13
Profit/loss transfer from E. Merck KG
-505
-449
-56
-555
-506
-48
Total
Merck KGaA
Merck & Cie
Total
Merck KGaA
Merck & Cie
Profit transfer to E. Merck KG
€ million
2019
2020
Appropriation of profits and changes in reserves
273
Capital Structure, Investments and Financing Activities
Notes
Consolidated Financial Statements
€ 168 million). The amount withdrawn by E. Merck KG would amount to € 474 million (2019: € 430 million).
26
2
475
-14
2020
Result of E. Merck KG before reciprocal profit
transfer, adjusted for trade tax
€ million
The reciprocal net profit/loss transfer between E. Merck KG and Merck KGaA as stipulated by the Articles of
Association was as follows:
to allocate to the profit brought forward/retained earnings of Merck KGaA a comparable sum determined
according to the ratio of subscribed capital to general partner's equity. This ensures that the retained earnings
and the profit carried forward of Merck KGaA correspond to the ownership ratios of the shareholders on the one
hand, and E. Merck KG on the other hand. Consequently, for distributions to E. Merck KG, the available amount
is the amount that results from netting the profit transfer of Merck KGaA with the amount either allocated or
withdrawn by E. Merck KG from retained earnings/profit carried forward. This amount corresponds to the sum
paid as a dividend to the shareholders and reflects their pro rata shareholding in the company.
272
Capital Structure, Investments and Financing Activities
Notes
Consolidated Financial Statements
The profit distribution to be resolved upon by shareholders also defines the amount of that portion of net
profit/loss freely available to E. Merck KG. If the shareholders resolve to carry forward or to allocate to retained
earnings a portion of Merck KGaA's net retained profit to which they are entitled, E. Merck KG shall be obliged
Appropriation of profits
The allocation of net profit/loss is based on the net income of both E. Merck KG and Merck KGaA determined in
accordance with the provisions of the German Commercial Code. These results are adjusted for trade tax
and/or corporation tax and create the basis for the allocation of net profit/loss. The adjustment for corporation
tax is made to compensate for the difference in the tax treatment between the general partner and the limited
liability shareholders. Corporation tax is only calculated on the income received by the limited liability
shareholders. Its equivalent is the income tax applicable to the partners of E. Merck KG which must be paid by
them directly. The adjustment thus ensures that the share in net profit corresponds to the respective interests
held by the two shareholder groups.
E. Merck KG and Merck KGaA engage in reciprocal net profit transfers. This makes it possible for E. Merck KG,
the general partner of Merck KGaA, and the shareholders to participate in the net profit/loss of Merck KGaA in
accordance with the ratio of the general partner's equity interest and the subscribed capital (70.274% or
29.726% of the equity capital).
E. Merck KG's share of net profit
The equity capital of the company consists of the subscribed capital composed of shares and the equity interest
held by the general partner E. Merck KG (general partner's equity). As of the balance sheet date, the
company's subscribed capital amounting to € 168 million was divided into 129,242,251 no-par value bearer
shares plus one registered share. Each share therefore corresponds to € 1.30 of the subscribed capital. The
amount resulting from the issue of shares by Merck KGaA exceeding the nominal amount was recognized in the
capital reserves. The equity interest held by the general partner amounted to € 397 million. As in the previous
year, there were no changes in subscribed capital in the year under review.
Equity capital/capital reserves
In cases where a company was not acquired in full, non-controlling interests are measured using the fair value
of the proportionate share of net assets.
Measurement of non-controlling interests within the scope of a company acquisition
From an accounting perspective, the contributions of both shareholder groups are treated as equity, regardless
of the general partner's option to terminate its capital share. This treatment is based on the provision in the
Articles of Association of Merck KGaA stating that the limited liability shareholders may decide on the
conversion of the company into a stock corporation and thus limit the general partner's settlement claim to
fulfillment in equity instruments.
As a partnership limited by shares, Merck KGaA has two different shareholder groups who have contributed to
the company: The general partner E. Merck KG as the personally liable partner and the shareholders.
Accounting treatment of the general partner's equity
Accounting and measurement policies
(34) Equity
Activities
Capital Structure, Investments and Financing
271
Capital Structure, Investments and Financing Activities
Notes
Consolidated Financial Statements
2019
Net income
E. Merck KG
E. Merck KG
-20
-7
7
-13
13
(29.726%)
Profit/loss transfer to Merck KGaA (ratio of
subscribed capital to equity capital)
Corporation tax
Other operating income
or other operating
expenses
Financial income and
expenses
-449
449
-506
506
(70.274%)
Profit transfer to E. Merck KG (ratio of general
639
-25
721
-44
(100%)
Basis for appropriation of profits
14
20
Corporation tax
625
701
Net income of Merck KGaA before reciprocal
profit transfer
-25
-44
Merck KGaA
Merck KGaA
Profit transfer to E. Merck KG including
partner's equity to equity capital)
-519
Other operating
Financial income
and expenses
Other operating
income or other
operating expenses
Financial income
and expenses
operating expenses
Other operating
income or other
Foreign currency
gains or losses
income or other
Other operating
Group equity (upon
derecognition:
reclassification to
financial income
and expenses)
derecognition:
reclassification to
other operating
income or other
operating
expenses)
Financial income
and expenses
Group equity (upon
Other operating
income or other
operating expenses
loss on
disposal/value
adjustments
Financial
Operational
Financial income
and expenses
Financial
Impairment losses,
and reversals of
impairment losses
on financial assets
(net)
losses/reversals of
impairment losses
Impairment losses,
and reversals of
impairment losses
on financial assets
(net)
Financial income
and expenses
Impairment
Operational
Financial
Asset type
Net gain and net
Subsequent measurement at
fair value through profit or
loss
fair value through other
comprehensive income
Subsequent measurement at
Subsequent measurement at
amortized cost
income or other
Operational
operating expenses operating expenses
and expenses
-48
Foreign currency gains
and losses recognized
directly in equity
Financial income and
expenses
Other operating income or
other operating expenses
Reclass of the cumulative
results previously
recognized directly in
equity in the retained
earnings when asset is
disposed
Results recognized
directly in equity (value
adjustments)
Value adjustments
Results recognized
directly in equity (value
adjustments)
Reclass of the cumulative
results previously
recognized directly in
equity in the retained
earnings when asset is
disposed
Dividend income
losses
Foreign currency gains or
Financial
fair value through profit or
loss
Operational
Subsequent measurement at
Financial
Operational
Asset type
fair value through other
comprehensive income
Subsequent measurement at
Category
The following table provides details on the measurement effects of equity instruments on the consolidated
balance sheet and the consolidated income statement:
276
Notes Capital Structure, Investments and Financing Activities
Consolidated Financial Statements
Financial income
and expenses
Financial income
and expenses
Financial income
and expenses
(applying the
effective interest
method)
Interest income or
expenses
Financial income
and expenses
Financial income
Category
315
Recognition
Cash, bank balances and cheques
€ million
Cash and cash equivalents comprised the following items:
274
Capital Structure, Investments and Financing Activities
Notes
Consolidated Financial Statements
Cash and cash equivalents include short term investments with a maximum remaining term of up to three
months which can be readily converted to a determined amount of cash.
Cash and cash equivalents
Accounting and measurement policies
(35) Cash and cash equivalents
The calculation of non-controlling interests was based on the reported equity of the subsidiaries concerned.
The consolidated equity and the profit attributable to non-controlling interests mainly related to the minority
interests in the publicly traded company P.T. Merck Tbk., Indonesia, as well as in Versum Materials Taiwan Co.,
Ltd., Taiwan, and in Merck Ltd., Thailand.
Non-controlling interests
The proposed withdrawal of E. Merck KG in the amount of € 474 million (2019: € 430 million) results from the
total amount of the profit/loss transfer to E. Merck KG, including changes in reserves, and the profit/loss of
E. Merck KG before reciprocal profit transfer.
Based on the assumed appropriation of profits, the profit/loss transfer to E. Merck KG for 2020, including
changes in reserves, amounted to € -567 million. This consisted of the profit transfer to E. Merck KG
(€ -506 million), the profit/loss transfer from E. Merck KG to Merck KGaA (€ -13 million) and the profit transfer
from Merck & Cie to E. Merck KG (€ -48 million). In the previous year, the profit/loss transfer to E. Merck KG
including changes in reserves amounted to € -510 million. This consisted of the profit transfer to E. Merck KG
(€ -449 million), the profit/loss transfer from E. Merck KG to Merck KGaA (€ -7 million), the change in profit
carried forward of E. Merck KG (€ 2 million) as well as the profit transfer from Merck & Cie to E. Merck KG
(€ -56 million).
-430
-56
-474
-48
Profit transfer to E. Merck KG/withdrawal by
E.Merck KG
-25
-44
Result of E. Merck KG before reciprocal profit
transfer, adjusted for trade tax
changes in reserves
-510
-455
-56
-567
The following table provides details on the measurement effects of debt instruments on the consolidated
balance sheet and the consolidated income statement:
Short-term cash investments (up to 3 months)
Cash and cash equivalents
Merck & Cie is a partnership under Swiss law that is controlled by Merck KGaA but distributes its operating
result directly to E. Merck KG. This distribution is a payment to shareholders and is therefore also presented
under changes in equity.
Dec. 31, 2019
618
Derecognition
Financial assets are derecognized if there is no reasonable expectation that the contract party will fulfill its
contractual obligations or if Merck transfers the contractual rights including all material risks and rewards of the
financial asset to a contract partner.
Dec. 31, 2020
910
Financial assets are only reclassified in rare cases in which Merck changes its business model in managing
financial assets.
Equity instruments not subject to mandatory subsequent measurement at fair value through profit or loss are
measured at fair value through other comprehensive income in subsequent periods if they are intended to be
held for the longer term. Further details on the measurement of financial assets at fair value are presented in
Note (43) "Information on fair value measurement".
acquirer within the context of the disposal of businesses within the meaning of IFRS 3 (see Note (43)
"Information on fair value measurement"). Merck does not utilize the option of the subsequent measurement of
debt instruments at fair value through profit or loss.
275
Capital Structure, Investments and Financing Activities
Notes
This classification is based on the business model and the structure of contractual payment flows. Financial
assets subsequently measured at amortized cost are accounted for using the effective interest method and
considering any impairment losses. The procedure for calculating impairment losses is described in Note (42)
"Management of financial risks". Financial assets of this class are held in order to collect their contractual cash
flows, which are exclusively principal repayments and interest payments on the outstanding capital amount.
Except for derivative financial instruments with positive market value, Merck only applies subsequent
measurement at fair value through profit or loss for debt instruments with contractual properties resulting in
cash flows that do not exclusively represent principal repayments and interest payments on the outstanding
capital amount. In particular, this includes contingent consideration that was contractually agreed with the
Subsequent measurement at fair value through profit or loss.
Subsequent measurement at fair value through other comprehensive income
.
• Subsequent measurement at amortized cost
At initial recognition, financial assets are assigned to one of the following measurement categories which also
correspond to the financial instrument classes as defined in IFRS 9:
Consolidated Financial Statements
Classification and subsequent measurement
446
162
1,355
781
Changes in cash and cash equivalents as defined by IAS 7 are presented in the consolidated cash flow
statement.
The maximum default risk was equivalent to the carrying amount of cash and cash equivalents.
(36) Other financial assets
Cash and cash equivalents included restricted cash amounting to € 246 million (December 31, 2019:
€ 240 million). This mainly related to cash and cash equivalents at subsidiaries that are subject to foreign
exchange restrictions.
Other financial assets
This section does not cover the accounting and measurement policies for derivative financial instruments. They
are presented in Note (39) "Derivative financial instruments”.
Recognition and initial measurement
2,019
Detailed information on the measurement methods for financial assets measured at fair value are presented in
Note (43) "Information on fair value measurement".
Accounting and measurement policies
-28
-4
2
-6
-2
instrument
-31
2
2
thereof: negative market
-4
-6
-3
Fair value of the hedging
thereof: positive market
values
2
1,794
163
values
JPY
KRW
Notional amount
55
392
151
139
165
thereof: current
1,794
55
392
151
139
thereof: non-current
January 2020 -
8.08
December
2020
-2
2
1
hedge effectiveness since
January 1, 2019
Weighted average hedging
1.19
1.12
TWD
36.24
127.40
1,378.90
rate
1 The hedging instruments and the corresponding hedged items were denominated in the same currency, therefore the hedge ratio was 1:1.
In addition to the transactional foreign exchange risks described previously, Merck was exposed to currency
translation risks since many of Merck's subsidiaries are located outside the eurozone and have functional
currencies other than the reporting currency. Exchange differences resulting from translation of the assets and
liabilities of these companies into euros, the reporting currency, are recognized in equity.
11
item used to determine
Change in value of hedged
2019
Hedge ratio¹
1:1
January 2020 -
December
2020
1:1
January 2020 -
December
2020
1:1
January 2020 -
December
2020
1:1
January 2020 -
December
2020
1:1
Maturity profile
January 2020 -
January 2021
Change in value of
outstanding hedging
-11
2
-2
-1
instruments since January 1,
1:1
CNY
1:1
USD
2
3
values
thereof: negative market
-7
-2
-15
-8
values
Maturity profile
January 2021 -
December
2021
January 2021 -
December
2021
January 2021 -
December
2021
January 2021 -
December
2021
January 2021 -
December
2021
3
January 2021 -
6
thereof: positive market
thereof: current
1,802
358
1,071
257
97
295
thereof: non-current
Fair Value of the hedging
65
-2
3
2
-5
instrument
71
December
2021
Hedge ratio¹
-2
5
hedge effectiveness since
January 1, 2020
Weighted average hedging
1.17
1.08
8.25
33.55
124.20
1,379.00
rate
1 The hedging instruments and the corresponding hedged items were denominated in the same currency, therefore the hedge ratio was 1:1.
December 31, 2019
€ million
-3
9
2
-65
1:1
1:1
1:1
1:1
1:1
Change in value of
outstanding hedging
CHF
65
-9
3
2
-5
instruments since January 1,
2020
Change in value of hedged
item used to determine
-2
-9
9
295
-46
-398
-481
Financial result
Interest income and expenses and similar income and expenses were as follows:
-354
-385
2020
Finance costs
2019
Financial instruments
Leases
Interest income Interest expenses
26
Interest income Interest expenses
-246
27
-270
-15
€ million
-14
Other interest expenses
-5
66
Income from fair value changes from debt instruments with subsequent measurement at fair
value through profit or loss
4
5
Income from the change of the fair value of share-based compensation programs
Currency differences from financing activities
14
12
Finance income
-3
44
Interest expenses and similar expenses
-387
-430
Capital loss from disposal of debt instruments with subsequent measurement at amortized cost
Expenses from fair value changes from debt instruments with subsequent measurement at fair
value through profit or loss
-1
-3
-5
Expenses from fair value changes of share-based compensation programs
Currency differences from financing activities
97
Pension provisions
-39
-47
Consolidated Financial Statements
Notes Capital Structure, Investments and Financing Activities
286
The following table shows the development of net gains and losses, interest income and expenses, currency
differences as well as dividend income from financial instruments (excluding items recognized in other
comprehensive income) by measurement category in the period under review:
2020
€ million
Financial assets
Subsequent
The decrease in interest expenses due to financial instruments compared with the previous year is primarily
attributable to lower interest payments on bonds.
measurement at
Subsequent
measurement at fair
value through other
comprehensive income
Equity Instruments
Subsequent
measurement at fair
Interest result
amortized cost
-430
66
-387
Other non-current provisions
-20
-26
Other interest income/expenses and similar income and
expenses
13
-75
39
-86
Capitalized borrowing costs for
8
13
Property, plant and equipment
4
11
4
2
Other intangible assets
Interest income/expenses and similar income and expenses
39
39
2019
2020
Interest income and similar income
swaps
-47
Fair value adjustment (directly recognized in
equity)
-1
12
13
-29
Reclassification to profit or loss
-22
Interest rate
14
17
14
Reclassification to assets
22
-1
35
26
Tax effect
-52
-81
1
-33
40
-122
Potential netting volume
due to master
netting
agreements
due to financial
collateral
Potential net
amount
32
-32
7
-89
The reserves for cash flow hedges and the cost of cash flow hedging of the Group applied to the following
hedging instruments:
Cost of hedging cash flows
Cash flow hedging
Time value of
€ million
Jan. 1, 2019
Forward
component of
options currency forwards
Spot component
Intrinsic value of
options
of currency
forwards
-6
Currency
differences
499
-3
Reclassification to assets
Tax effect
Dec. 31, 2020
1
-9
-18
-3
-9
15
-25
-31
-23
Consolidated Financial Statements
Notes Capital Structure, Investments and Financing Activities
285
(40) Finance income and expenses/Net gains and losses from financial
instruments
Finance income and expenses were as follows:
€ million
5
34
-5
12
-3
Dec. 31, 2019
-8
-25
-13
-70
-36
Jan. 1, 2020
-8
-25
-13
-70
-36
Fair value adjustment (directly recognized in
equity)
-2
-11
31
23
Reclassification to profit or loss
-10
Dividends
Interest
income
Interest Impairment
expenses
losses
9,442
816
Other current and non-current
financial liabilities
2,531 3,561 -4,687
-15
65
33
398
2020
-1
Financial debt
13,194
6,436 -7,793
-15
65
-151
398
9
1,885
Dec. 31,
9
-184
Cash
Non-cash
Changes
Change
€ million
Jan. 1,
2020
Cash
inflows
Repay-
ments
in lease
Other liabilities
Ex-
change
rate
effects
Fair
value
adjust-
ment
in scope
Other
of
consoli-
dation
Bonds
9,854
Financial liabilities to E. Merck KG
808
2,486 -2,724
390 -382
-1 12,142
2020
Derivative assets (current and non-
current)
521
420
9,854
808
Other current and non-current
financial liabilities
Financial debt
Derivative assets (current and non-
current)
1,367 1,193 -1,281
9,361
-30
-11
9
198
495
546
2,531
5,080 -2,989
-11
198
84
495
24
Dec. 31,
2019
consoli-
dation
Other
-514
-26
2019
Cash
Non-cash
Changes
€ million
Jan. 1,
2019
Bonds
7,173
Financial liabilities to E. Merck KG
821
Cash
inflows
3,482 -1,290
406 -418
Repay-
ments
Change
in lease
Other liabilities
Ex-
change
rate
effects
59
Fair
value
adjust-
ment
in scope
of
-33
40
-122
The change in financial debt was as follows:
Net cash flows from financing activities
75
-884
822
-10
1
26
-246
-81
-81
75
Interest result
Net gains and losses
Currency
differences
Dividends
Interest
income
Interest
expenses
Impairment
losses
Reversals of
impairment
losses
-62
Fair value
Disposal
adjustments gains/losses
impairment
losses
Net gains and losses
Reversals of
-10
5
-1
21
value through profit or
loss
Financial debt
Subsequent
measurement at
1
amortized cost
Subsequent
measurement at fair
value through profit or
loss
Total
2019
€ million
-244
-2
Fair value
adjustments
The option to recognize dividend payments and profit withdrawals in the cash flows from financing activities is
exercised in determining the cash flows from financing activities.
Disposal
gains/losses
Subsequent
-270
-95
87
-714
782
-1
27
-270
-7
-95
67
-1
In the table above, interest income or expenses related to derivatives without a hedging relationship are
recognized within fair value adjustments. The currency result from equity instruments with subsequent
measurement at fair value through other comprehensive income was recognized in other comprehensive income.
Consolidated Financial Statements
Notes Capital Structure, Investments and Financing Activities
287
(41) Net cash flows from financing activities
Accounting and measurement policies
87
Total
value through profit or
loss
measurement at fair
measurement at
-31
amortized cost
Subsequent
measuremen at fair
value through other
comprehensive income
Equity Instruments
7
Subsequent
measuremen at fair
1
20
value through profit or
loss
Financial debt
Subsequent
measurement at
24
amortized cost
Subsequent
Financial assets
Net presentation
Netting
presentation
• Receivables from and liabilities to third parties in non-functional currency.
• Intragroup financing in non-functional currency,
Foreign exchange risks from the following transactions are economically hedged through the use of foreign
exchange contracts and currency options:
• Firm purchase commitments over the next 12 months in non-functional currency.
• Forecast transactions in non-functional currency, the expected probability of which is very high for the
next 12 months,
Foreign exchange risks from the following transactions are hedged using foreign exchange contracts and
currency options applying hedge accounting:
A more rule-based hedging approach was gradually introduced for hedging foreign exchange risks as of the
beginning of fiscal 2019. The entire foreign exchange exposure is divided into several defined risk levels and
systematically hedged using suitable hedging instruments. The number of currencies included in hedging was
also expanded. Hedging is performed based on a regularly reviewed basket of currencies. As part of the new
hedging concept, the time horizon for hedging was reduced from a maximum of 36 months to 12 months. The
new hedging concept aims to ensure a consistent hedging quality at lower costs.
Owing to the international nature of its business, Merck is exposed to transactional foreign exchange risks
within the scope of both its business activities and financing activities. Foreign exchange risks are continuously
analyzed and different hedging strategies used to limit or eliminate these risks.
Consolidated Financial Statements
Foreign exchange risks
Merck uses marketable forward exchange contracts, options, and interest swaps as hedging instruments. The
strategy to hedge interest rate and foreign exchange rate fluctuations arising from forecast transactions and
transactions already recognized in the balance sheet is set by a risk committee, which meets on a regular basis.
The use of derivatives is regulated by extensive guidelines and subject to ongoing risk controls by Group
Treasury. Speculation is prohibited. The strict separation of functions between trading, settlement, and control
functions is ensured. Derivatives are only entered into with banks that have a good credit rating. Related
default risks are continuously monitored.
Market fluctuations with respect to foreign exchange and interest rates represent significant profit and cash flow
risks for Merck. Merck aggregates these Group-wide risks and steers them centrally, partly by using derivatives.
To estimate existing risks of foreign exchange and interest rate fluctuations, Merck uses scenario analyses.
Merck is not subject to any material risk concentration from financial transactions.
(42) Management of financial risks
288
Capital Structure, Investments and Financing Activities
Notes
Consolidated Financial Statements
The amount of undrawn borrowing facilities that could be employed for future operating activities and to meet
obligations and information on changes in financial debt can be found in Note (37) "Financial debt/Capital
management".
The Report on Risks and Opportunities included in the combined management report provides further
information on the management of financial risks.
Notes
Capital Structure, Investments and Financing Activities
289
73
98
65
407
-280
457
KRW
JPY
TWD
CNY
CHF
USD
December 31, 2019
Exchange rate +10%
(depreciation vs. €)
Exchange rate -10%
(appreciation vs. €)
Net exposure
€ million
December 31, 2020
The following table shows the net exposure and the effects of transactional exchange rate movements of the
key currencies against the euro in relation to the net income and equity of the Group on the balance sheet
date:
Fair value adjustments of other current and non-current financial liabilities are attributable to liabilities from
derivatives. In the consolidated cash flow statement, cash changes of assets from derivatives were recognized
together with repayments of other current and non-current financial liabilities. In the above reconciliation,
changes of assets from derivatives were recognized separately because they did not form part of financial
liabilities.
Consolidated income statement
Equity (other comprehensive income)
Other cash changes show interest payments for lease liabilities that are recognized in the net cash flow from
operating activities. Changes in lease liabilities include additions and retirements of right-of-use from leases
and the effects from unwinding of the discount on lease liabilities. Other non-cash changes resulted from the
application of the effective interest method.
-502
Presentation on
the balance
sheet
during the term
At maturity
Positive market
values
Other financial
assets
Interest rate
Financial
transactions
Negative
market values
Market value
Financial debt
hedging relationship
Positive market
Transactions in
values
Other financial
assets
Currency
operating
business
Negative
market values
Derivatives with a cash flow
item
Type of hedged
Type of
collateral
Consolidated Financial Statements
Notes Capital Structure, Investments and Financing Activities
281
(39) Derivative financial instruments
Accounting and measurement policies
Derivative financial instruments
The IFRS 9 provisions are applied for hedge accounting. Hedging transactions are entered into for highly
probable forecast transactions in foreign currencies and for hedging fair values of assets on the balance sheet.
Cash flow hedge accounting for forecast transactions in foreign currency mean the hedged item is recognized at
a fixed exchange rate on a net basis instead of being recognized at the spot exchange rate at the transaction
date. As a result of hedging fair values of assets on the balance sheet, the compensating changes in value of
the corresponding hedged item and hedging instrument offset each other.
Merck only uses derivatives as hedging instruments. Merck uses the dollar offset method as well as regression
analyses to measure hedge effectiveness.
Hedging ineffectiveness may occur in the timing of forecasted cash flows or if hedged items are dissolved.
Derivatives that do not or no longer meet the documentation or effectiveness requirements for hedge
accounting, whose hedged item no longer exists, or for which hedge accounting rules are not applied are
classified as "financial assets or liabilities at fair value through profit or loss" depending on their balance.
In the case of hedging relationships where Merck uses options as hedging instruments, only the intrinsic value
of options is designated as the hedging instrument. Changes in the fair value of the time value component of
options that are used for hedge accounting are recognized in other comprehensive income and in the cost of
cash flow hedge reserve within equity. The subsequent accounting of these amounts depends on the type of
hedged transaction.
In the case of hedging relationships where Merck uses forward contracts as hedging instruments, only the spot
element is designated as the hedging instrument. Changes in the fair value of the forward element in forward
contracts are initially recognized in the cost of cash flow hedge reserve within equity. The subsequent
accounting of these amounts depends on the type of hedged transaction.
Reclassifications of the cash flow hedge reserve to profit or loss are recognized in the operating result, while
reclassifications of the cost of cash flow hedge reserve are recognized in financial income and expenses.
Consolidated Financial Statements
Notes Capital Structure, Investments and Financing Activities
282
-
Derivative financial instruments are recognized in the consolidated balance sheet, the consolidated income
statement, and the consolidated statement of comprehensive income with the exception of the balance sheet
treatment of amounts included directly from the reserve in the initial cost or in the other carrying amount of a
non-financial asset or liability - as follows:
Changes in fair value in the
consolidated income statement
and the consolidated statement of
comprehensive income
Hedging relationship
-33
Other financial
liabilities
46
41
7
7
8
14
-5
83
-28
-4
2695
-20
49
-80
-10
-10
-12
-8
-114
28
-93
In this presentation, effects of cash flow hedges are taken into consideration in the equity of the Group. The net
exposure of each of the above currencies consisted of the following components:
• Planned cash flows in the next 12 months in the respective currency less
• The nominal values of hedging instruments of these planned cash flows.
97
257
1,071
358
1,802
Notional amount
KRW
JPY
TWD
CNY
CHF
USD
€ million
December 31, 2020
The impact of cash flow hedge accounting for forecast transactions in foreign currency was as follows for the
major currencies:
290
Notes Capital Structure, Investments and Financing Activities
Consolidated Financial Statements
The planned cash flows in the next 12 months are usually hedged at a ratio of 25% to 90% in line with the risk
management strategy and depending on market development. As in the previous year, balance sheet items in
the above currencies were economically hedged by derivatives in full if they did not correspond to the functional
currency of the respective subsidiary. Accordingly, they do not affect the net exposure presented above.
4
-28
20
-49
-33
115
-7
-10
-7
-41
28
-46
64
Consolidated income statement
Equity (other comprehensive income)
-9
-18
-62
40
-119
7
10
7
-21
17
8
17
80
Consolidated income statement
Equity (other comprehensive income)
Consolidated income statement
Equity (other comprehensive income)
284
39
200
933
-493
802
KRW
JPY
TWD
CNY
CHF
USD
(depreciation vs. €)
Exchange rate +10%
Exchange rate -10%
(appreciation vs. €)
Net exposure
€ million
93
966 13,194
Fair value
adjustments
(in equity)
Fair value
adjustments
(in equity)
Fair value
adjustments
(in equity)
Fair value
adjustments
(in equity)
Other
operating
income
40
45
2
December 31, 2019
€ million
Cash flow hedge
Interest
Positive market values
62
Negative market values
Transactions in operating
business
Financial transactions
Transactions in operating
business
current non-current
current non-current
current non-current
7
current non-current
46
Financial transactions
8
96
10
Currency
96
No hedge accounting
16
10
Interest
10
Currency
16
Virtual power purchase
agreement
45
62
40
2
40
62
8
2
16
Currency
Interest
7
20
Netting Net presentation
130
-149
130
-149
Potential netting volume
due to master
netting
agreements
due to financial
collateral
Potential net
amount
74
-74
presentation
56
-75
Notes
Capital Structure, Investments and Financing Activities
284
December 31, 2019
€ million
Derivative assets
Derivative liabilities
Gross
Consolidated Financial Statements
Gross
Derivative liabilities
Derivative assets
Interest
14
14
Currency
20
Virtual power purchase
agreement
20
14
46
19
56
56
19
19
56
46
As in the previous year, all hedging relationships were transaction related. Netting of derivatives from an
economic perspective was possible due to the existing framework agreements on derivatives trading that Merck
had entered into with commercial banks. Actual netting only takes place in the case of insolvency of the
contract partner. Derivatives were not offset on the face of the balance sheet.
The following table presents the potential netting volume of the reported derivative assets and liabilities:
December 31, 2020
€ million
No hedge accounting
Financial
income and
expenses
45
current non-current
Other
operating
income
Other
operating
expenses
Financial
income and
expenses
Financial
income and
expenses
Other
operating
income
Other
operating
expenses
Other financial
liabilities
The nominal amounts of Merck's derivative exposures were as follows:
Dec. 31, 2019
€ million
Cash flow hedge
current
non-current
current
non-current
5,285
Dec. 31, 2020
Negative
market values
operating
business
Other financial
assets
Other
operating
expenses
Interest rate
Financial
transactions
Positive market
values
Other financial
assets
Currency
Derivatives without a
hedging relationship
Financial
transactions
Negative
market values
Positive market
values
Financial debt
Financial
income and
expenses
Financial
income and
expenses
Other financial
assets
Negative
market values
Financial debt
Virtual power Transactions in
purchase
agreement
Positive market
values
2,765
96
2
569
Capital Structure, Investments and Financing Activities
283
The fair values of the derivatives were as follows:
December 31, 2020
€ million
Cash flow hedge
Positive market values
Negative market values
Notes
Transactions in operating
business
Financial transactions
Transactions in operating
business
current
non-current
current non-current
current
non-current
Financial transactions
Consolidated Financial Statements
1,102
7,912
-
Currency
4,716
2,765
2
No hedge accounting
4,451
1,100
5,147
1,100
Interest rate
1,100
1,100
Currency
4,451
5,147
Virtual power purchase agreement
9,736
1,100
Interest rate
-18
In the pursuit of solving the toughest challenges in life science, we seek opportunities to support our global
customers and collaborators with the skills and equipment they need to make critical advancements for the
industry. Aligning with this goal, in January, we announced the opening of a non-profit, high-tech skill
development center in collaboration with the Council of Scientific and Industrial Research's Institute of Microbial
Technology (CSIR-IMTECH), an organization under the government of India's Ministry of Science and
Technology. Located in Chandigarh, India, the center is equipped with genome-editing, single-molecule
biomarker detection, and other technologies to help local students build life science skills.
Merck
Empowered leaders
The delivery concentrates on three key strategic cornerstones empowered leaders, curious talents, and result
driven teams and networks - that all play an instrumental role in distinguishing and focusing our actions.
-
The People strategy acts as a basis for our continuous efforts to attract, retain and develop our leaders and our
talents. It serves as an illustration of our belief that strategic efforts can only be successful if we maintain a
focus on our people.
Strategy
Combined Management Report Fundamental Information about the Group
28
To become the vibrant science and technology company, we focus on our people - their talent, their
performance, their ideas. Merck's People strategy aims at building the capabilities we need to shape the future
by attracting and retaining the right people as well as creating the right culture for them to collaborate and
perform at their best.
People
The transformation in recent years and our clear focus on science and technology have paid off. All our business
sectors operate in highly attractive markets and have excellent prospects for the future. Our Healthcare
pipeline, our Process Solutions business with products and services for drug manufacturing, and our
Semiconductor Solutions business will be the main growth drivers ("BIG 3″) in the coming years.
Our three business sectors have moved forward in delivering on their strategic priorities in recent years.
Healthcare has seen increasing sales contributions from the medicines BavencioⓇ and MavencladⓇ and has
made good progress with its development pipeline. The Life Science business sector continues to deliver above-
market growth and has been operating more profitably than most of its competitors. With the acquisition of
Versum Materials, Performance Materials has shifted its portfolio to focus on the high-growth semiconductor
business and generates high margins.
We have made significant progress on this journey in recent years. In the past months, the strengths of our
business model with three innovation-driven business sectors have become particularly evident during the
Covid-19 crisis.
Our priority Performance focuses on the financial aspects of our activities. It provides a clear definition and
tangible targets of financial success. We focus on organic growth while rapidly lowering our debt and pursuing a
sustainable culture of cost consciousness until 2022.
Performance
We drive a high standard of leadership to sustain engaged and curious employees. Establishing a culture of
inspiration and inclusion in which leaders set an example through their attitude and behavior, as well as
selecting and placing the right employees, is key. To support our growth and innovation course, we need a
working environment that actively promotes diversity. One of our strategic goals is to recognize unique voices
and strengths and to foster a culture of inclusion by appreciating individual differences.
To achieve our strategic ambition of becoming the vibrant science and technology company, we focus on our
three Group-wide priorities: Performance, People, and Technology.
In Healthcare, we intend to fully leverage our pipeline's potential. Our new product launches, MavencladⓇ and
BavencioⓇ, are increasingly contributing to earnings. We expect sales performance in our established products
to remain at least stable through to 2022. By 2022, we aim to achieve additional annual sales of around
€ 2 billion with new medicines and see significant growth potential beyond that year.
We are now in the growth and expansion phase of our strategy and are well on track. Following the Versum
Materials acquisition in 2019, we are giving priority to organic growth while rapidly lowering our debt and
pursuing a sustainable culture of cost consciousness until 2022. We do not rule out making large transformative
deals, yet in light of our strong business portfolio, it is more likely that we will complement our businesses
through a number of small to medium-sized acquisitions after 2022.
222
27
Strategy
Combined Management Report Fundamental Information about the Group
The contents of this chapter or section are voluntary and therefore not audited. However, our auditor has read the text critically.
With our Group strategy, we want to become the vibrant science and technology company. By 2022, we aim to
have strong, innovative science- and technology-focused business sectors with leadership positions in our
areas. We want to be a top-tier company in relation to our peers in terms of sales growth and margin, and we
aim to continue to deliver sustainable returns to our owners.
Performance Materials is currently undergoing a major transformation by repositioning its overall business
toward the highly attractive electronic materials market. With the acquisitions of Versum Materials Inc. and
Intermolecular Inc., both in 2019, we have achieved a leading position in this market, with a focus on
Semiconductor Solutions.
Within Life Science, we solidified our position as one of the industry leaders following the acquisition of Millipore
Corporation in 2010 and Sigma-Aldrich Corporation in 2015.
In Healthcare, we focus on development and commercialization of innovative specialty medicines. To do so we
actively managed our portfolio and acquired Serono SA in 2007. Today, we are focusing our R&D efforts on
oncology, immuno-oncology, neurology, and immunology.
Over the past years, Merck has grown significantly through a series of strategic moves that have enabled us to
develop into a vibrant science and technology company. We have systematically and continuously strengthened
and focused our portfolio of innovative science and technology throughout our business sectors.
Ambition for the future
Group Strategy
Life Science's growth is driven by our robust product portfolio and backed by our global supply chain, our
e-commerce platform, and our strong track record of service and innovation excellence. The business sector
plans to deliver annual organic sales growth of 6% to 9% (CAGR) per year in the mid-term, continuing to
outpace the market. Our strong positions in Process Solutions and selective pursuit of attractive segments in
the Research Solutions and Applied Solutions markets all contribute to sustaining our profitable growth.
Performance Materials benefits from strong and long-term growth trends, especially from digitization and the
heavily increasing data volumes. We expect Semiconductor Solutions to be the fastest-growing business unit of
Performance Materials with annual organic sales growth in the mid- to high-single-digit percentage range in the
coming years.
• Mergers and acquisitions (M&A) are an important driver of our long-term value creation strategy with
a focus on innovation-driven technology.
In this context, we actively engage and challenge our leaders to become "leaders of people", and we empower
them to support our company in its transformation. Our leaders are encouraged to embrace new technologies
for data-driven decision-making and development of people.
Curious talents
Combined Management Report Fundamental Information about the Group
30
30
The third strategic pillar is innovation: We aim to develop high-quality, first-to-market, and best-in-disease
therapies and to build a portfolio in each of our franchises. We have streamlined our pipeline and expanded our
innovation capabilities with strong investigational drug candidates and technologies. In order to maximize the
output of our R&D investments and increase our chances of success in discovering and developing new
therapies, we focus our expertise on specific franchises and are exploiting synergies in disease mechanisms and
biological pathways. We are investing in digital technologies as well as personalized and translational medicine
in order to drive continued pipeline success.
The second pillar of our strategy is the focus on specialty medicine franchises. Here, we expect the oncology,
immuno-oncology, neurology, and immunology markets to remain highly attractive in terms of size, growth
prospects, and profitability. Within each specialty franchise, our approach is to develop deep internal expertise
and insight, from internal research to commercialization, augmented by external talent sourcing and strategic
partnering. In order to optimize the value and focus of our pipeline we continuously monitor and assess the
potential of our pipeline candidates, based on clinical data, strategic fit and financial criteria, to determine the
best way forward.
Following our successes over the past years, we continue to drive pipeline projects with the aims of bringing
groundbreaking medicines to patients, maximizing our existing portfolio, and continuing our expansion in
growth markets. Our ambition is to become a global specialty innovator, operating in franchises with significant
unmet medical needs and bringing high value to patients. Therefore, we continue to invest in research and
development to discover new treatment options and improve existing ones. Together with our stakeholders and
partners, we want to ensure that people can access the medicines they need to stay healthy and live longer.
The first pillar of our strategy is to reinforce our global footprint, bringing the innovation of our pipeline to
patients and growing our presence - in the United States and in China, for example. The emerging markets and
China are expected to be the largest growth drivers for many of our established products in the future.
Managing the balance between delivering innovative new medicines while expanding our reach and ensuring
the profitable growth of the existing business will be one of the strategic challenges. Fertility and endocrinology,
for instance, offer significant opportunities to bring value to patients. Given their high profitability and growth
potential, maximizing the commercial potential of these areas will remain important.
Global megatrends such as growing and aging populations as well as better access to healthcare continue to
drive the demand for our products. To meet these demands and respond appropriately to the dynamics of our
markets, we have significantly transformed our Healthcare business sector in recent years.
Healthcare
Business Strategies
A major focus of our innovation efforts is digitalization. We are leveraging related opportunities through our
Digital Organization in order to create value for patients, customers, and business associates. To us,
digitalization means the digital integration of our entire value chain, the digitalization of our products, services,
and communication interfaces to customers, as well as the development of new digital business models.
We believe that responsible data-driven collaboration has the power to transform healthcare and accelerate
scientific discovery. Syntropy, our joint venture with Palantir Technologies Inc., is aimed at unlocking the value
of scientific data and empowering the world's leading experts to collaborate in the fight against cancer and
many other diseases. Syntropy's user-centric data integration platform safeguards data ownership while
allowing users to structure and analyze data from disparate sources. Following a successful pilot, Syntropy has
signed its first collaboration with a major NCI (National Cancer Institute) Designated Cancer Center in the
United States. We also recently announced a partnership with MITRE Corporation, United States, to improve the
overall quality and consistency of cancer data available to clinicians, patients, researchers, and other
stakeholders.
Digitalization
Strategy
Fundamental Information about the Group
Combined Management Report
As "leaders of innovation", our leaders are encouraged to set a clear, inspiring direction to empower employees
and to provide structure, resources, and clear prioritization to achieve our goals.
When it comes to external innovation, we focus on investments in disruptive emerging fields adjacent to, in
between, and beyond our established business sectors. We strive to transform groundbreaking scientific ideas
into businesses with the potential to improve patients' lives, disrupt industries, and transform the way we live.
This includes M Ventures, our € 400 million evergreen corporate venture capital fund. M Ventures has the
mandate to drive innovation through equity investments in innovative and disruptive technologies and products
with the potential to significantly impact the vitality and sustainability of our core and future business areas.
The team invests globally in transformational ideas driven by great entrepreneurs, taking an active role in
portfolio companies and teaming up with these entrepreneurs and our co-investors to translate innovation into
commercial success. M Ventures has a significant focus on early stage investing and company creation including
the creation of spin-offs to leverage our science and technology base. Since inception, M Ventures has invested
in over 60 promising startups and companies that could impact our core and future business areas, while at the
same time providing Merck with strategic and financial returns, such as through the successful IPO of Progyny
(October 19, 2019) and the recent IPO of Galecto (October 29, 2020), a phase II biotech developing
therapeutics directed at biological targets which are at the heart of fibrosis, inflammation, and cancer. In
addition, M Ventures runs multiple incubators in Israel and a China seed fund worth RMB 100 million
(€ 13 million) to further foster early stage innovation in this market with strategic importance for us.
This approach is complemented by offering a platform to capture the full innovation potential of Merck between
and beyond our sectors. An example in this area is our Additive Manufacturing of Tablets project. Producing
tablets for clinical trials today is still quite time-consuming and expensive when using traditional tablet
manufacturing processes. Through a newly created partnership with AMCM GmbH, a sister company of 3D
printing world-market leader EOS GmbH, a GMP (Good Manufacturing Practice)-certified 3D printing solution is
being developed that will make tablet production simpler and more flexible, saving time and money. This novel,
simplified process in clinical development of drugs can be enabled by using powder bed fusion methods,
whereby a laser melts and fuses powder together layer by layer. In addition, 3D printing allows for API
formulation to be scalable while avoiding costly reformulations throughout the entire pharmaceutical
development and commercial production process.
The innovation field of AI-enabled health solutions is the first China-specific innovation field. It includes AI-
related products and services, which mainly help our China Healthcare business grow, and focuses on AI
solutions for patient journey and clinical trial in Merck's therapeutic areas in China.
A growing population, climate change, and the threats of antibiotic-resistant and zoonotic diseases demonstrate
the need for sustainable, pathogen-free, and transparently produced animal protein. Our innovation field "Clean
Meat" also referred to as cultured, cultivated or cell-based meat - focuses on the biotechnology required to
produce genuine meat and seafood grown in vitro using stem cells taken from animals. This will enable the
production of animal protein that is healthier, more ethical, and environmentally sustainable. We aim to become
the technology enabler for the emerging cultured meat industry, leveraging our vast expertise in cell culture,
advanced materials, bioprocessing and cellular manufacturing. Cell culture media, free of any animal-derived
material, is the major cost driver for cultured meat products. One of our projects in this innovation field is
tackling this challenge by designing and commercializing custom formulations for the production of different
cultured meat and seafood species.
We are focusing on our activities within the following core innovation fields of interest: Clean Meat, Artificial
Intelligence (AI)-enabled Health Solutions, and Liquid Biopsy.
Propelling innovation fields
29
29
Combined Management Report Fundamental Information about the Group Strategy
Complementary to the business sectors, we are also looking into innovations that fall between our business
sectors or beyond our company's current scope. With our Innovation Center in Darmstadt, Germany, and our
Innovation Hubs in Menlo Park, California, United States, in Shanghai, China, and in Guangzhou, China, we are
discovering new ideas and technologies, then scaling them up to build new businesses.
Generating new business
Our approach to technology paves the way for discovering and scaling the most exciting technologies. The
majority of our innovations come from within our existing business sectors, with approximately 7,900 scientists
and researchers working for our company. These innovations include everything from incremental innovations
to disruptive opportunities in the fields of Healthcare, Life Science, and Performance Materials.
Our activities not only support our people but also the way they work together. In a highly connected world, we
put special emphasis on results-driven teams and networks to ensure a stimulating work environment that
fosters high performance. To enhance our growth and innovation potential over the long-term and ensure the
necessary flexibility to allow us to respond promptly to new trends, we support the development of and
collaboration among our employees. Our focus on team collaboration is underpinned by our endeavor to always
provide future-oriented solutions. This applies to the way we work and also to the frameworks we provide as an
employer to ensure flexibility for individuals and teams to drive results.
Results-driven teams and networks
Curious talents play an instrumental role in achieving our goals in a globally competitive environment.
Therefore, we have launched a number of new offerings to stimulate individual learning and deliver company-
wide change, such as our new LinkedIn learning platform. By modeling the values and behaviors required to
promote a culture of innovation and curiosity, we encourage our people to challenge the status quo, to think
critically and to demonstrate a pioneering spirit and a passion for innovation. By doing so, our talents are
motivated to break down ambiguous and complex questions and to embrace fast, effective, and unbiased
decision-making.
Investing strategically in innovative technologies
.
Technology
• We continue to operate under our current ownership with the Merck family as the majority owner.
The contents of this chapter or section are voluntary and therefore not audited. However, our auditor has read the text critically.
*
We aim to optimize digitization across Life Science to increase lab productivity, efficiency, and safety. In
February, we introduced the BrightLab™ platform, our cloud-based software solution bringing inventory
management and instrument connectivity functionalities to research scientists. In March, we launched the
LANEXO™ system for lab inventory, safety, and compliance management. Together, these two components of
our laboratory informatics offering will boost our digital lab productivity business and commercial growth for
Life Science.
system.
To ensure safe laboratory work and analysis, our leading lab water offerings provide reliable, consistent sources
of high-quality pure water. To further support our customers in this space, in May, we launched the Milli-Q® IX
7003/7005/7010/7015 Type 2 water purification system, a redesigned version of our benchtop pure water
An additional expansion to our site in Buchs, Switzerland, will support our offering of testing kits and services
that ensure our food is safe to eat and our water is safe to drink. In July, we announced an investment of
€ 18 million to build a new laboratory facility that will support our reference materials business and allow
increased support of researchers and testing labs in pharmaceutical, environmental, and food and beverage
analysis. Completion of the expansion is scheduled for December 2021, adding modern, flexible space to one of
our most important research and development centers.
Applied Solutions*
23
Merck
Combined Management Report Fundamental Information about the Group
In October, we celebrated another expansion with the topping-out ceremony for our new € 140 million
membrane production plant in Darmstadt, Germany. The project is part of Merck's plan to invest € 1 billion in
global headquarters by 2025, as announced in 2019. The new membrane manufacturing facility for aseptic
filters will help meet customer demand in the growing biopharmaceutical market, expanding manufacturing of
Millipore Express® membranes, which are critical components in Millipore Express® filters and help ensure the
sterility of biological drug products. Broadening our global manufacturing footprint, we invested a combined
€ 40 million in our facilities in Jaffrey, New Hampshire, USA, and Danvers, Massachusetts, USA, which supply
critical products to customers developing life-saving therapies, including Covid-19 vaccines. The expansion of
our facility in Jaffrey will add 275 jobs to the filtration plant and a new, state-of-the-art water system that
treats and reduces concentration of organic solvents. The expansion will allow the site to operate on a 24-hour
cycle by the end of the year, delivering on increased demand for the manufacturing of filtration devices and
membrane products, specifically Durapore® filters, Express® filters and the Viresolve® product lines, which are
used to ensure the sterility of many life-saving therapies and to remove viral contamination for a variety of
therapies. The expansion to our site in Danvers will add capacity for the manufacturing of MobiusⓇ single-use
consumables and virus filtration technologies, which have seen significantly increased demand. These
expansions, significantly increasing our capacity at both sites, will help meet unprecedented demand of key life-
saving products and demonstrate our commitment to growing our global presence while providing employment
opportunities.
We announced continued expansion in September with a € 59 million addition to our facility near Madison,
Wisconsin, USA, that supports high-potent active pharmaceutical ingredient (HPAPI) and antibody-drug
conjugate (ADC) manufacturing. With more than 35 years of experience in the development and manufacturing
of small molecules, biologics, and ADC technologies, we offer extensive experience in both clinical and
commercial manufacturing. This investment allows large-scale manufacturing of increasingly potent compounds
for therapies with the potential to treat cancer. The project is an addition to our campus in St. Louis, Missouri,
USA, which was the first commercial ADC facility in North America, and which specializes in ADC bio-
conjugation, active pharmaceutical ingredients, excipient and adjuvants manufacturing. Expected to be
completed by mid-2022, it also creates one of the largest dedicated HPAPI manufacturing facilities specially
designed to handle single-digit nanogram containment.
We took many steps forward with our Life Science expansion plans throughout 2020. A key growth pillar for the
Life Science business sector, our BioReliance® End-to-End Solutions are service offerings for process
development and manufacturing for emerging biotech companies. In July, we opened our M Lab™ Collaboration
Center in Shanghai, which will host a new BioReliance® End-to-End Solutions GMP manufacturing facility
offering contract development manufacturing organization services to customers in China and Asia-Pacific. The
new M Lab™ Collaboration Center, which is the largest of our nine centers worldwide and located in a hub for
biomedical sciences and the research community in China, also offers customizable solutions to help advance
drug development.
A strategic fit with our goal of advancing cell-based therapies to patients, our numerous investments in viral
and gene therapy manufacturing will allow further advancement toward potentially life-saving treatments. In
April, we announced an expansion to this offering with plans for a second facility at our site in Carlsbad,
California, USA. This € 100 million, 140,000-square-foot manufacturing facility will support viral and gene
therapy production at the 1,000-liter scale using Mobius® single-use equipment and is expected to open next
year. In September, we announced the expansion of our biosafety testing laboratory services, including our
BioRelianceⓇ viral clearance offering, in Singapore. This increased viral capacity at our Singapore lab by 50% to
meet demand from biopharmaceutical and cell and gene therapy developers and manufacturers in Asia-Pacific,
allowing customers to continue developing life-saving medicines amid the Covid-19 pandemic.
Combined Management Report Fundamental Information about the Group
22
Combined Management Report
The contents of this chapter or section are voluntary and therefore not audited. However, our auditor has read the text critically.
*
Our portfolio now includes 28 patents for CRISPR technology granted worldwide, including six patents granted
in 2020. In April, we were awarded our second U.S. patent for CRISPR-chrom technology, making us the only
provider with a patent covering the fusion of chromatin modulating peptides to CRISPR proteins. We were
awarded two additional U.S. patents for foundational CRISPR-Cas9 technology in May, which both support
scientists and researchers in their work to advance gene therapy development programs.
In November, we announced our agreement with Donghao Lansheng (Group) Co., Ltd. to pilot a new customs
clearance process in China. The new import policy means we will be able to process shipments with fewer
application and technical dossier requirements. The agreement made us the first and only company to be
accepted by the Shanghai government to pilot this new process, representing an important milestone in
improving the availability of global research materials and ensuring more efficient flow of supplies critical to the
development of life-saving therapies in China.
A key goal for our Life Science business sector is to support our customers that manufacture drugs, from small
to large innovator companies, bring life-enhancing medicines and therapies to market – and to patients
faster. To facilitate reaching this target, we continue to add building blocks to our BioContinuum™ Platform to
address intensified bioprocessing and continuous manufacturing. In July, we acquired Resolution Spectra
Systems, a Meylan, France-based leader in bioprocess analytical monitoring, whose Raman technology
bioprocess monitoring sensors complement our newly launched Bio4CTM Software Suite. This acquisition further
enhances our advanced bioprocess portfolio with Good Manufacturing Practice (GMP)-ready instrumentation and
software to analyze and manage generated data.
-
-
Process Solutions*
To further the drug discovery process, in September, we launched the MILLIPLEX® SARS-CoV-2 antigen panels
for IgG, IgA, and IgM, which utilize multiplexing technology. The panels are invaluable research tools for Covid-
19 serologicals, epidemiological studies, and vaccine development.
Research Solutions*
Promoting scientific engagement and STEM disciplines remains a passion of our business sector. In the spirit of
continuing to ignite youth interest in science and offering inspiring, engaging learning opportunities during
challenging times, we launched Curiosity Labs™ at Home, a virtual video series of scientific experiments that
can be conducted with materials typically found around the house. In 2020, the program generated more than
2.7 million video views, reaching users in 132 countries.
• We deliver sustainable value, and we want to maintain an attractive financial profile (for example, a
strong credit rating) while assessing and considering the ESG (Environmental, Social, Governance)
impact of our growth ambition.
21
Fundamental Information about the Group
Merck
Merck
Performance Materials
*
The contents of this chapter or section are voluntary and therefore not audited. However, our auditor has read the text critically.
Combined Management Report Fundamental Information about the Group
Strategy
26
Strategy Fundamentals
The core markets for Surface Solutions are automotive coatings, cosmetics, and, to a smaller extent,
industrials. We are serving these markets with functional and decorative solutions. Our focus is on expanding
our portfolio through innovation in all areas and proactive solution development in close cooperation with our
customers. We provide our customers with solutions that help them to create innovative surfaces of all kinds.
Our materials enable more beautiful, more resistant, and more effective products. Our pearlescent pigments
allow striking automotive coatings, fascinating cosmetics, extraordinary packaging, and innovative product
design. With a broad portfolio of active ingredients, we enable cosmetics manufacturers to enrich their skin care
products with moisturizing, protecting, or anti-aging effects. Moreover, with our functional solutions we serve a
large number of innovative applications, from dirt-repellent and easy-care surfaces to laser markings of plastic
parts and cables. While Covid-19 has had significant impacts across the automotive and cosmetics markets,
Surface Solutions is implementing measures to stabilize the business and to prepare for future growth.
We are curious minds dedicated to human progress. We believe that scientific exploration and responsible
entrepreneurship are key to technological advances that benefit us all. Our values courage, achievement,
responsibility, respect, integrity, and transparency - guide us in every step we take and in every decision we
-
As a company, we have a strong foundation. These fundamentals have been defined by the Merck family. We
always take them into consideration when discussing and deciding on our Group strategy.
• We follow a risk-diversification strategy with three distinct business sectors, and we avoid
24
overexposure to any single customer, industry, or geography. We ensure resilience against business
disruption and deep crises.
• With our science and technology focus, we want to be leaders in our fields of expertise and markets,
always pushing the boundaries to find new solutions and drive innovation. We aim to create value for
our business and for society.
make.
Surface Solutions*
Strategy*
Semiconductor Solutions is at the heart of electronics and enables transformation in communications, mobility,
and healthcare. As almost every electronic device uses one of our products, we are advancing almost every
aspect of digital development. We are developing solutions for smaller, faster, and more powerful devices. As
an industry leader, we are pushing the boundaries of science and technology to help our customers create the
next generation of digital devices and experiences.
Performance Materials is advancing digital living. Our main focus is on the electronics market with our materials
and solutions changing the way we generate, access, store, process, and display information. In addition, our
highly specialized, application-driven Surface Solutions business makes life more colorful. Together with our
customers, we are discovering the next generation of high-tech materials and solutions. With strong growth
trends such as 5G and Big Data, and new applications such as autonomous driving and Internet of Things (IoT),
we have set the course for future growth.
Semiconductor Solutions*
The business sector consists of three business units: Semiconductor Solutions, Display Solutions and Surface
Solutions. Comparing Performance Materials with a smartphone, Display Solutions represents the user
interface, Semiconductor Solutions the intelligence, and Surface Solutions the aesthetics. We offer innovative
solutions especially for the electronics industry - for microchips and displays - and for surfaces of every kind.
We are well on track with the execution of our five-year Bright Future transformation program announced in
2018. With the completion of the Intermolecular and Versum Materials acquisitions, we achieved two major
milestones to transform Performance Materials into a strong solutions provider and leading player in the
electronic materials market. After closing the acquisition of Versum Materials on October 7, 2019, our newly
integrated organization went live on June 1, 2020. Effective March 4, 2021, we plan to change the name of the
Performance Materials business sector to Electronics.
Semiconductor Solutions is the largest business unit within Performance Materials. It consists of materials,
delivery systems, and services for the semiconductor industry. Our Semiconductor Materials unit supplies
products for every major production step in the wafer processing, including doping, lithography, patterning,
deposition, planarization, etching, and cleaning. Specialty cleans, photoresists, and conductive pastes for
semiconductor packaging round out the portfolio. Our material innovation accelerator Intermolecular is a
trusted partner for materials innovation and is our Silicon Valley science hub. Its capabilities allow material
combinations to be tested directly in the specific application environment. Compared to conventional methods,
this means enormous time savings in the development process, considerably faster learning cycles, and
findings on new material combinations, providing a unique service for customers.
The Delivery Systems & Services (DS&S) business enables the safe and responsible handling of gases and liquid
chemicals for electronic manufacturers. It focuses on the development and deployment of safe and reliable
delivery equipment. This allows our materials to be handled with the highest quality and safety standards for
our customers.
In Liquid Crystals we continue to see very dynamic market developments. Covid-19 has accelerated the market
shift toward China and increased competition. We maintained our position as the technology leader, and with
our XtraBright™ products we were able to win new projects for large-area displays as well as high-resolution
mobile devices. Our OLED materials qualified for free-form display-based products that entered the market this
year. Our photoresist materials are also being used in flexible displays. Our low-temperature processable
positive tone photoresists are widely used to pattern on-cell touch sensors. These sensors enable a thinner
display structure, which is crucial for foldable devices. Our Liquid Crystal Windows business reached a major
milestone with the opening of the Niemeyer Sphere located at the headquarters of crane manufacturer Kirow in
Leipzig, Germany, in July. The prestigious architectural piece is one of the last works of renowned Brazilian
architect Oscar Niemeyer. The construction of the building was realized using triangular versions of our eyriseⓇ
dynamic liquid crystal windows. The Liquid Crystal Windows business is now preparing for the market launch of
privacy-on-demand eyrise® windows in the first quarter of 2021.
*
The contents of this chapter or section are voluntary and therefore not audited. However, our auditor has read the text critically.
Combined Management Report Fundamental Information about the Group
Merck
25
Display Solutions*
Our Display Solutions business unit consists of the Liquid Crystals, Organic Light-Emitting Diodes (OLED),
Photoresists, and Liquid Crystal Windows businesses, among others. We are supporting our display customers
in the development of novel display technologies and product concepts for applications, while also addressing
new requirements that have emerged from the Covid-19 pandemic. With the proliferation of multiple use cases
and display trends, technological requirements for the display industry are significantly expanding. We are in a
leading position to develop required new display materials and technology concepts to contribute to the diverse
display landscape. We remain active in the development of a broad range of display materials, including Liquid
Crystals, OLED, Quantum Dots Pixel Color Converters (QDPCC), and Display Patterning Materials (DPM).
Performance Materials accounted for 19% of Group sales in 2020 and its share of EBITDA pre (excluding
Corporate and Other) was 18%. The EBITDA pre margin was 30.3% of net sales.
Credit risks
Credit risk for Merck means the risk of a financial loss if a customer or other contract partner is not able to
meet its contractual payment obligations. Merck is exposed to credit risks mainly due to existing trade accounts
receivable, other receivables, other debt instruments, derivatives, and contract assets.
-4,017
-319
Merck analyzes all financial assets that are more than 90 days past due and examines whether the credit risk
has risen significantly and, as a result, there is objective evidence of impairment requiring the recognition of
additional risk provisions.
Accounting and measurement policies
Credit risks are continuously monitored by credit management. It additionally carries out the management of
risks arising from extending credit to customers, suppliers, and in the course of other business relationships.
-243
16,982
-587
-8,305
-174
-189
-20
-30
Credit risks
-4,698
Impairment of trade accounts receivable and contract assets
Impairment of other receivables
The customer groups with comparable default risks to be considered are determined according to the specific
business sector and the place of business of the respective customers.
Investments in debt instruments subsequently measured either at amortized cost or at fair value through other
comprehensive income are primarily considered to be investments with low risk, meaning that the expected
credit loss in the upcoming 12 months is used to determine the impairment loss.
-119
Impairment of other financial assets
Individual cases are also analyzed to ascertain whether objective findings suggest that the value of other
receivables is impaired. Such suggestions may include, for example, economic difficulties of the debtor,
contractual breaches or the renegotiation of contractual payment obligations. If the analysis concludes there is
a substantially increased risk of default, the expected credit loss is calculated over the entire lifetime.
The general three-stage impairment model and the simplified approach are used to recognize loss allowances of
financial instruments included in other receivables. The individual credit rating of the contract partner is used to
determine the impairment loss of other receivables.
A debtor's creditworthiness is assumed to be impaired if there are objective indications that the debtor is in
financial difficulties, such as the disappearance of an active market for its products or impending insolvency. On
initial recognition, the lifetime expected credit losses are deducted from the nominal amount of trade accounts
receivable considered as originated credit-impaired financial assets.
A default generally exists when the debtor cannot fully meet its liabilities.
Merck uses the simplified impairment model for trade accounts receivable subsequently measured at amortized
cost and contract assets, pursuant to which any credit losses expected to occur over the entire lifetime of an
asset are taken into account. In order to measure expected credit risks, the assets are grouped based of the
existing credit risk structure and the respective maturity structure.
If there is objective evidence that certain trade accounts receivable are fully or partially impaired, additional
loss allowances are recognized to provide for expected credit losses.
Accordingly, when a country's rating changes, the historical default rates of the rating group to which the
respective country has been re-allocated have to be applied, rather than the historical default rates of the
previous rating group.
development plans, particularly in Asia). These country ratings are aggregated into three separate rating
groups. Under the impairment model, past default rates and country ratings are used as an approximation of
the defaults to be expected in the future.
294
Capital Structure, Investments and Financing Activities
Notes
Consolidated Financial Statements
The expected credit loss rates used in the simplified impairment model are derived on the basis of past
experience and current macroeconomic expectations. In doing so, country-specific ratings are taken into
consideration since many of Merck's customers depend directly or indirectly on the economic trends in the
country where their place of business is located (public and private healthcare systems, universities and
research companies from within the pharmaceutical industry as well as industries subsidized under
The expected default rates used in the simplified impairment model for trade accounts receivable were analyzed
and adjusted in the second quarter of fiscal 2020 in response to the impact of the Covid-19 pandemic. The
adjustment was performed by updating the minimum default probabilities per aging category derived from
market data based on the development of credit default swap prices. As part of the continuous monitoring of
financial market data, credit default swap prices no longer indicated an increased credit risk in the fourth
quarter of 2020; as a result, the adjustment made during the year was retracted.
-12
2,054
Finance lease liabilities
Loans from third parties and other
financial debt
-27
-569
596
Other financial liabilities
-1,320
1,320
Liabilities to related parties
-2,054
Trade accounts payable
-250
-1
-1,337
-25
1,587
Bank loans
For financial assets with only a minimal default risk, the rules concerning the mandatory recognition of a risk
provision for the lifetime expected credit loss are not applied at initial recognition or during subsequent
measurement. Therefore, no assessment of whether there has been a significant increase in the credit risk is
carried out for such assets. Merck does not presume an increased credit risk as of the balance sheet date if the
contract partner has an investment grade rating.
97
567
-53
-44
-565
565
Refund liabilities
-46
46
Derivatives with a hedging
relationship
relationship
-29
-19
-15
76
-16
16
Derivatives without a hedging
Contingent considerations
value through profit or loss
Subsequent measurement at fair
-8
If there are indications that the debtor's creditworthiness had worsened but that this was not yet reflected in its
existing credit rating, the credit risk assessment is adjusted and the impairment allowances recognized for
expected credit losses are increased. In all other cases, there are no new risk assessments as of the balance
sheet date and the risk profile initially assumed is maintained.
481
Notes
External credit rating of at least AA- or comparable
External credit rating of at least BBB- or comparable
External credit rating lower than BBB- or comparable
Trade accounts receivable before loss allowances
€ million
December 31, 2019
External credit rating of at least AA- or comparable
External credit rating of at least BBB- or comparable
External credit rating lower than BBB- or comparable
Trade accounts receivable before loss allowances
€ million
December 31, 2020
The table below contains an overview of the credit risk by business sector and country rating established by
leading rating agencies as of December 31, 2020:
Healthcare
Merck continuously reviews and monitors open positions of all its customers in the corresponding countries and
takes steps to-mitigate risks if necessary.
The credit risk from trade accounts receivable is largely impacted by the specific circumstances of individual
customers. Merck also considers additional factors such as the general default risk in the respective industry
and country in which the customer operates.
Credit risks from trade accounts receivable
296
Capital Structure, Investments and Financing Activities
Notes
Consolidated Financial Statements
The loss allowances and reversals recognized for trade accounts receivable as shown above applied entirely to
receivables resulting from contracts with customers.
The credit risk of customers is assessed using established credit management processes that take individual
customer risks into account. This is done in particular by analyzing the aging structure of trade accounts
receivable.
Life Science
Performance
Materials
Group
Performance
3,125
496
1,163
1,466
458
2
31
425
410
13
136
260
2,257
-3,828
996
781
-8
-6
Net impairment on financial assets
of other debt instruments subsequently measured at fair value through other comprehensive
income
Impairment losses
€ million
The following table shows impairments for financial assets from operative transactions and contract assets as
well as gains from their reversals recognized in the consolidated income statement:
Discretionary judgment is applied in determining individual impairment allowances.
Impairment of other financial assets
As of December 31, 2020, trade accounts receivable were impaired by 2.3% (December 31, 2019: 2.4%). If it
had been necessary to recognize impairment on trade accounts receivable and contract assets at 10% higher as
of the reporting date, this would have caused a € 7 million reduction in profit before tax (2019: € 8 million).
⚫ the calculation of the expected credit losses.
⚫ the identification of a substantial increase in the credit risk, and
⚫ the identification of customer groups with identical default risks,
In terms of the impairment of trade accounts receivable and of contract assets, there is significant discretion
and estimation uncertainty when it comes to
Impairment of trade accounts receivable and contract assets
Credit risks
Significant discretionary decisions and sources of estimation uncertainty
On the balance sheet date, the theoretical maximum default risk for all items referenced above corresponds to
the net carrying amounts less any compensation from credit insurance.
Wherever a considerable increase in the default risk is assumed, the lifetime expected credit loss of the
financial asset is considered.
295
Capital Structure, Investments and Financing Activities
of trade accounts receivable
Consolidated Financial Statements
of contract assets
2019
2
4
of other debt instruments subsequently measured at amortized cost
of contract assets
85
71
of trade accounts receivable
87
75
of debt instruments subsequently measured at fair value through other comprehensive income
Reversals of impairment losses
-5
-3
of debt instruments subsequently measured at amortized cost
-89
-78
-95
-81
2020
-223
-1,375
-519
Notes Capital Structure, Investments and Financing Activities
Consolidated Financial Statements
1
-1
Consolidated Financial Statements
Notes
Capital Structure, Investments and Financing Activities
292
291
The Merck Group's net exposure to interest rate changes comprised the following:
€ million
Short-term or variable interest rate monetary deposits
Short-term or variable interest rate monetary borrowings
Net interest rate exposure
Dec. 31, 2020
Dec. 31, 2019
1,368
811
Interest rate risks
Around 40% of the expected production volume under the virtual power purchase agreement is hedged via a
separate hedging instrument.
Liquidity risks
The risk that Merck cannot meet its payment obligations resulting from financial liabilities, is limited by
establishing the required financial flexibility and by Group-wide cash management. Information on issued bonds
and other sources of financing can be found in Note (37) "Financial debt/capital management".
Subsequent measurement at
amortized cost
Interest
Repayment
Interest
Repayment
Interest
amount
€ million
Repayment
Cash flows
> 5 years
Carrying
Cash flows
1 - 5 years
< 1 year
Cash flows
December 31, 2020
The following liquidity risk analysis presents the contractual cash flows such as repayments and interest on
financial liabilities and the net cash flows of derivatives with a negative fair value:
Liquidity risks are monitored and reported to management on a regular basis.
-2,607
-4,761
-1,240
-3,950
December 31, 2020
Change in expected future
electricity prices
percentage points
Change in expected annual
production volume
Change in cost of capital after
tax
percentage points
percentage points
€ million
+10
-10
+10
-10
+1
-1
Change in the fair value of the virtual power
purchase agreement
3
-3
On October 15, 2020, Merck concluded a virtual power purchase agreement with a wind energy project
developer in the United States for an expected project capacity of 50 megawatts. The wind farm is scheduled to
be commissioned in 2022. Merck will receive renewable energy certificates (RECs) for the quantities of
electricity produced. As the agreement is designed as a contract for difference, it fulfills the definition of a
derivative financial instrument and is measured at fair value through profit or loss in accordance with IFRS 9.
The agreement had a carrying amount of € 8 million at the reporting date. A change in the significant valuation
parameters would have had the following effect on fair value:
Bonds and commercial paper
Electricity price risks
Share price risks
The effects of a parallel shift in the yield curve by +100 or -100 basis points on the consolidated income
statement as well as on equity relative to all short-term or variable monetary deposits and monetary
borrowings within the scope of IAS 32, except contingent considerations, are presented in the following table.
In the event of a downward shift, the interest rate for instruments subject to a contractual interest rate floor of
zero percent was limited accordingly.
€ million
Change in market interest rate
Effects on consolidated income statement
Effects on equity (other comprehensive income)
2020
2019
+ 100 basis
points
- 100 basis
points
+ 100 basis
points
- 100 basis
points
-21
11
-23
11
Merck does not expect the IBOR reform to have a significant impact neither on interest rate risk nor net assets,
financial position or results of operations.
The shares in publicly listed companies amounting to € 244 million (December 31, 2019: € 209 million) are
generally exposed to a risk of fluctuations in fair value. A 10% change in the price of these financial
instruments would impact Group equity by € 24 million (2019: € 21 million). This change in value would be
recognized in Group equity.
-4,042
9,642
-517
Consolidated Financial Statements
-4,231
-81
-7
-196
-5,612
-526
-5,799
Notes
-199
-246
-16
-110
-8
438
-666
666
15,646
Capital Structure, Investments and Financing Activities
293
December 31, 2019
-2,224
-120
10,059
Bonds and commercial paper
amortized cost
Subsequent measurement at
Repayment
Interest
Repayment
Interest
Repayment
Cash flows
>5 years
Cash flows
1 - 5 years
Cash flows
<1 year
Interest
Carrying
amount
€ million
-46
45
Lease liabilities
Refund liabilities
439
Other financial liabilities
Healthcare
1,375
Liabilities to related parties
-1,768
1,768
Trade accounts payable
-250
-4,150
-189
-5,014
-478
-1
-835
-5
1,085
Bank loans
-405
-167
-34
58
relationship
Derivatives with a hedging
relationship
-15
-62
-15
104
-26
26
Derivatives without a hedging
Contingent considerations
value through profit or loss
Subsequent measurement at fair
-42
-16
-15
-4
Loans from third parties and other
financial debt
Life Science
allowances
Group
-3
(including non-current leasing
Other Receivables
thereof: POCI
-47
-1
-2
-5
-3
5
-8
-45
thereof: Level 3
-30
-2
-1
7
1
2
I
Consolidated Financial Statements
777
-81
-3
7
87
-95
-76
Loss allowances for financial assets
thereof: Level 3
thereof: Level 2
2
1
-4
thereof: Level 1
receivables)
-4
3
80
-82
-28
Effects of
currency
translation
Reclassifica-
tion within
levels
nition Utilizations
Jan. 1 Additions
€ million
Derecog-
-76
5
-2
-2
2019
7
75
-81
-81
Loss allowances for financial assets
-1
Changes in
scope of
consolidation
Notes Capital Structure, Investments and Financing Activities
Dec. 31
-76
thereof: Level 1/2
(including current leasing receivables)
-77
-3
-3
7
85
-89
-73
Trade and other receivables
cost
-81
-3
-1
7
87
-95
Subsequent measurement at amortized
-1
299
Accounting and Measurements Policies
Subsequent measurement at fair
value through profit or loss
Financial liabilities
Derivatives (with a hedging
relationship)
Interest rate curves available
on the market
Spot and forward rates
observable on the market as
well as exchange rate
volatilities
Volatilities observable on the
market
Use of recognized actuarial
methods
Forward exchange contracts
and currency options
Nominal value considering a
liquidity discount
Forward exchange contracts
and currency options
Convertible note/bond with
embedded settlement option
for equity in companies
Derivatives (without a hedging
relationship)
1
Other debt instruments
Quoted prices in an active
market and volatilities
observable on the market
Derived from active market
including a liquidity discount
Interest rate swaps
Use of recognized actuarial
methods
Spot and forward rates
observable on the market as
well as exchange rate
volatilities
Interest rates observable on
the market
Discounting of future cash
flows
observable on the market as
well as exchange rate
volatilities
Spot and forward rates
Use of recognized actuarial
methods
Liabilities to banks and other
loan liabilities
Forward exchange contracts
and currency options
Financial liabilities
Subsequent measurement at
amortized cost
Derivatives (with a hedging
relationship)
Interest rate curves available
on the market
observable on the market as
well as exchange rate
volatilities
Spot and forward rates
Use of recognized actuarial
methods
Interest rate swaps
Forward exchange contracts
and currency options
Derivatives (without a hedging
relationship)
Main input factors used to
determine fair values
Subsequent measurement at fair
value through profit or loss
Shares
Description of the measurement
technique
Subsequent measurement at
Financial liabilities
Other debt instruments
value through profit or loss
Subsequent measurement at fair
Shares
Bonds
Other debt instruments
Equity instruments
value through other comprehensive
income
Subsequent measurement at fair
Main input factors used to
determine fair values
Description of the measurement
technique
Financial instruments concerned
Financial assets
Fair value determined by official prices and quoted market values (Level 1)
The measurement techniques and main input factors used to determine the fair value of financial instruments
are as follows:
Information on fair value measurement
amortized cost
(43) Information on fair value measurement
Financial debt
Quoted prices in an active
market
Financial instruments concerned
Equity instruments
Subsequent measurement at fair
value through other comprehensive
income
Financial assets
Fair value determined using input factors observable in the market (Level 2)
300
Capital Structure, Investments and Financing Activities
Notes
Consolidated Financial Statements
Quoted prices in an active
market
Quoted prices in an active
market
Derived from active market
Bonds
investments
Derived from active market
Other short-term cash
Publicly-traded funds
Derived from active market
Materials
thereof: Level 3
4
Prior to the recognition of additional impairment losses, purchased or originated credit impaired (POCI) trade
accounts receivable totaled € 4 million as of December 31, 2020 (December 31, 2019: € 3 million). Additional
impairment losses amounting to € 1 million were recognized after initial recognition (December 31, 2019:
€0 million). These POCI receivables are included in the credit impaired trade accounts receivable shown in the
provision matrices.
297
Notes Capital Structure, Investments and Financing Activities
Consolidated Financial Statements
-49
-39
-3
The POCI receivables were measured at fair value on initial recognition by deducting the expected credit losses
from their nominal amounts. The undiscounted expected credit losses deducted in fiscal 2020 amounted to
-3
-73
-43
-10
-2
-7
-11
59
-3
€ 17 million (2019: € 3 million). This amount related to all trade accounts receivable classified as credit
impaired on initial recognition and recognized for the first time in the fiscal year, some of which have already
been settled.
Loss allowances based on expected credit losses for trade accounts receivable as of December 31, 2019, were
as follows:
December 31, 2019
59
367
2,669
41.3%
Total
More than 360
days past due
Up to 360 days
past due
11.1%
Up to 180 days
past due
6.1%
Up to 90 days
past due
1.9%
0.6%
Not yet due
thereof: credit impaired
Loss allowances
thereof: credit impaired
Trade accounts receivable before loss
Expected loss rate
€ million
42
5
6
7
Goods were generally sold under retention of title so that a reimbursement claim exists in the event of default.
Other guarantees generally were not demanded. The scope of credit-insured receivables was immaterial for
Merck.
3,251
548
1,089
1,614
617
2
42
573
463
20
164
278
2,172
526
883
763
Loss allowances based on expected credit losses for trade accounts receivable as of December 31, 2020, were
as follows:
43
December 31, 2020
Expected loss rate
3,125
68
57
56
312
2,633
Total
More than 360
days past due
62.9%
3.7%
Up to 90 days Up to 180 days Up to 360 days
past due
past due
past due
17.7%
2.2%
0.4%
Not yet due
thereof: credit impaired
Loss allowances
thereof: credit impaired
Trade accounts receivable before loss
allowances
€ million
thereof: Level 2
112
5
-47
thereof: Level 3
66
-64
-30
thereof: Level 1/2
(including current leasing receivables)
-13
-73
6
71
-78
-77
Trade and other receivables
cost
-76
5
65
16
2
4
-3
+
thereof: Level 1
receivables)
(including non-current leasing
Other Receivables
thereof: Level 3
thereof: Level 1/2
-1
-48
-24
23│
-1
Contract Assets
thereof: POCI
-2
5
7
75
-81
-47
-41
-2
-1
-1
-2
-77
-46
-5
-4
-7
-16
53
42
3
2
1
Credit risks from other receivables
3,251
Gross other receivables amounted to € 196 million as of December 31, 2020 (December 31, 2019:
€ 340 million). Other receivables in the amount of € 194 million were allocated to Level 1 of the general three-
level impairment model (December 31, 2019: € 339 million), meaning that the credit loss expected in the next
twelve months was used to determine the amount of impairment when examining the individual credit risk of
the respective contract partner. The following table shows the impairment losses recognized for other
receivables.
Credit risks from other financial assets
-81
Subsequent measurement at amortized
Dec. 31
scope of
consolidation
Changes in
Effects of
currency
translation
Reclassifica-
tion within
levels
Utilizations
Derecog-
nition
Jan. 1 Additions
€ million
2020
Impairment losses on financial assets developed as follows:
298
Notes Capital Structure, Investments and Financing Activities
Consolidated Financial Statements
Merck limits credit risks from other financial assets by concluding contracts almost exclusively with contract
partners whose creditworthiness is good. The credit risk from financial contracts is monitored daily on the basis
of market information on credit default swap rates and fortnightly on the basis of rating information.
In fiscal 2020, the nominal amount of one other receivable classified as credit impaired on initial recognition
was reduced in full by expected credit losses in the amount of € 4 million (2019: €0 million). This meant that
the balance sheet as of December 31, 2020 did not include any other receivables that were already classified as
credit impaired on initial recognition.
-1
(46) Executive Board and Supervisory Board compensation
36
5,799
Total
438
327
112
37
Lease liabilities (measured in accordance
with IFRS 16)²
666
666
9
Refund liabilities
45
45
45
45
38, 39
Derivatives with a hedging relationship
39
relationship
104
2
9,847 15,646
102
9,970
28
quoted
Total
(Level 3)
in the
market
Fair value
determined
using input
factors not
observable
in the
market
(Level 2)
Fair value
determined
using input
factors
observable
Fair value¹
Fair value
determined
by official
prices and
Carrying amount
cost
Subsequent measurement at amortized
Financial assets
€ million
The following table presents the carrying amounts and the fair values of the individual financial assets and
liabilities as of December 31, 2019, for each individual financial instrument class pursuant to IFRS 9:
305
Capital Structure, Investments and Financing Activities
Notes
Consolidated Financial Statements
1 The simplification option under IFRS 7.29(a) was used for disclosures of certain fair values.
2 Measurements within the scope of IFRS 16 are exempted from the requirements of IFRS 13 (IFRS 13.6(b)).
12,325
2,327
Consoli-
dated
104
62
cost
Subsequent measurement at amortized
Financial debt
958
575
348
5,548
848
4,701
Total
accordance with IFRS 16)²
4
1
3
25
Lease receivables (measured in
96
96
96
96
36, 39
Trade payables and other liabilities
42
30
Financial debt
37, 38,
Derivatives without a hedging
26
26
26
26
38
Contingent considerations
through profit or loss
Subsequent measurement at fair value
997
12,150
2,180
9,970
1,768
11,602
9,419
34
963
38
Other financial liabilities
2,183
37
1,768
market
notes
Current
7
7
36, 39
Derivatives with a hedging relationship
relationship
33
33
33
14
20
36, 39
Derivatives without a hedging
50
26
22
2
50
50
258
258
258
7
55
7
25
Financial debt
2,054
2,054
30
Trade payables and other liabilities
cost
Subsequent measurement at amortized
Financial debt
810
499
62
62
250
5,086
761
4,325
Total
accordance with IFRS 16)²
5
I
5
Lease receivables (measured in
36
Other debt instruments
258
Equity instruments
through other comprehensive income
Subsequent measurement at fair value
9
8
1
36
Other debt instruments
leasing receivables)
3,480
22
3,458
25
781
781
35
Cash and cash equivalents
(Level 1)
Total
values
Non-
current
36
399
399
209
36
Contingent considerations
36
Equity instruments
through profit or loss
Subsequent measurement at fair value
39
39
39
9
Derivatives with a hedging relationship
29
24
24
24
22
36
Other debt instruments
25
Trade and other receivables
399
190
24
37
relationship
8
Consolidated Financial Statements
The most significant contingent consideration was the future purchase price claim from the disposal of the
Biosimilars business to a subsidiary of Fresenius SE & Co. KGaA, Bad Homburg vor der Höhe, on August 31,
2017. It was calculated by an external valuation expert on initial recognition in 2017 and continued on this
basis. As of December 31, 2020, the carrying amount was € 208 million (December 31, 2019: € 198 million).
The calculation of the fair value of assets from contingent considerations is subject to significant discretionary
judgment.
Assets from contingent consideration
Determining the parameters that are to be included in discounted cash-flow-methods and deriving the fair value
from observable prices within the scope of equity refinancing are both subject to discretionary decisions and
estimation uncertainty.
Equity investments in unlisted companies
Significant discretionary decisions and sources of estimation uncertainty
When determining the probability of occurrence of the individual milestones events in connection with the
development of drug candidates, the focus is on empirically available probabilities of success of development
programs in comparable phases of clinical development in the relevant therapeutic areas. To determine the
sales planning, internal sales plans and sales plans of external industry services are used. The discount rate
(after tax) as of December 31, 2020, of between 5.4% and 6.5% (December 31, 2019: 5.9% to 6.9%) was
calculated using the weighted average cost of capital.
• and the discount factor used.
⚫ the underlying sales planning used to derive royalties,
⚫ the estimated probability of reaching the individual milestone events,
The fair values of assets from contingent considerations are calculated by weighting the expected future
milestone payments and royalties using their probability of occurrence and discounting them. The main
parameters when determining contingent considerations are
Assets from contingent considerations (Level 3)
302
Capital Structure, Investments and Financing Activities
Notes
Consolidated Financial Statements
The planning periods used to determine the fair value of equity investments in unlisted companies ranged from
3 to 9 years (December 31, 2019: 1 to 9 years). Cash flows for periods in excess of this are included in the
terminal value calculation using long-term growth rates of between 1.0% and 2.0% (December 31, 2019: 1.0%
and 2.0%). The applied average cost of capital (after tax) was 7.0% on December 31, 2020 (December 31,
2019: 7.0%).
Equity investments in unlisted companies (Level 3)
Counterparty credit risk was taken into consideration for measurements of financial instruments at fair value. In
the case of non-derivative financial instruments, such as other liabilities or interest-bearing securities, this was
reflected using risk premiums on the discount rate, while discounts on market value (so-called credit valuation
adjustments and debit valuation adjustments) were used for derivatives.
Sales planning, milestone
payments, probabilities of
regulatory and commercial
events, discount rates
Notes
production volumes, discount
factors
Capital Structure, Investments and Financing Activities
If, in the context of determining the fair value of this contingent consideration at the date of transaction, the
probability of approval as well as the discount factor of the three major development programs had been
estimated to be lower or higher, this would have led to the following changes in the measurement and the
corresponding effects on the profit before income tax:
10%
unchanged
-10%
€ million
Change in probability of regulatory approval
December 31, 2019
27
21
-5
-32
-27
5.5% (unchanged)
6.0%
Change of discount rate
33
6
10%
unchanged
-10%
-22
5.0%
€ million
Change in probability of regulatory approval
December 31, 2020
303
5.4%
Electricity future price curves,
expected electricity
Use of recognized actuarial
methods
Derivatives (without a hedging
relationship)
Subsequent measurement at fair
value through profit or loss
Trade and other receivables
Observable prices derived
from equity refinancing
Cost-based determination
Derived from observable
prices within the scope of
equity refinancing sufficiently
close to the balance sheet
date, considered risk
allowances
Expected cash flows from
recent business planning,
average cost of capital,
expected long-term growth
rate
Equity investments in
unlisted companies
Equity instruments
Discounting of expected
future cash flows
Main input factors used to
determine fair values
Description of the measurement
technique
Financial instruments concerned
Subsequent measurement at fair
value through other comprehensive
income
Financial assets
Fair value determined using input factors unobservable in the market (Level 3)
301
Capital Structure, Investments and Financing Activities
Notes
Consolidated Financial Statements
As a matter of principle, the compensation of the Executive Board of Merck KGaA is paid by the general partner,
E. Merck KG, and recognized in its income statement. From January to December 2020, companies included in
these consolidated financial statements also recognized expenses of € 2.4 million (2019: € 3.8 million) for
services rendered by members of the Executive Board of Merck KGaA at these companies.
Trade accounts receivable
that are intended for sale due
to a factoring agreement
Discounting of probability-
weighted future milestone
payments and license fees
Virtual power purchase
agreement
Acquisition cost
Contingent considerations
from the purchase of
businesses
Hedging instrument for the
virtual power purchase
agreement
Contingent consideration
Derivatives (without a hedging
relationship)
Subsequent measurement at fair
value through profit or loss
Financial liabilities
Interest rates observable on
the market
Net asset values of the fund
interests
Sales planning, milestone
payments, probabilities of
regulatory and commercial
events, discount rates
production volumes, discount
factors
Electricity future price curves,
expected electricity
Bonds with embedded
settlement option for equity
in an unlisted company
from the sale of businesses or weighted future milestone
shares in corporations
payments and license fees
Consideration of the fair
value of companies in which
the funds are invested
Use of recognized actuarial
methods
Discounting of probability-
Discounting of expected
future cash flows
Interests in unlisted funds
Contingent considerations
Other debt instruments
Contingent consideration
receivable, average fees for
sales of trade accounts
receivable
Nominal value of potentially
sold trade accounts
Nominal value less factoring
fees
-28
6
40
9
9
4
5
36
Other debt instruments
19
19
19
19
25
Trade and other receivables
499
255
226
18
499
499
36
Equity instruments
through other comprehensive income
9
Subsequent measurement at fair value
Subsequent measurement at fair value
Equity instruments
26
34
18
16
36, 39
Derivatives without a hedging
41
33
8
41
34
7
36
Other debt instruments
260
260
260
260
36
Contingent considerations
36
through profit or loss
7
7
1
Fair value
determined
using input
factors
observable
Fair value¹
market
quoted
Fair value
determined
by official
prices and
Carrying amount
Consoli-
dated
Financial assets
€ million
The following table presents the carrying amounts and the fair values of the individual financial assets and
liabilities as of December 31, 2020, for each individual financial instrument class pursuant to IFRS 9:
304
Capital Structure, Investments and Financing Activities
Notes
Consolidated Financial Statements
26
-6
-37
33
-33
5.9% (unchanged)
6.4%
Change of discount rate
in the
market
Fair value
determined
using input
factors not
observable
in the
market
notes
36
Other debt instruments
leasing receivables)
3,223
24
3,199
25
Trade and other receivables (excluding
1,355
1,355
34
35
cost
Subsequent measurement at amortized
Total
(Level 3)
(Level 2)
(Level 1)
Total
values
Non-
current
Current
Cash and cash equivalents
4,422
Trade and other receivables (excluding
12,551 10,183
20191
M Ventures portfolio companies
2020¹
€ million
The following equity instruments measured at fair value through other comprehensive income were disposed of
in 2020 and 2019:
308
Notes Capital Structure, Investments and Financing Activities
Consolidated Financial Statements
2019
-16
24
190
258
26
483
Net carrying amounts as of Dec. 31,
10
-10
Other
Level 1/Level 2
-104
Fair value on the date
-104
Reasons for the disposal
Portfolio
Acquisition of intangible assets
€ million
Other financial obligations comprised the following:
(44) Other financial obligations
M Ventures portfolio companies mainly include minority interests in listed and unlisted companies. The mandate
of M Ventures is to invest in innovative technologies and products that are related to Merck's three business
sectors.
The M Ventures portfolio companies disposed of in fiscal 2020 related to ObsEva SA, Switzerland (fair value as
of December 31, 2019: € 3 million) and shares in Progyny, Inc., United States (2019: Translate Bio, Inc., USA,
Canbex Therapeutics Ltd., United Kingdom, and shares in Progyny, Inc., United States).
1 Disposals due to liquidations are not included.
5
8,129
13
adjustment/restructuring
and full acquisition by
third parties
M Ventures portfolio companies
Portfolio
91
91
100
Transfer of the
cumulative gains (+)
or losses (-) within
group equity to
retained earnings
income
(+) or loss (-) on
disposal recognized in
other comprehensive
The cumulative gain
adjustment/restructuring
and full acquisition by
third parties
of derecognition
Transfers out of Level 3 into
received/payments made
1
balance sheet date
2
I
-15
2
-11
assets/liabilities held as of the
thereof: attributable to
2
1
19
-1
2
3
-45
19
3
-22
thereof: other operating result
consolidated income statement
Gains (+)/losses (-) recognized in the
thereof: financial income and
-25
1
20
-22
-6
-20
-2
-50
Disposals due to divestments/payments
I
Currency translation difference
98
98
Acquisition of property, plant, and equipment
Other financial obligations
Gains (+)/losses (-) recognized in
other comprehensive income
I
20
20
1
20
assets/liabilities held as of the
thereof: attributable to
-45
20
expenses
balance sheet date
Fair value changes
Dec. 31, 2020
850
0.0
0.0
0.0
0.0
0.2
0.1
Emanuel-Merck-Vermögens-KG
0.0
0.0
0.0
0.0
0.0
0.0
0.3
0.1
E. Merck Beteiligungen KG
Dec. 31, 2019
1,320.0
Dec. 31, 2020
1,373.7
14.3
0.1
0.5
0.0
0.5
0.0
0.2
Information on Executive Board and Supervisory Board compensation can be found in Note (46) "Executive
Board and Supervisory Board compensation". Activities above and beyond those described therein, such as the
provision of services or the granting of loans, between companies of the Merck Group and members of the
Executive Board or the Supervisory Board of Merck KGaA, the Executive Board or the Board of Partners of
E. Merck KG or members of their immediate families did not take place in either fiscal 2020 or the previous
year.
Information on pension funds that are classified as defined benefit plans in accordance with IAS 19 can be
found in Note (33) "Provisions for employee benefits".
Between January and December 2020, expenses of € 0.7 million (April 26 to December 31, 2019: € 0.1 million)
for supplies of goods resulted from transactions with Engel-Apotheke, Darmstadt, whose owner has been a
member of the Supervisory Board of Merck KGaA since April 26, 2019.
€ 808.4 million), subject to standard market interest rates. Neither collateral nor guarantees existed for any of
the balances either in favor or to the disadvantage of the Merck Group.
As in the previous year, the liabilities of Group companies in respect of E. Merck KG primarily resulted from
mutual profit transfers between Merck KGaA and E. Merck KG as well as the profit transfer by Merck & Cie,
Switzerland, to E. Merck KG. They included financial liabilities of € 815.9 million (December 31, 2019:
5.9
5.2
5.4
3.4
0.3
0.5
0.1
0.1
Non-consolidated subsidiaries
0.0
0.0
0.0
0.1
0.0
0.0
0.0
Joint ventures
1.2
1.3
E. Merck KG
152
55
33
Dec. 31, 2019
Dec. 31, 2020
Other financial obligations were recognized at nominal value.
Obligations to acquire intangible assets
After more than 5 years
In 1-5 years
Within 1 year
€ million
The expected maturities of the obligations to acquire intangible assets were as follows:
309
Notes Capital Structure, Investments and Financing Activities
Consolidated Financial Statements
Obligations to acquire intangible assets existed in particular owing to contingent considerations within the scope
of in-licensing and research and development collaborations. In these agreements, Merck has entered into an
obligation to make milestone payments once specific targets have been reached. In the not very likely event
that all contract partners achieve all of their milestones, Merck would be obligated to pay up to € 850 million
(December 31, 2019: € 984 million) for the acquisition of intangible assets. The decrease compared with the
previous year is primarily attributable to out-licensing and clinical results in the portfolio of the in-licensing
agreements concluded in the Healthcare business sector (see Note (7) "Collaboration agreements"). The table
above does not contain any other financial obligations from possible future sales-based license fees and
milestone payments.
1,143
985
159
135
984
159
665
770
850
Dec. 31, 2019
Dec. 31, 2020
2019
2020
2019
2020
€ million
Liabilities
Receivables
Expenses
Dec. 31, 2019
Income
Related parties in respect of the Merck Group are E. Merck KG, Emanuel-Merck-Vermögens-KG and E. Merck
Beteiligungen KG. Furthermore, direct or indirect subsidiaries of Merck KGaA, associates of the Merck Group,
joint ventures of the Merck Group, as well as pension funds that are classified as defined benefit plans in
accordance with IAS 19 are also related parties within the meaning of IAS 24. Members of the Executive Board
and the Supervisory Board of Merck KGaA, the Executive Board and the Board of Partners of E. Merck KG as
well as close members of their families are also related parties, as are companies controlled or jointly controlled
by this group of persons or over which this group of persons can exercise significant influence.
Related party disclosures
Accounting and Measurement Policies
(45) Related party disclosures
Other Disclosures
310
Other Disclosures
Notes
Consolidated Financial Statements
984
Transactions were conducted with related parties as follows:
Level 1/Level 2
5
factoring agreements
agreements
conclusion of factoring
19
94
acquisitions/divestments/
Additions due to
Jan. 1, 2020
258
26
483
Net carrying amounts,
Contingent
consideration
instruments
Total
€ million
Other debt
Subsequent measurement at fair value
through profit or loss
Financial assets
2020
The changes in financial assets and liabilities for each of the individual classes of financial instruments allocated
to Level 3 and measured at fair value were as follows:
306
Transfers into Level 3
Notes Capital Structure, Investments and Financing Activities
from Level 1/Level 2
Gains (+)/losses (-)
recognized in the
thereof: other
statement
consolidated income
-2
2
-1
-9
25
51
8
-16
24
190
Derivatives
without a
hedging
relationship
Contingent
consideration
Trade and
other
receivables
Equity
instruments
Subsequent measurement at
fair value through profit or
loss
Financial liabilities
Subsequent measurement at
fair value through other
comprehensive income
Derivatives
without a
hedging
relationship
Fair value changes
-20
Consolidated Financial Statements
13,027
38, 39
Derivatives with a hedging relationship
relationship
76
56
19
37, 39
Derivatives without a hedging
16
16
37
Contingent considerations
Transfers into Level 3 from
Subsequent measurement at fair value
1,108
27
1,081
38
Other financial liabilities
12,889
2,706
46
1The simplification option under IFRS 7.29(a) was used for disclosures of certain fair values.
2Measurements within the scope of IFRS 16 are exempted from the requirements of IFRS 13 (IFRS 13.6(b)).
46
46
16
2,828
16,982 10,183
8,687
8,295
Total
567
458
109
37
Lease liabilities (measured in accordance
with IFRS 16)²
565
565
9
Refund liabilities
|
46
76
76
16
16
66
-1
through profit or loss
1
Subseqent
measurement
at fair value
through profit
Subsequent measurement at
fair value through other
comprehensive income
Subsequent measurement at fair value
through profit or loss
liabilities
Financial
Financial assets
2019
The changes in financial assets and liabilities for each of the individual classes of financial instruments allocated
to Level 3 and measured at fair value were as follows in 2019:
307
Capital Structure, Investments and Financing Activities
Notes
Consolidated Financial Statements
Additions during the reporting period primarily comprised acquisitions of equity instruments and trade accounts
receivable that are designated to be sold on account of a factoring agreement, as well as acquisitions of
convertible notes. Disposals during the reporting period related in particular to advance payments received in
connection with trade accounts receivable under factoring agreements. The transfers from Level 3 to Level 1
related to the M Ventures portfolio companies F-star Therapeutics, Inc., United States, and Galecto, Inc., United
States, which are now listed. The gains and losses from Level 3 assets recognized in other comprehensive
income were reported in the consolidated statement of comprehensive income under the item "fair value
adjustments".
-2
-26
19
255
8
260
33
547
or loss
Net carrying amounts as
of Dec. 31, 2020
Other debt
Total
-13
-18
26
53
6
acquisitions/divestments/conclusion of
Additions due to
-5
21
140
45
259
27
487
Net carrying amounts, Jan. 1, 2019
Contingent
consideration
Trade and
other
receivables
Equity
instruments
Derivatives
without a
hedging
relationship
Contingent
consideration
instruments
€ million
9
73
Other
19
assets/liabilities held
thereof: attributable to
-2
20
income and expenses
20
2
19
thereof: financial
balance sheet date
held as of the
-2
1
-18
-1
operating result
to assets/liabilities
thereof: attributable
-9
-2
2
20
-20
-2
I
-16
Transfers out of Level 3
into Level 1/Level 2
-16
-31
I
-3
-33
divestments/payments
Disposals due to
difference
received/payments made
-2
as of the balance sheet
date
I
recognized in other
Gains (+)/losses (-)
22
22
comprehensive income
Currency translation
-1
Sigma-Aldrich Brasil Ltda.
Barueri
100.00
Chile
100.00
Rio de Janeiro
Brazil
Merck S.A.
Sigma-Aldrich Quimica Ltda.
100.00
Chile
Santiago de Chile
100.00
Colombia
Merck S.A.
Bogota
100.00
Ecuador
Santiago de Chile
100.00
100.00
Sigma-Aldrich de Argentina S.R.L.
Merck S.A.
100.00
Pyeongtaek-shi
100.00
Taipei
100.00
100.00
100.00
74.00
45.11
Buenos Aires
Merck Healthcare Vietnam Limited
Merck Vietnam Ltd.
100.00
Ho Chi Minh City
Latin America
Argentina
Merck S.A.
Buenos Aires
100.00
Argentina
Brazil
Ho Chi Minh City
Merck C.A.
100.00
100.00
100.00
Middle East and
Africa (MEA)
Egypt
Merck Ltd.
Cairo
100.00
Israel
Inter-Lab Ltd.
Yavne
100.00
Israel
InterPharm Laboratories Ltd.
Yavne
100.00
Israel
Ulsan
Herzliya Pituach
Merck Serono Ltd.
Montevideo
Ares Trading Uruguay S.A.
100.00
Lima
Mexico
Mexico
Mexico
Panama
Peru
Uruguay
Guatemala
Merck, S.A.
Merck Biopharma Distribution S.A. de C.V.
Merck, S.A. de C.V.
Sigma-Aldrich Quimica, S. de R.L. de C.V.
Quito
Mesofarma Corporation
100.00
Mexico City
100.00
Mexico City
100.00
Toluca
100.00
Panama City
Merck Peruana S.A.
Guatemala City
100.00
South Korea
100.00
100.00
Singapore
Merck Pte. Ltd.
Singapore
100.00
Singapore
Sigma-Aldrich Pte. Ltd.
Singapore
100.00
Singapore
Versum Materials Singapore International Pte. Ltd.
Singapore
100.00
Singapore
Versum Materials Singapore Pte. Ltd.
Singapore
100.00
Footnotes follow at the end of the table
Country
Singapore
South Korea
Merck Performance Materials Pte. Ltd.
City
100.00
Versum Materials Malaysia Sdn Bhd
Merck Ltd.
Kuala Lumpur
100.00
Auckland
100.00
New Zealand
Sigma-Aldrich New Zealand Co.
Auckland
100.00
Bonifacio Global
Philippines
Merck Business Solutions Asia Inc.
99.99
City
Bonifacio Global
Philippines
Merck Inc.
100.00
Singapore
South Korea
South Korea
South Korea
Taipei
Kaohsiung
Taipei
Bangkok
Registered office
Equity interest
(%)
thereof:
Merck KGaA (%)
Seoul
100.00
Seoul
100.00
Pyeongtaek-shi
100.00
Seoul
100.00
Ansan-si
100.00
Ansan-si
100.00
Siheung-si
Versum Materials Taiwan Co., Ltd.
Merck Ltd.
Merck Performance Materials Ltd.
SAFC Hitech Taiwan Co., Ltd.
Versum Materials Korea Technology Inc.
Versum Materials PM Korea Inc.
Versum Materials SPC Korea Ltd.
Merck Ltd.
Versum Materials HYT Inc.
Versum Materials Korea Inc.
South Korea
South Korea
South Korea
South Korea
South Korea
Taiwan
Taiwan
Taiwan
Taiwan
Ansan-si
Thailand
Vietnam
Consolidated Financial Statements
Notes
Scope of Consolidation
319
Company
Merck Electronic Materials Ltd.
Merck Ltd.
Merck Performance Materials Ltd.
Sigma-Aldrich Korea Ltd.
Versum Materials ADM Korea Inc.
Vietnam
Israel
thereof:
Yavne
Merck 36. Allgemeine Beteiligungs-
Germany
Darmstadt
100.00
100.00
<0.5
<0.5
GmbH
Merck 37. Allgemeine Beteiligungs-
Germany
Darmstadt
100.00
<0.5
<0.5
GmbH
Germany
Merck 38. Allgemeine Beteiligungs-
Darmstadt
100.00
GmbH
100.00
<0.5
100.00
Merck 29. Allgemeine Beteiligungs-
Germany
Darmstadt
100.00
100.00
<0.5
<0.5
GmbH
Germany
Merck 30. Allgemeine Beteiligungs-
GmbH
Darmstadt
100.00
100.00
<0.5
<0.5
Merck 31. Allgemeine Beteiligungs-
Germany
Darmstadt
100.00
<0.5
<0.5
<0.5
GmbH
Ireland
Russia
Sigma-Aldrich (OM) Ltd.
Athens
100.00
<0.5
<0.5
SAFC Arklow Ltd.
Arklow
100.00
<0.5
<0.5
Chemical Trade Limited LLC
Moscow
100.00
<0.5
<0.5
Footnotes follow at the end of the table
New Zealand
Greece
countries
Other European
<0.5
Germany
Merck 39. Allgemeine Beteiligungs-
GmbH
Darmstadt
100.00
100.00
<0.5
<0.5
Germany
Merck 40. Allgemeine Beteiligungs-
GmbH
GmbH
Darmstadt
100.00
<0.5
<0.5
Germany
Merck 41. Allgemeine Beteiligungs-
GmbH
Darmstadt
100.00
100.00
<0.5
100.00
<0.5
<0.5
100.00
100.00
Tunisia
Merck Promotion SARL
Tunis
100.00
Tunisia
Merck SARL
Tunis
100.00
Footnotes follow at the end of the table
Country
Company
Consolidated Financial Statements
Notes
Scope of Consolidation
320
Registered office
Equity interest
(%)
thereof:
Kempton Park
100.00
Halfway House
100.00
90.00
Israel
QLight Nanotech Ltd.
Jerusalem
100.00
Israel
Sigma-Aldrich Israel Ltd.
Rehovot
100.00
Merck KGaA (%)
Israel
South Africa
South Africa
Versum Materials Israel Ltd.
Merck Healthcare and Life Science Limited
Merck (Pty) Ltd.
Sigma-Aldrich (Pty) Ltd.
Tel Aviv
100.00
Nairobi
Kenya
PMatX Ltd.
United Arab
Emirates
Dubai
<0.5
Germany
Merck 26. Allgemeine Beteiligungs-
GmbH
Darmstadt
100.00
100.00
<0.5
<0.5
Germany
Merck 27. Allgemeine Beteiligungs-
GmbH
Darmstadt
100.00
100.00
<0.5
<0.5
Merck 28. Allgemeine Beteiligungs-
Germany
Darmstadt
100.00
<0.5
100.00
100.00
Darmstadt
II. Companies accounted for using the equity method
100.00
North America
United States
Syntropy Technologies LLC
Wilmington
50.00
Country
Company
Merck Serono Middle East FZ-Ltd.
III. Subsidiaries not consolidated for reasons of materiality
Equity
interest (%)
thereof:
Merck KGaA
(%)
Fair value as
of Dec. 31.
2020
(€ million)
Fair value as
of Dec. 31.
2019
(€ million)
Germany
Germany
Merck 25. Allgemeine Beteiligungs-
GmbH
Registered office
Malaysia
100.00
Kuala Lumpur
0.3
0.1
0.4
0.3
0.3
0.7
0.1
0.4
2.8
9.6
2.6
9.3
Germany
Merck Group
0.5
Germany
0.3
10.4
Consolidated Financial Statements
approved them for forwarding to the Supervisory Board. The Supervisory Board is responsible for examining the
consolidated financial statements and declaring whether it approves them.
The Executive Board of Merck KGaA prepared the consolidated financial statements on February 16, 2021, and
(49) Information on preparation and approval
The Statement of Compliance in accordance with section 161 of the German Stock Corporation Act
(Aktiengesetz) was updated and published in the corporate governance section of the website
www.merckgroup.com/investors > Corporate governance in March 2020 and thus made permanently available.
(48) Corporate governance
0.1
312
Notes
Consolidated Financial Statements
Other audit-related services pertained to various statutory or contractually agreed audits. Tax consultancy
services encompassed services in connection with the preparation of tax returns for employees delegated
abroad. Other services included other consultancy services in regulatory and business matters.
3.3
11.0
3.1
Other Disclosures
Merck Group
prüfungs-
gesellschaft,
gesellschaft,
Other Disclosures
Notes
Consolidated Financial Statements
Ireland
Ireland
Ireland
311
Ireland
Millipore Cork Unlimited Company
Shrawdine Limited
Sigma-Aldrich Ireland Ltd.
Dublin
100.00
Carrigtwohill
Merck Serono (Ireland) Ltd.
From January to December 2020, for members of the Executive Board of Merck KGaA salaries amounting to
€ 27.4 million (2019: € 27.6 million) were recorded by E. Merck KG and by companies included in these
consolidated financial statements, thereof fixed salaries of € 5.3 million (2019: € 5.6 million), variable
compensation of € 14.0 million (2019: € 15.3 million), and additional benefits of € 0.4 million (2019:
€ 0.8 million); as part of the Long-Term Incentive Plan, the members of the Executive Board were eligible to
receive 83,210 virtual shares - Merck Share Units (MSUs) - subject to target achievement (December 31,
2019: 92,588 MSUs). The fair value of these MSUs at the grant date was € 7.7 million (December 31, 2019:
€ 5.9 million). The grant value was € 8.8 million (December 31, 2019: € 8.7 million).
Furthermore, in fiscal 2020, for members of the Executive Board additions to provisions included expenses of
€ 17.5 million (2019: € 7.1 million) for the long-term incentive plan, and additions to pension provisions
included current service costs of € 3.0 million (2019: € 3.0 million).
Payments to former members of the Executive Board or their surviving dependents are made for a limited
period of time and represent continued payment of fixed compensation in the event of death, as well as pension
payments. In fiscal 2020, these amounted to € 13.8 million (2019: € 13.4 million). The pension provisions for
2020 amounted to € 177.0 million (December 31, 2019: € 163.6 million).
thereof: KPMG AG
Wirtschafts-
2019
AG Wirtschafts-
prüfungs-
thereof: KPMG
2020
Total
Other audit-related services
Tax consultancy services
Other services
Audits of financial statements
€ million
The costs for the auditors (KPMG) of the financial statements of the Merck Group consisted of the following:
(47) Auditor's fees
Further individualized information and disclosures, as well as a presentation of the compensation system for the
members of the Executive Board and the Supervisory Board, can be found in the compensation report in the
combined management report.
As in the previous year, in fiscal 2020, members of the Executive Board and the Supervisory Board received no
advance payments or loans; the Merck Group did not enter into contingent liability relationships in favor of
these persons.
As in the previous year, no compensation was paid to former members of the Supervisory Board in fiscal 2020.
The compensation of the Supervisory Board in fiscal 2020 amounting to € 870.5 thousand (2019: € 880.8
thousand) consisted of a fixed portion of € 822.5 thousand (2019: € 823.8 thousand) and meeting attendance
compensation of € 48.0 thousand (2019: € 57.0 thousand).
Notes
100.00
Scope of Consolidation
Scope of Consolidation
Germany
Germany
100.00
100.00
Darmstadt
Merck 12. Allgemeine Beteiligungs-GmbH A)
Germany
Germany
Gernsheim
Emedia Export Company mbH
Germany
100.00
100.00
Darmstadt
100.00
Chemitra GmbH A)
Germany
Germany
Darmstadt
100.00
Darmstadt
100.00
Darmstadt
100.00
Germany
Darmstadt
Darmstadt
100.00
Darmstadt
Merck 13. Allgemeine Beteiligungs-GmbH
Merck 15. Allgemeine Beteiligungs-GmbH
Merck 16. Allgemeine Beteiligungs-GmbH A)
Merck 20. Allgemeine Beteiligungs-GmbH A)
Merck 21. Allgemeine Beteiligungs-GmbH
Merck 24. Allgemeine Beteiligungs-GmbH A)
Merck Accounting Solutions & Services Europe GmbH A)
Merck Chemicals GmbH A)
Germany
Germany
100.00
Germany
100.00
100.00
Parent
company
Darmstadt
Merck KGaA
Germany
Germany
thereof:
Merck KGaA (%)
Germany
(%)
Equity interest
I. Fully consolidated companies
Company
Country
The shareholdings of Merck KGaA as of December 31, 2020, are presented below, along with a list of the
fair values for equity instruments subsequently measured at fair value through other comprehensive
income.
(50) List of shareholdings
Registered office
AmpTec GmbH
Hamburg
100.00
Darmstadt
BSSN UG (haftungsbeschränkt) A)
Germany
100.00
Darmstadt
BSSN Software GmbH A)
Germany
100.00
Berlin
Biochrom GmbH A)
Germany
100.00
Darmstadt
AZ Electronic Materials GmbH
Germany
313
Arklow
100.00
Arklow
Netherlands
eyrise B.V.
Veldhoven
100.00
100.00
Netherlands
100.00
Merck B.V.
100.00
Amsterdam
Netherlands
Merck Chemicals B.V.
100.00
Zuidoost
Schiphol-Rijk
Netherlands
Pietà
Malta
100.00
Luxembourg
Sigma-Aldrich Global S.a.r.l.
Luxembourg
100.00
Luxembourg
Merck Capital Ltd.
Sigma-Aldrich S.a.r.l.
100.00
Malta
Merck Capital Holding Ltd.
Pietà
100.00
50.29
Luxembourg
Merck Europe B.V.
Amsterdam
100.00
Netherlands
Versum Materials Asia B.V.
Utrecht
100.00
Netherlands
Versum Materials Holdings Nederland B.V.
100.00
Utrecht
Netherlands
Versum Materials International B.V.
Utrecht
100.00
Netherlands
Versum Materials Netherlands B.V.
100.00
Zwijndrecht
Sigma-Aldrich Chemie N.V.
Netherlands
Netherlands
Netherlands
Netherlands
Netherlands
Merck Holding Netherlands B.V.
Merck Ventures B.V.
Serono Tri Holdings B.V.
Sigma-Aldrich B.V.
Schiphol-Rijk
100.00
Amsterdam
100.00
Schiphol-Rijk
100.00
Zwijndrecht
100.00
Luxembourg
Millipore International Holdings, S.a.r.l.
Luxembourg
100.00
Merck Life Science S.r.l.
Milan
100.00
Italy
Merck S.p.A.
Milan
Italy
100.00
Merck Serono S.p.A.
Rome
99.74
Italy
Versum Materials Italia S.r.l.
Milan
Italy
S.p.A.
100.00
Colleretto Giacosa
100.00
Ireland
Silverberry Limited
Arklow
100.00
Ireland
Versum Materials Ireland Limited
Dublin
100.00
Italy
Allergopharma S.r.l.
Istituto di Ricerche Biomediche Antoine Marxer RBM
Rome
100.00
Italy
100.00
100.00
Lativa
Riga
Luxembourg
100.00
Luxembourg
Merck Holding S.a.r.l.
Luxembourg
100.00
Merck Finanz S.a.r.l.
Luxembourg
Luxembourg
100.00
Luxembourg
Merck Re S.A.
Luxembourg
100.00
Merck Invest SCS
Luxembourg
100.00
Luxembourg
100.00
Lithuania
Merck Serono, UAB
Vilnius
100.00
Luxembourg
Mats Finance S.a.r.l.
Luxembourg
100.00
Luxembourg
Merck Chemicals Holding S.a.r.l.
Luxembourg
100.00
Luxembourg
Merck Finance S.a.r.l.
Merck Serono SIA
100.00
Weiterstadt
100.00
100.00
100.00
Frederiksberg
Survac ApS
Denmark
100.00
Estonia
Soborg
Denmark
100.00
Soborg
Merck A/S
Denmark
100.00
Merck Life Science A/S
Prague
Merck Serono OÜ
100.00
Merck Biodevelopment S.A.S.
France
100.00
Lyon
Gonnon S.A.S.
France
Tallinn
100.00
Merck OY
Finland
100.00
Espoo
Merck Life Science OY
Finland
Espoo
Sigma-Aldrich spol s r.o.
Czech Republic
100.00
100.00
Overijse
Merck Chemicals N.V./S.A.
Belgium
100.00
Vienna
Belgium
Sigma-Aldrich Handels GmbH
100.00
Vienna
Merck Gesellschaft mbH
Austria
100.00
Vienna
Austria
Merck N.V.-S.A.
Overijse
100.00
Prague
Merck spol. s r.o.
Czech Republic
100.00
Zagreb
Merck d.o.0.
Croatia
100.00
Sofia
Merck Bulgaria EAD
Bulgaria
100.00
Overijse
Sigma-Aldrich BVBA/SPRL
Belgium
Lyon
100.00
France
Merck Chimie S.A.S.
Maroussi, Athens
Fallavier
100.00
Merck Finance Limited
Sigma-Aldrich Kft.
Merck Kft.
100.00
Merck A.E.
Ireland
Ireland
Hungary
Hungary
Greece
France
Sigma-Aldrich Holding S.a.r.l.
Budapest
100.00
Budapest
Equity interest
(%)
Registered office
315
Scope of Consolidation
Notes
Consolidated Financial Statements
Company
Country
Footnotes follow at the end of the table
100.00
Carrigtwohill
Merck Millipore Ltd.
100.00
Carrigtwohill
100.00
Saint Quentin
Merck Chemicals and Life Science GesmbH
Fallavier
Saint Quentin
100.00
Lyon
Merck Santé S.A.S.
France
99.86
Lyon
France
Merck S.A.
100.00
Trosly Breuil
Merck Performance Materials S.A.S.
France
100.00
Fontenay s/Bois
France
Merck Serono S.A.S.
Lyon
100.00
Sigma-Aldrich Chimie SNC
France
Fallavier
100.00
Saint Quentin
Sigma-Aldrich Chimie S.a.r.l.
France
100.00
Meylan
Resolution Spectra Systems S.A.S.
France
100.00
Molsheim
Millipore S.A.S.
France
100.00
Utrecht
Austria
Other European
Merck Life Science GmbH A)
Germany
100.00
Darmstadt
Merck Life Science Germany GmbH A)
Germany
Eppelheim
100.00
Merck Internationale Beteiligungen GmbH
Germany
100.00
100.00
Darmstadt
Merck International GmbH
Darmstadt
Germany
100.00
Germany
Merck Performance Materials GmbH
Germany
100.00
Darmstadt
Merck Performance Materials Germany GmbH A)
Germany
100.00
100.00
Merck Patent GmbH A)
Germany
100.00
100.00
Darmstadt
Merck Life Science Holding GmbH
Darmstadt
100.00
100.00
Gernsheim
Germany
100.00
100.00
Darmstadt
Merck Export GmbH A)
Germany
Merck Financial Services GmbH
100.00
Darmstadt
Merck Consumer Health Holding Germany GmbH
Germany
100.00
Darmstadt
100.00
100.00
Darmstadt
100.00
100.00
Merck Holding GmbH
Germany
100.00
Darmstadt
Merck Healthcare KGaA A)
Germany
100.00
100.00
Darmstadt
Merck Healthcare Holding GmbH
Germany
100.00
Gernsheim
Merck Financial Trading GmbH
Germany
Wiesbaden
100.00
Germany
Merck Performance Materials Holding GmbH
Sigma-Aldrich Grundstücks GmbH & Co. KG
Germany
100.00
Taufkirchen
Sigma-Aldrich Chemie Holding GmbH
Germany
Steinheim
100.00
Sigma-Aldrich Chemie GmbH
Germany
100.00
Steinheim
Sigma-Aldrich Biochemie GmbH
Germany
Steinheim
100.00
Germany
Sigma-Aldrich Logistik GmbH
100.00
Frankfurt am Main
Versum Materials Germany GmbH
Germany
100.00
100.00
Steinheim
Sigma-Aldrich Verwaltungs GmbH
Germany
100.00
Steinheim
Sigma-Aldrich Produktions GmbH
Germany
100.00
Steinheim
Grundstücksverwaltungsgesellschaft mbH
countries
100.00
Darmstadt
Germany
Germany
thereof:
Merck KGaA (%)
Equity interest
(%)
Registered office
Company
Country
Merck Real Estate GmbH A)
314
Notes
Consolidated Financial Statements
Footnotes follow at the end of the table
100.00
100.00
Darmstadt
Scope of Consolidation
Darmstadt
100.00
100.00
Germany
Merck Wohnungs- und
100.00
Gernsheim
Merck Vierte Allgemeine Beteiligungsgesellschaft mbH
Germany
100.00
100.00
Darmstadt
Merck Serono GmbH A)
Germany
100.00
100.00
Hohenbrunn
Merck Schuchardt OHG
100.00
100.00
Netherlands
Versum Materials Netherlands International B.V.
Bellefonte
100.00
United States
Versum Materials Formulations and Technology, LLC
Wilmington
100.00
Supelco, Inc.
United States
Wilmington
100.00
United States
Versum Materials Technology LLC
Wilmington
100.00
Versum Materials Manufacturing Company, LLC
United States
United States
The Woodlands
United States
Sigma-Aldrich Research Biochemicals, Inc.
Natick
100.00
United States
Sigma-Aldrich RTC, Inc.
100.00
Laramie
United States
Sigma-Aldrich, Inc.
Milwaukee
100.00
United States
Sigma-Genosys of Texas LLC
100.00
Versum Materials US International, Inc.
Wilmington
100.00
Macquarie Park
100.00
Australia
Sigma-Aldrich Oceania Pty. Ltd.
Macquarie Park
100.00
SAFC Biociences Pty. Ltd.
Australia
Macquarie Park
100.00
China
Beijing Skywing Technology Co., Ltd.
Beijing
100.00
Sigma-Aldrich Pty. Ltd.
Australia
100.00
Bayswater
United States
Versum Materials US LLC
Wilmington
100.00
United States
Wilmington
100.00
Asia-Pacific (APAC)
Versum Materials, Inc.
Australia
Merck Healthcare Pty. Ltd.
Macquarie Park
100.00
Australia
Merck Pty. Ltd.
100.00
St. Louis
Sigma-Aldrich Missouri Insurance Company
United States
Wilmington
100.00
United States
United States
Millipore UK Holdings II, LLC
Wilmington
100.00
Millipore UK Holdings I, LLC
United States
SAFC Biosciences, Inc.
United States
United States
Ormet Circuits, Inc.
Research Organics, LLC
SAFC Carlsbad, Inc.
SAFC, Inc.
San Diego
United States
United States
100.00
Wilmington
Wilbraham
100.00
United States
Grzybowski Scientific Inventions Ltd.
Evanston
100.00
United States
Intermolecular, Inc.
Wilmington
100.00
United States
United States
J.C. Schumacher Company
Millipore Asia Ltd.
Los Angeles
100.00
100.00
China
Cleveland
Lenexa
St. Louis
100.00
United States
United States
United States
Sigma-Aldrich Corporation
Sigma-Aldrich Co. LLC
Sigma-Aldrich Foreign Holding Co.
St. Louis
100.00
St. Louis
100.00
St. Louis
100.00
Sigma-Aldrich Manufacturing LLC
United States
100.00
St. Louis
100.00
Carlsbad
100.00
Madison
100.00
United States
Serono Laboratories, Inc.
Rockland
100.00
United States
Sigma Chemical Foreign Holding LLC
St. Louis
100.00
United States
Sigma Redevelopment Corporation
100.00
FloDesign Sonics, Inc.
Merck Chemicals (Shanghai) Co., Ltd.
100.00
100.00
India
Sigma-Aldrich Chemicals Private Limited
Bangalore
100.00
Indonesia
Mumbai
P.T. Merck Chemicals and Life Sciences
100.00
Indonesia
P.T. Merck Tbk.
Jakarta
86.65
Japan
Jakarta
BioReliance K.K.
Merck Specialities Pvt. Ltd.
100.00
Versum Materials (Dalian) Co., Ltd.
Dalian
100.00
China
Versum Materials (Shanghai) Co., Ltd.
Shanghai
India
100.00
Merck Life Science Pvt. Ltd.
Mumbai
100.00
India
Merck Performance Materials Pvt. Ltd.
Mumbai
India
Tokyo
100.00
Japan
Japan
Sigma-Aldrich Japan G.K.
Tokyo
100.00
Japan
Versum Materials Japan Inc.
100.00
Tokyo
Malaysia
Merck Sdn Bhd
Petaling Jaya
100.00
Malaysia
Sigma-Aldrich (M) Sdn Bhd
100.00
Tokyo
Merck Performance Materials G.K.
Japan
Merck Biopharma Co., Ltd.
Tokyo
100.00
Japan
Merck Electronics Ltd.
Tokyo
100.00
Japan
Merck Holdings G.K.
Tokyo
100.00
Japan
Merck Limited
Tokyo
100.00
China
Ltd.
100.00
Wuxi
Equity interest
(%)
thereof:
Merck KGaA (%)
Suzhou
Shanghai
100.00
100.00
Guangzhou
Registered office
Hong Kong
Nantong
100.00
Hong Kong
100.00
China
China
100.00
Merck Life Science Technologies (Nantong) Co., Ltd.
Merck Ltd.
Merck Innovation Hub (Guangdong) Co., Ltd.
Merck Life Science Ltd.
Merck Electronic Materials (Suzhou) Ltd.
Merck Holding (China) Co., Ltd.
China
Merck Display Materials (Shanghai) Co., Ltd.
Shanghai
100.00
Footnotes follow at the end of the table
Consolidated Financial Statements
Notes
Scope of Consolidation
318
Country
China
China
China
China
China
China
Company
China
Shanghai
Merck Management Consulting (Shanghai) Co., Ltd.
Merck Performance Materials Hong Kong Ltd.
Merck Pharmaceutical (HK) Ltd.
100.00
China
Merck Serono Co., Ltd.
Beijing
100.00
China
SAFC Hitech (Shanghai) Co., Ltd.
100.00
Shanghai
China
Sigma-Aldrich (Shanghai) Trading Co., Ltd.
Shanghai
100.00
Sigma-Aldrich (Wuxi) Life Science & Technology Co.,
China
100.00
Beijing
Merck Serono (Beijing) Pharmaceutical R&D Co., Ltd.
China
Hong Kong
100.00
Hong Kong
100.00
China
China
Merck Pharmaceutical Distribution (Jiangsu) Co., Ltd.
Merck Pharmaceutical Manufacturing (Jiangsu) Co.,
Ltd.
Nantong
100.00
Nantong
100.00
China
Merck Serono (Beijing) Pharmaceutical Distribution
Co., Ltd.
Beijing
100.00
Shanghai
Merck KGaA (%)
United States
Rockland
Switzerland
Merck & Cie
Altdorf
51.63
51.63
Switzerland
100.00
Merck (Schweiz) AG
100.00
Switzerland
Merck Performance Materials (Schweiz) AG
Schaffhausen
100.00
Switzerland
Zug
Merck Serono SA
Aubonne
Switzerland
Madrid
100.00
Sweden
Merck AB
Solna
100.00
Ares Trading SA
Sweden
Solna
100.00
Sweden
Sigma-Aldrich Sweden AB
Stockholm
100.00
Merck Chemicals and Life Science AB
Aubonne
100.00
Switzerland
Turkey
Merck Ilac Ecza ve Kimya Ticaret AS
Istanbul
100.00
United Kingdom
BioReliance Limited
100.00
Aberdeen
United Kingdom
BioReliance U.K. Acquisition Limited
London
100.00
United Kingdom
Epichem Group Limited
100.00
Buchs
Sigma-Aldrich Production GmbH
Switzerland
SeroMer Holding SA
Coinsins
100.00
Switzerland
Sigma-Aldrich (Switzerland) Holding AG
Buchs
100.00
Switzerland
Sigma-Aldrich Chemie GmbH
Buchs
100.00
Switzerland
Sigma-Aldrich International GmbH
Buchs
100.00
Merck, S.L.U.
Spain
100.00
Madrid
Sigma-Aldrich Sp.z.o.o.
Poznan
100.00
Portugal
Merck, S.A.
Algés
Poland
100.00
Merck Romania S.R.L.
Bucharest
100.00
Russia
Russia
Serbia
Romania
100.00
Warsaw
Merck Sp.z.o.0.
Utrecht
100.00
Netherlands
Versum Materials Pacific B.V.
Utrecht
100.00
Norway
Merck Life Science AS
Oslo
100.00
Poland
Merck Business Solutions Europe Sp.z.o.0.
Wroclaw
100.00
Poland
Merck LLC
Gillingham
Sigma-Aldrich Rus LLC
Moscow
100.00
Sigma-Aldrich, spol. s r.o.
Bratislava
100.00
Slovenia
Merck d.o.o.
Bratislava
Ljubljana
Spain
Merck Chemicals and Life Science S.A.U.
Madrid
100.00
Spain
Merck Life Science S.L.U.
100.00
Merck spol. s r.o.
Slovakia
Slovakia
Merck KGaA (%)
100.00
Moscow
100.00
Belgrade
100.00
Footnotes follow at the end of the table
Consolidated Financial Statements
Notes
Scope of Consolidation
316
Country
Company
Registered office
Equity interest
(%)
thereof:
Merck d.o.o. Beograd
100.00
100.00
Merck Holding Ltd.
Electron Transfer Technologies, Inc.
West Trenton
100.00
Footnotes follow at the end of the table
Consolidated Financial Statements
Notes
100.00
Scope of Consolidation
Country
United States
Company
EMD Accounting Solutions & Services America, Inc.
Registered office
Equity interest
(%)
317
thereof:
Merck KGaA (%)
Round Rock
United States
United States
100.00
Urbana
100.00
United States
BioControl Systems, Inc.
Wilmington
Cerilliant Corporation
100.00
BioReliance Corporation
Rockville
100.00
Cell Marque Corporation
Rocklin
100.00
United States
United States
Rockland
100.00
United States
Burlington
100.00
Philadelphia
100.00
United States
EMD Serono Holding, Inc.
100.00
Rockland
United States
EMD Serono Research & Development Institute, Inc.
Billerica
100.00
United States
EMD Serono, Inc.
100.00
Rockland
100.00
Wilmington
EMD Digital Inc.
Burlington
100.00
United States
United States
United States
United States
EMD Millipore Corporation
United States
EMD Finance LLC
EMD Group Holding, Inc.
EMD Holding Corp.
EMD Performance Materials Corp.
Wilmington
100.00
St. Louis
Aldrich Chemical Foreign Holding LLC
Aldrich-APL, LLC
United States
United States
Merck Serono Ltd.
Feltham
100.00
Millipore (U.K.) Limited
Feltham
100.00
United Kingdom
United Kingdom
United Kingdom
Millipore UK Holdings LLP
100.00
United Kingdom
SAFC Biosciences Limited
Gillingham
100.00
United Kingdom
Feltham
100.00
Feltham
Merck Serono Europe Ltd.
Feltham
100.00
United Kingdom
Merck Investments Ltd.
Feltham
100.00
United Kingdom
Merck Life Science UK Limited
Gillingham
100.00
United Kingdom
Merck Performance Materials Limited
Feltham
100.00
United Kingdom
SAFC Hitech Limited
United Kingdom
Gillingham
United Kingdom
United Kingdom
Canada
Millipore (Canada) Ltd.
Oakville
100.00
Canada
Canada
100.00
United States
Burlington
100.00
Oakville
100.00
Milwaukee
100.00
Natrix Separations, Inc.
Sigma-Aldrich Canada Co.
Aldrich Chemical Co. LLC
Mississauga
EMD Inc.
Canada
Sigma-Aldrich Company Limited
Gillingham
100.00
Versum Materials UK Limited
London
100.00
North America
Canada
EMD Chemicals Canada Inc.
Oakville
100.00
Canada
EMD Crop BioScience Canada Inc.
Toronto
100.00
100.00
100.00
100.00
<0.5
We assessed the appropriateness of the valuation model used. To verify arithmetical accuracy, we used a risk-
based audit approach to recalculate the Company's calculations based on samples contained in the valuation
model.
In addition, we assessed whether the Company's disclosures regarding the goodwill impairment test in the
notes to the consolidated financial statements are complete and appropriate.
Our observations
The calculation method used for the goodwill impairment test is appropriate and in line with the applicable
valuation principles. Overall, the assumptions and parameters used by management are balanced. The
disclosures in the notes to the consolidated financial statements are complete and properly depict the judgment
associated with the subsequent measurement of goodwill.
Recognition and measurement of income tax liabilities
Explanatory notes on the recognition and measurement of income tax liabilities can be found in the notes to the
consolidated financial statements under note 15.
The financial statement risk
As of December 31, 2020, current income tax liabilities amount to EUR 1,460 million.
As part of our audit of the discount factor, we analyzed the peer group used. With regard to other assumptions
and parameters (e.g. risk-free interest rate, beta factor, market risk premium), we compared those
assumptions and parameters with our own assumptions and publicly available data to assess whether these
were appropriate and whether they were within the range of external recommendations, to the extent available.
In addition, we verified the calculation model used to determine the discount factor and qualified the method by
using our own calculation model.
Merck operates in different jurisdictions with different legal systems. The application of local regulations on
income tax, tax incentives and transfer pricing rules is complex. The recognition and measurement of income
tax liabilities require Merck to exercise judgment in assessing tax matters and to make estimates regarding
uncertain tax positions.
There is a risk for the financial statements that income tax liabilities are not fully recognized or not
appropriately measured.
Reproduction of the Independent Auditor's Report
329
Our audit approach
We involved our own specialists in international tax law into the audit team in order to evaluate Merck's
assessment of tax risks and as far as obtained the related opinions of external experts engaged by Merck.
We obtained an understanding of existing tax risks through inquiry of employees of the tax department. We
assessed the competence, capabilities and objectivity of the external experts and evaluated their expert
opinions.
In addition, we analyzed correspondence with the relevant tax authorities and assessed the assumptions
underlying the determination of income tax liabilities based on our knowledge and experience of how the
relevant legal requirements are currently applied by the tax authorities and courts.
Our observations
The measurement of income tax liabilities and the assessment of unrecognized contingent tax liabilities are
subject to judgment and estimation uncertainty. Merck engages event driven external experts to support its
own risk assessment with expert opinions from tax specialists.
The valuation model and assumptions underlying the recognition and measurement of income tax liabilities are
reasonable.
We reconciled the expected net cash flows underlying the recoverable amount calculations with the current
medium-term plan approved by management. To assess the assumptions used in preparing the medium-term
plan, we obtained an understanding of the planning process through discussions with company representatives,
including corporate management and representatives from the corporate divisions and the research and
development department, we assessed the plausibility and consistency of the explanations received with the
projections, and we compared the assumptions used with the expectations of external analysts and sources.
Our audit approach
In our opinion, on the basis of the knowledge obtained in the audit,
⚫ the accompanying consolidated financial statements comply, in all material respects, with the IFRSS as
adopted by the EU, and the additional requirements of German commercial law pursuant to Section
315e (1) HGB [Handelsgesetzbuch: German Commercial Code] and, in compliance with these
requirements, give a true and fair view of the assets, liabilities, and financial position of the Group as
of December 31, 2020, and of its financial performance for the financial year from January 1, 2020, to
December 31, 2020, and
⚫ the accompanying combined management report as a whole provides an appropriate view of the
Group's position. In all material respects, this combined management report is consistent with the
consolidated financial statements, complies with German legal requirements and appropriately
presents the opportunities and risks of future development. Our opinion on the combined
management report does not cover the content of the components of the combined management
report specified in the "Other Information" section of the auditor's report.
Pursuant to Section 322 (3) sentence 1 HGB, we declare that our audit has not led to any reservations relating
to the legal compliance of the consolidated financial statements and of the combined management report.
Reproduction of the Independent Auditor's Report
327
Basis for the Opinions
We conducted our audit of the consolidated financial statements and of the combined management report in
accordance with Section 317 HGB and EU Audit Regulation No 537/2014 (referred to subsequently as "EU Audit
Regulation") and in compliance with German Generally Accepted Standards for Financial Statement Audits
promulgated by the Institut der Wirtschaftsprüfer [Institute of Public Auditors in Germany] (IDW). Our
responsibilities under those requirements and principles are further described in the "Auditor's Responsibilities
for the Audit of the Consolidated Financial Statements and of the Combined Management Report" section of our
auditor's report. We are independent of the group entities in accordance with the requirements of European law
and German commercial and professional law, and we have fulfilled our other German professional
responsibilities in accordance with these requirements. In addition, in accordance with Article 10 (2)(f) of the
EU Audit Regulation, we declare that we have not provided non-audit services prohibited under Article 5 (1) of
the EU Audit Regulation. We believe that the evidence we have obtained is sufficient and appropriate to provide
a basis for our opinions on the consolidated financial statements and on the combined management report.
Using our own sensitivity analyses, we assessed with the involvement of our own specialists in valuation the
extent to which the goodwill of the cash-generating units would still be sufficiently covered by the respective
recoverable amount if assumptions and parameters underlying the calculations were to change in a manner
that is deemed possible.
Key Audit Matters in the Audit of the Consolidated Financial Statements
Impairment testing of goodwill of the operating segments Life Science and
Performance Materials
Explanatory notes on the impairment tests can be found in the notes to the consolidated financial statements
under note 18.
The financial statement risk
The goodwill in the consolidated financial statements as of December 31, 2020 amounts to EUR 15,959 million
(38.2% of the Group's total assets), with EUR 10,287 million of this attributable to Life Science and with EUR
4,146 million to Performance Materials. The goodwill of Life Science results especially from the acquisitions of
the Miilipore Corporation, USA, in July 2010 and of the Sigma-Aldrich Corporation, USA, in November 2015.
Due to the acquisition of Versum Materials, Inc., USA, in October 2019 the goodwill of Performance Materials
has increased significantly.
Goodwill is to be tested for impairment once a year, and may need be tested ad hoc if necessary. In performing
the goodwill impairment test, Merck primarily determines the recoverable amount by means of the discounted
cash flow method. The valuation model used to determine the recoverable amount is complex and the result of
this valuation are highly dependent on the projection of future net cash flows (taking into account future
revenue growth, profit margins and long-term growth rates) and the discount factor used, and therefore is
subject to significant estimation uncertainty.
There is a risk for the financial statements that an existing goodwill impairment loss was not recognized as of
the reporting date. In addition, there is a risk that the related disclosures in the notes to the consolidated
financial statements are not complete and appropriate.
328
Reproduction of the Independent Auditor's Report
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit
of the consolidated financial statements for the financial year from January 1, 2020, to December 31, 2020.
These matters were addressed in the context of our audit of the consolidated financial statements as a whole,
and in forming our opinion thereon, we do not provide a separate opinion on these matters.
We have audited the consolidated financial statements of MERCK Kommanditgesellschaft auf Aktien and its
subsidiaries (the Group), which comprise the consolidated balance sheet as of December 31, 2020, the
consolidated income statement, the consolidated statement of comprehensive income, consolidated statement
of changes in net equity and consolidated cash flow statement for the financial year from January 1, 2020, to
December 31, 2020, and notes to the consolidated financial statements, including a summary of significant
accounting policies. In addition, we have audited the combined management report of MERCK Kommandit-
gesellschaft auf Aktien for the financial year from January 1, 2020, to December 31, 2020. In accordance with
German legal requirements, we have not audited the components of the combined management report
specified in the "Other Information" section of our auditor's report.
Other Information
⚫ the corporate governance statement referred to in the combined management report,
12
<20.00
Wiesbaden
InfraServ GmbH & Co. Wiesbaden KG
Germany
-
B)
<20.00
6
Dresden
<0.5
<20.00
Sankt Augustin
Azelis Deutschland Kosmetik GmbH
Ferroelectric Memory GmbH
Germany
Germany
B)
B)
2
Management and the Supervisory Board are responsible for the other information. The other information
comprises the following components of the combined management report, whose content was not audited:
Germany
• Obtain an understanding of internal control relevant to the audit of the consolidated financial
statements and of arrangements and measures (systems) relevant to the audit of the combined
management report in order to design audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of these systems.
⚫ the components of the combined non-financial statement referred to in the combined management
report,
• information extraneous to combined management reports and marked as unaudited and
⚫ the remaining parts of the annual report.
The other information does not comprise the consolidated financial statements, the audited parts of the
combined management report and our auditor's report.
Our opinions on the consolidated financial statements and on the combined management report do not cover
the other information, and consequently we do not express an opinion or any other form of assurance
conclusion thereon.
In connection with our audit, our responsibility is to read the other information and, in so doing, to consider
whether the other information
⚫ is materially inconsistent with the consolidated financial statements, with the information in the
combined management report audited for content or our knowledge obtained in the audit, or
• otherwise appears to be materially misstated.
• Evaluate the appropriateness of accounting policies used by management and the reasonableness of
estimates made by management and related disclosures.
Responsibilities of Management and the Supervisory Board for the
Consolidated Financial Statements and the Combined Management Report
Management is responsible for the preparation of the consolidated financial statements that comply, in all
material respects, with IFRSS as adopted by the EU, and the additional requirements of German commercial law
pursuant to Section 315e (1) HGB and that the consolidated financial statements, in compliance with these
requirements, give a true and fair view of the assets, liabilities, financial position, and financial performance of
the Group. In addition, management is responsible for such internal control as they have determined necessary
to enable the preparation of consolidated financial statements that are free from material misstatement,
whether due to fraud or error.
330
In preparing the consolidated financial statements, management is responsible for assessing the Group's ability
to continue as a going concern. They also have the responsibility for disclosing, as applicable, matters related
to going concern. In addition, they are responsible for financial reporting based on the going concern basis of
accounting unless there is an intention to liquidate the Group or to cease operations, or there is no realistic
alternative but to do so.
Furthermore, management is responsible for the preparation of the combined management report that, as a
whole, provides an appropriate view of the Group's position and is, in all material respects, consistent with the
consolidated financial statements, complies with German legal requirements, and appropriately presents the
opportunities and risks of future development. In addition, management is responsible for such arrangements
and measures (systems) as they have considered necessary to enable the preparation of a combined
management report that is in accordance with the applicable German legal requirements, and to be able to
provide sufficient appropriate evidence for the assertions in the combined management report.
The Supervisory Board is responsible for overseeing the Group's financial reporting process for the preparation
of the consolidated financial statements and of the combined management report.
Auditor's Responsibilities for the Audit of the Consolidated Financial
Statements and of the Combined Management Report
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a
whole are free from material misstatement, whether due to fraud or error, and whether the combined
management report as a whole provides an appropriate view of the Group's position and, in all material
respects, is consistent with the consolidated financial statements and the knowledge obtained in the audit,
complies with the German legal requirements and appropriately presents the opportunities and risks of future
development, as well as to issue an auditor's report that includes our opinions on the consolidated financial
statements and on the combined management report.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance
with Section 317 HGB and the EU Audit Regulation and in compliance with German Generally Accepted
Standards for Financial Statement Audits promulgated by the Institut der Wirtschaftsprüfer (IDW) will always
detect a material misstatement. Misstatements can arise from fraud or error and are considered material if,
individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users
taken on the basis of these consolidated financial statements and this combined management report.
We exercise professional judgment and maintain professional skepticism throughout the audit. We also:
• Identify and assess the risks of material misstatement of the consolidated financial statements and of
the combined management report, whether due to fraud or error, design and perform audit
procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to
provide a basis for our opinions. The risk of not detecting a material misstatement resulting from
fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional
omissions, misrepresentations, or the override of internal controls.
Reproduction of the Independent Auditor's Report
<20.00
Opinions
To MERCK Kommanditgesellschaft auf Aktien, Darmstadt
B)
B)
Israel
Pantheon Biosciences Ltd.
Yavne
<20.00
B)
B)
<20.00
Israel
Tel Aviv
<20.00
B)
B)
Israel
Israel
PxE Computational Imaging Ltd.
Sentaur Bio Ltd.
Lachish Darom
Pilltracker 2015 Ltd.
<20.00
Yavne
Israel
ARTSAVIT Ltd.
Yavne
<20.00
<0.5
B)
1
B)
Israel
Immunorizon Ltd.
Metabomed Ltd.
Yavne
B
B
Israel
MediSafe Project Ltd.
Haifa
<20.00
B
B
20.00
Report on the Audit of the Consolidated Financial
Statements and of the Combined Management
Report
B)
Yavne
325
Responsibility Statement
To the best of our knowledge, and in accordance with the applicable reporting principles, the consolidated
financial statements of the Merck Group, as of December 31, 2020, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the Group, and the combined management report of the fiscal
year 2020 includes a fair review of the development and performance of the business and the position of the
Group, together with a description of the material opportunities and risks associated with the expected
development of the Group.
Darmstadt, February 16, 2021
S. Aman
Stefan Oschmann
Belén Garijo
Peter Guenter
Responsibility Statement
Behmmm
flarus beukenst
Marcus Kuhnert
Reproduction of the Independent Auditor's Report
326
Reproduction of the Independent
Auditor's Report
Based on the results of our audit, we have issued the following unqualified audit opinion:
Independent Auditor's Report
Kai Beckmann
B
Marcus Kuhnert
Kai Beckmann
22.50
B)
B
Israel
Wiliot Ltd.
Caesarea
<20.00
B)
Marcus berhut
B
B) Companies which are affiliates from the Merck Ventures B.V. portfolio. As of December 31, 2020, the fair value of the M Ventures portfolio amounted
to € 234 million (December 31, 2019: € 275 million).
C) Closed-end funds classified as debt in accordance with IFRS 9.
D) This is an affiliate within the meaning of IFRS 11 (joint activity).
Darmstadt, February 16, 2021
S.
Stefan Oschmann
Belén Garijo
Peter Guenter
A) Companies opting for exemption as provided for by Section 264 (3) and Section 264b of the German Commercial Code.
Israel
Darmstadt
Germany
Latin America
B)
B)
100.00
Burlington
<0.5
<0.5
100.00
Dominican
St. Louis
United States
United States
<0.5
100.00
Wilmington
EMD Digital Holdings LLC
United States
North America
Fluka Chemical Corp.
TocopheRx, Inc.
<0.5
Republic
Merck Dominicana, S.R.L.
Merck, S.A.
100.00
Casablanca
<0.5
<0.5
49.00
Hydra
MDCA Pharma Promotion SARL
Merck Maroc S.A.R.L.
Nigeria
Panama
Morocco
Africa (MEA)
Middle East and
<0.5
100.00
Panama City
<0.5
100.00
Santo Domingo
Algeria
<0.5
100.00
Sigma-Aldrich Financial Services
Limited
Merck Cross Border Trustees Ltd.
United Kingdom
<0.5
100.00
London
BioControl Systems Limited
United Kingdom
(€ million)
Feltham
Fair value as
of Dec. 31.
2019
thereof:
Merck KGaA
(%)
Equity
interest (%)
Registered office
321
Scope of Consolidation
Notes
Consolidated Financial Statements
Company
Fair value as
of Dec. 31.
2020
(€ million)
Gillingham
100.00
<0.5
<0.5
<0.5
100.00
Gillingham
Sigma Chemical Co. Ltd.
United Kingdom
United Kingdom
<0.5
<0.5
<0.5
100.00
Merck Pension Trustees Ltd.
United Kingdom
<0.5
<0.5
100.00
Feltham
Merck Ltd.
United Kingdom
Feltham
Alcan Systems GmbH
<0.5
Lagos
50.58
St. Louis
Prolog Healthy Living Fund II, L.P.
United States
North America
B)
B)
22.06
C)
Basel
Switzerland
2
2
39.11
Muttenz
CAMAG Chemie-Erzeugnisse und
Adsorptionstechnik AG
Switzerland
B)
Vaximm AG
B
United States
St. Louis
Germany
(€ million)
2019
Fair value as
of Dec. 31.
2020
(€ million)
Fair value as
of Dec. 31.
thereof:
Merck KGaA
(%)
Equity
interest (%)
Prolog Healthy Living Fund, L.P.
Registered office
Scope of Consolidation
Notes
Consolidated Financial Statements
VI. Other equity positions
Company
Country
Footnotes follow at the end of the table
38.32
322
Merck Pharmaceutical and Life
Sciences Ltd.
25.35
Asceneuron SA
Caracas
Caracas
Representaciones MEPRO S.A.
Venezuela
Merck S.A.
Venezuela
Latin America
<0.5
<0.5
100.00
100.00
Darmstadt
Merck Foundation gGmbH
Germany
Germany
IV. Majority interest in non-controlled companies
<0.5
<0.5
100.00
100.00
Lausanne
100.00
<0.5
Switzerland
B)
B
29.44
Amsterdam
iOnctura B.V.
Netherlands
B
<0.5
B
Amsterdam
Calypso Biotech B.V.
Netherlands
countries
Other European
V. Associated companies not accounted for using the equity method for reasons of materiality
<0.5
<0.5
38.81
20.00
Wilaya de Tipiza
Novapharm Production SARL
<20.00
Swale
London
<20.00
BB
B)
B)
B)
Peratech HoldCo Limited
Storm Therapeutics Limited
North America
United States
United States
United States
United States
United States
United States
United States
Boston
<20.00
B)
B)
Seattle
<20.00
<0.5
<0.5
Akili Interactive Labs, Inc.
Allozyne, Inc.
Altoida, Inc.
Brompton-on-
B
B)
B)
Switzerland
Switzerland
United Kingdom
United Kingdom
United Kingdom
United Kingdom
FoRx Therapeutics AG
Inthera Bioscience AG
Artios Pharma Limited
Macrophage Pharma Limited
Basel
BBBB
<20.00
Schlieren
23.28
B
Cambridge
<20.00
B
Cambridge
20.31
B)
<20.00
Suwanee
B)
<20.00
B)
B
Wilmington
<20.00
B)
B
Wilmington
Wilmington
50.00
United States
Immunitas Therapeutics, Inc.
Wilmington
<20.00
B
United States
Indi Molecular, Inc.
Culver City
D)
<20.00
B
<20.00
B)
ApoGen Biotechnologies, Inc.
Seattle
<20.00
B)
B)
Bioling Inc.
San Diego
B)
<20.00
B)
United States
Galecto, Inc.
United States
ElectronInks Inc.
F-star Therapeutics, Inc.
Hydrochlor, LLC
Austin
B)
<20.00
Nijmegen
B)
Sankt Augustin
<20.00
1
1
Germany
Germany
PharmLog Pharma Logistik GmbH
PrintCity GmbH & Co. KG
Boenen
pharma mall Gesellschaft für
Electronic Commerce mbH
<20.00
3
Neuried
<20.00
<20.00
<0.5
<0.5
Other European
countries
2
Belgium
Germany
<20.00
<20.00
<0.5
<0.5
Germany
IOmx Therapeutics AG
Martinsried
<20.00
B)
B)
B
LegenDairy Foods GmbH
Berlin
<20.00
B)
B)
Germany
micropsi industries GmbH
Berlin
Germany
B)
ReWind Therapeutics N.V.
<20.00
B)
BBB
B)
France
Scipio Bioscience S.A.S.
Montrouge
<20.00
B)
<20.00
Netherlands
Leiden
<20.00
B)
Netherlands
Netherlands
Mosa Meat B.V.
SynAffix B.V.
Maastricht
<20.00
Anavo Therapeutics B.V.
Leuven-Heverlee
Paris
France
B)
B)
Finland
Abacus Diagnostica OY
Turku
<20.00
<0.5
<0.5
DNA Script S.A.S.
Finland
Turku
<20.00
B)
France
Aveni SACS
Massy
<20.00
B)
Forendo Pharma OY
B)
BB
B)
United States
Tioga Pharmaceuticals, Inc.
San Diego
<20.00
<20.00
< 0.5
< 0.5
United States
9
Vera Therapeutics, Inc.
<20.00
11
United States
Xilio Therapeutics, Inc.
Waltham
<20.00
B)
B)
Wilmington
Asia-Pacific
9
Wilmington
Robert W. Baird & Co.
Chicago
<20.00
C)
C)
United States
SeeQC, Inc.
Elmsford
<20.00
<20.00
United States
Sonde Health, Inc.
Boston
<20.00
B
B)
United States
Telios Pharma, Inc.
B
B)
(APAC)
Immutep Limited
Seoul
<20.00
<0.5
Latin America
Cayman Islands
CLEARInk Displays, Ltd.
Footnotes follow at the end of the table
Grand Cayman
Contruction Guarantee Cooperative
<20.00
B
Middle East and
Consolidated Financial Statements
Notes
Scope of Consolidation
324
Africa (MEA)
Algeria
B)
Australia
South Korea
35.00
Sydney
<20.00
<0.5
<0.5
China
Multitude Therapeutics Inc.
Shanghai
<20.00
D)
B)
China
Nanjing
<20.00
B)
Technology Co., Ltd.
Japan
Showa Denko Versum Materials 2 Co.,
Ltd.
Tokyo
Nanjing Xinchen Neuromorphic
B)
<20.00
Oakland
B)
United States
Metalenz, Inc.
Boston
<20.00
B
Footnotes follow at the end of the table
Country
BB
Company
Notes
Scope of Consolidation
323
Registered office
Equity
interest (%)
thereof:
Merck KGaA
(%)
of Dec. 31.
2020
(€ million)
Fair value as
Consolidated Financial Statements
Fair value as
of Dec. 31.
2019
(€ million)
B)
<20.00
B)
United States
Inorganic Intelligence, Inc.
Wilmington
<20.00
B)
United States
United States
BB
Kraig Biocraft Laboratories, Inc.
Lumiode, Inc.
<20.00
<0.5
<0.5
New York
<20.00
United States
MemryX Inc.
Ann Arbor
Ann Arbor
United States
Neurable Inc.
Boston
Menlo Park
<20.00
B)
B)
United States
Raze Therapeutics, Inc.
Cambridge
<20.00
101
B)
United States
Ribometrix Inc.
Durham
<20.00
B)
B)
United States
United States
Riffyn, Inc.
B)
226
<20.00
Germantown
<20.00
B)
B)
United States
Pacific Light & Hologram, Inc.
Wilmington
<20.00
B)
B)
United States
United States
United States
United States
Pictor Labs, Inc.
Plexium Inc.
Precigen, Inc.
Progyny, Inc.
Los Angeles
<20.00
B)
Wilmington
<20.00
B)
B)
Country
Berlin
Inuru GmbH
Adjustments¹
1,727
2,120
2,985
40.8%
Margin (% of net sales) 1
16.5%
16.7%
2,423
11.6%
17.0%
EBITDA¹
4,415
1,461
1,735
2,630
51.6%
13.1%
Profit after tax
2,481
8.6%
Business Development 2016 - 2020
This overview may include historically adjusted values in order to ensure comparability with the
reporting period.
€ million
2016
2017
2018
2019
Operating result (EBIT)¹
2020
Results of operations
Net sales
15,024
14,517
14,836
16,152
17,534
Change in %
334
2,615
1,324
27,652
34,805
32,516
-6.6%
thereof:
Goodwill
15,015
28,166
13,582
17,114
15,959
-6.8%
Other intangible assets
9,980
8,317
7,237
13,764
3,396
30,589
-4.6%
1,994
50.6%
Earnings per share (in €)
3.75
5.99
7.76
3.04
Non-current assets
4.57
Assets and liabilities²
Total assets
38,258
35,621
36,888
43,808
41,796
50.3%
9,221
Business Development 2016 - 2020
Wirtschaftsprüfer
3,800
4,385
5,201
18.6%
Margin (% of net sales) 1
29.9%
29.3%
4,246
25.6%
29.7%
Profit before income tax
2,154
2,129
Reproduction of the Independent Auditor's Report
331
• Conclude on the appropriateness of management's use of the going concern basis of accounting and,
based on the audit evidence obtained, whether a material uncertainty exists related to events or
conditions that may cast significant doubt on the Group's ability to continue as a going concern. If we
conclude that a material uncertainty exists, we are required to draw attention in the auditor's report
to the related disclosures in the consolidated financial statements and in the combined management
report or, if such disclosures are inadequate, to modify our respective opinions. Our conclusions are
based on the audit evidence obtained up to the date of our auditor's report. However, future events or
conditions may cause the Group to cease to be able to continue as a going concern.
27.1%
• Evaluate the overall presentation, structure and content of the consolidated financial statements,
including the disclosures, and whether the consolidated financial statements present the underlying
transactions and events in a manner that the consolidated financial statements give a true and fair
view of the assets, liabilities, financial position and financial performance of the Group in compliance
with IFRSS as adopted by the EU and the additional requirements of German commercial law pursuant
to Section 315e (1) HGB.
4,490
-12.5%
4,164
3,528
4,066
4,923
21.1%
Margin (% of net sales) 1
29.4%
EBITDA pre¹
28.7%
25.2%
28.1%
75
82
272
318
279
23.8%
[German Public Auditor]
• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or
business activities within the Group to express opinions on the consolidated financial statements and
on the combined management report. We are responsible for the direction, supervision and
performance of the group audit. We remain solely responsible for our opinions.
We communicate with those charged with governance regarding, among other matters, the planned scope and
timing of the audit and significant audit findings, including any significant deficiencies in internal control that we
identify during our audit.
• Evaluate whether the ESEF documents enable an XHTML reproduction with content equivalent to the
audited consolidated financial statements and the audited group management report.
• Evaluate whether the tagging of the ESEF documents with Inline XBRL technology (iXBRL) enables an
appropriate and complete machine-readable XBRL copy of the XHTML reproduction.
Further Information pursuant to Article 10 of the EU Audit Regulation
We were elected as group auditor at the annual general meeting on May 28, 2020. We were engaged by the
Supervisory Board on June 30, 2020. We have been the group auditor of MERCK Kommanditgesellschaft auf
Aktien without interruption since the financial year 1995.
We declare that the opinions expressed in this auditor's report are consistent with the additional report to the
Supervisory Board pursuant to Article 11 of the EU Audit Regulation (long-form audit report).
German Public Auditor Responsible for
the Engagement
333
The German Public Auditor responsible for the engagement is Dirk Janz.
KPMG AG
Wirtschaftsprüfungsgesellschaft
[Original German version signed by:]
[signature] Janz
Wirtschaftsprüfer
[German Public Auditor]
[signature] Jung
Frankfurt am Main, February 17, 2021
• Evaluate the consistency of the combined management report with the consolidated financial
statements, its conformity with [German] law, and the view of the Group's position it provides.
• Perform audit procedures on the prospective information presented by management in the combined
management report. On the basis of sufficient appropriate audit evidence we evaluate, in particular,
the significant assumptions used by management as a basis for the prospective information, and
evaluate the proper derivation of the prospective information from these assumptions. We do not
express a separate opinion on the prospective information and on the assumptions used as a basis.
There is a substantial unavoidable risk that future events will differ materially from the prospective
information.
Reproduction of the Independent Auditor's Report
• Obtain an understanding of internal control relevant to the assurance of the ESEF documents in order
to design assurance procedures that are appropriate in the circumstances, but not for the purpose of
expressing an assurance opinion on the effectiveness of these controls.
We also provide those charged with governance with a statement that we have complied with the relevant
independence requirements, and communicate with them all relationships and other matters that may
reasonably be thought to bear on our independence, and where applicable, the related safeguards.
From the matters communicated with those charged with governance, we determine those matters that were of
most significance in the audit of the consolidated financial statements of the current period and are therefore
the key audit matters. We describe these matters in our auditor's report unless law or regulation precludes
public disclosure about the matter.
Other Legal and Regulatory Requirements
Report on the Assurance in accordance with Section 317 (3b) HGB on the
Electronic Reproduction of the Consolidated Financial Statements and the
Combined Management Report Prepared for Publication Purposes
We have performed assurance work in accordance with Section 317 (3b) HGB to obtain reasonable assurance
about whether the reproduction of the consolidated financial statements and the combined management report
(hereinafter the “ESEF documents") contained in the file that can be downloaded by the issuer from the
electronic client portal with access protection, „merckkgaa-2020-12-31.zip" (SHA256-Hashwert:
241df0f72f0c90276cb0cc9737d36239903231e97d511f6e9f5ab49eee0dee53) and prepared for publication
Reproduction of the Independent Auditor's Report
332
• Evaluate the technical validity of the ESEF documents, i.e. whether the electronic file containing the
ESEF documents meets the requirements of Commission Delegated Regulation (EU) 2019/815 on the
technical specification for this electronic file.
purposes complies in all material respects with the requirements of Section 328 (1) HGB for the electronic
reporting format ("ESEF format"). In accordance with German legal requirements, this assurance only extends
to the conversion of the information contained in the consolidated financial statements and the combined
management report into the ESEF format and therefore relates neither to the information contained in this
reproduction nor any other information contained in the above-mentioned electronic file.
We conducted our assurance work on the reproduction of the consolidated financial statements and the group
management report contained in the above-mentioned electronic file in accordance with Section 317 (3b) HGB
and the Exposure Draft of the IDW Assurance Standard: Assurance in accordance with Section 317 (3b) HGB
on the Electronic Reproduction of Financial Statements and Management Reports Prepared for Publication
Purposes (ED IDW ASS 410) and the International Standard on Assurance Engagements 3000 (Revised)].
Accordingly, our responsibilities are further described below. Our audit firm has applied the IDW Standard on
Quality Management 1: Requirements for Quality Management in Audit Firms (IDW QS 1).
The company's management is responsible for the preparation of the ESEF documents including the electronic
reproduction of the consolidated financial statements and the group management report in accordance with
Section 328 (1) sentence 4 item 1 HGB and for the tagging of the consolidated financial statements in
accordance with Section 328 (1) sentence 4 item 2 HGB.
In addition, the company's management is responsible for the internal controls they consider necessary to
enable the preparation of ESEF documents that are free from material intentional or unintentional non-
compliance with the requirements of Section 328 (1) HGB for the electronic reporting format.
The company's management is also responsible for the submission of the ESEF documents together with the
auditor's report and the attached audited consolidated financial statements and audited group management
report as well as other documents to be published to the operator of the German Federal Gazette
[Bundesanzeiger].
The supervisory board is responsible for overseeing the preparation of the ESEF documents as part of the
financial reporting process.
Our objective is to obtain reasonable assurance about whether the ESEF documents are free from material
intentional or unintentional non-compliance with the requirements of Section 328 (1) HGB. We exercise
professional judgement and maintain professional scepticism throughout the assurance work. We also:
• Identify and assess the risks of material intentional or unintentional non-compliance with the
requirements of Section 328 (1) HGB, design and perform assurance procedures responsive to those
risks, and obtain assurance evidence that is sufficient and appropriate to provide a basis for our
assurance opinion.
In our opinion, the reproduction of the consolidated financial statements and the combined management report
contained in the above-mentioned electronic file and prepared for publication purposes complies in all material
respects with the requirements of Section 328 (1) HGB for the electronic reporting format. We do not express
any opinion on the information contained in this reproduction nor on any other information contained in the
above-mentioned file beyond this reasonable assurance opinion and our audit opinion on the accompanying
consolidated financial statements and the accompanying combined management report for the financial year
from January 1, 2020, to December 31, 2020 contained in the "Report on the Audit of the Consolidated
Financial Statements and the Combined Management Report" above.
7,653
1,633
Property, plant, and equipment
40.7%
Research and development costs
Dividend per share (in €)
1,976
1.20
2,108
2,227
2,268
40.9%
2,288
1.25
1.25
1.30
1.404
7.7%
Employees (number as of December 31)
50,348
0.9%
52,880
46.7%
36.7%
Business free cash flow¹
3,318
3,193
2,508
2,732
3,765
37.8%
39.5%
Net financial debt¹
10,144
6,701
12,363
10,758
-13.0%
Other key data
Equity ratio (in %)¹
11,513
73.8%
51,713
58,096
2021
Half-yearly
Financial Report
November
11
2021
Quarterly Statement Q3
Published on March 04, 2021
5
by Merck KGaA, Group Communications
64293 Darmstadt, Germany
Telephone: +49 6151 72-0
Fax: +49 6151 72-5577
Website: www.merckgroup.com
DESIGN
nexxar GmbH, Vienna
www.nexxar.com
Frankfurter Strasse 250,
-17.0%
August
Quarterly Statement Q1
1.9%
1 Not defined by International Financial Reporting Standards (IFRS).
2 Fiscal 2019 has been adjusted, see Note (2) "Reporting principles" in the Notes to the Consolidated Financial Statements.
3 According to the consolidated cash flow statement.
4 Proposal on the appropriation of profits for 2020.
FINANCIAL CALENDAR
March
2021
4
Annual Press Conference
April
23
Annual General Meeting
2021
May
12
2021
1,413
57,036
813
-1.4%
Trade receivables and other current
3,161
3,170
3,226
3,488
3,221
3,342
-7.7%
Cash and cash equivalents
939
589
2,170
781
1,355
73.6%
receivables
Equity
2,764
2,609
and equipment3
4,231
4,512
4,811
6,192
6,421
3.7%
2,632
Current assets
7,455
9,236
9,003
9,280
3.1%
thereof:
Inventories
7,670
14,050
3,294
919
2,790
2,215
4,550
2,357
-48.2%
Payments for investments in intangible assets³
132
3,788
392
208
150
-27.8%
Payments for investments in property, plant,
716
14,066
910
106
Current
Liquidity
17,914
17,233
13.2%
17,017
-5.0%
Financial liabilities
12,597
10,823
13,194
12,142
8,896
Non-current
8,809
8,033
6,681
8,644
9,785
-8.0%
50.5%
Profit after tax from discontinued operation
667
7
3
3
96.4%
0
Amortization of acquired intangible assets
28
-100.0%
Income tax
637
440
197
1,320
44.8%
-28
1,987
Payback period
€ million
857
An additional parameter to prioritize investments in property, plant & equipment, and intangible assets is the
payback period, which indicates the time in years after which an investment will generate positive net cash
flow.
Merck value added (MEVA)
Merck value added gives information about the financial value created in a period. Value is created when the
return on capital employed (ROCE) of the company or the business is higher than the weighted average cost of
capital (WACC). MEVA metrics provide us with a powerful tool to weigh investment and spending decisions
against capital requirements and investors' expectations.
Combined Management Report
Fundamental Information about the Group Internal Management System
39
Capital market-related parameters
Net income, earnings per share (EPS), and earnings per share pre (EPS pre)
Earnings per share are calculated by dividing profit after tax attributable to the shareholders of Merck KGaA
(net income) by the weighted average number of theoretical shares outstanding. The use of a theoretical
number of shares takes into account the fact that the general partner's capital is not represented by shares. To
provide an alternative view, we also report earnings per share pre, in which the effects of integration expenses,
IT expenses for selected projects, restructuring expenses, gains/losses on the divestment of businesses,
acquisition expenses, and other adjustments are eliminated. Moreover, amortization of acquired intangible
assets as well as impairment losses on property, plant & equipment, and intangible assets are eliminated. The
adjustment excludes impairment losses on intangible assets for acquired research and development (R&D)
projects below a threshold value of € 50 million. Income tax is calculated on the basis of the company's
underlying tax rate. The following table presents the reconciliation of net income to net income pre for the
calculation of EPS pre.
Reconciliation net income to net income pre¹
Change
€ million
Net income
Non-controlling interest
2020
2019
in %
1,119
Sustained employee development
-23.4%
5.56
1.14
20.6%
1 Not defined by International Financial Reporting Standards (IFRS).
Credit rating
The rating of our creditworthiness by external agencies is an important indicator of our ability to raise debt
capital at attractive market conditions. The capital market makes use of the assessments published by
independent rating agencies in order to assist debt providers in estimating the risks associated with a financial
instrument. We are currently assessed by Moody's, Standard & Poor's, and Scope. The most important factor
for the credit rating is the ability to repay debt, which is determined in particular by the ratio of operating cash
flow to net- or gross financial debt.
Dividend ratio
We pursue a reliable dividend policy with a target payout ratio based on EPS pre (see definition above) with the
aim of ensuring an attractive return for our shareholders.
40
Combined Management Report Fundamental Information about the Group Internal Management System
Other relevant/non-financial performance measures
Along with the indicators of the financial performance of the businesses, non-financial measures also play an
important role in furthering the success of the company. From a Group perspective, innovations in the
businesses as well as the promotion of a diverse workforce, especially at the leadership level, and sustained
planning for the filling of company-critical positions, are of particular importance.
Innovation
Innovations are the foundation of our business and will also be prerequisites for future success in changing
markets. We are continuously working to develop new products and service innovations for patients and
customers. Indicators for the degree of innovation are defined based on the specifics of the respective
businesses.
We believe that a diverse workforce strengthens our ability to innovate. We actively promote diversity among
our leaders to create an integrative culture that reflects our values and enables every employee to fulfill their
potential. We ensure that our ambitious corporate goals can be realized through strategic succession planning
for company-critical positions. To gauge the success of the related measures, we have introduced diversity and
succession planning as focus issues and non-financial indicators.
144
In addition to NPV and IRR, when looking at individual accounting periods, return on capital employed is an
important metric for the assessment of investment projects. It is calculated as the adjusted operating result
(EBIT) pre divided by the sum of property, plant & equipment, intangible assets, trade accounts receivable,
trade accounts payable, and inventories.
6.70
Earnings per share pre¹ in €
20.6%
497
Adjustments¹
407
372
34
9.2%
Income tax on the basis of the underlying tax rate¹
-974
-807
-262
-167
Non-controlling interests to be adjusted
-7
-3
-3
96.4%
Net income pre¹
2,914
2,417
20.7%
The internal rate of return is a further important criterion for the assessment of acquisition projects and
investments in property, plant & equipment, as well as intangible assets. It is the discount rate that makes the
present value of all future free cash flows equal to the initial investment or the purchase price of an acquisition.
A project adds value if the internal rate of return is higher than the weighted cost of capital including markups.
Return on capital employed (ROCE)
169
The main criterion for the prioritization of investment opportunities is the net present value. It is based on the
discounted cash flow method and is calculated as the sum of the discounted free cash flows over the projection
period of a project. The weighted average cost of capital (WACC), representing the weighted average of the
cost of equity and cost of debt, is used as the discount rate. Depending on the type and location of a project,
different markups are applied to the WACC.
NPV1 = Net present value (Kapitalwert).
ROCE¹ = Return on capital employed (Rendite auf das investierte Kapital).
BFCF¹ Business Free Cash Flow (Free Cash Flow des Geschäfts).
MEVA¹ = Merck value added (wirtschaftliche Wertschöpfung durch Merck).
EPS = Earnings per share (Ergebnis je Aktie).
EBITDA pre¹ = Earnings before interest, income tax, depreciation and amortization as well as adjustments (Ergebnis vor Zinsen, Ertragsteuern,
Abschreibungen und Anpassungen).
EBITDA pre margin, ROCE
IRR¹= Internal rate of return (interner Zinsfuß).
Payback period,
Capex
EBITDA pre margin,
POS, ROCE
eNPV, IRR,
Licensing
ROCE, MEVA
Net sales growth,
EBITDA pre margin
Net sales,
EBITDA pre,
BFCF
NPV, IRR,
EBITDA pre margin,
EPS, ROCE, MEVA
eNPV₁ = Expected Net present value (erwarteter Kapitalwert).
1 Not defined by International Financial Reporting Standards (IFRS).
%
€ million
1,383
16,152
2019
2020
17,534
Change
Net sales
POS¹ = Probability of success (Erfolgswahrscheinlichkeit).
M&A = Mergers & Acquisitions (Fusionen und Übernahmen).
€ million
Merck Group
Net sales are defined as the revenues from the sale of goods, services rendered to external customers, and
commission income and profit sharing from collaborations, net of value-added-tax and after sales deductions
such as rebates or discounts. Net sales are the main indicator of our business growth and therefore an
important parameter of external as well as internal performance measurement. In addition, organic sales
growth is used for internal performance management. Organic sales growth shows the percentage change in
net sales versus a comparative period, adjusted for exchange rate and portfolio effects. Exchange rate effects
may arise as a result of foreign exchange fluctuation between the functional non-euro currency of a
consolidated company and the reporting currency (euro). By contrast, portfolio effects reflect sales changes due
to acquisitions and divestments of consolidated companies or businesses.
Net sales
The three key performance indicators of net sales, EBITDA pre, and business free cash flow (to be replaced by
operating cash flow (OCF) in 2021) are the most important factors for assessing operational performance.
Therefore, we refer to these KPIs in the Report on Economic Position, the Report on Risks and Opportunities,
and the Report on Expected Developments. As the most important indicators of financial business performance,
the KPIs are key elements of our performance management system.
Key performance indicators of the Group and its businesses
36
Combined Management Report Fundamental Information about the Group Internal Management System
Net sales
8.6%
NPV, IRR,
MEVA
-19
We are pursuing a conservative financial policy characterized by the following:
Strategic finance and dividend policy
34
4
Strategy
Fundamental Information about the Group
We ensure that we meet our obligations at all times and adhere to a conservative and proactive funding
strategy that involves the use of various financial instruments. Our diversified and profitable businesses form
the basis for our strong and sustainable cash flow generation capacity. Moreover, we have several funding
resources in place. A € 2 billion syndicated loan facility, renewed in 2018, is in place until 2025 to cover any
unexpected cash needs.
Combined Management Report
• SDG 17: Partnerships for the Goals
• SDG 12: Responsible Consumption and Production
• SDG 9: Industry, Innovation, and Infrastructure
• SDG 8: Decent Work and Economic Growth
SDG 3: Good Health and Well-being
The goals we have set ourselves to 2030 and beyond will contribute to the attainment of the United Nations
SDGs. Our business activities contribute to the following five SDGs in particular:
Today and in the future, we are pursuing numerous initiatives and projects in these focus areas and measuring
our progress. These efforts ensure that sustainability will become a key indicator of our success across all our
business sectors. We are also planning to also link the long-term variable compensation of the Executive Board
from 2022 onward with the progress made toward achieving the company's sustainability goals.
You can find more information about our sustainability activities in the "Sustainability" chapter and in our
2020 Sustainability Report.
M&A
This credit line is a backup facility that should only be used in exceptional situations. In addition, we have a
commercial paper program with a volume of € 2 billion at our disposal. Within the scope of this program, we
can issue short-term commercial paper with a maturity of up to one year. Furthermore, in 2020, we used
bilateral bank loan facilities with first-class banks to optimize our funding structure. For the acquisition of
Versum Materials in 2019, Merck also agreed on a US$ 2.3 billion term loan, which was partially drawn and
further reduced in the course of 2020.
Maintaining long-term and reliable business relations with a core group of banks
Net income, EPS,
EPS pre, Dividend ratio,
Credit rating
Net Sales,
EBITDA pre, BFCF
Merck Group
Business
Abbreviations
Projects
The Value Creation and Financial KPI Pyramid, which summarizes our important financial performance
measures, reflects the comprehensive framework of financial KPIs to steer the businesses and prioritize the
allocation of cash resources. It consists of three managerial dimensions: Merck Group, Business, and Projects,
each of which requires the use of different indicators.
Additionally, as a general rule, the bond market represents a key element. The most recent bond issues took
place in January 2020 (€ 1.5 billion euro bonds) and September 2020 (€ 1.0 billion hybrid bond). The use of
various instruments provides a broad financing basis and addresses different investor groups.
As a global company with a diverse portfolio of products and services, we use a comprehensive framework of
indicators to manage performance. The most important key performance indicator (KPI) for measuring
performance is EBITDA pre.
35
Combined Management Report Fundamental Information about the Group Internal Management System
We are pursuing a sustainable dividend policy. Provided the economic environment develops in a stable
manner, the current dividend represents the minimum level for future dividend proposals. Our dividend policy
will follow the business development and earnings increases over the coming years. However, dividend growth
could deviate, for example, within the scope of restructuring or in the event of significant global economic
developments. We aim for a target corridor of 20% to 25% of earnings per share pre.
Sustainable dividend policy
The rating of our creditworthiness by external rating agencies is an important indicator of financial stability. A
strong investment-grade rating is an important cornerstone of our financial policy, as it safeguards access to
capital markets at attractive financial conditions. Merck currently has a Baal rating from Moody's, an A rating
from Standard & Poor's (S&P), and an A- rating from Scope, each with a stable outlook. Continuing to reduce
our debt after the Versum Materials acquisition is of utmost importance to us.
Strong investment-grade rating
We mainly work with a well-diversified, financially stable and reliable group of banks. Due to our long-term
business approach, bank relationships typically last for many years and are characterized by professionalism
and trust. The banking group consists of banks with strong capabilities and expertise in various products and
geographic regions. We regard these banks as strategic partners. Accordingly, we involve them in important
financing transactions.
Internal Management System
EBITDA pre
EBITDA pre is the main performance indicator measuring ongoing operational profitability and is used internally
and externally. To provide an alternative understanding of the underlying operational performance, it excludes
from the operating result depreciation and amortization, impairment losses and reversals of impairment losses,
as well as adjustments. These adjustments are restricted to the following categories: integration expenses, IT
expenses for selected projects, restructuring expenses, gains/losses on the divestment of businesses,
acquisition expenses, and other adjustments. The classification of specific income and expenses as adjustments
follows clear rules and underlies strict governance at the Group level. Within the scope of internal performance
management, EBITDA pre allows for necessary changes or restructuring without penalizing the performance of
the operating business. The following table shows the composition of EBITDA pre in fiscal 2020 compared to the
previous year. The IFRS figures have been modified to reflect the elimination of adjustments included in the
respective functional costs.
Combined Management Report Fundamental Information about the Group
4.3%
-1,045
109
-1,154
-1,090
98
Internal rate of return (IRR)
Research and development costs
Administration expenses
-4,566
10
-4,576
-4,147
60
-4,207
Marketing and selling expenses
-9.2%
5.4%
-2,288
-2,262
-25
Other operating income and
assets (net)
-24.8%
-8
0
-8
27
-6
-6
impairment losses on financial
Impairment losses and reversal of
1.0%
-2,239
29
-2,268
-0
10,202
56
10,145
IFRS
Pre¹
IFRS adjustments
Net sales
€ million
of
of
adjustments
Elimination
Change
20192
2020
Reconciliation EBITDA pre¹
Merck Group
37
Internal Management System
Elimination
Pre¹
Pre¹
17,534
10,752
53
10,699
Gross profit
14.0%
-5,950
56
-6,006
-6,782
53
-6,835
Cost of sales
8.6%
16,152
16,152
17,534
0
• Water and resource intensity
• Climate change and emissions
-1,188
• Sustainability and transparency in the supply chain
6.4%
1 Not defined by International Financial Reporting Standard (IFRS).
Business free cash flow (BFCF)
Business free cash flow comprises the major cash-relevant items that the operating businesses can influence
and that are under their full control. It comprises EBITDA pre less investments in property, plant, equipment,
software, advance payments for intangible assets, changes in inventories, trade accounts receivable, and
receivables from royalties and licenses. To manage working capital on a regional and local level, the businesses
use the two indicators "days sales outstanding" and "days in inventory".
Operating cash flow (OCF) from 2021
For fiscal 2021, the key performance indicator of business free cash flow will be replaced by operating cash flow
(OCF). In the future, this means that our internal indicator for controlling cash flow will be the same as the
externally relevant indicator OCF, which we already report.
Combined Management Report Fundamental Information about the Group Internal Management System
thereof: acquisitions/divestments
Merck Group
38
Change
€ million
2020
2019
€ million
%
Business free cash flow¹
EBITDA pre¹
-4.6%
16.8%
-10
10
84
-84
Other adjustments
9
-9
thereof: exchange rate effects
13
EBITDA pre¹
5,201
5,201
4,385
4,385
18.6%
thereof: organic growth¹
-13
5,201
4,385
817
Elimination of acquisitions/divestments
-45
346
-391
0.0%
Business free cash flow¹
3,765
5.7%
2,732
37.8%
1 Not defined by International Financial Reporting Standard (IFRS).
2 Excluding payments for low-value leases and interest components included in lease payments.
Investments and value management
Sustainable value creation is essential to secure the long-term success of the company. To optimize the
allocation of financial resources, we use a defined set of parameters as criteria for the prioritization of
investment opportunities and portfolio decisions.
Net present value (NPV)
• Securing our social license to operate in all regions
1,033
-8
-136
-144
18.6%
Investments in property, plant & equipment and software, as
well as advance payments for intangible assets
-1,439
-1,026
-412
40.2%
Changes in inventories
48
-577
626
-108.3%
Changes in trade accounts receivable as well as receivables
from royalties and licenses
144
-259
403
-155.3%
Lease payments²
Acquisition-related adjustments
divestment of businesses
Financial flexibility and a conservative funding strategy
6
Megatrends like Internet of things (IoT), AI, and autonomous driving lead to high innovation pressure and drive
the growth of data from every side. The global data volume grows exponentially at around 30% annually; the
"data explosion" will transform electronics far beyond what today's systems can handle. Data needs to be
generated, transferred, processed, stored, and made comprehensible for humans through smart interfaces. Our
strategy is to cover all aspects of this data handling and to enable processes by providing customized solutions
for the production of innovative electronic components. We are the company behind the companies, advancing
digital living. Performance Materials targets mainly the electronic materials market with a focus on the
semiconductor and display industries in order to participate in the growth of data-driven electronic solutions.
The Bright Future program ensures the successful transformation of Performance Materials by driving the
realization of our strategy. The main outcomes of the program are the shift of our portfolio into growing
electronics segments, safeguarding our margin ambition, and changes in organization and culture within
Performance Materials. The absolute growth of Semiconductor Solutions and future growth in OLED are
expected to outweigh the decline in liquid crystal sales. We expect to stabilize the EBITDA pre margins at
around 30% in the long-term, well above the industry average. Performance Materials expects an organic sales
growth in the range of 3% to 4% (CAGR) per year in the mid-term. With Versum Materials and Intermolecular,
we are able to obtain a leading position in the electronic materials market. Overall, our strategy realization
within the electronics market is well on track, and we are working on measures in Surface Solutions to manage
the Covid-19 effects and to stabilize the business.
In 2019, we acquired Versum Materials, a leading industry player, and Intermolecular, a testing and
prototyping expert for materials innovation. With those two acquisitions we have further expanded our offerings
in innovative and critical technologies for the electronics industry. Based on our best-in-class portfolio of
products and services, we are well positioned in high-growth segments. Our industry-spanning customer base
with a strong focus on thought and investment leaders in the industry allows us to target growth above the
highly attractive semiconductor market.
32
Strategy
Combined Management Report Fundamental Information about the Group
Performance Materials is currently undergoing a major transformation by repositioning its overall business to
that of a global electronic materials, equipment, and service provider. The target markets are attractive due to
their long-term growth and value potential. The electronic content of any product is increasing; electronics are
now part of nearly every product, and our diversification is securing long-term stability. Effective
March 4, 2021, we plan to change the name of the Performance Materials business sector to Electronics.
Performance Materials
Sustainability Strategy
Staying this course will reinforce our position as a leading, innovation-driven, global supplier of tools,
technologies, and services. In 2021, we will continue to serve our customers combatting the Covid-19
pandemic and support research labs in adjusting to new ways of working. Our innovations will enable next-
generation bioprocessing, streamline testing workflows, and drive new advances in biology and chemistry. We
are investing for our future, especially to build scale in bioprocess services such as contract development and
manufacturing services, and testing of monoclonal antibodies, viral vectors, and antibody-drug conjugates. Our
pursuit of profitable growth from our strong core positions us to sustain momentum and shape the future of the
life science industry.
•
• Establish new growth pillars and capabilities in gene editing, cell and gene therapies, contract
development and manufacturing services, and digitization while exploring new ways to address
bottlenecks and inefficiencies in drug discovery and development.
• Strengthen the core organization by expanding our long-held positions in chemistry, lab water and
bioprocessing, as well as enhancing our e-commerce and supply chain capabilities.
Our aspiration is to sustain this momentum, which is reflected in our three-pillar strategy:
-
-
We have become one of the top players in the industry and set the standard for financial performance and
innovation, with average annual revenue growth of 6% to 8% since 2016. Our Research Solutions business unit
holds solid positions across chemistry and biology consumables, which we are enhancing with innovations such
as multiplex, high-sensitivity protein detection kits and genome-editing tools. Within our Process Solutions
business unit, we offer a complete suite of products for monoclonal antibody production, hold a strong position
in single-use systems, and are gaining scale in contract development and manufacturing services. Our Applied
Solutions business unit provides the broadest range of reference materials and continues to strengthen our
established position in lab water with sustained momentum from recent launches and new digital offerings.
The Covid-19 pandemic, rather than changing our outlook, has reinforced that we are going in the right
direction. Our purpose to solve the toughest problems in life science in collaboration with the global scientific
community has strengthened our resolve to accelerate access to better health for people worldwide. Whether
it is in labs, on the manufacturing floor with templates to bring therapeutic breakthroughs to scale, or at the
point-of-care as patients worldwide receive vaccines, therapies and diagnostic tests, this year has put our
purpose into action.
Sustain momentum of our core through operational excellence and investments in our capacity and
capabilities, such as expansions at our global manufacturing and production sites as well as testing
labs.
Sustainability is enshrined in our strategy
Humankind is being confronted with global societal challenges. Issues such as climate change, resource
scarcity, a growing global population, demographic change, and insufficient access to healthcare in low- and
middle-income countries are becoming increasingly relevant.
Our businesses create long-term value. Our aim is to reconcile ecological, social, and societal aspects for our
company, for our stakeholders, and for society as a whole. Merck has been guided by strong values for more
than 350 years and across many generations. Sustainability has always been a high priority in all our business
activities.
Sustainability culture and values
-6
•
Impact of our technologies and products on health and well-being
•
• Sustainable innovations and technologies for our customers
In order to achieve our sustainability goals, we are concentrating on seven focus areas:
By 2040, we will be climate-neutral and reduce our resource consumption.
•
• In 2030, we will achieve progress for more than one billion people through sustainable science and
technology.
We have defined three new goals with our sustainability strategy:
New sustainability goals
33
Combined Management Report Fundamental Information about the Group Strategy
Our new strategic sustainability goals build on what we have achieved in recent years. The rapidly growing
challenges in society and the environment demand a clear perspective for the years ahead. This is why we have
enshrined sustainability as an essential component of our company's overall strategy. Through our business
activities, we want to be economically successful and create value for society. At the same time, we endeavor
to avoid generating subsequent costs for society.
Our sustainability strategy centers on a commitment to using science and technology to achieve sustainable
progress for humankind. With this we help to solve the problems described in the United Nations' 17 global
Sustainable Development Goals (SDGs). Another key objective is to make our business model resistant to
challenges and sudden changes. For example, this includes protecting our supply chains against continued
resource scarcity in order to ensure that we can reliably provide our customers and patients with our products
and medicines.
We believe that sustainable business and profitable growth go hand in hand: The only way for us to secure our
future competitiveness is by creating sustainable added value for society.
Life Science continues to deliver above-market growth and profitability through a strategic pursuit of leading
positions in attractive market segments.
Life Science
By 2030, we will integrate sustainability into all our value chains.
Strategy
EBITDA¹
4,923
4,066
Restructuring expenses
162
-162
120
impairment losses
-120
108
95
-95
Gains (-)/losses (+) on the
-10
In this context, strategic collaborations are an integral part of delivering on our commitment to transform the
lives of patients living with serious unmet medical needs. We recognize the value of collaboration in the
research and development of breakthrough therapies, as well as in strengthening our current portfolio. Here,
we focus on balancing the right blend of internal capabilities and external partnerships (for example, with Pfizer
Inc. on BavencioⓇ and with GlaxoSmithKline plc on bintrafusp alfa) and on building strong collaborations with
other leaders in the industry.
10
Integration expenses/IT expenses
-6.6%
-108
-9
Fundamental Information about the Group
Combined Management Report
1,937
123
104
38.0%
expenses
Operating result (EBIT)¹
31
2,120
Depreciation/amortization/
impairment losses/reversals of
1,938
2,985
1,946
1,810
-128
0.2
In 2020, we successfully finished implementing a sustainable water management system across all high water
use sites, a process we started in 2016. At sites that consume large quantities of water and are also located in
water-stressed areas, we reduced our water use by 27% relative to 2014, surpassing our original target of
10%.
Building on this success, in 2020 we developed a new set of goals for 2025 and 2030 aimed at enhancing the
water efficiency of our processes and reducing the environmental impacts of our waste water. For instance, we
defined an intensity score aimed at boosting water efficiency, which we intend to improve by 10% by 2025
(2019 baseline). Furthermore, it is our stated goal to exceed regulatory water-quality requirements. In an effort
to minimize our negative environmental impacts, we plan to reduce potentially harmful emission residues in our
waste water to below a scientifically defined threshold by 2030. In 2020, CDP gave our Water Security efforts a
B rating (2019: B).
Water is not the only resource growing scarcer, which makes it imperative for us to use raw materials as
efficiently as possible while simultaneously reducing our waste. We use a variety of methods for recycling,
recovering and disposing of the waste we generate, each of which has a different impact on the environment.
To systematically account for these effects, we have put in place the Merck Waste Score. We aim to reduce this
score by 5% by 2025 compared with 2016. In order to support waste reduction, we are also constantly
evaluating ways to enhance our production processes and waste disposal methods. By the end of 2020, we had
achieved a 4.6% reduction.
Combined Management Report
50
Research and Development
50
Research and Development
Science is at the heart of everything we do. We conduct research and development (R&D) worldwide in order to
develop new products and services to improve the quality of life of patients and satisfy the needs of our
customers. Further optimizing the relevance and efficiency of our research and development activities - either
on our own or in cooperation with third parties - is one of our top priorities.
In 2020, approximately 7,900 employees worked for Merck, researching innovations to address long-term
health and technology trends in both established and growth markets (2019: approximately 7,800).
Fundamental Information about the Group
Water and resource intensity
49
Combined Management Report
Additional facts and figures can be found in our Sustainability Report 2020.
3 Light and heavy fuel oil, liquefied petroleum gas (LPG), diesel, biodiesel, gasoline and kerosene.
2 Since 2018, our reported figures have excluded the Consumer Health business, which was divested on December 1, 2018.
1 In line with the Greenhouse Gas Protocol, for all previous years (up to the 2006 baseline) energy consumption has been calculated based on the current
corporate structure as of December 31 of the reporting year and retroactively adjusted for acquisitions or divestments of (parts of) companies, or for
changes in emission factors (portfolio-adjusted). Exceptions to this are company units that were added as a result of the acquisition of Versum
Materials. Figures dating back to the 2006 baseline are not available for these units.
Steam, heat, cold
0.2
0.1
0.0
0.1
Electricity
0.1
Expenditures for R&D amounted to € 2.3 billion in 2020 (2019: € 2.3 billion). In our R&D activities, we focus on
both in-house research and external collaborations that enable us to increase the productivity of our research
while simultaneously reducing financial outlay. The organizational setup of our R&D activities reflects our
structure with three business sectors. With our Healthcare business sector's research pipeline, we aspire with
our research pipeline to make a positive difference for patients - always with the goal to help create, improve,
and prolong life. Our main research areas include oncology, immuno-oncology, and immunology including
multiple sclerosis. In the Life Science business sector, our research activities focus on technologies for
laboratory and life science applications as well as the support of new developments. We continue to focus on
digitized and automated labware, DNA purification for downstream applications and emerging chemical
synthesis, as well as software for our BioContinuum™ Platform to accelerate Biopharma 4.0. We remain
dedicated to delivering on our core competencies, such as filtration, pure lab water, and diagnostic solutions.
The main focus of our Performance Materials business sector's research is on the development of innovative
materials and technologies required for the latest generations of memory chips and processors. In addition,
Performance Materials develops materials for OLED and LC displays as well as new effect pigments for use in
the automotive, cosmetics and printing industries.
Fundamental Information about the Group Sustainability
Research and Development Costs
37
Healthcare
The ratio of research expenditure to Group sales was 13.0% (2019: 14.0%). The decline is due to the positive
sales development.
0.0
0.9%
20
2,268
2,288
4.3%
3
59
62
2.4%
6
267
274
€ million
13.3%
313
-1.5%
-26
1,666
1,640
%
€ million
2019
2020
Change
Total
Corporate and Other
Performance Materials
Life Science
276
Combined Management Report. Fundamental Information about the Group Sustainability
With our sustainability strategy, we are pursuing three specific goals across seven focus areas. We are currently
carrying out numerous projects and initiatives in these focus areas and will continue to do so in the future. This
framework reflects those fields in which our business operations can contribute most to achieving five of the
SDGs.
*
လ
Healthcare*
Measuring sustainability
In order to assess the sustainability of our products, technologies, and business activities, we have developed
Sustainable Business Value (SBV), a method that enables us to evaluate our positive and negative impacts on
society along our entire value chain. In addition to ESG (Environmental, Social, Governance) parameters, SBV
also incorporates economic, ethical, and digital aspects as well as the benefit of the product itself. This gives
rise to a monetary value that quantifies, for example, the societal benefits a product offers, which helps us
drive sustainability across our business operations and position ourselves for future success.
* The contents of this chapter or section are voluntary and therefore not audited. However, our auditor has read the text critically.
Combined Management Report
Fundamental Information about the Group Sustainability
42
Innovations and technology for our customers
We believe that we can harness science and technology to help tackle many global challenges. From supplying
innovative therapies and empowering scientists around the world to advancing digital living, our business
models are oriented around creating both business and societal value. Our goal is to minimize and ultimately
exclude negative sustainability impacts - not only during production but also during their use. These efforts
also help our customers achieve their own sustainability goals.
Life Science: Reducing environmental impacts throughout the product life cycle
-
We work to decrease the environmental impacts of our products. This applies to the entire life cycle from
production and use through to the disposal of our products. To reduce the environmental impact of our devices
and instruments during their use by customers, we apply our Design for Sustainability (DFS) program. This
comprehensive approach keeps sustainability criteria in the foreground during product development, capturing
the improvements in a scorecard to help inform customers. When developing a new product, our aim is to
improve as many of these criteria scores as possible. Beginning with the concept stage, product teams identify
potential environmental impacts and opportunities to make improvements. By the end of 2020, 38% of these
product development projects met at least three or more sustainability criteria.
In addition, our scientists are developing innovative solutions in line with the 12 Principles of Green Chemistry
developed by chemists Paul T. Anastas and John C. Warner. The objective is to enable research that is as
environmentally conscious as possible and to minimize adverse effects on human health. More than 1,100
greener alternatives to conventional products have been made available to date, such as the new bio-based
solvent Cyrene™. Derived from waste cellulose, this product serves as an alternative to widely used solvents,
which are subject to increasing regulatory restrictions due to their associated toxicity. Cyrene™ was awarded an
EU Horizon 2020 grant to expand the production of the material in Europe.
17
With DOZNⓇ, we developed a web-based quantitative Green Chemistry analysis tool. DOZNⓇ 2.0 now brings
new possibilities for sustainable product design to our customers and empowers them with data to make more
environmentally friendly choices in their sourcing and development processes.
Performance Materials: Increasing the sustainability of end products
Thanks to our liquid crystal window (LCW) technology, windows can be darkened in a matter of seconds. We
commercialize this technology under our eyrise® brand. These darkened windows regulate the heat generated
by direct sunlight. Estimates based on planned customer projects show that this technology can reduce the
energy consumed by building climate control systems and lighting by up to 10%, thereby replacing
conventional shading. In addition, the people behind these windows feel more comfortable and work more
efficiently thanks to the positive effects of natural daylight.
Over the past decade, our semiconductor materials customers have been increasing their efforts to use more
environmentally sustainable materials in their chip manufacturing, while simultaneously improving the
performance of their computer chips at lower costs. We have responded to this challenge by developing next-
generation colloidal silica products using at least 30% less colloidal silica. This reduces the volume of product
needed, which in turn shrinks our environmental footprint.
43
Combined Management Report
Fundamental Information about the Group Sustainability
In the cosmetics industry, we are addressing the continuing trend towards ingredients that meet stringent
sustainability criteria. Our portfolio of fillers eliminates the need for microplastic particles, which are highly
resistant to environmental biodegradation, fragment into ever smaller pieces, and do not dissolve in water. Our
cosmetic formulations comply with strict criteria. By the end of 2020, 78 of our cosmetic pigments and active
ingredients had been certified according to Ecocert's COSMOS standard for organic and natural cosmetics.
Contribution of our technologies and products to health and quality of life
At least half of the world's population still does not have adequate access to health. We are striving to make
health solutions affordable and raise awareness of diseases. Our aim is to create a healthier future for all. We
use innovation in science and technology to improve the health of underserved populations mainly in low- and
middle-income countries. To achieve this, we leverage our expertise from all business sectors and collaborate
closely with a wide range of partners. We also participate in industry-wide initiatives to develop new
approaches.
Our Global Health strategy
Our Global Health strategy focuses on the elimination of schistosomiasis and malaria as public health problems
and the prevention and control of non-communicable diseases, such as diabetes and hypertension in low- and
middle-income countries. Our projects and programs are guided by the concept of "shared value": We create a
measurable and sustainable positive impact on society through our products and services. For us, this means
developing business models that increase the value and competitiveness of our company by solving unmet
health needs and strengthening local health systems.
Our fight against schistosomiasis
Schistosomiasis, a neglected tropical disease (NTD), is one of the most prevalent parasitic infections in Africa,
placing a significant burden on public health and the local economy. The disease affects almost 240 million
people worldwide, with more than 90% of cases occurring in Africa. An estimated 200,000 people die every
year from long-term effects of schistosomiasis, such as liver and kidney infections, bladder cancer, genital
schistosomiasis, and anemia. School-aged children are particularly vulnerable to the disease.
Our ultimate aim is to eliminate the disease as a public health problem. To help achieve this goal, we have
adopted an integrated schistosomiasis strategy that we are implementing in close collaboration with multiple
partners worldwide. This approach focuses on five building blocks: treatment; research and development
(R&D); water, sanitation and hygiene (WASH); health education; and advocacy and partnerships.
As part of our longstanding partnership with the World Health Organization (WHO), we are committed to
provide up to 250 million praziquantel tablets per year for distribution in endemic countries. To date, our tablets
have been distributed in 47 endemic African countries to treat school-aged children. In 2020, we donated
around 226 million tablets for distribution in 30 countries, 27 of which are in sub-Saharan Africa. Together with
the Global Schistosomiasis Alliance, we held a consultation meeting with experts and stakeholders and provided
feedback to WHO ahead of the new NTD Roadmap passed by the World Health Assembly in autumn 2020.
To ensure that our packaging impacts the environment as little as possible, we developed a sustainable
packaging strategy for Life Science called SMASH. We have set four goals: reducing the amount of packaging,
achieving zero deforestation, improving plastic sustainability, and maximizing recycling. For instance, thanks to
the collaboration with our vendors and customers, we have conducted several product and distribution
packaging improvement projects that will cut plastic and corrugated packaging by more than 100 metric tons
annually. Additionally, for the shipment of our glass reagent bottles, we have been working continuously to
replace expanded polystyrene inserts with molded pulp inserts, which resulted in the use of more than three
million molded pulp inserts in 2020.
41
12
8 12 17
Go
Sustainability*
Through our business operations, we create long-term value while seeking to balance environmental, social,
and business aspects - for our company, for our stakeholders, and for society. Sustainability is an essential
component of our Group strategy. In 2020, we formulated new, strategic sustainability goals, which build
on what we have achieved in recent years (for further information, see "Strategy”). The separate, combined
non-financial (Group) report has been integrated into our 2020 Sustainability Report.
Our sustainability strategy revolves around leveraging science and technology to achieve progress for mankind.
With this we are help to to solve the problems described the United Nations' (UN) 17 global Sustainable
Development Goals (SDGs). Through our business activities, we want to be economically successful and create
value for society. At the same time, we endeavor to avoid generating subsequent costs for society.
DEDICATED TO
HUMAN PROGRESS
In 2030, we will achieve human
progress for more than one billion
people through sustainable science
and technology.
OUR FOCUS AREAS
Sustainable innovations and
technology for our customers
Impact of our technologies and
products on health and
well-being
CREATING
SUSTAINABLE VALUE
CHAINS
By 2030, we will integrate sustainability
into all our value chains.
OUR FOCUS AREAS
Sustainability culture and
values
9
Sustainable and transparent
supply chain
FOCUS SDGs
REDUCING OUR
ECOLOGICAL FOOTPRINT
By 2040, we will achieve climate neutrality
and reduce our resource consumption.
OUR FOCUS AREAS
Climate change and emissions
Water and resource intensity
FOCUS SDGs
FOCUS SDGs
3
8 9
17
W
M
M
Securing our social license to
operate in all regions
With our Healthcare research pipeline, we aspire to make a positive difference for patients - always with the
purpose to help create, improve, and prolong life. Our main focus areas include oncology, immuno-oncology,
and neurology & immunology.
As a participant in the United Nations Global Compact, we have committed ourselves to 10 principles based on
key UN conventions regarding human rights, labor standards, environmental protection, and anti-corruption.
We actively support the implementation of the principles within our sphere of influence and regularly
communicate on our progress. We follow the guidelines of the Responsible Care® Global Charter, which is an
initiative of the International Council of Chemical Associations (ICCA). Responsible Care® aims to help the
chemical industry enhance its environmental, health, and safety performance. We are also a member of the
Chemie³ initiative in Germany, a collaboration between the German Chemical Industry Association (VCI), the
German Employers' Federation of the Chemical Industry (BAVC), and the German Mining, Chemical, and Energy
Industrial Union (IG BCE). This globally unique alliance seeks to make sustainability a core part of the chemical
industry's guiding principles and to drive the sector's position within the German economy as a key contributor
to sustainable development. In implementing sustainability in our business, the frequent dialogue with our
various stakeholders is very important to us. These stakeholders include employees, business associates, the
Merck family, investors, regulatory agencies, industry associations, and non-governmental organizations
(NGOs). This continuous exchange creates transparency and clearly demonstrates how we live our values.
44
1,288
1,261
1,205
Direct energy consumption
2,372
2,178
2,158
2,073
Total energy consumption
2020
20193
2018²
2017
In gigawatt hours
Energy Consumption¹
Energy management plays a key role in energy efficiency and climate impact mitigation. Our production sites in
Darmstadt and Gernsheim - Germany, account for around 25% of our global energy consumption. Both sites
fulfill the requirements of ISO 50001, the international standard for energy management systems. Currently,
13 of our production sites have a certified energy management system.
6 The figures presented here have been calculated in accordance with the market-based method.
5 eq = equivalent.
4 Includes Versum Materials as of 2020. Excluding Versum Materials, our greenhouse gas emissions totaled 563 kilotons in 2020.
3 Since 2018, our reported figures have excluded the Consumer Health business, which was divested on December 1, 2018.
2 Baseline for our emission targets is 2006.
13
304
289
13
13
304
312
13
402
1,706
1,265
Natural gas
1,140
1,194
Over time, we have developed a portfolio of R&D projects on schistosomiasis. These include the development of
a new pediatric formulation of praziquantel to treat children under the age of six. This project, implemented
through a consortium of partners, is in Phase III clinical development to generate data for registration. Other
projects include the setup of a platform to identify new drugs to prevent and treat schistosomiasis and the
development of highly sensitive diagnostic methods for schistosomiasis and other neglected tropical diseases.
In 2020, we entered into a strategic alliance with Janssen Pharmaceuticals Inc. to develop an artificial
intelligence-based diagnostic tool and new technologies for transmission control.
0.1
Total energy sold
163
145
148
145
Steam, heat, cold
944
745
749
723
Electricity
1,107
341
890
868
Indirect energy consumption
35
33
34
33
Biomass and self-generated renewable energy
52
33
33
32
Liquid fossil fuels³
1,178
1,222
897
332
341
352
Throughout the entire life cycle of our medicines, we provide patients and physicians with up-to-date safety
information based on benefit-risk evaluations. Patient safety is a top priority in everything we do. To this end,
company experts process safety-relevant information from various sources such as clinical trials, adverse
reaction reports, and medical and scientific literature. Our Global Patient Safety unit continuously monitors and
evaluates the safety and benefit-risk ratio of our pharmaceutical products worldwide (pharmacovigilance). Our
Medical Safety and Ethics Board oversees the safety and benefit-risk assessments of all our commercialized
products and investigational drugs worldwide. For the safety of patients, we have established a global
pharmacovigilance system that we are always working to enhance.
Chemical product safety is all about protecting human health and the environment from negative impacts
resulting from the use of chemical products throughout their entire life cycle. We support developments related
to the European Green Deal and are preparing to implement the European Commission's Chemicals Strategy for
Sustainability in our company. During the import, manufacture, and commercialization of our products, we
provide relevant information to our customers and the public. This helps them understand the hazards, how to
mitigate risks, and how to use the products safely, in line with local and regional regulatory requirements. We
have automated and standardized most of our hazard communication processes within our business sectors.
Information is communicated via the pertinent digital channels, the Safety Data Sheets, and the labels of our
products.
The safety of our products is at the core of our sustainability efforts. When used properly, they must pose no
risk to customers, patients, consumers, or the environment. We regularly examine safety throughout the
product's entire life cycle and continuously take steps to minimize risks. We provide patients, consumers, and
customers with extensive informational material so that they can use our products in a safe, responsible, and
proper manner.
Safety of our products
We do our best to mitigate the ethical, financial, and legal risks of our business activities, thereby advocating
for and ensuring our social license to operate. To this end, we have comprehensive structures and systems in
place to ensure compliance with legal requirements, along with ethical, social, and ecological standards in all
the countries where we operate. In view of the dynamic environment of change across all regions with respect
to our social license to operate, we pay special attention to regional aspects.
Securing our social license to operate in all regions
We expect all our suppliers to comply with the labor, social, and environmental standards defined in our
Responsible Sourcing Principles, which are primarily derived from the core labor standards of the ILO
(International Labour Organisation) and the UN Global Compact. We are continuously working to ensure
adherence to our supply chain standards. As a member of the industry initiative Together for Sustainability
(TFS), we have access to the supplier self-assessments and audit results shared among all member companies,
who in turn abide by all restrictions stipulated within antitrust law.
Fundamental Information about the Group Sustainability
Combined Management Report.
46
By securing social, ethical, and environmental standards, sustainability is a key aspect of managing supply
chains. We procure many raw materials, packaging materials, technical products, components, and services
worldwide. We aim to promote supply chain stability while providing our customers with high-quality products
and services. Our supplier management focuses on compliance with fundamental environmental and social
standards in addition to high-quality, delivery reliability, and competitive prices. To achieve this, we have
introduced relevant strategies, processes, and guidelines that we are continuously improving to prevent
violations of supply chain standards. We make sure that all legal requirements are considered and
corresponding measures are initiated where necessary. In this context, we are closely monitoring the
developments relating to a potential supply chain law and the resulting requirements. To ensure supply
security, we select our suppliers based on diverse criteria such as country risk, material risk, supplier risk, and
business criticality. This helps our sourcing employees to identify potential mitigation actions with relevant
suppliers and work on improvements.
Sustainability and transparency in the supply chain
In 2020, Covid-19 prompted us to take our science education program virtual; our Curiosity Labs™ at Home
program features 20 simple experiments that can be conducted using materials commonly found around the
home. Each experiment is explained via video and comes with step-by-step instructions. In 2020, the program
generated more than 2.7 million video views, reaching users in 132 countries.
Because education is key to raising awareness for sustainability, we focus our community engagement in part
on the holistic promotion of science and education. In doing so, we nurture characteristics that are essential to
our business activities as a science and technology company, namely creativity, enthusiasm for new
discoveries, curiosity, and the courage to transcend boundaries. For instance, we grant scholarships and,
through the volunteer efforts of our employees, help make science classes more engaging.
Attractive workplace for our employees
Boosting scientific education
Sustainability has been part of our company culture for centuries and is reflected in our values. Our new
sustainability strategy is a natural step in our evolution and is actively supported by the Merck family. To put
this strategy into practice, we are focusing on amplifying this aspect of our company culture, which includes
educating our workforce on sustainability. Additionally, the company is planning to also link the long-term
variable compensation of the Executive Board from 2022 onward with the progress made toward achieving the
company's sustainability goals.
Sustainability culture and values
45
Fundamental Information about the Group Sustainability
Combined Management Report
We also promote initiatives to strengthen supply chains and to guarantee the targeted supply of medicines in
those countries. For instance, NTDeliver is a digital information tool for improving transparency in medicine
donation supply chains created through public-private partnerships. Deliveries from companies running
donation programs are clearly tracked - from purchase orders made by the WHO through to delivery to the first
warehouse in the destination country. This improves coordination and efficiency and provides a more
transparent overview of the in-country inventory. We deploy our NTDeliver tool to monitor the amount of
schistosomiasis medicine reaching schools, particularly those in last-mile deliveries to remote, rural locations,
for example in Kenya.
Our Access to Health approach aims to address the health system gaps that prevent underserved populations
from receiving healthcare. We coordinate with our partners to identify and develop solutions, such as future-
oriented access models for both neglected and non-communicable diseases in low- and middle-income
countries.
Promoting accessibility and improving supply chains
As part of our Open Innovation initiatives, we contribute to WIPO Re: Search, a partnership between the World
Intellectual Property Organization (WIPO) and BIO Ventures for Global Health (BVGH) that engages private
industry to early stage R&D for vaccines, diagnostics, and drugs against neglected tropical diseases (including
schistosomiasis), malaria and tuberculosis. We are also a member of the DNDI (Drugs for Neglected Diseases
initiative) to accelerate research of novel medicines for infectious diseases. This initiative has proved the
success of a transformative open innovation model through which participating companies can simultaneously
search for new treatments. In addition to our Open Innovation projects, including the new Open Global Health
Library, we have adopted a policy to not file or enforce patents in many low- and middle-income countries and
use a publicly available database (Pat-Informed) to be transparent about our patents and patent applications.
Our proactive approach to intellectual property enables research into solutions to the global health challenges
that affect millions in developing low- and middle-income countries. We have adopted a framework of Open
Innovation to accelerate research and development into innovative treatments for infectious diseases. We
provide free access to our proprietary compound library for drug discovery activities to identify new drugs. We
engage non-profit organizations and academia, as well as drive collaborative efforts in line with our mission to
improve the health of underserved populations in low- and middle-income countries.
Addressing affordability challenges
Furthermore, we are working toward making our insect repellent IR3535Ⓡ available as a malaria prevention
method in Africa. We joined forces with our partners in Ghana to implement a new program and test IR3535Ⓡ,
using a new formulation technology for long-lasting efficacy to reduce application times. This insect repellent is
already used for protection against the bites of insects and ticks that can transmit diseases such as Lyme, Zika,
dengue, and chikungunya.
More than 200 million cases of malaria and over 400,000 related deaths are recorded every year, with almost
70% of deaths occurring in children under the age of five. Over 90% of cases and 90% of deaths occur in
Africa. Through our As One against Malaria program, we are implementing several initiatives and projects for
new treatments, diagnostics, prevention methods, and approaches to strengthen health systems. As part of this
integrated program, we are in early clinical development with an innovative drug (M5717) for the prevention
and treatment of malaria.
As One Against Malaria
For us, sustainable entrepreneurship also means taking social responsibility. We see ourselves as part of the
community - both at our individual sites as well as worldwide. Our mission is to help shape society, not only
through our products and technologies but also through our community engagement. We therefore work with
our employees to promote a diverse array of social initiatives that help tackle challenges at the local level.
Our community outreach primarily focuses on those areas where we can leverage the expertise from our core
business. For instance, we promote health and educational initiatives – especially in the natural sciences -
along with cultural programs. Moreover, we provide disaster relief and offer support to people in need in the
vicinity of our sites. In 2020, we spent around € 53 million in total on community engagement, carrying out
274 charitable projects in 96 countries worldwide. We empower and encourage our employees to take action
and engage in activities that benefit the community. Employees are granted up to two days of leave per year to
support volunteer efforts on behalf of our company.
* The contents of this chapter or section are voluntary and therefore not audited. However, our auditor has read the text critically.
Our employees contribute to groundbreaking progress in science and technology across the world. They are the
basis of our success and therefore play a central role in our responsible business conduct. In accordance with
the Merck values, we live a culture of mutual esteem and respect. We are dedicated to upholding international
social and labor standards. These are stipulated in our Social and Labor Standards Policy, which complements
our Human Rights Charter and our Code of Conduct. This policy is the foundation for fair and open interactions
with our employees.
Combined Management Report
2,010
630
636
653
754
20204
2019
2018³
2017
2006²
Biogenic CO2 emissions
Indirect CO2eq emissions6
Direct CO2eq emissions
Thereof:
To remain successful going forward, we want to attract people to our company who contribute their curiosity,
courage, and spirit of invention. We therefore place a strategic focus on employee development, leadership,
and performance management. Furthermore, we strive to foster diversity among our employees (more
information can be found under "People at Merck").
Total CO2eq5 emissions
Greenhouse Gas Emissions, Scope 1 and Scope 21
Sustainability
Fundamental Information about the Group
Combined Management Report
48
In 2020, we improved our rating from CDP for our greenhouse gas emissions performance to B (2019: C). CDP
assesses companies in terms of their performance and transparency when it comes to climate action and water
management.
Building on our previous target, we drew up new climate action goals in 2020. By 2030, we intend to reduce
our direct (Scope 1) and indirect (Scope 2) emissions by 50% compared to 2020 and to source 80% of our
purchased electricity from renewable sources. Moreover, we plan to set a new reduction target for our
emissions from the upstream and downsteam value chain (Scope 3). We are currently setting up processes to
record non-reported Scope 3 data more precisely. We will validate the data basis for a specific target in
2021. Overall, by 2040 we are aiming for climate neutrality across our entire value chain in terms of our Scope
1, Scope 2 and Scope 3 emissions.
Climate change is one of the major challenges facing us in the 21st century. Because our company is no
exception when it comes to generating greenhouse gases, we had set a goal to reduce total direct (Scope 1)
and indirect (Scope 2) greenhouse gas emissions by 20% by 2020 (2006 baseline), irrespective of production
growth. We have now accomplished this objective. In 2020, we recorded a 25% overall reduction relative to
2006, despite growth in our operating business. However, this excludes emissions from the 2019 acquisition of
Versum Materials, which could not be incorporated into our emission footprint because the available emissions
data available does not reach back to our 2006 baseline. This acquisition increased our emissions significantly.
In total, we emitted approximately 2,010,000 metric tons of CO2 equivalents in 2020.
Climate change and emissions
Defining our principles and strategies for environmental stewardship, health and safety (EHS), our Group EHS
Policy is an integral part of our EHS management system, which undergoes an external ISO 14001 audit every
year. At all our sites, local EHS managers are in charge of operational environmental protection. Because our
business is constantly evolving, we conduct internal audits to review our environmental management system
and also have external audits regularly performed to confirm that ISO 14001 requirements are still being met.
In 2020, we obtained an ISO 14001 group certificate for the 11th consecutive year, which covers 92 sites
around the world.
Comprehensive environmental management system
Supporting relevant responsible governance initiatives
47
Fundamental Information about the Group Sustainability
In metric kilotons
1 In line with the Greenhouse Gas Protocol, for all previous years (up to the 2006 baseline) greenhouse gas emissions were calculated based on the
current corporate structure as of December 31 of the reporting year and retroactively adjusted for acquisitions or divestments of (parts of) companies,
or for changes in emission factors (portfolio-adjusted). Exceptions to this are company units that were added as a result of the acquisition of Versum
Materials. Figures dating back to the 2006 baseline are not available for these units.
Combined Management Report. Fundamental Information about the Group Sustainability
• For bintrafusp alfa, two-year follow-up data from a Phase I global study of bintrafusp alfa, an
investigational bifunctional fusion protein targeting TGF-ẞ and PD-L1, in second-line treatment of
patients with NSCLC (INTR@PID SOLID TUMOR 001) were presented. These data highlighted the
potential of this dual-targeting proposed mode of action in NSCLC, and additionally, the potential to
offer new ways to fight difficult-to-treat cancers beyond PD-1/PD-L1 in the future.
Non-small cell lung cancer, EGFR mutant, MET amplified 3
Phase II
Non-small cell lung cancer, METex14 skipping
Registration
Non-small cell lung cancer, METex14 skipping 1,2
Phase III
Status
Bintrafusp alfa (TGFbeta trap/anti-PD-L1)
Phase II
Avelumab (anti-PD-L1 mAb)
Immuno-Oncology
M8891 (MetAP2 inhibitor)
M4344 (ATR inhibitor)
Multiple myeloma
Solid tumors
Solid tumors 5
Multiple sclerosis
Indication
Avelumab (anti-PD-L1 mAb)
Rectal cancer
Phase II
Solid tumors 4
Urothelial cancer 7
Phase II
Phase III
Non-small cell lung cancer, 1st line
Non-small cell lung cancer 7
Bintrafusp alfa (TGFbeta trap/anti-PD-L1)
Bintrafusp alfa (TGFbeta trap/anti-PD-L1)
Bintrafusp alfa (TGFbeta trap/anti-PD-L1)
Bintrafusp alfa (TGFbeta trap/anti-PD-L1)
Bintrafusp alfa (TGFbeta trap/anti-PD-L1)
Bintrafusp alfa (TGFbeta trap/anti-PD-L1)
Bintrafusp alfa (TGFbeta trap/anti-PD-L1)
Bintrafusp alfa (TGFbeta trap/anti-PD-L1)
M6223 (anti-TIGIT mAb)
Avelumab (anti-PD-L1 mAb)
Avelumab (anti-PD-L1 mAb)
Avelumab (anti-PD-L1 mAb)
Registration
Phase III
Non-small cell lung cancer, 1st line
Urothelial cancer, 1st line maintenance 6
Phase I
Solid tumors
Phase I
Solid tumors
Phase I
Phase I
Phase I
Phase I
M3258 (LMP7 inhibitor)
Phase II
Tepotinib (MET kinase inhibitor)
Tepotinib (MET kinase inhibitor)
Tepotinib (MET kinase inhibitor)
Peposertib (M3814) (DNA-PK inhibitor)
Peposertib (M3814) (DNA-PK inhibitor)
Berzosertib (M6620) (ATR inhibitor)
M1774 (ATR inhibitor)
Evobrutinib (BTK inhibitor)
Fundamental Information about the Group
Combined Management Report
Sweden. Further launches are planned next year. A series of studies conducted with fertility patients and nurses
highlighted both the ease of use and the patient-friendliness of our Gonal-f penⓇ.
During the Covid-19 pandemic, we supported patients with advancing their treatment at home with the release
of our Gonal-f® (follitropin alfa) 150 IU pen. In January, the European Commission granted Marketing
Authorization for the Gonal-f® 150 IU pen. Since then, it was launched in Germany, Spain and
The PergoverisⓇ Pen, a convenient and ready-to-use fertility combination treatment option for women with
severe follicle-stimulating hormone and luteinizing hormone deficiency, was successfully launched in several
countries in Europe, Asia-Pacific, and Latin America in 2019.
Fertility
Our broad portfolio of small-molecule DDR inhibitors represents multiple development paths, including
combinations with other agents and modalities, and we are investing in this promising approach with the
objective of becoming a leader in this therapeutic class. Peposertib inhibits DNA-dependent protein kinase
(DNA-PK), a key enzyme needed for DNA repair, which may enhance the efficacy of agents such as
radiotherapy and chemotherapy. Ataxia telangiectasia and rad3-related (ATR) kinase inhibitors target the ATR
protein believed to be a key sensor for DNA damage and may enhance the efficacy of DNA-damaging agents
and potentially also be efficacious as monotherapy against tumors with high levels of replication stress induced
by overexpression of oncogenes.
• Our investigational ATR inhibitor berzosertib (M6620), was first presented as a late-breaking oral
presentation from a randomized Phase II study of M6620, in combination with gemcitabine compared
with gemcitabine alone in patients with platinum-resistant high-grade serous ovarian cancer, as well
as published in The Lancet Oncology, in June. The study is sponsored by the National Cancer Institute
(NCI) under its Cooperative Research and Development Agreement with Merck for M6620, and these
results were the first-ever randomized data to be presented for an ATR inhibitor.
Research and Development
• Data presented at ESMO 2020 for bintrafusp alfa in patients with pretreated BTC represent the longest
treatment and observational period to date in this setting and further deepen the understanding of the
long-term efficacy and safety profile of bintrafusp alfa in BTC. Results presented were from an
expansion cohort in an ongoing Phase I, open-label trial in patients with locally advanced/metastatic
BTC for which first-line chemotherapy failed (INTR@PID SOLID TUMOR 008). After 28 months,
bintrafusp alfa demonstrated a manageable safety profile with durable responses and long-term
survival in patients with pre-treated BTC.
•
• For bintrafusp alfa, our investigational bifunctional fusion protein targeting TGF-ẞ and PD-L1, two
long-term follow-up studies in BTC and NSCLC assessing the efficacy of and safety from the
INTR@PID clinical trial program were presented. These data highlighted notably the potential to offer
new ways to treat difficult-to-treat cancers beyond PD-1/PD-L1 in the future.
combination with Bavencio® (avelumab), demonstrating the role of Erbitux® as a promising
combination partner. Data was presented in an oral presentation investigating avelumab plus
cetuximab in pre-treated RAS wild type metastatic colorectal cancer patients as rechallenge strategy:
the phase II CAVE (cetuximab-avelumab) mCRC study (Presentation #3970).
55
Combined Management Report Fundamental Information about the Group Research and Development
Erbitux® (cetuximab) demonstrated its steady role across the continuum of care in mCRC, and as the
backbone of treatment of SCCHN. And a number of investigator-sponsored studies (ISS), including in
•
• For tepotinib, three posters were presented from VISION, the largest study in patients with NSCLC
harboring METex14 skipping treated with tepotinib, with data highlighting durable clinical activity
consistent across clinically relevant subgroups (Poster #1283P); health-related quality of life shown to
be maintained, with clinically meaningful delays in the time to deterioration of cough, dyspnea, and
chest pain (Poster #1286P); and a safety profile consisting of mostly mild to moderate adverse events
with few treatment discontinuations. Additionally, trial in progress data was presented from the
INSIGHT 2 study assessing the combination of osimertinib and tepotinib in patients with EGFR-mutant
NSCLC that has developed resistance to first-line osimertinib treatment due to MET amplification is
ongoing and actively recruiting patients (Poster #1415TiP).
Three-year follow-up results from a global Phase I study (INTR@PID SOLID TUMOR 001) of bintrafusp
alfa as a second-line treatment for patients with NSCLC represent the longest treatment and
observational period with bintrafusp alfa in this setting to date and further deepen the understanding
of bintrafusp alfa's potential long-term efficacy and safety profile. Results demonstrated a promising
duration of response (DOR) and long-term clinical benefit, especially in patients with high PD-L1
expression, as well as a manageable safety profile in a setting of high medical need where there is no
globally accepted standard of care. Data presented at ESMO reinforced prior two-year follow-up
results for this study presented at ASCO 2020.
56
99
We continue to support efforts to save the northern white rhinoceros from extinction. Merck is a partner of the
BioRescue Project of the Leibniz Institute for Zoo and Wildlife Research (Leibniz-IZW) in the Forschungsverbund
Berlin e. V., donating technology and financial support, as well as sharing expertise and experience in fertility.
Neurology
Compound
Therapeutic area
As of: December 31, 2020
Healthcare Pipeline
57
40
Research and Development
Fundamental Information about the Group
Combined Management Report
As part of our commitment to speed up the availability of new medicines for patients in need, we are investing
€ 250 million from 2019 to 2022 in a new facility in Corsier-sur-Vevey, Switzerland the Merck Biotech
Development Center - dedicated to biotech development and manufacturing for clinical studies. Driven by the
growth of our Healthcare business sector R&D pipeline, this investment will help to sustainably secure capacity
and high agility to deliver clinical trial material in a cost-effective way, contribute to accelerated development
timelines of new biological entities, and address the increasing manufacturing complexity of the next
generations of biotech compounds. The Biotech Development Center adds to recent investments aiming to
further increase our capacities in the research, development, and manufacturing of medicines, such as the
expansions of the R&D facility of Billerica, Massachusetts, United States, of the biotech manufacturing site of
Aubonne, Switzerland, and of the pharma manufacturing site of Darmstadt, Germany.
-
Building for the Future
The launch of AluettaⓇ, our new pen for the injection of SaizenⓇ, complements our device portfolio and
supports the growth of SaizenⓇ by expanding our business in key geographies like Germany. Aluetta® is
currently available in 23 countries.
The number of patients taking SaizenⓇ (somatropin) enrolled on Easypod® Connect continued to grow in 2020,
reaching 23,762 in October. SaizenⓇ is our main endocrinology product and is indicated for the treatment of
growth hormone deficiency in children and adults, while Easypod® Connect is a unique web-based platform that
allows HCPs to monitor their patients' adherence to treatment with real-time injection data collected and
transmitted from their EasypodⓇ devices.
ConcorⓇ AM, a fixed-dose combination of Bisoprolol and Amlodipine, continues its worldwide rollout to include
new countries, taking the total number to 59.
GlucophageⓇ, containing the active ingredient metformin, is now approved in 61 countries for prediabetes when
lifestyle intervention is not enough to control the condition. With the successful submission and launch in Brazil
of Glucophage® XR 850 for prediabetes in July 2019, in 2020 this project was expanded at the global level to be
rolled out to additional countries to serve prediabetes patients, and we have successfully submitted in the
Central America Region (El Salvador, Guatemala, Honduras, Nicaragua, Dominican Republic, Panama) according
to our rollout plan for this product indication.
The new formulation of Euthyrox® (levothyroxine) for the treatment of hypothyroidism obtained further
regulatory approvals in 2020, resulting in a total of 65 countries where this incremental innovation is
registered, allowing for more precise dosing. The product is currently launched in 31 countries worldwide such
as Germany, Spain, China, United States and Colombia.
General Medicine & Endocrinology
Oncology
Solid tumors 7
Phase II
Non-small cell lung cancer 1st and 2nd line
Fundamental Information about the Group
Combined Management Report
TIGIT: T cell immunoreceptor with Ig and ITIM domains
TLR7/8: Toll-like receptors 7 and 8
TGFbeta: Transforming growth factor beta
PK: Protein kinase
PeEF2: Plasmodium eukaryotic elongation factor 2
PD-L1: Programmed cell death ligand 1
MET: MET proto-oncogene, receptor tyrosine kinase
Research and Development
METex14: MET exon 14
mAb: Monoclonal antibody
IL: Interleukin
IgA: Immunoglobulin A
BTK: Bruton's tyrosine kinase
BLYS: B-lymphocyte stimulator
ATR: Ataxia telangiectasia and Rad3-related kinase
APRIL: A proliferation-inducing ligand
10 Pending Phase III initiation in 2021.
MetAP2: Methionine aminopeptidase 2
59
59
Life Science*
Our major launches in 2020 include the Scepter™ 3.0 handheld cell counter, Genelute™-E Single Spin DNA kits,
a full DNA Encoded Library (DEL) technology, proteolysis targeting chimeras (PROTACS), MILLIPLEX® kits, and
an additional 200 ZooMAbⓇ recombinant antibodies.
In September, we launched the MILLIPLEX® SARS-CoV-2 antigen panels for IgG, IgA and IgM. These panels
utilize multiplexing technology to simultaneously detect the presence of different antibody classes against four
different SARS-CoV-2 protein antigens in a single reaction from human serum or plasma samples. These panels
were developed in close collaboration with academic researchers to deliver excellent sensitivity and specificity.
We continue to support the significant increase in research about Covid-19, coronaviruses, and related immune
responses, much of which uses our products such as enzyme-linked immunosorbent assays, ZooMAbⓇ
recombinant antibodies and MILLIPLEX® multiplex panels to study Covid-19-related serological and
immunological responses. We also collaborated with academic partners to apply our retrosynthetic analysis
software for novel synthesis of critical antiviral drugs with cheaper or alternate starting materials, alleviating
supply chain problems. Furthermore, we focused on delivering critical raw materials for use in antiviral drug
synthesis or for Covid-19 diagnostic kit manufacturing.
Throughout the year, our R&D teams have demonstrated exceptional agility while navigating the impacts of the
Covid-19 pandemic. Our colleagues have worked swiftly and diligently to accelerate necessary product
launches, pause on others and bring new, innovative ideas into the pipeline and launch within months.
Research Solutions
Further, we are empowering virtual R&D by leveraging smart technology to collaborate with our customers and
stakeholders. Our teams provided virtual offerings and interactions, including a self-service portal for audit
stakeholders, a global pilot study of EmproveⓇ Smart Glasses Kits, and digital collaborations and trainings at
our M Lab™ Collaboration Centers using cutting-edge tools like Microsoft Surface Hub that allow customers to
get a first-hand view from the lab floor and explore solutions virtually.
Additionally, we have worked with academic partners to license or co-develop ELISAs, monoclonal antibodies,
MILLIPLEX® panels, and proteins and scaled up those tools to become more broadly available to the research
community.
We announced another new collaboration with Mammoth Biosciences Inc., of San Francisco, California, USA, for
the development, scale-up and commercial production of their CRISPR-based DETECTR BOOST™M SARS-COV-2
Reagent Kit. Once this new test isapproved by the FDA, Clinical Laboratory Improvement Amendments labs in
the U.S. will be able to significantly improve capacity to regularly perform testing. Mammoth recently secured
funding from the National Institute of Health's RADx program to scale its CRISPR-based testing workflow and
we will serve as contract manufacturer for this high-throughput Covid-19 test.
We also announced an extension of our ongoing collaboration with Baylor College of Medicine in Houston,
Texas, USA, which previously focused on vaccine development for tropical disease outbreaks, to now advance a
vaccine manufacturing platform for Covid-19. Our joint work supports the accelerated transition to Phase I
clinical trials, optimizing the production process to advance two Covid-19 vaccine candidates, including the CoV
RBD219-N1 vaccine candidate originally developed to target SARS. Additionally, our new collaboration with the
Massachusetts Institute of Technology's (MIT) Center for Collective Intelligence and Community Biotechnology
Initiative began with the release of a report detailing potential paths to solutions for pandemic response. The
report summarizes the results of a three-week collective intelligence exercise conducted with more than 180
science, healthcare, and policy experts from around the world, which generated suggestions to combat Covid-
19 via transmission control, diagnostics, and monitoring, and accelerating access to vaccines and therapies,
among other technical topics.
Research and Development
• Abstracts also showcased the scientific innovation and diversity of our pipeline, with results from a
number of high-priority clinical development programs, including tepotinib, bintrafusp alfa and our
comprehensive DNA Damage Response (DDR) portfolio.
60
* The contents of this chapter or section are voluntary and therefore not audited. However, our auditor has read the text critically.
Collaboration remains an important focus for the Life Science business sector as we work to drive innovation
and solve the industry's toughest problems, especially those related to Covid-19. While delivering on our own
portfolio and capabilities, we also seek to collaborate with other key players in the industry to work toward our
shared goal of bettering and increasing access to health globally. As such, we joined Oxford University in the
United Kingdom in their announcement that they laid the foundation for large-scale production of the Covid-19
vaccine candidate, ChAdOx1 nCoV-19, which leveraged our previous collaborative work to develop the
manufacturing process for a rabies vaccine candidate. Our support enabled the development of the
manufacturing process, which would normally take at least six months to a year, to take place in just two
months' time, saving valuable time for the vaccine developer.
To expand our capacity for manufacturing Covid-19 related products and critical therapies, in November, we
invested US$ 47 million in a combined expansion of our facilities in Jaffrey, New Hampshire, USA, and Danvers,
Massachusetts, USA. Both sites supply critical products to customers developing life-saving therapies, including
Covid-19 vaccines, such as single-use and virus filtration technologies.
We remain conscious of ensuring ease of access to our broad product portfolio, especially amid the rush to
develop solutions for Covid-19. Leveraging our industry-leading e-commerce website, www.sigmaaldrich.com,
we created a dedicated Covid-19 webpage that provides a one-stop-shop of more than 200 products
and corresponding information for scientists working on Covid-19 research and potential vaccines. In doing so,
we continue to support the significant increase in research of Covid-19, coronaviruses and related immune
responses, much of which uses our products such as enzyme-linked immunosorbent assays (ELISAs), ZooMAbⓇ
recombinant antibodies, and MILLIPLEX® multiplex panels to study Covid-19-related serological and
immunological responses.
As a global life science tools and equipment supplier, we are committed to providing the critical research and
diagnostic tools, products, and reagents, therapy manufacturing and vaccine development products, as well as
biosafety testing that can aid the global scientific effort to fight this novel virus. We continue to support many
of our customers working on Covid-19 projects through our products and services, providing for more than 35
different testing solutions across RT-PCR, antigen and antibody diagnostics for both high-throughput centralized
and distributed point-of-care settings; more than 50 different vaccine candidates, consisting of several
platforms that include DNA, inactivated, live attenuated virus, viral vector, protein subunit and mRNA; and
more than 20 monoclonal antibody, plasma products, and antivirals.
The engine behind the solutions for Covid-19
As such, we launched more than 18,300 products in 2020, including those launched through our "faucet
program" for antibodies, reference materials, chemicals, and nanomaterials. These included key innovations
from all our business units, such as our GenElute™M-E Single Spin DNA kits, MILLIPLEX® immunoassay kits and
ZooMAbⓇ recombinant antibodies from Research Solutions; the sodium-acetate granulated, Bio4C™
Orchestrator, our perfusion-ready bioreactor, Cellicon TM perfusion device and controller, and VirusExpress™
Lentiviral production cells from Process Solutions; and the Milli-Q® IX 7003/7005/7010/7015 Type 2 water
purification system from Applied Solutions.
Across our three business units, Research Solutions, Process Solutions, and Applied Solutions, our R&D teams
of more than 2,000 employees continue to bring expertise and a diversified and relevant portfolio of products
and services to our customers around the world. In 2020, our Life Science business sector focused on delivering
the promise of accelerating access to health for people everywhere by collaborating with the global scientific
community.
9 As announced on November 09, 2020, Merck has entered into an out-licensing agreement with Vera Therapeutics.
8 Includes study in combination with Bintrafusp alfa.
7 Avelumab combination studies with Talazoparib, Axitinib, ALK inhibitors, Cetuximab or chemotherapy.
6 As announced on December 11, 2020, the Committee for Medicinal Products for Humans Use (CHMP) of the European Medicines Agency adopted a
positive opinion recommending approval of Avelumab as monotherapy for the first-line maintenance treatment of adult patients with locally advanced or
metastatic urothelial carcinoma.
Sonelokimab (M1095) (anti-IL-17 A/F nanobody)
Atacicept (anti-BLYS/anti-APRIL fusion protein)
Atacicept (anti-BLYS/anti-APRIL fusion protein)
Sprifermin (fibroblast growth factor 18)
Immunology
Healthcare Pipeline
Research and Development
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Footnotes on next page
Phase I
Locally advanced non-small cell lung cancer
Biliary tract cancer 1st line
Biliary tract cancer 2nd line
Cervical cancer 2nd line
Triple negative breast cancer
Cervical cancer 1st line
Solid tumors
Solid tumors 8
Phase I
Phase I
Phase II
Phase II
Phase II
Phase II
Phase II
Phase II
M5049 (TLR7/8 antagonist)
• Data from the Phase III JAVELIN Bladder 100 study (Presentations #6990; 704MO; 745P) of
BavencioⓇ in the first-line maintenance treatment of patients with locally advanced or metastatic
urothelial carcinoma (UC) versus best supportive care were presented. In addition, the primary results
of the Phase III JAVELIN Head and Neck 100 (Presentation #9110) were presented.
M5049 (TLR7/8 antagonist)
Systemic lupus erythematosus 9
5 Includes studies (phase I/II) in collaboration with NCI.
4 Includes studies in combination with Avelumab.
3 In combination with Osimertinib.
2 As announced on November 26, 2020, the European Medicines Agency (EMA) has validated for review the application for Tepotinib for the treatment of
adult patients with advanced non-small cell lung cancer.
1 As announced on August 25, 2020, the US Food and Drug Administration (FDA) has accepted and granted Priority Review to the new drug application
(NDA) in non-small cell lung cancer (NSCLC).
Unless noted otherwise, clinical programs conducted in collaboration with external partners are not shown unless Merck is the sponsor of that respective
trial. More information on the ongoing clinical trials can be found at www.clinicaltrials.gov. Pipeline products are under clinical investigation and have not
been proven to be safe and effective. There is no guarantee any product will be approved in the sought-after indication.
Phase I
Malaria
M5717 (PeEF2 inhibitor)
Global Health
Covid-19 pneumonia
Immunology
Psoriasis 10
Phase I
Phase II
Phase II
Phase II
Osteoarthritis
Phase II
Phase II
IgA nephropathy 9
⚫ At the 2020 European Society of Medical Oncology Annual Virtual Meeting in September, we had a
significant presence at the ESMO20 Virtual Scientific Program. Data from more than 30 abstracts
across multiple tumor types highlighted our biology-driven approach with breakthrough innovations
and significant advances in cancer care across our oncology assets.
Combined Management Report Fundamental Information about the Group
On August 25, the U.S. FDA accepted and granted Priority Review to our New Drug Application for once-daily,
orally dosed tepotinib for the treatment of patients with metastatic NSCLC whose tumors have a mutation that
leads to mesenchymal-epithelial transition exon 14 (METex14) skipping. Tepotinib is being reviewed by the FDA
under its Real-Time Oncology Review (RTOR) pilot program. Tepotinib was granted Breakthrough Therapy
Designation by the FDA in September 2019.
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Research and Development
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Additionally, bintrafusp alfa is under investigation as a Phase II monotherapy study in patients with locally
advanced or metastatic biliary tract cancer (BTC) who did not respond to, or were intolerant to, first line
platinum-based chemotherapy (INTR@PID BTC 047) and in a Phase II/III combination study as a first-line
treatment of gemcitabine plus cisplatin with or without bintrafusp alfa in BTC patients. It is also being studied in
two lung cancer studies a Phase II study of bintrafusp alfa with concurrent chemoradiation therapy (CCRT) in
unresectable Stage III non-small cell lung cancer (NSCLC) (INTR@PID LUNG 005), and a Phase Ib/II, open-
label study of bintrafusp alfa in combination with chemotherapy in participants with Stage IV NSCLC regardless
of PD-(L)1 expression status (INTR@PID LUNG 024). On January 20, 2021, Merck announced the
discontinuation of the INTR@PID Lung 037 clinical trial, a randomized, open label controlled adaptive Phase III
study of bintrafusp alfa compared with pembrolizumab as a first-line (1L) treatment in patients with PD-L1
expressing advanced NSCLC after a review of the totality of clinical data by the independent data monitoring
panel concluded that the study was unlikely to meet the co-primary endpoint, specifically progression-free
survival.
Several new clinical studies were initiated in 2020 for bintrafusp alfa (M7824), discovered as a result of our own
research and under clinical development through an alliance with GlaxoSmithKline (GSK). Bintrafusp alfa is a
potential first-in-class investigational bifunctional fusion protein designed to simultaneously block two
immunosuppressive pathways, TGF-ß and PD-L1, within the tumor microenvironment. This approach is thought
to control tumor growth by potentially restoring and enhancing anti-tumor responses. In preclinical studies,
bintrafusp alfa has demonstrated antitumor activity both as monotherapy and in combination with
chemotherapy. Based on its proposed mechanism of action, the compound offers a potential targeted approach
to addressing the underlying pathophysiology of difficult-to-treat cancers. Studies initiated in 2020 included a
new Phase II monotherapy study in mobility group AT-hook 2 (HMGA2) expressing triple negative breast cancer
(INTR@PID BREAST 020), a Phase I monotherapy study in metastatic or locally advanced urothelial cancer
(INTR@PID UROTHELIAL 152) and two studies in HPV-associated tumors, including the Phase II monotherapy
study in platinum-experienced cervical cancer (INTR@PID CERVICAL 017) and Phase I combination study with
other anti-cancer therapies in participants with locally advanced or advanced cervical cancer (INTR@PID
CERVICAL 046). A Phase I combination study evaluating bintrafusp alfa and M6223, a t-cell
immunoreceptor with immunoglobulin and ITIM domains (TIGIT), which is an immune checkpoint receptor
thought to inhibit t-cell activation and contribute to t-cell exhaustion was initiated (NCT04457778). Like
bintrafusp alfa, M6223 was also discovered in our research labs.
We have continued to deliver on the strategic evolution of our immunology pipeline this year, which includes
out-licensing certain assets to allow us to focus on our priority areas and assets. In September, we announced
that we are looking for a partner to take sonelokimab (M1095), an investigational anti-IL-17 A/F NanobodyⓇ
that neutralizes both IL-17A and IL-17F in patients with moderate to severe chronic plaque-type psoriasis, into
Phase III. In October, we announced the out-licensing of M6495, an anti-ADAMTS5 NanobodyⓇ for the potential
treatment of osteoarthritis (OA), to Novartis, and in November, we entered into an out-licensing agreement
with Vera Therapeutics for atacicept.
Oncology & Immuno-Oncology
Oncology and immuno-oncology are core focus areas in our R&D portfolio. With an emphasis on biology-driven
research, we aim to deliver transformative treatments. Translational research is embedded into the whole R&D
process, with several projects addressing unmet needs in hard-to-treat cancers through innovative treatment
approaches and novel combinations. In 2020, we achieved a number of significant milestones across our
oncology and immuno-oncology pipeline.
Treating more than 1 million patients since authorization, Erbitux® (cetuximab) is a standard of care for
patients with epidermal growth factor receptor (EGFR)-expressing, RAS wildtype metastatic colorectal cancer
(mCRC), as well as both recurrent and/or metastatic and locally advanced squamous cell carcinoma of the head
and neck (SCCHN). We continue to invest in cetuximab and are committed to making it available to those
patients it will benefit most. In March, ErbituxⓇ obtained the approval of the National Medical Products
Administration of China for the first-line treatment of patients with recurrent and/or metastatic squamous cell
carcinoma of the head and neck in combination with platinum-based therapy with fluorouracil.
We continue to develop much-needed new treatment options for patients with hard-to-treat cancers and have
made key progress in this area with avelumab, an anti-PD-L1 antibody we are co-developing and co-
commercializing with Pfizer. To date, avelumab has received approval in more than 50 countries across the
world under the brand name BavencioⓇ.
On April 9, Merck and Pfizer announced that the FDA granted Breakthrough Therapy Designation for BavencioⓇ
in first-line maintenance treatment of locally advanced or metastatic UC, and that the companies had submitted
a supplemental Biologics License Application for review under the FDA's Real-Time Oncology Review (RTOR)
pilot program.
On June 22, we announced that the European Medicines Agency (EMA) had validated for review the Type II
variation application for BavencioⓇ for this proposed indication. A supplemental application was also submitted
in Japan.
We also have continued to progress our efforts to bring BavencioⓇ in combination with axitinib to patients with
advanced renal cell carcinoma (RCC). On July 31, we and our Alliance partner Pfizer announced that in the
United Kingdom, the National Institute for Health and Care Excellence (NICE) recommended BavencioⓇ in
combination with axitinib for first-line treatment of adult patients with advanced RCC. This is the first
combination of an immunotherapy with a targeted antiangiogenic therapy to be recommended by NICE as a
first-line treatment option for advanced RCC for use within the Cancer Drugs Fund in the United Kingdom.
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Combined Management Report Fundamental Information about the Group Research and Development
Other highlights from our development pipeline included the advancement of several potential first-in-
class/best-in-class compounds. The development program for tepotinib, our oral MET inhibitor designed to
inhibit the oncogenic MET receptor signaling caused by MET (gene) alterations, has continued to see pivotal
clinical, regulatory, and commercial milestones in 2020. Discovered in-house at Merck, tepotinib underscores
our strategic focus on delivering innovative precision medicines to patients with cancer.
On March 25, tepotinib was approved in Japan for the treatment of patients with unresectable, advanced or
recurrent non-small cell lung cancer (NSCLC) with METex14 skipping alterations. The treatment, known as
TEPMETKOⓇ in Japan, was the first MET inhibitor to have received a regulatory approval for NSCLC
with MET gene alterations.
On May 29, The New England Journal of Medicine published the primary analysis of the Phase II VISION study
of tepotinib in advanced NSCLC with METex14 skipping alterations. Also presented during the ASCO20 Virtual
Scientific Program, results showed consistent response and durable anti-tumor activity across lines of treatment
in patients assessed by both liquid biopsy (LBx) and tissue biopsy (TBX).
To date, more than 1,300 patients have been dosed globally in the bintrafusp alfa INTR@PID clinical
development program.
At the 2020 American Society of Clinical Oncology (ASCO) Annual Virtual Meeting held on May 31 and June 4,
we had a significant presence at the Virtual Scientific Program. Potential first-in-class early and late stage
pipeline compounds, and investigational uses of our approved medicines were featured at the meeting:
On January 6, we announced top-line results from the Phase III JAVELIN Bladder 100 trial, which showed that
patients with previously untreated locally advanced or metastatic urothelial carcinoma (UC) whose disease did
not progress on initial chemotherapy and who were randomized to receive first-line maintenance therapy with
BavencioⓇ and best supportive care (BSC) lived significantly longer than those who received BSC only. These
results were subsequently published online ahead of print on September 18 in The New England Journal of
Medicine simultaneously with the presentation of additional analyses at the European Society for Medical
Oncology (ESMO) Virtual Congress 2020, describing the efficacy of BavencioⓇ as a first-line maintenance
treatment across various subgroups of patients and highlighting exploratory biomarkers as well as patient-
reported outcomes.
• In addition, a late-breaking oral presentation of results of the investigator-sponsored, multicenter
Phase II TROPHIMMUN study of Bavencio® for the treatment of chemotherapy-resistant gestational
trophoblastic tumors (Cohort A), was also featured in the ASCO press program.
• Data from the Phase III JAVELIN Bladder 100 study (Abstract# LBA1) of BavencioⓇ in the first-line
maintenance treatment of patients with locally advanced or metastatic urothelial carcinoma (UC) were
highlighted in the ASCO embargoed presscast on May 26 and at the plenary session on May 31. The
data showed that BavencioⓇ as first-line maintenance significantly improved overall survival in the
primary population of all randomized patients by 7.1 months, with a 31% reduction in the risk of
death compared with initial chemotherapy followed by BSC alone.
Combined Management Report Fundamental Information about the Group
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554
Multiple sclerosis (MS) is one of the world's most common neurological disorders. Despite the emergence of a
number of therapies in the last two decades, there are still significant unmet needs for MS patients. We have
more than 20 years of experience in MS, and we remain committed to finding solutions for patients' significant
unmet medical needs.
We continue to receive regulatory approvals for our oral treatment option MavencladⓇ (cladribine tablets)
around the world. MavencladⓇ is now approved in more than 80 countries worldwide, including those of the
European Union, the United States, Australia, Canada, and Switzerland.
New data for both our marketed MS treatments MavencladⓇ and Rebif® (interferon beta-1a) and our
investigational treatment evobrutinib, the first and only Bruton's tyrosine kinase inhibitor (BTKi) to demonstrate
high and sustained efficacy through 108 weeks in clinical studies, have been presented across key congresses
this year, including the 6th Congress of the European Academy of Neurology (EAN). We presented a total of
16 abstracts at this congress, which took place virtually from May 23-26.
In June, the U.S. Food and Drug Administration (FDA) cleared our investigational new drug application (IND)
for M5049 for the potential treatment of patients with Covid-19 pneumonia. The first patient was dosed in the
Phase II trial at end of July. M5049 is a potentially first-in-class small molecule that blocks the activation of
Toll-like receptor (TLR)7 and TLR8, two innate immune sensors that detect single-stranded RNA from viruses
such as SARS-CoV-2, the virus responsible for Covid-19. The aim of the study is to investigate if M5049
intervention at a critical point in the course of Covid-19 disease may prevent or ameliorate the hyper-
inflammatory response in patients with Covid-19 pneumonia and prevent progression to "cytokine storm".
Successful intervention with the investigational drug may reduce life-threatening complications of Covid-19,
including severe respiratory symptoms that often necessitate further medical interventions such as mechanical
ventilation.
Generating data around our MS treatments and the risk of respiratory viral infections has been important this
year to help support clinicians as they make treatment decisions for their patients living with MS. At
MSVirtual2020: 8th Joint ACTRIMS-ECTRIMS Meeting that took place virtually from September 11-13, we
presented a total of 54 abstracts across our MS portfolio, including data providing insights on how MavencladⓇ
and RebifⓇ do not affect the risk of respiratory viral infections and Covid-19 outcomes in MS patients. Other
important data presented at ACTRIMS-ECTRIMS included new efficacy and real-world safety data on
MavencladⓇ:
Neurology & Immunology
Early onset of action: Efficacy results from the Phase IV MAGNIFY-MS study, demonstrating an early
onset of action from end of month one through a reduction in mean combined unique active (CUA)
lesion count in the first six months of MavencladⓇ treatment for highly active RMS
• Sustained efficacy: New data evaluating cumulative relapse incidence over five years in patients
enrolled in the CLARITY and CLARITY Extension trials, showing the sustained efficacy of MavencladⓇ
Late-breaking interim data from the CLASSIC-MS study on the long-term efficacy and real-world
treatment patterns for patients receiving MavencladⓇ, with eight to 14 years of follow-up
• Disability improvement: Results from a post hoc analysis from the CLARITY Extension, showing
patients receiving early treatment with Mavenclad® had a greater prevalence of disability
improvement over five years, as measured by the Expanded Disability Status Scale (EDSS)
• The global Phase III clinical development program evaluating evobrutinib in relapsing MS includes two
pivotal studies, EVOLUTION RMS 1 and 2. Evobrutinib was developed within our own laboratories and
further demonstrates our commitment to improving the lives of people with MS and other chronic
progressive diseases.
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Research and Development
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52
• For oral MET inhibitor tepotinib, results from the primary analysis of the Phase II VISION study
showed consistent response and durable anti-tumor activity across lines of treatment in patients
assessed by both liquid biopsy (LBX) and tissue biopsy (TBX).
•
• Several oral presentations for both the TPExtreme ISS and the independent BEACON-CRC study data
featuring Erbitux®, the standard of care for patients with epidermal growth factor receptor (EGFR)-
expressing, RAS wildtype metastatic colorectal cancer (mCRC), as well as both recurrent and/or
metastatic and locally advanced squamous cell carcinoma of the head and neck (SCCHN),
demonstrated its steady role across the continuum of care in mCRC and as the backbone of treatment
of SCCHN.
Semiconductor Solutions
Our Planarization business continues to make significant progress in new product development in memory and
logic across both slurry and cleans products. To better support our customers, in late June, we inaugurated a
new R&D center in Korea to develop next-generation chemical mechanical planarization (CMP) materials. Since
the opening, our team has been able to support several demos with key Korean customers, which is critical to
enable rapid local collaboration.
To better support our customers, in late August, we made significant investments in developing advanced
analytical and container capabilities in Kaohsiung, Taiwan to continually drive quality enhancement. The facility
is in close proximity to many of our Taiwanese customers and aims to provide local collaboration support and
faster time to market.
In September, we opened a new Research Center for electronic applications in Darmstadt, Germany. With this
investment we are scaling up our research & development capabilities for next-generation display and
semiconductor materials to further expand our position a as leading supplier to the electronics industry. In
October, we announced a € 20 million investment to expand OLED manufacturing capacities in South Korea and
China. In November we also announced our plans to build a new Electronics Technology Center in Shanghai,
China, which will focus on semiconductor and OLED materials.
Performance Materials*
We also received the CiteAb award for Innovative Product of the Yearfor our ZooMAb® Recombinant Antibodies.
This new range of recombinant monoclonal antibodies is manufactured using a proprietary expression system
as well as with less preservatives and freeze-dried, making shipping easier and giving long-term stability.
Further, our LANEXOTM system won the Gold German Design Award for excellent communications design apps,
recognizing how helpful digitalization can be in boosting efficiency, optimizing safety, and simplifying
compliance in the regulated analytical and research laboratory.
Fundamental Information about the Group
Combined Management Report
Our Blazar™ platform was honored with two additional awards in 2020. First, the CPhI's Excellence in Pharma
award for its analysis, testing, and quality control, which recognizes innovations for and dedication to driving
the pharmaceutical industry forward. Second, the Blazar™ platform also won a prestigious R&D 100 Award for
analytical and testing capabilities, recognizing the global best that are pioneering revolutionary ideas in science
and technology. Bio4CTM ProcessPad, part of our expanding BioContinuum™ Platform, also made the shortlist
for the 2020 CPhI Awards.
We are addressing our customers' critical material needs through every step of the wafer manufacturing
process. The outstanding capabilities and competencies of the businesses are diverse and will enable us to
bring game-changing innovations for our customers into the market faster.
Also in July, we were recognized with two awards at INTERPHEX 2020, which honors the future of
pharmaceutical, biotech and device development and manufacturing innovation. Our BioRelianceⓇ Blazar™
Platform won the Editor's Choice Award while our BioContinuum™ Buffer Delivery Platform, one of our
BioContinuum T™ Platform's newly launched building blocks, received Best in Show. We received two additional
awards at the 2020 Asia-Pacific Bioprocessing Excellence Awards. Our BioContinuum™ Platform was awarded
Best Bioprocessing Innovation of the Year, and the Life Science business sector was awarded Best
Bioprocessing Supplier of the Year in Downstream Processing.
Research and Development
In Semiconductor Materials, our Thin Film Solutions business achieved significant progress in advancing critical
PORS (Process of Record) for new organosilanes for conformal high-performance atomic layer deposition (ALD)
and progressed our plasma-enhanced chemical vapor deposition (PECVD) for low dielectric constant
applications. We also continue to make progress in developing high-purity metal-containing precursor offerings
enabled by new engineered container delivery systems. We continue to focus on developing new spin-on
dielectric formulations for processes with improved dielectric characteristics for faster and better logic and
memory devices.
Delivery Systems & Services (DS&S) develops, deploys, and operates equipment that enables safe and reliable
delivery of hazardous materials in the manufacturing process of our customers. The unit is in the process of
increasing its manufacturing capacity to meet the growing demand in memory and foundry, and we
commenced a project to manufacture our second CHEMGUARD product line, BCD100 and 200, state-of-the-art
bulk chemical delivery systems. We also released our CHEMGUARD CG600 model for bulk
Tetrakis(dimethylamino)titanium (TDMAT) delivery. This product extends our prior TDMAT technology to
remote, bulk supply to support our customers' ever-increasing flow rate and uptime requirements of advanced
nodes. The first container changes were successfully completed and executed much faster than anticipated,
reducing container change time significantly.
* The contents of this chapter or section are voluntary and therefore not audited. However, our auditor has read the text critically.
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Research and Development
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Our material innovation accelerator Intermolecular saw an increase in the amount of work done in their labs for
quantum computing and neuromorphic computing companies. These companies benefit from the flexible device
processing infrastructure and deep materials knowledge to quickly achieve tangible products in these emerging
technology areas. Intermolecular is a trusted partner for materials innovation and is our Silicon Valley science
hub. For more than 15 years, Intermolecular has being exploring, testing, and developing advanced materials
that are revolutionizing the next generation of electronics.
DS&S has successfully applied its GASGUARD Active Control technology to low vapor pressure compressed
gases. Originally, it was developed to maintain, repeat and stabilize pressure for high vapor pressure gases
under varying manufacturing conditions and with zero pressure drift. GASGUARD Active Control now allows
semiconductor fabs to achieve much greater precision in controlling the pressure of low vapor pressure
compressed gases, such as WF6 and others.
This technology and all DS&S equipment are operated and maintained by our MEGASYS® Total Gas and
Chemical Services at many of our customer sites. As part of a global operations infrastructure, we are a
premier supplier of semiconductor fab and subfab services to the worldwide electronics industry.
Display Solutions
In July, our DOZN™ green chemistry tool won Environment + Energy Leader's Top Project of the Year award.
The award recognizes excellence in environmental, sustainability, and energy management. With more than
300 active, registered users, the DOZN™ system helps customers make data-driven decisions to increase
environmental sustainability by evaluating the relative greenness of chemicals and chemical processes against
the 12 Principles of Green Chemistry. Additionally, in recognition of our continued effort to create safer, more
sustainable solutions, our StericupⓇE and SteritopⓇE filtration devices were awarded New Product of the Year by
Business Intelligence Group through its BIG Awards for Business program.
With our Specialty Gases we continue to make progress with our new etch gas technology program, which is
focused on advancing the development of new chemistries to enable more than 100-layer single-stack etching
for advanced memory devices such as V-NAND. We continue to see significant performance in new POR wins
across our existing portfolio and new product introductions.
To begin the year, Life Science received a 2020 CMO Award from Life Science Leader and Outsourced Pharma,
an honor determined based on primary market research and customer feedback. The award honors outsourcing
respondents who exceed customer expectations with their capabilities, compatibility, expertise, quality,
reliability, and service.
Additionally, in November, we announced our collaboration with Transcenta, a global biotherapeutics company,
to advance continuous biomanufacturing with strategic technology implementation. The collaboration will co-
develop a first-of-its-kind, single-use, flow-through polishing system for GMP operation. The first phase of this
multi-year partnership will focus on developing and designing the process technologies, single-use system and
automation, while the second phase will focus on an expanded scope of process and digital technologies to
optimize a continuous manufacturing process.
Increasing digital tools while adding to our titration portfolio, in March, we launched a new SmartChemicals
technology that uses Supelco® SmartTitrants and Supelco® SmartStandards to transfer data seamlessly to a
titrator. With this new technology, an RFID label is embedded on our TitripurⓇ volumetric solutions, CertipurⓇ
volumetric standards and all Aquastar® Karl Fischer titrants and standards. These RFID labels store all relevant
data from the Certificate of Analysis, which helps eliminate time-consuming steps and errors by transferring
data wirelessly and instantly to titration instruments.
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Process Solutions
Over the course of the year, we continued to deliver solutions for today's biomanufacturing processes while
developing leading-edge technologies for the factories of the future. In April, we unveiled our Bio4C™ Software
Suite, a first-of-its kind digital ecosystem that combines process control, analytics and plant-level automation.
It includes two browser-based platforms: the Bio4CTM ProcessPad, which will allow users to acquire, aggregate
and analyze data from disparate sources such as equipment, batch records, databases and historians across the
bioprocess; and the Bio4CTM Orchestrator, which will provide remote access to systems, recipes, reports, user
accounts, and alarms from a holistic process dashboard. Part of our expanding BioContinuum TM Platform, this
transformative software suite allows users to look across the entire manufacturing process versus individual
operational units, giving biomanufacturers complete process control and deep insights, bringing Bioprocessing
4.0 to the here and now.
With this launch and others, our BioContinuum™ pipeline continues to drive the biopharmaceutical industry on
a journey to evolve and digitize the next generation of bioprocessing to increase speed and reduce costs.
Additional launches from this year include our BioContinuum™ Buffer Dilution 30L System, part of the
BioContinuum™ Buffer Deliver Platform; our perfusion-ready bioreactor, Cellicon TM perfusion device and
controller for seed train intensification with optimized process control; and the Cellvento® 4CHO-X expansion
medium.
In October, we announced our collaboration with D1Med, a Shanghai-based biopharmaceutical startup and
precision-medical company, to advance the application of three-dimensional (3D) cell culture technology in
China. As part of the collaboration, we will provide D1Med with 3D cell culture products and application support,
including local and global expertise to co-develop the 3D cell culture protocol for PDO applications, which come
from humans and mimic the biological characteristics of the original tumor as tools to study cancer
development, drug screening and disease modelling.
In our Display Solutions business unit, our liquid crystal technology UB-FFS (ultra-brightness fringe-field
switching) continues its successful growth, thanks to new product qualifications and rising demand in the liquid
crystal displays (LCD) sector for mobile devices, especially mobile phones and tablet PCs. The development of
high-resolution 4K and 8K TV sets continues to pose a challenge, as the LCD backlight transmission and
efficiency will be reduced due to higher pixel density. We are therefore actively working to expand our ultra-
bright (UB) technology offering with our UBplus liquid crystal materials for the TV market. With such
technologies, we increase the light transmission efficiency of applications for large-format TV sets and display
panels by 10% to 15%.
With more than 35 years of experience in the development and manufacturing of small molecules, biologics,
and antibody-drug conjugates (ADCs), we offer extensive experience in both clinical and commercial
manufacturing. In September, we continued investing in ADC technologies with an expansion of our
manufacturing capacities at our site in Madison, Wisconsin, USA, marking another critical advancement of
increasingly potent compounds for therapies that have the potential to treat cancer.
To further advance our portfolio of gene-editing and novel modalities, in October, we launched the
VirusExpress™ Lentiviral Production Platform to bolster our viral vector manufacturing capabilities and offer a
simplified upstream workflow that makes processes easier to manage, adjust, and scale. This new platform
helps to overcome lentiviral production challenges and can reduce process development time by approximately
40%, based on our experience as a contract development and manufacturing organization. In addition to
accelerating process development, the VirusExpress™ Platform's suspension culture format allows each batch of
virus to be larger, yielding more patient doses while being amenable to true scale-up and less labor-intensive.
The chemically defined medium also eliminates the safety, regulatory, and supply chain concerns related to
animal- and human-derived materials. This marks the latest of Merck's continued investments in the rapidly
growing cell and gene therapy market.
Merck has 16 years of experience in genome editing, from early development to manufacture. Our portfolio now
includes 28 patents for CRISPR technology, granted worldwide, including six additional patents granted in 2020.
We were awarded our second U.S. patent for CRISPR-chrom technology and two U.S. patents for foundational
CRISPR-Cas9 technology. In June, we joined 10x Genomics, a single-cell and spatial genomics technologies
Combined Management Report
Fundamental Information about the Group Research and Development
Recognized for award-winning innovation
62
The growing potential of CRISPR technologies also raises scientific, legal, and social questions. We support
genome-editing research only after careful consideration of ethical and legal standards. Our work is guided by
the Merck Bioethics Advisory Panel, an independent panel made up of a diverse group of international
biomedical experts that provides guidance for research in which Merck's businesses are involved.
We also announced a global licensing agreement with ReForm Biologics, a pharmaceutical technology company
in Woburn, Massachusetts, USA, for excipient development and commercialization. The collaboration will
accelerate R&D activities and GMP manufacturing for ReForm's excipients, making them available to our
customers for use in biologic formulations.
Since 2018, 63% of drugs in the pipeline were being developed by biotech start-ups focused on innovative
therapies, including those intended to treat niche diseases with small patient populations. Our global health
commitment focuses on these companies and supports bringing their drugs to market through our grant
programs. Grants provide selected companies with access to our products and services to help accelerate
market entry for new therapies. Through our Advance Biotech Grant Program, which we run in North America,
Europe, and Asia, we announced two grant recipients for 2020, selected based on the scientific and societal
merit of their respective therapies in development, as well as process challenges and expertise gaps. Additional
finalists were also announced.
Applied Solutions
To continue strategically advancing our core capabilities, in May, we launched the Milli-Q® IX
7003/7005/7010/7015 Type 2 water purification system, a redesigned version of our benchtop pure water
system that provides laboratories with a reliable and consistent source of high-quality pure water. This is a
smaller and more intuitive and ergonomic device than previous generations of the water purification system.
For half a century, we have been the partner of choice for water purification systems and services for lab
scientists who need to ensure their water is free of contaminants. This new system goes a step further to
incorporate a range of sustainable purification technologies and design features aimed at minimizing
environmental impact. Additionally, in January, we launched the new Milliflex Oasis® System to provide
enhanced result reliability, increased productivity, and advanced traceability. The system offers enhanced
benefits for pharmaceutical bioburden and water testing, including 96 new features, while streamlining the
bioburden testing workflow.
Life Science has more than 30 years of experience in the diagnostics space, and our products and capabilities
have played a significant role in Covid-19 testing efforts, as evidenced by our collaboration with Mammoth
Biosciences. Covid-19 developments and other advancements in the area of innovative personalized medicines
have resulted in an increased demand for more rapid sterility testing solutions to support the development and
release of these products. Additionally, we continue to establish new growth opportunities and capabilities in
contract development and manufacturing services. In February, we announced that our business was selected
by Elypta, a molecular diagnostics firm in Sweden, as the contract manufacturer for their Research Use Only
(RUO) clinical diagnostic liquid biopsy kits. Once validated and commercialized, the kits will be intended to
improve the accuracy of cancer diagnoses by analyzing metabolites deregulated in several cancer types. The
kits will be manufactured at our facility in St. Louis, Missouri, USA.
We remain focused on advancing digitalization, especially our offering of digital lab productivity tools. To
continue growing our laboratory informatics solutions to create the labs of the future, in February, we
introduced the BrightLab™ platform. The tool brings Internet of Things (IoT) integrations to R&D, meeting the
increasing demand for data automation and accessible, real-time monitoring of centralized and synched lab
Combined Management Report
Fundamental Information about the Group
Research and Development
63
83
data. Additionally, in March, we launched the LANEXOTM system. This first-to-market digital lab informatics
solution offers radio-frequency identification (RFID) labels, cloud-based integration, mobile and web
applications for easily accessible digital data capture and real-time documentation. These solutions recognize
the increasing demand for data automation that can be easily set up and rapidly integrated into existing lab
workflows to ultimately help speed up the discovery process.
company, in announcing our development of two linked technologies: single-cell transcriptomics and pooled
CRISPR screening. This is the first solution for simultaneous gene perturbation measurement and unbiased
single-cell gene expression. Further, in October, we announced our agreement to license CRISPR technology to
two companies: PanCELLa, a cell therapy firm based in Toronto, Canada, and Takara Bio USA, Inc., a
biotechnology company based in Mountain View, California, USA. The licenses aim to accelerate drug discovery
leading to development of new therapies.
Our VA (vertical alignment) liquid crystal platform including PS-VA (polymer-stabilized vertical alignment)
technology remains predominant when it comes to large-format TV sets. Here, our latest materials provide
additional performance benefits and improve processing efficiency in the production of TV sets. Moreover, we
have successfully demonstrated our manufacturing expertise with respect to the new liquid crystal technology
SA-VA (self-aligned vertical alignment). We are now focusing our attention on applications for specialized
display products from the premium segment through to TV applications produced in large numbers, as this
technology offers the high contrast and image quality of the PS-VA technology while also enabling
improvements in display design and panel production, for example through the reduction of waste and energy
consumption in the production of LCDs.
Within our Performance Materials business sector, we are a market and technology leader in most of our
industries. As a science and technology company, we offer leading-edge products and solutions that, in many
cases, set us apart from the competition. We integrated our supply chain units into the respective business
units to fully reflect business accountability in the organizational design across the entire supply chain. In order
to bring our R&D closer to our businesses and reflect our new organizational structure, we transferred our
research activities to our business units. Our Chief Technology Office (CTO) focuses on identifying trends and
vetting technologies that are beyond the time horizon or scope of our business units. As a dedicated technology
organization, the CTO is managing research partnerships, shaping our technology roadmaps, and managing our
long-term R&D portfolio. We have also created a Technology Leadership Board to review and optimize our
technology investment across the business sector.
Research and Development
At the end of 2020, women occupied 35% of leadership roles Group-wide, meaning that we again exceeded our
goal of maintaining the proportion of female leaders at a stable level of 30% by 2021. At the same time, we
developed goals and measures to ensure a balance of men and women when filling vacancies at the different
levels of our businesses. Factors such as the stronger female presence in leadership programs are already
helping to ensure that female candidates are taken into account to a greater extent when filling vacancies. Our
flexible working models and unconscious bias training are also helping to increase the percentage of women in
the Group.
69
People at Merck
Combined Management Report Fundamental Information about the Group
At Merck, many teams work across sites and internationally. The diversity of competencies and experiences
among the team members offers tremendous potential that our leaders can use. Internationality and a global
mindset characterize our company culture and are therefore mirrored by our international management team.
At present, 66% of our managers are not German citizens. All in all, 75 different nationalities are represented in
such positions.
In order to manage our global and diverse organization, we need managers who can build international teams
and promote international collaboration so as to contribute to a productive and flexible working environment.
We seek managers whose inclusive leadership style also reflects different employee and customer traits. This
opens up career opportunities for talented employees from all areas of our company and ensures a broad
experience base as well as differentiated decision-making.
Diversity and management
In addition to these various programs, we partner with universities across the globe to enable our employees to
obtain qualifications such as an executive MBA.
Another initiative we have been offering our up-and-coming leaders since the 1990s is our International
Management Program, where participants work on an interdisciplinary project over a period of eight months.
The results are then presented to the Executive Board. In the reporting period, 25 of our employees worked on
a project as part of this program.
For the past 21 years, we have been partnering with top international universities to offer the Merck University
program. Over a period of around a year, senior executives take classes on management techniques and
strategic business development. To date, a total of 522 executives have completed this program.
In recent years, we have initiated three programs to enhance the skills of our people managers. The Managerial
Foundation program imparts the basics of leadership, such as communication techniques, leadership styles,
conflict management, motivation, and emotional intelligence. The Advanced Management program covers
topics such as change management, self-reflection, and resilience. The third initiative is our Global Leadership
program, which focuses on competencies needed to ensure successful international collaboration. Due to the
Covid-19 pandemic, we also offer the majority of the programs entirely virtually. We have also introduced a
range of support programs for leaders (e.g. group coaching and virtual workshop formats). We will also
continue to work with our leaders to ensure that they gain the necessary skills to manage their employees
responsibly in uncertain and challenging times.
Management programs for executives
A transparent competency model is the pillar of our personnel development efforts. Managers and employees
should show strategic competence by being purposeful, future-oriented, innovative, results-driven,
collaborative, and empowering. By demonstrating these qualities, our managers can build a strong culture of
collaboration based on curiosity, creativity, and trust. In addition, our leaders are expected to set an example
by living the Merck values and taking responsibility for their own decisions. Based on this competency model,
we have defined six leadership behaviors that summarize the conduct we expect from our leaders. To assess
the performance and potential of every individual and to establish an effective leadership culture, regular and
differentiated feedback is also of great importance. In this way, employees and supervisors can develop a
shared vision, execute the business strategy, and further develop a unifying corporate culture.
Strategic competency development
Good leaders are key to the success of not only our employees but also our company. Because they provide our
talent with the right framework to unleash their potential and generate new ideas, we highly value the
continuing education and development of our managers.
The report on stipulations to promote the proportion of women in leadership positions at Merck KGaA,
pursuant to section 76 (4) and section 111 (5) of the German Stock Corporation Act (AktG), can be found
in the Corporate Governance statement. This is made available on the website
https://www.merckgroup.com/en/investors/corporate-governance/reports.html.
Leveraging the opportunities of digitalization
Digital transformation has been leaving its mark on the world of work for a long time now. New, agile ways of
working and artificial intelligence (AI) are thus increasingly gaining ground, a shift we are actively supporting at
Merck. For example, we have been developing an intelligent humanoid robot in collaboration with Darmstadt
Technical University since 2017. The aim is to find out how employees and managers respond to intelligent
robots and AI in the workplace and in which areas they could be used. Another goal is to prepare our
executives and staff for the introduction of AI in the working environment. The studies are also intended to
make new technologies hands-on so as to create acceptance of them early on.
State-of-the-art big data applications provide leaders with rapid and specific answers to HR-related questions.
In addition to conventional master data, this may take the form of information on compensation, performance,
and potential as well as strategic succession and HR planning. The Visier software developed by the People
Analytics HR unit can connect this data in order to allow trends to be identified at an early stage. This means
that managers have access to an extensive trove of data that they can utilize for operational and, above all,
strategic (HR) decisions as long as this is consistent with data privacy regulations.
Combined Management Report Fundamental Information about the Group
Our focus on systematic personnel development allows us to sustainably strengthen the performance potential
within our company and to increase the motivation of our people. Only by expanding the abilities of each
individual can we count on innovative and curious employees and managers in the future and flexibly respond
to different requirements.
Targeted advanced training and maximizing performance capability
Although the conditions were more difficult on account of the Covid-19 pandemic, we maintained a consistently
high vocational training rate in Darmstadt, Germany, our largest site, in 2020. A total of 600 young people
were enrolled in vocational training in 28 different occupations at our headquarters in the reporting period. We
give unlimited employment contracts to all employees in vocational training who work in occupations for which
we have sustainable demand. On average, the post-vocational training hiring rate – taking voluntary
terminations into account - was more than 90% over the past five years. We also offer vocational training at
other sites in Germany, with a total of 607 young employees participating. We promote the professional and
social expertise of our employees in vocational training through numerous regional and global project activities.
In Darmstadt, the Starting Vocational Training and Integrating Refugees through Training programs help young
people to enter the job market: The 11-month preparation program gives them an insight into working life and
readies them to enter vocational training. In this way, we assist young people who have a school-leaving
qualification but have been searching for a vocational training position for at least one year without success, as
well as refugees who have been forced to leave their home country and are seeking to build a new life in
Germany. In the reporting year, we combined the programs so that the participants can learn and benefit from
each other. Encouraging cultural awareness in both directions, promoting language development through
personal contact with native speakers, and integrating the role model function of highly motivated people are
just a few of the benefits of the Starting Vocational Training program. In 2020, the program accepted
participants ages 16 to 30.
Vocational training to recruit young people
A globally accessible welcome portal is available to new employees in order to help them prepare for their new
job at Merck and to support their onboarding phase. To further improve the onboarding process, supervisors,
Human Resources, and new employees can exchange information and documents before their first day of work.
In addition, all new employees are assigned an experienced colleague who can help familiarize them with the
daily work routine. Our managers are also given detailed information such as onboarding plans and process
descriptions to support them with this task.
When filling job vacancies, we pursue a holistic recruitment approach coupled with globally uniform and binding
procedures. This starts with an internal job posting before external channels such as job portals and
recruitment agencies are used. This process enables us to offer employees better development opportunities.
For employees with leadership responsibility, we offer targeted interview coaching to support them in selecting
candidates and to establish uniform quality standards.
Building empowered leaders
A holistic recruitment approach
70
People at Merck
Combined Management Report Fundamental Information about the Group
We believe that curiosity can make great things happen. We therefore seek to provide an environment that
gives our employees plenty of scope for creativity and awakens their desire to innovate. In particular, training
and career development play a key role. Focusing on their individual strengths, aspirations, and skills, we
support their personal and professional development, thereby laying the groundwork for an enriching and
challenging career with our company. We endeavor to discover qualified employees at an early stage in their
career and develop their talents.
Furthering and asking more of talent
Digitalization is also impacting our vocational training and continuing education programs, where IT skills are
becoming increasingly crucial. At the same time, digital media is creating new opportunities for learning, which
is why we are increasingly integrating 3D printing, robotics, big data, and artificial intelligence into our
curricula. Moreover, we are testing novel learning and innovation methods such as Scrum and design thinking.
To learn how to operate machinery, our apprentices also utilize virtual reality environments, initially learning
how to operate the machinery through virtual images before developing the corresponding expertise in real
environments.
Data and technology at Merck have become more important than ever before in light of the Covid-19 pandemic.
So far, our strong foundations have helped us to overcome the crisis and keep our employees safe and active.
We want to make even greater use of innovative technologies like artificial intelligence in order to advance the
way in which our employees work.
70
69
Employee development at Merck is founded on regular exchanges and a culture in which employees aspire to
high levels of performance and engagement. As the basis for internal strategic talent management, the
performance and potential management process is globally aligned for all employees in accordance with the
same principles and is part of a shared IT system. We systematically combine talent recognition with
performance assessments based on employee target agreements, as we are convinced that ongoing feedback
helps all employees to grow in terms of their performance and potential. Regular individual assessments permit
us to more readily identify high-potential employees and to further them accordingly. Clear objectives,
differentiated and open feedback, and individual development plans are thus important prerequisites for both
the personal development of every individual and the success of the company.
People at Merck
Overview of our headcount figures
A career with Merck is enriching - both professionally and personally. We offer conditions that meet the
individual needs of our employees and encompass an exciting range of tasks and advanced training
possibilities, furthering flexible forms of cooperation and a culture of mutual esteem and respect. The latter is
particularly important, as our workforce represents a broad range of nationalities, cultures, religions, and age
groups, as well as a variety of personal and professional backgrounds. We are committed to an inclusive culture
in which each individual can develop their full potential and contribute their individual perspectives. We are
convinced that the diversity of our workforce and our open, international corporate culture have a positive
impact on our company's business success and innovative strength.
"Bring Your Curiosity to Life" our promise as an employer - describes how we collaborate at Merck, how we
advance our business, how our employees can develop within the company, and who we are. Becoming a global
science and technology company would not have been possible without the passion, creativity, and curiosity of
our employees. And we are certain that our current and future employees ensure our economic success. They
create innovations for patients and customers, and they secure our ability to compete. For this reason, the
development of all our employees is very important to us. In short, we are working to create an environment
where people are able to develop and reach their full potential.
-
People at Merck*
67
40
People at Merck
Fundamental Information about the Group
Combined Management Report
In our automotive pigments business, we continue to focus on developing achromatic pigments. The latest
example is Xirallic NXT Amur Black, a blue-black effect pigment with a silky-silvery fine texture including Living
SparkleⓇ. In our pipeline, we address the special requirements that radar and lidar sensor applications have for
coating pigments. Another key topic in our development is fueled by the evolution of autonomous driving.
In our Cosmetics business, we are putting sustainability at the center of our efforts by more and more focusing
on natural materials in our portfolio of active ingredients. For example, we will add to our offerings through the
launch of a series of cosmetic applications containing four superfood extracts, which are backed by in-house
scientific efficacy studies. Another new development will offer our customers an attractive portfolio of algae
extracts that unlock the power of the ocean for the skin, together with RonaCare® RenouMer. Furthermore, we
are tapping into the potential of the haircare market with the launch of a series of third-party products enabling
the formulation of multi-tasking haircare products. Our well-established Functional Fillers portfolio RonaFlairⓇ
will be extended by a new ingredient combining two features, soft focus effect and transparency. RonaFlairⓇ
Infinity will address market needs like flawless skin without a masking effect.
Surface Solutions
Our display materials are contributing to the fast-growing market of free-form displays, which includes foldable
smartphones and rollable TVs. We further strengthened our ability to drive innovations in the fast-growing
OLED market by acquiring OLED patents from Konica Minolta in April. Additional sublimation units will be built
at our sites in Pyeongtaek, South Korea, and Shanghai to help meet customer demand in the growing OLED
market. The investment will further increase our local OLED production footprint in Korea and establish OLED
production capacity in China. In late November, we announced partnership agreements with Optitune Oy and
Solip Tech Co., Ltd. to advance display patterning materials for free-form applications. The partnerships will
enable the commercialization of liviFlex™-H, the first product from the company's new range of display
materials that addresses challenges in the manufacturing of free-form OLED displays.
68
As of December 31, 2020, we had 58,127 employees worldwide (previous year: 57,071). In 2020, we were
represented by a total of 221 legal entities with employees in 66 countries.¹
Distribution of Employees
66
23%
Fundamental Information about the Group
by Region
* The contents of this chapter or section are voluntary and therefore not audited. However, our auditor has read the text critically.
1 Merck also has employees at sites that are not fully consolidated subsidiaries. These figures refer to all people directly employed by Merck and
therefore may deviate from figures in the financial section of this report.
23%
Asia Pacific
13,518
26,587
Europe
46%
Combined Management Report
6%
1,323
Middle East & Africa
2%
13,312
North America
Latin America
3,387
Market for type 2 diabetes therapies²
Market for multiple sclerosis therapies²
Global pharmaceutical market
Healthcare
Report on Economic Position
Development in 2020 and 2019
77
Combined Management Report
Report on Economic Position
The overall growth was driven in particular by the Life Science business sector, with Healthcare also making a
positive contribution to organic growth. Performance Materials was down on the previous year in terms of
organic sales. This illustrates the fact that the growth in the North America and Europe regions is primarily
attributable to the Life Science business sector. In the Asia-Pacific region, the growth contributions from the
Life Science and Healthcare business sectors were more than enough to offset the downturn in the Performance
Materials business sector.
As in the previous year, Merck's organic sales growth was significantly higher than the IMF's global growth
expectations at 6.0%. With the exception of the Middle East and Africa, all regions contributed to this growth in
the reporting year. North America accounted for the highest share of Group-wide growth at 42.4%, followed by
Europe with 33.4%, Asia-Pacific with 17.8%, and Latin America with 8.2%. The organic downturn in the Middle
East and Africa region was reflected in a slightly negative contribution to Group growth of -1.8%.
According to the latest forecasts by the IMF, global gross domestic product (GDP) fell by -3.5% in 2020
(previous year: +2.8%). Activity resumed more quickly after the lockdowns than had been initially anticipated,
especially in the advanced economies, although there are general differences in terms of the impact of the
pandemic in the individual countries. While economic output in the industrialized nations fell by -4.9% (previous
year: +1.6%), the emerging markets and developing economies saw a less pronounced downturn of -2.4%
(previous year: +3.6%). GDP in the United States declined by -3.4% (previous year: +2.2%). The eurozone
was hit harder by the pandemic, with GDP decreasing by -7.2% (previous year: +1.3%). The downturn in GDP
in the emerging economies of Asia was relatively minor at -1.1% (previous year: +5.4%). While the Indian
economy contracted by -8.0% (previous year: +4.2%), the rapid recovery of the Chinese economy to record
growth of 2.3% (previous year: 6.0%) meant that the overall figure decreased only slightly. As part of the
advanced economies, Japan reported a downturn of -5.1% (previous year: +0.3%).
Based on the World Economic Outlook published by the International Monetary Fund (IMF) on January 26,
2021, the recession in the second quarter of 2020 was followed by a recovery in the global economy from the
second half of 2020 onward. However, there is considerable variation between individual countries when it
comes to the pace of the continued recovery. Key factors include the comprehensive rollout of vaccines as
quickly as possible, the extent to which those vaccines are effective against Covid-19 mutations, and effective
containment measures. Government fiscal policy measures could also have a further positive impact. Yet, the
IMF does not expect the global economic activity to return to the level forecast prior to the outbreak of the
Covid-19 pandemic by 2022.
Market for fertility treatment²
Macroeconomic and Sector-Specific Environment
Report on Economic Position
Market for the treatment of colorectal cancer³
12.8%
Change 2019
32.3%
Share of biopharmaceuticals in the global pharmaceutical market5
76
4.4%
6.1%
Market for laboratory products4
Life Science
Change 20201
5.7%
6.9%
-2.5%
12.4%
1.0%
0.9%
6.2%
3.0%
-10.5%
Report on Economic Position
43.7
Combined Management Report
51,039.8
56,204.6
57,358.3
Asia-Pacific (APAC)
10,462.9
12,694.2
13,489.6
Europe
25,126.8
44.1
44.4
44.4
Germany
43.3
30.5%
global, total
13,312
12,829
10,978
5 Ratio adjusted retrospectively.
4 Not including the Versum Materials legal entities or Allergopharma.
3 With the completion of the acquisition of Versum Materials on October 7, 2019, around 2,300 employees joined Merck.
2 Not including the Sigma-Aldrich legal entity in Steinheim, Germany, or Allergopharma.
1 Merck also has employees at sites that are not fully consolidated subsidiaries. These figures refer to all people directly employed by Merck and therefore
may deviate from figures in the financial section of this report.
15.0
14.8
Report on Economic Position
14.5
9.5
10.0
global, total
Average length of service in Germany
Average length of service
43.8
North America
9.6
Monoclonal antibody (mAb) pipeline6
36.9
13.3%
Performance Materials
Our Life Science business sector significantly exceeded our original forecast, generating organic sales growth of
11.8% in 2020. Following an especially strong fourth quarter, this was also above the most recently updated
range of 9% to 10%. Thanks in particular to the extreme relevance of our product and service range in the
context of the pandemic, Process Solutions was the most dynamic business unit, as expected, and delivered the
largest contribution to organic sales growth within Life Science. Applied Solutions and Research Solutions also
contributed positively to the organic sales performance, as anticipated, albeit to a considerably lesser extent
than Process Solutions.
Life Science
We originally forecast solid organic sales growth for our Healthcare business sector compared with the previous
year. Despite the impact of the Covid-19 pandemic, the business sector recorded moderate organic growth of
3.4% in 2020 as a whole. This was slightly above the forecast we updated in the third quarter, which provided
for organic growth of between 2% and 3%. This development was driven in particular by the significant growth
contribution of our most recently approved products, especially MavencladⓇ. Together with the positive sales
performance of the rest of our base business, this more than offset the downturn in sales in the fertility
business in the second quarter as a result of Covid-19.
Healthcare
We forecast solid organic net sales growth for the Group in 2020. Over the course of the year, Merck reported
more dynamic organic sales growth, driven by the strong organic growth of the Life Science business sector in
particular. This meant we slightly exceeded our forecast with strong overall organic net sales growth of 6.0% in
fiscal 2020. At the start of the year, we still anticipated a slightly negative to slightly positive exchange rate
effect on our net sales. However, several currencies saw increasingly unfavorable development as the year
progressed, particularly the US dollar. The negative exchange rate effect in 2020 as a whole was -2.6% and
thus slightly outside our most recent update in the third quarter, which provided for a range of -3% to -4%.
The positive portfolio effect of 5.3% was primarily due to the acquisition of Versum Materials and developed in
line with our original assessment.
Net sales
The forecast of the Merck Group for fiscal 2020 published in the Annual Report for fiscal 2019 comprised the
forecast for the Group as well as the forecast for the three business sectors: Healthcare, Life Science, and
Performance Materials.
Review of Forecast against Actual Business
Developments
80
Report on Economic Position Review of Forecast against Actual Business Developments
Combined Management Report.
The market for cosmetics and care products fell by -2.5% overall in 2020 (previous year: +2.0%). Our relevant
market of color cosmetics declined by as much as -8.4% in 2020 due to Covid-19-related effects such as
lockdowns and social distancing. The trade conflicts between the United States and China and uncertainties in
connection with Brexit also served to slow market growth further.
The markets for automotive coatings and cosmetics are crucial to Merck's Surface Solutions business. Global
automobile production fell by -16.7% in 2020 (previous year: -5.6%). Factory closures in response to Covid-19,
supply chain interruptions and a slump in consumer demand are the main reasons for this development. In
China, one of the most important markets, the recovery has already progressed well, whereas in Europe and
North America the markets are not yet on the pre-Covid-19 level.
With its Liquid Crystals business, Merck is the leading producer of liquid crystal mixtures for the display
industry. According to surveys by market researchers at Omdia (formerly IHS), growth in the display surface
area was negative at around -2.0% in 2020 (previous year: +4.2%). This was primarily due to the low level of
demand for televisions and mobile phones as a result of the weaker consumer demand in connection with
Covid-19, as well as the trade dispute between the United States and China. Liquid crystals will continue to play
a key role in the display industry in the future. OLED technology, for which Merck is also one of the leading
material suppliers, is becoming increasingly important in high-end display applications.
Since we expected the growth in semiconductor business to exceed the downturn in sales in the Display
Solutions business unit, we originally forecast slight organic growth for our Performance Materials business
sector. In light of the impact of Covid-19 on our display, automotive, and cosmetics end markets in the first
quarter, we were forced to significantly downgrade our forecast to a moderate to strong organic decline.
Our key assumption of high growth momentum in the Semiconductor Solutions business unit proved to be
correct. Thanks to a particularly strong fourth quarter for Semiconductor Solutions in particular, the
business sector closed the year with an organic sales decline of -3.2%, ahead of our most recent forecast of
between -4% and -5%. As consistently forecast, the portfolio effect of 35.4% primarily resulting from the
Versum Materials acquisition, was in the mid-thirties percentage range.
(MEA)
36.8
26,013.1
12,704.4
10,959.6
North America
(MEA)
1,322.2
1,365.2
1,151.1
The semiconductor industry is the most important market for Merck's business with materials for the production
of integrated circuits (Semiconductor Solutions). In particular, the growth in demand for semiconductor
materials depends on the wafer area produced for semiconductors. The silicon wafers required as raw materials
are used as an indicator to estimate the demand for semiconductor materials. According to the global industry
association SEMI.org, the area of delivered silicon wafers increased by approximately 2.4% in 2020 (previous
year: -6.9%). Although the global economy fell into a severe recession in the first half of 2020 as a result of
the global lockdowns to protect public health in response to Covid-19, demand for semiconductor chips
remained robust. This was due to the strict social distancing rules, which triggered a significant wave of IT
spending on the part of companies, governments, and individuals. With entire production facilities, offices,
schools, and companies closing their doors temporarily, working from home, home schooling, online shopping
and online entertainment suddenly became considerably more important as a means of enabling economic
activity to resume, at least in part. To this end, demand for electronics - and hence semiconductor chips
remained robust and even intensified as the digitalization of the world picked up pace. McKinsey estimates that
the global digital transformation has accelerated by around five years as a result of the Covid-19 lockdowns. As
a consequence, the production capacities of semiconductor manufacturers remained largely constant with
sustained high utilization rates throughout 2020, meaning that the development of the semiconductor and
electronics industry was entirely decoupled from the wider GDP trend. As social distancing rules look set to
remain in place or be intensified in order to prevent a renewed rise in new infections from the fourth quarter of
2020 onward, demand for laptops/PCs, servers, communication infrastructure, storage capacity, and similar
products will be high, especially in 2021.
Middle East and Africa
3,383.8
3,427.8
3,339.5
Latin America
full-time equivalents)
Number of employees in FTE (FTE =
25,896.8
by region
Performance Materials
79
Report on Economic Position
3 Growth rates based on market data stated in US dollars. Market data from EvaluatePharma on the growth of indications are based on published
company reports and are subject to exchange rate fluctuations.
2 Growth rates based on market data in local currency, translated at a constant euro exchange rate. The IQVIA market data on the growth of indications
are based on current figures, including the third quarter of 2020. Annual growth based on the values for the past 12 months. The type 2 diabetes
market excludes the United States, since this market is insignificant to Merck.
1 Predicted development. Final development rates for 2020 were not available for all industries when this report was prepared.
-5.6%
-16.7%
Global number of produced light vehicles
2.0%
4 The Global Market for Laboratory Products, December 2020, Frost & Sullivan. Acceleration attributed to Covid related tailwinds (Covid-19 testing,
research, and vaccines).
-2.5%
4.2%
-2.0%
Growth of liquid crystal display surface area?
-6.9%
2.4%
Growth of wafer area for semiconductor chips
Performance Materials
Global sales of cosmetics and care products
10.8%
5 Growth rates based on market data in local currency, translated at a constant euro exchange rate. IQVIA market data on the growth of indications are
based on current figures, including the third quarter of 2020. Annual growth based on the values for the past 12 months.
7 Growth of display area is a pure volume indicator, which is counteracted by a negative price momentum.
Report on Economic Position
Combined Management Report
In the pharma and biotech production market in which our Process Solutions business unit is active, demand is
driven by the development and manufacture of therapeutics and vaccines. According to IQVIA, the end market
for biopharmaceuticals grew by 9.9% in 2020 (previous year: 13.9%) to € 316 billion (or 32.3% of the global
pharmaceutical market). Monoclonal antibodies, currently the leading area of biopharmaceuticals, continued on
their growth path in 2020 with positive development of 10.8% (previous year: 13.3%). The slowdown
compared with the previous year is due to the global lockdowns in response to Covid-19, which led to
production and clinical trials being suspended. Volatility is expected to persist in the near term as routine
healthcare applications start to resume, albeit with reduced hospital capacities. The rapid development of
treatment methods and vaccines in connection with Covid-19 is giving the pharma and biotech production a
considerable boost. As of January 21, 2021, a total of 1,083 programs for the development and production of
billions of vaccine doses were in progress.
According to the market research firm Frost & Sullivan, the market for laboratory products, which is relevant to
our Research Solutions and Applied Solutions business units, grew 6.1% in 2020 (previous year: +4.4%). This
was primarily due to a surge in demand for products related to Covid-19 testing, research, and vaccination.
These developments served to more than offset the temporary reduction in laboratory activity during the
lockdowns that were imposed in response to the Covid-19 pandemic. The impact of the closures was most
pronounced in the second quarter of 2020, when just 12.2% of the laboratories surveyed by the market
research firm Bioinformatics were fully operational. Lab activity picked up steadily throughout the fall and
winter (39% of laboratories were fully operational in the fourth quarter of 2020) and is expected to return to
pre-pandemic levels in 2021. Market development for 2021-2022 is expected to continue growing between 4%
and 6%.
Our Life Science business sector is a leading global supplier of products, tools and services for research
laboratories, pharma and biotech production, and industrial and testing laboratories. While Covid-19 is having a
pronounced impact on many sectors and the global economy as a whole, the life science market has proven
itself to be robust.
13,265.9
Life Science
6 EvaluatePharma. Deceleration since 2019 is due to global lockdowns in response to Covid-19 causing a pause in manufacturing and clinical trials.
Volatility is expected to persist in the near term as routine healthcare use resumes with lower clinic capacities.
The developments in the therapeutic areas of relevance to Merck saw differing trends in the reporting year. The
global market for type 2 diabetes excluding the United States followed the positive trend of previous years,
achieving growth of 12.4% in 2020 (previous year: 12.8%). The therapeutic area of infertility saw a downturn
of -2.5% in the reporting year (previous year: +6.9%). Following a strong upturn in recent years, the market
for colorectal cancer also declined by -10.5% in 2020 (previous year: +5.7%). The growth trend in the market
for multiple sclerosis patients remains at previous year's level with 0.9% (previous year: 1.0%).
78
Report on Economic Position
Report on Economic Position
Combined Management Report.
The developments at a regional level are extremely heterogeneous. Latin America reported significant growth of
10.6% (previous year: 11.8%). The EMEA (Europe, Middle East, and Africa) region also enjoyed solid if slower
year-on-year growth of 4.4% (previous year: 6.8%). In North America, growth also slowed compared with the
previous year, amounting to 3.9% (previous year: 5.3%). In absolute terms, the pharmaceutical market in the
United States remains the biggest and most important market by some distance. Market growth in the Asia-
Pacific region (excluding China) stagnated at 0.5% (previous year: 5.0%). Individual positive developments,
particularly in India, were offset by a sharp downturn in Japan. Despite the downturn of -2.9% in China, which
was largely due to the impact of the Covid-19 pandemic, the continued development of the local healthcare
system and the shift from spending on generic products as a result of price regulation (e.g. volume-based
procurement) in favor of innovative treatments mean that China will remain an attractive market, and we are
forecasting a return to substantially positive growth from 2021 onward.
In a study from September 2020, the pharmaceutical market research firm IQVIA forecast growth in the global
pharmaceutical market of 3.0% in 2020 (previous year: 6.2%). Due to Covid-19, the pharmaceutical market is
therefore expected to see lower growth in the reporting year than was originally anticipated at the start of the
year. The reduced growth forecast is due to people making fewer visits to physicians, and hence slower growth
in the number of new patients. This particularly affected the areas of gastroenterology, oncology, and
cardiology, while endocrinology and dermatology were least affected. In particular, the lockdowns and the rules
on social distancing have made it harder for patients to access hospitals, leading to reduced demand for these
products.
Healthcare
Besides the growth of the pharmaceutical sector as a whole, the development of the biopharmaceutical market
is particularly relevant to our business. According to IQVIA, the market volume for biological pharmaceuticals
totaled approximately € 316 billion in 2020 (previous year: approximately € 288 billion), thus continuing the
recent trend of a continuous increase in market share. These products accounted for 32.3% of the global
pharmaceutical market in 2020 (previous year: 30.5%). The most important market for biological
pharmaceuticals remains the United States, with a 61.0% share of the global market volume.
1,323
Number of countries
1,153
• Company benefits including a company pension
•Health and well-being
• Service offers
Specific benefit packages are in place at a national level to meet the different needs of our employees using
well-established management mechanisms. Focusing more closely on individualized fringe and social benefits in
the future will continue to enable our employees to individually choose those benefits that best meet their
personal situation and stage of life.
Valuing diversity and dialogue
We appreciate the diversity that our employees bring to our workforce in terms of their gender, national or
ethnic background, sexual orientation, religion, or personal life experience. We are committed to an inclusive
culture in which each individual can develop their full potential and contribute their individual perspectives. We
deeply believe that a diverse workforce and a respectful corporate culture are indispensable for our ability to
innovate and that they contribute significantly to our business success.
Our diversity strategy
-
Our Chief Diversity Officer is responsible for strategic management with regard to the topics of diversity and
inclusion. In addition, all the business sectors and larger Group functions have active leadership teams that
implement our diversity and inclusion strategy in their respective area of responsibility. A committee with
responsibility for diversity - the Diversity Council is composed of high-ranking managers from all the business
sectors and selected Group functions. The work of the committee focuses on advancing our diversity strategy,
which involves two key areas. First, we aim to promote the advancement of women into leadership positions
and give talented people from the Asian region greater opportunities. Secondly, we aim to develop a better
understanding of this growth market. The focus has recently been expanded to include LGBTQI+ (lesbian, gay,
bisexual, transgender, queer or questioning, intersex and other gender identities), disability and ethnic
Combined Management Report Fundamental Information about the Group
People at Merck
72
background as additional dimensions, with activities in North America and Europe concentrating in particular on
the topic of ethnicity.
At the same time, our other goals remain unchanged: We aim to recruit people representing a breadth of
qualifications, skills, and experiences. In order to foster exchanges among like-minded individuals, we also
support the specific employee networks in which several thousand of our employees participate. As well as our
women's networks in various countries, we support networks that promote the interests of the LGBTQI+
community, employees from different ethnic groups and international employees, for example. In China,
Generation Now is a network for young people that provides them with access to mentoring and innovation
projects. Our Carer network brings together employees from all over the world who care for a relative. In
addition, we organize regular events to mark occasions such as our Diversity Days, International Women's Day,
Pride Month, Coming Out Day, and Black History Month, where we discuss current developments that are
particularly relevant to us.
We also raise awareness of unconscious bias throughout the Group. We help executives to identify and reassess
these thought patterns in their daily encounters as well as in decision-making processes and to bring about
long-term changes in their own behavior in this regard. We also use the Job Analyzer, an online tool that allows
job advertisements to be checked for critical wordings prior to their publication, to foster gender-neutral
communication with those applying for jobs.
•
At Merck, we reward the performance of every individual through appropriate and competitive total
compensation. For years, we have been achieving this through global processes and programs that are
supported by digital platforms. We also offer our managers flexible, market-, and needs-oriented compensation
tools. These support well-informed decisions and thus provide comprehensible, performance-, and position-
based compensation. Apart from monetary compensation components, we also offer our employees attractive
fringe and social benefits. Our fringe benefits feature globally under the internal benefits4me brand. Its
offerings comprise three pillars:
A transparent and flexible employee reward system
All measures are documented in a globally standardized development plan. Individual development
opportunities are also supported by our job architecture, which applies globally and enables us to harmonize all
positions and simplify their classification. This job architecture defines three fundamental career types:
managers, experts, and project managers. They are all equal. Employees who wish to advance in their careers
and aim for a top position within the company can also do so via the expert and project manager career paths.
global, total
In Germany
global, total
Percentage of executives (= role 4 or
higher)
Percentage of women in leadership
positions (= role 4 or higher)
Percentage of women in the workforce
Number of nationalities working in Germany
Percentage of employees with German citizenship
Percentage of employees working outside Germany
Percentage of employees with global managers
In Germany, we have signed the Charta der Vielfalt (Diversity Charter), the Charta der Gleichstellung (Equal
Opportunity Charter), and the Inclusion Action Plan of the German Mining, Chemical, and Energy Industrial Union
(IG BCE). At an international level, we support the Women's Empowerment Principles, an initiative of UN Women
and the UN Global Compact aimed at empowering women in the workplace. We are also a member of the
Business Coalition for Equality Act, a group of leading employers in the United States that supports the Equality
Act. By joining these initiatives, we underscore our commitment to fairness and tolerance in the workplace.
Number of nationalities
66
66
66
Combined Management Report Fundamental Information about the Group
People at Merck
71
Global training courses and workshops developed specifically for teams help our employees develop and build
individual abilities in line with new requirements and perspectives. Digital solutions in the form of e-learning
and language courses are also available to our employees. To enable our employees and managers to realize
their full potential, we also provide local business and function-related offers. In response to the crisis, we
offered global training in 2020 on topics such as virtual leadership, employee well-being, and working from
home. This also included guidance on conducting team meetings in order to help teams adapt their cooperation
to the new situation and to create an inclusive atmosphere. The range of training is supplemented by individual
and group coaching on topics such as self-resilience and self-motivation.
Number of legal entities
Different aspects of diversity
As a global employer with intercultural expertise, people from a total of 141 nations work for Merck; 21% of our
employees are German citizens, and 77% of our employees work outside Germany. At our headquarters in
Darmstadt, 11% of staff are not German citizens.
Women currently account for 43% of our workforce. However, the ratio of women to men varies widely across
the different regions, businesses, and functions. We are therefore working to raise the proportion of women
wherever they are underrepresented, taking into account the situation typical for the industry as well as
regional differences.
Fostering work-life balance
We know that people's priorities in life can change. The Covid-19 pandemic has provided a vivid demonstration
of how important it is to achieve a healthy balance between work, childcare, and family obligations. We take
this into account by offering flexible working time/location models, working time accounts for early retirement,
and the possibility of taking an extended break from work, among other things. We also place great emphasis
on family life. Here our commitment ranges from parental leave to childcare as well as support of employees
caring for a relative.
74
Combined Management Report Fundamental Information about the Group
People at Merck
Even before the Covid-19 pandemic, our employees had the choice between different flexible working models.
Thanks to the consistently positive experiences in terms of performance and commitment during the pandemic,
we decided to roll out our proven mywork@Merck program at all of our locations worldwide. The program allows
employees to freely choose their working hours and location (in the same country) in agreement with their teams
and supervisors. Employees agree with their direct supervisors on when and how often all team members are
required to be in the office. Time tracking and time control are no longer required. The model reinforces our
company's performance culture and culture of trust and forms part of our global Future Ways of Working program.
Workplace suitability permitting, the model can be taken up both by employees formally covered by collective
agreements and employees exempt from them. Implementation will be complete by the end of 2021.
By offering information, advice, and assistance in finding childcare and nursing care as well as home and garden
services, we help employees to reconcile the demands of their professional and personal lives. At various sites,
employees benefit from childcare options that we subsidize. As an example, our headquarters in Darmstadt has
featured a daycare center offering 150 slots in crèche, kindergarten, and after-school care for more than 50 years
now. The Parents@Merck program makes it easier for our employees to return to work following parental leave by
giving mothers and fathers on parental leave the chance to talk and interact, as well as helping them to keep in
touch with the company. Moreover, they can make use of our various training and networking opportunities. We
have also established similar programs in other locations.
Leadership development: We want to provide our leaders with the skills they need to manage their
employees successfully in a new world of work and make the right decisions.
A constant focus on health and safety
As part of our response to the Covid-19 pandemic, we established global and local working groups to develop risk
scenarios and plans of action. We built up internal coronavirus testing capacities, developed and implemented
work safety standards, ensured the procurement of protective equipment, and made employees fully aware of the
need to maintain social distancing and wear a face covering.
At our Darmstadt and Gernsheim sites, our Health Management unit conducts an array of campaigns and
programs to promote the health of our workforce. Our employees have access to a health catalog detailing our
Health Management services in both English and German. Among other things, this contains information on
ergonomics, nutrition, stress, and mental health issues.
Workplace safety and health protection are the highest priority at Merck. It is especially important to us to do
everything we can to prevent workplace-related illnesses and accidents. We apply the lost time injury rate (LTIR),
which describes the number of accidents worldwide resulting in lost time of one day or more per million working
hours, as a key indicator in measuring the success of our occupational safety measures. We calculate the LTIR for
our employees as well as for temporary staff. Our previous target was to reduce the LTIR to 1.5 (accidents
resulting in lost time of one day or more per million working hours) by 2020. The LTIR in 2020 was 1.3. We are
currently developing a new target for the period beyond 2020.
Experience shows that most workplace accidents can be prevented by proper conduct. Through our BeSafe! safety
culture initiative, we are working to educate our employees on dangers in the workplace and provide them with
rules of conduct that help keep them safe. Uniform standards as well as local modules to meet specific safety
requirements at individual sites can help achieve a steady improvement in the current situation. The program
focuses on engaging managers in the safety culture and building their buy-in, aiming to make safety an intrinsic
value and empower our employees to take responsibility for their own safety. The Covid-19 pandemic and the
resulting restrictions meant it was not possible to conduct as many awareness campaigns in 2020. We are also
working hard on the next phase of the safety culture initiative. Its new name, TeamSafe, reflects the fact that all
employees bear collective responsibility for safety. In the next phase, the initiative will focus on enthusiasm,
empowerment, and a role model function in the area of occupational health and safety.
Combined Management Report
Fundamental Information about the Group
People at Merck
The health and safety of our employees constitute an important part of our daily responsibilities - especially in
times of new challenges like the Covid-19 pandemic. We do everything to protect our employees against accidents
and work-related illnesses, including in the areas of stress prevention, nutrition, and exercise. We employ
preventive measures that can be easily incorporated into the daily work routine. They are designed to help our
employees to avoid health problems.
global, total
• Investments in new technologies: We want to make even greater use of innovative technologies like
artificial intelligence in order to advance the way in which our employees work.
-
Demographic change is posing challenges to society in Germany as well as several other European Union
countries, the United States, China, and Japan. The average age of our employees is approximately 42. We
assume that this figure will continue to rise in the coming years and are preparing for this situation. As part of
our range of Health and Well-Being offerings, we specifically promote our employees' physical and psychological
well-being throughout their entire career.
Understanding our employees
We want to create a working environment that empowers our employees to think outside of the box and find
new solutions, opening the door to creative ideas and the discovery of new market opportunities. In order to
promote this and to allow us to carry out even better comparisons both within the company and with our
competitors, we conduct Group-wide employee engagement surveys every year. In this way, we ensure a
regular exchange between employees, leaders, and senior management. The honest feedback we receive from
staff shows us whether the measures and initiatives specified here are successful and highlights areas where we
can improve further.
In October, the global employee engagement survey was again conducted in 21 languages and the status of
implementation was reviewed. Around 50,500 employees (86%) took part. In the midst of the pandemic, our
Combined Management Report Fundamental Information about the Group
People at Merck
73
• Flexible working models: We want to create even more flexible working models that enable employees
to work flexible hours in the office, in their workplace, at home, or elsewhere whatever the nature
of their work. Merck will also make increased use of part-time work and job sharing in order to
provide employees with flexible alternatives to full-time work. Another special feature will be the
creation of location-independent roles, allowing us to recruit talented employees who meet the
respective job requirements regardless of where in the world they may live.
Group-wide score, which indicates how attached our employees feel to the company, was actually three
percentage points higher than in the previous year at 77%. In addition, regular snapshot surveys have been
conducted during the peak phases of Covid-19 to determine the mood of employees in light of the changes in
their working situation. The results are used to identify strategic focus areas and feed into company-wide work
on an ongoing basis.
As an employer, we take responsibility for the well-being of our people and offer a wide range of opportunities
to optimize work-life balance and protect their health and safety.
Covid-19-related activities
Social distancing and face coverings, home working and home schooling: The Covid-19 pandemic is presenting
our employees with new challenges. Our overriding priority is to ensure the health and safety of our employees
and their families. However, maintaining our business processes and supporting customers and institutions,
including in areas such as vaccine development, are also important aspects.
Supporting our employees is an integral component of our crisis management throughout all phases of the
crisis. For example, we offer online training and coaching. We have also established a global hotline for our
employees, allowing them to ask questions at any time of day and obtain assistance with whatever professional
or personal problems they may have.
One particular focal point is the provision of guidelines and tools aimed at helping employees to achieve a
healthy balance between their work, childcare, and family obligations and supporting employees who are at a
particularly high health risk.
One thing has become particularly clear to us in the months since the crisis began: Flexible working models and
virtual cooperation are more important than ever before. In many countries, we were fortunate in that we were
able to fall back on proven flexible working models like MyWork@Merck and digital work tools.
We have established a special working group to address the experiences gained from the Covid-19 pandemic.
Its aim is to establish what lessons can be learned from the pandemic and how they can be applied to the
potential workplace of tomorrow. The working group has identified three focus areas:
Differentiated solutions to support employee well-being
75
222
136
4.8%
global, total
42.8
Percentage of employees working part-
time
6,384
5,990
5,698
Number of employees in the mywork@merck model (Germany)
4.6%
4.3%
4.5%5
Vocational training rate
607
589
604
4.9%
5.0%
Men
12.5%
43.0
43.1
Latin America
40.4
40.3
40.7
Average age by region
Number of employees in vocational training in Germany
Middle East and Africa (MEA)
38.6
39.1
North America
Percentage of employees aged 30 - 49 years
Percentage of employees aged 17 - 29 years
19.1%
16.9%
39.2
75
734
702
43.0%
44.0%
11.6%
11.0%
10.6%
77.1%
75.8%
42.9%
73.9%
22.4%
24.1%
100
96
95
141
139
21%
221
In Germany
global, total
38.9%
Number of nationalities
65.5%
64.0%4
63.6%2
Percentage of executives who are not
German citizens
6.6%
6.2%4
38.9%
6.5%²
32.9%
31.6%4
30.9%²
34.6%
33.5%4
32.3%²
37.7%
global, total
Overview of employee figures¹
207
Merck (overall)
Dec. 31, 20193
12,728
10,486
Asia-Pacific (APAC)
41.7
41.7
41.7
25.1%
24.8%
24.4%
37.0
Merck (overall)
Dec. 31, 2018
60.2%
1,366
61.1%
14.7%
15.0%
14.5%
Average age globally
Percentage of employees aged 50+
13,518
Europe
60.2%
26,715
Merck
(overall)
Dec. 31, 2020
global, total
51,749
57,071
58,127
Asia-Pacific (APAC)
25,792
Europe
26,587
Number of employees
Latin America
3,340
3,433
3,387
by region
Middle East and Africa
• Organic (6.0%) and acquisition-related (5.3%) sales growth offset by negative exchange rate effects
(-2.6%)
Slightly higher than in 2019
We expect Corporate and Other to be below the prior year
in fiscal 2020. This is mainly due to a substantially lower
burden from foreign currency hedging, which will partly
offset opposing foreign exchange effects in the sectors.
Q1/2020
Q2/2020
Costs slightly below the year-earlier level
-440 to -460
report
Q3/2020
- Costs slightly below the year-earlier level
-495
(+5.5%:
Group net sales up € 1.4 billion or 8.6% to € 17.5 billion (2019: € 16.2 billion)
+17.7% organic,
-0.4% portfolio,
-11.8% currency)
N-510 to -550
-571
+6.6%
Combined Management Report.
Report on Economic Position
Merck Group
Course of
of 
Business and
Economic Position
Merck Group
Overview of 2020
.
• Profitable growth for the Group: EBITDA pre margin rises to 29.7% (2019: 27.1%)
Group EBITDA pre increases by 18.6% to € 5.2 billion (2019: € 4.4 billion); this includes income of
€ 365 million from the release of a provision for patent dispute
.
Results 2020 in € million
88
Review of Forecast against Actual Business Developments
Main comments
-
Slightly positive foreign
exchange effect
~980 to 1,030
- Organic decline between
-6% and -9%
- Portfolio effect in the mid-
thirties percentage range
- Foreign exchange effect
between -1% and -3%
1,024
(+27.5%:
-7.5% organic,
+36.3% portfolio,
-1.3% currency)
Increase with growth rates in
the low-thirties percentage
range
Rise in EBITDA pre including
the contribution from Versum
Materials, reduced by higher
capital investments
Increase with growth rates in
the low-twenties percentage
range
Increase with growth rates in
the low-twenties percentage
range
~770 to 870
- Increase with growth rates in
the high-twenties percentage
range
847
+32.1%
Combined Management Report.
Report on Economic Position
Corporate and Other
888
87
EBITDA pre
Business free cash flow
-469
-536
Actual results 2019 in € million
Forecast for 2020 in the 2019 Annual
Report
Forecast for 2020 in the interim
• Earnings per share pre increases by 20.5% to € 6.70 (2019: € 5.56)
8.6%
• Reduction in net financial debt of 13.0% to € 10.8 billion (December 31, 2019: € 12.4 billion)
Margin (% of net sales) 1
29.7%
27.1%
Profit after tax
1,994
1,324
670
50.6%
Earnings per share (€)
4.57
3.04
1.53
50.3%
Earnings per share pre (€)1
18.6%
6.70
1.14
20.5%
Business free cash flow¹
3,765
2,732
1,033
37.8%
1 Not defined by International Financial Reporting Standards (IFRS).
Development of sales and results of operations
In fiscal 2020, the Merck Group generated net sales of € 17,534 million (2019: € 16,152 million), representing
a year-on-year increase of € 1,383 million or 8.6%. This positive development was attributable to organic sales
growth in the Life Science and Healthcare business sectors as well as acquisition-related sales growth in the
Performance Materials business sector. Group-wide organic net sales growth totaled € 961 million or 6.0% in
fiscal 2020. Information on the impact of the Covid-19 pandemic on net sales can be found in the sections on
the individual business sectors. Exchange rate effects negatively impacted net sales in the amount of
€ -428 million or -2.6% in fiscal 2020. They resulted in particular from the U.S. dollar, the Brazilian real, and
the Chinese renminbi. Group net sales rose by € 849 million or 5.3% due to portfolio changes in the year under
review. This was primarily due to the acquisition of Versum Materials, Inc., United States (Versum Materials),
which was completed on October 7, 2019, and which supplements the semiconductor business of the
89
Combined Management Report.
Report on Economic Position
5.56
• Business free cash flow of the Merck Group amounts to € 3.8 billion (2019: € 2.7 billion)
817
5,201
Merck Group
Key figures
Change
€ million
2020
2019
€ million
%
Net sales
17,534
16,152
1,383
- Portfolio effect in the mid-
thirties percentage range
Operating result (EBIT)¹
4,385
2,985
865
40.8%
Margin (% of net sales) 1
17.0%
13.1%
EBITDA¹
4,923
4,066
857
21.1%
Margin (% of net sales) 1
28.1%
25.2%
EBITDA pre¹
2,120
Organic decline in the low
teens percentage range
- Planned realization of
synergies of around
- Moderately positive foreign
exchange effect
Strong organic growth
Slightly negative foreign
exchange effect
~7,250 to 7,450
- Organic growth between
9% and 10%
- Exchange rate effect of
-2% to -3%
7,515
(+9.5%:
-
+11.8% organic,
0.0% portfolio,
Strong organic growth
- Neutral to moderately
adverse foreign exchange
effect
-
Strong organic earnings
growth
- Moderately negative foreign
exchange effect
~2,300 to 2,370
-2.3% currency)
foreign exchange effect
- Neutral to slightly adverse
Strong organic growth
Merck Group
- Negative foreign exchange
effect on account of the US
Dollar and foreign exchange
developments in several
growth markets
- Foreign exchange effect
slightly negative
Organic earnings growth on
account of the expected sales
growth and slight margin
improvement
-
Negative foreign exchange
effect due to the trend of
exchange rates on several
growth markets
- Rise in EBITDA pre
- Improved management of
working capital
- On the other hand, increase
in capital spending on strategic
projects
Q1/2020
Q2/2020
-
Q3/2020
Results 2020 in € million
-
- Organic growth between
13% and 15%
- Process Solutions remains
the main driver of growth,
followed by Applied Solutions
-
2,405
(+13.0%:
Results 2020 in € million
Net sales
2,574
-
Slight organic growth
- Portfolio effect in the low- to
mid-thirties percentage range
Q3/2020
-
Strong growth momentum in
the Semiconductor Solutions
business unit
- Continued price decline in
Liquid Crystals business,
slightly mitigated by a volume
increase
- Slight growth of Surface
Solutions
- Portfolio effects due to
Versum Materials in the low to
mid-thirties percentage range,
no material portfolio effect
from Intermolecular
- Negative foreign exchange
effect due to the trend of
exchange rates on several
growth markets and of the
US Dollar
- Slightly negative foreign
exchange effect
Q2/2020
Q1/2020
Forecast for 2020 in the interim
report
+17.2% organic,
-3.8% portfolio,
-0.5% currency)
Increase in the low-tens range
percentage
Increase in the low-tens
percentage range
~1,600 to 1,750
- Increase in the low-twenties
percentage range
1,595
+16.0%
Combined Management Report.
Report on Economic Position Review of Forecast against Actual Business Developments
86
Performance Materials
Actual results 2019 in € million
Forecast for 2020 in the 2019
Annual Report
Main comments
Foreign exchange effect
between of -3% and -4%
- All businesses contribute to
growth
Slightly negative foreign
exchange effect
Strong increase in the low- to
mid-twenties percentage range
-
- Portfolio effect in the mid-
thirties percentage range
Exchange rate effect of
0% to -2%
- Organic decline between
-4% and -5%
- Neutral to slightly positive
foreign exchange effect
~3,250 to 3,400
- Portfolio effect in the mid-
thirties percentage range
- Moderate to strong organic
decline
3,380
(+31.3%:
Slightly positive foreign
exchange effect
- Portfolio effect in the low- to
mid-thirties percentage range
- Moderate to strong organic
decline
Moderate decline
Q2/2020
Q3/2020
Results 2020 in € million
-
-3.2% organic,
+35.4% portfolio,
-0.9% currency)
EBITDA pre
Business free cash flow
- Portfolio effect in the low to
mid-thirties percentage range
Organic decline in the low to
mid-teens percentage range
-
Negative foreign exchange
effect due to the foreign
exchange developments in
several growth markets and of
the US Dollar
-
€ 25 million from the
integration of Versum
Materials
Versum Materials earnings
contribution in the low to mid-
thirties percentage range leads
to slight margin improvement
-
- Growth in Semiconductor
Solutions could offset price
decline in Liquid Crystals
supported by active cost
management
· Slightly negative foreign
exchange effect
-
- Portfolio effects in the low-
to mid-thirties percentage
range
· Slight organic growth
641
803
- Adverse portfolio effect in
the mid-double-digit million
range
- Slight to moderately adverse
foreign exchange effect
~6,500 to 6,700
- Organic growth of 2% to 3%
- Adverse portfolio effect in
the mid-double-digit million
range
Report on Economic Position Review of Forecast against Actual Business Developments
Life Science
85
Actual results 2019 in € million
Forecast for 2020 in the 2019
Annual Report
Main comments
Forecast for 2020 in the
interim report
Strong organic growth
Net sales
EBITDA pre
Business free cash flow
6,864
2,129
1,375
Strong and profitable organic
earnings growth
Combined Management Report.
-
+51.4%
percentage range (excluding
release of a provision:
increase in the mid-single-digit
percentage range)
- Negative foreign exchange
effect of between -3% and
-4%
6,639
(-1.1%:
+3.4% organic,
-0.9% portfolio,
-3.6% currency)
· Organic stable
- Significantly negative foreign
exchange effect
~2,220 to 2,290 (thereof
income from the release of a
provision for a patent dispute
+365 million)
- Organic growth between
25% and 27% (excluding
income from the release of a
provision 6% and 8%)
-
Foreign exchange effect of
between -7% and -9%
2,267
(+18.0%:
+26.6% organic,
-0.1% portfolio,
-8.5% currency)
Stable to slight decline
~1,625 to 1,775 (thereof
income from the release of a
provision for a patent dispute
+ 365 million)
- Growth in the mid-thirties
1,895
Performance Materials business sector. The disposal of the Allergopharma allergy business effective
March 31, 2020, served to reduce net sales in the Healthcare business sector.
-0.9%
Merck Group
100.0%
16,152
-6,835
-39.0%
-6,006
100.0%
-37.2%
1,383
-829
8.6%
13.8%
10,699
61.0%
10,145
62.8%
554
17,534
5.5%
-4,207
-24.0%
-4,576
-28.3%
369
-8.1%
Administration expenses
-1,188
-6.8%
-1,154
-7.1%
-34
3.0%
Research and development costs
Marketing and selling expenses
%
€ million
%
Middle East and
581
3%
-3.0%
-2.2%
3.5%
-1.7%
591
4%
Africa (MEA)
Merck Group
17,534
100%
6.0%
-2.6%
5.3%
8.6%
2019
%
2020
Change
Gross profit
Cost of sales
-2,288
Net sales
Consolidated Income Statement
Merck Group
The Consolidated Income Statement of the Merck Group is as follows:
1 Not defined by International Financial Reporting Standards (IFRS).
100%
16,152
€ million
6%
-13.0%
-14.0%
Profit after tax from discontinued operation
Profit after tax
1,994
-3.6%
11.4%
0.0%
11.4%
-440
1,296
-2.7%
-197
44.8%
8.0%
698
53.9%
28
0.2%
-28
-100.0%
1,994
1,324
670
50.6%
Non-controlling interests
-7
Net income
1,987
0.0%
11.3%
-3
1,320
0.0%
8.2%
-3
667
96.4%
50.5%
1 Not defined by International Financial Reporting Standards (IFRS).
8.2%
Profit after tax from continuing operations
-637
Income tax
-20
0.9%
Impairment losses and reversals of impairment
-6
0.0%
-8
0.0%
2
-24.8%
losses on financial assets (net)
Other operating income and expenses
-25
Operating result (EBIT)¹
2,985
-0.1%
17.0%
-19
2,120
-0.1%
13.1%
51.6%
895
-7.9%
30
-2.4%
10.7%
-385
1,735
-2,268
-2.0%
15.0%
Profit before income tax
Financial result
40.8%
865
31.8%
-6
-354
2,630
The net sales in the individual quarters as well as the respective organic growth rates in 2020 are presented in
the following graph:
1,012
0.1%
Merck Group
Net sales by business sector
Combined Management Report.
Report on Economic Position
Merck Group
90
90
€ million
2020
Share
Organic
growth¹
Exchange
rate effects
Acquisitions/
divestments
6,639
Total change
Share
Healthcare
6,639
38%
3.4%
-3.6%
-0.9%
-1.1%
6,714
42%
Life Science
7,515
43%
11.8%
2019
38%
Healthcare
7,515
Life Science
Net sales and organic growth¹ by quarter²
€ million/organic growth in %
Q1
Q2
Q3
Q4
2020
4,370
4,119
4,447
4,599
2019
3,746
3,971
4,054
4,381
%
43%
3,380
Performance Materials
19%
€ million/% of net sales
Net sales by business sector - 2020
-2.3%
Merck Group
11.0%
7.2%
2 Quarterly breakdown unaudited.
1 Not defined by International Financial Reporting Standards (IFRS).
-2.5%
7.6%
The Life Science business sector increased its net sales by 9.5% year-on-year to € 7,515 million (2019:
€ 6,864 million). Double-digit organic growth of 11.8% was offset by negative exchange rate effects of -2.3%.
Accounting for 43% of Group sales (2019: 42%), Life Science was the strongest business sector in terms of net
sales. The net sales of the Healthcare business sector declined by -1.1% to € 6,639 million in fiscal 2020
(2019: € 6,714 million). This was due to negative exchange rate and portfolio effects, which exceeded the
organic growth of 3.4%. Accordingly, the share of Group sales attributable to Healthcare fell by 4 percentage
points to 38% (2019: 42%). The 31.3% increase in Performance Materials sales to € 3,380 million (2019:
€ 2,574 million) was primarily attributable to the acquisition of Versum Materials. In organic terms, net sales
declined by -3.2%. The share of the Merck Group's net sales attributable to Performance Materials increased by
3 percentage points to 19% (2019: 16%).
-10.1%
9.5%
42%
29%
6.8%
-1.1%
-0.3%
5.4%
4,735
29%
North America
4,739
27%
9.7%
-2.4%
5.2%
12.5%
4,991
4,214
Asia-Pacific (APAC)
6,313
36%
3.0%
-1.4%
11.1%
12.7%
5,599
35%
Latin America
910
5%
7.8%
-18.0%
26%
Europe
Share
2019
Performance
3,380
19%
-3.2%
Slight organic growth
35.4%
31.3%
2,574
16%
Materials
Merck Group
17,534
100%
6.0%
-2.6%
5.3%
8.6%
Total change
divestments
Acquisitions/
Exchange
rate effects
Organic
growth¹
Share
6,864
2020
Net sales by region
Merck Group
In fiscal 2020, the Merck Group recorded the following regional sales performance:
1 Not defined by International Financial Reporting Standards (IFRS).
100%
16,152
€ million
-
Actual results 2019 in € million
Organic slightly negative
- Positive portfolio effect in the
mid-single-digit percentage
- Stable organic development
~4,350 to 4,850
- Foreign exchange effect due
to emerging market currencies
and the US Dollar
- Realization of synergies from
the integration of Versum
Materials in Performance
Materials as planned
- Strong organic growth in Life
Science supported by solid
organic growth in Healthcare
and Performance Materials
with slight organic growth
0% to -3%
- Slightly negative foreign
exchange effect of
range
- Positive portfolio effect in the
mid-single-digit percentage
Strong organic growth
+6.0% organic,
+5.3% portfolio,
€ million
Results 2020 in
17,534
(+8.6%:
- Exchange rate effect of
-2% to -3%
- Portfolio effect in the mid-
single-digit percentage range
- Organic growth between
4% and 5%
~17,100 to 17,500
Exchange rate effect of
-2% to +0%
- Portfolio effect in the mid-
single-digit percentage range
Slight to moderate organic
growth
-
range
~16,900 to 17,700
- Slightly adverse foreign
exchange effect of 0% to -3%
~4,450 to 4,850
- Positive portfolio effect in the
mid-single-digit percentage
€ 6.25
€ 5.60 to
€ 6.35
€ 5.50 to
3,765
+37.8%
Growth in the low to mid-
thirties percentage range
(excluding release of a
provision: increase in the
high teens to low twenties
percentage range)
~3,475 to 3,775 (thereof
from the release of a
provision for a patent
dispute 365 million)
Stable to strong increase
~2,750 to 3,200
Slight to strong increase
~2,650 to 3,250
Rise in EBITDA pre and
positive effects from
working capital; higher
investments in property,
plant, and equipment
range
Percentage growth in the
mid-twenties percentage
+6.4% portfolio,
+16.8% organic,
5,201
(+18.6%:
- Negative foreign exchange
effect of -3% to -5%
range
- Positive portfolio effect in the
mid-single-digit percentage
- Organic growth between
14% and 16% (excluding
income from a release of a
provision between 6% and
8%)
Negative foreign exchange
effect of -4% to -2%
~5,050 to 5,250 (thereof
income from the release of a
provision for a patent dispute
+ 365 million)
range
Slight to moderate organic
growth
€ 6.50 to
€ 6.80 -
- Exchange rate effect of
-2% to +1%
- Slight to moderate organic
growth
Report on Economic Position Review of Forecast against Actual Business Developments
Combined Management Report.
82
88
We originally expected the business free cash flow of the Merck Group to see an increase in the mid-twenties
percentage range in 2020. Even excluding the € 365 million reversal of a provision for a patent dispute, this
forecast was achieved with growth of 24.5% to € 3,400 million (2019: € 2,732 million). Including the reversal
of the provision in the amount of € 365 million, business free cash flow rose by 37.8% to € 3,765 million.
The year-on-year increase of 22.2% in the Healthcare business sector (less € 365 million from the reversal of
provisions) exceeded the growth in the low double-digit teens percentage range that we forecast at the start of
the year. At € 1,895 million (including € 365 million from the reversal of provisions), it was also above the third
quarter forecast range of between € 1,625 million and € 1,775 million. At 16.0%, business free cash flow in the
Life Science business sector fell below the original forecast range of growth in the low to mid-twenties
percentage range. At € 1,595 million, it also fell slightly short of the range of € 1,600 million to € 1,750 million
that we forecast in the third quarter. In the Performance Materials business sector, we originally forecast
growth rates in the low thirties percentage range, which we achieved with an increase of 32%. At € 847 million,
Performance Materials also fell within the third quarter forecast range of between € 770 million and
€ 870 million.
Business free cash flow
EBITDA pre of Corporate and Other amounted to € -495 million in fiscal 2020, thus exceeding the forecast
range of € -460 million to € -490 million that we specified in the reporting on the third quarter of 2020.
Compared with the prior-year figure of € -469 million, this corresponded to a rise in costs of 5.5%. The higher
expenditures compared to the last forecast were mainly due to higher losses from our currency hedging
transactions.
Corporate and Other
Due to the expected sales growth accompanied by the Bright Future transformation program, we also originally
forecast slight organic growth in EBITDA pre in the Performance Material business sector. In the light of the
impact of Covid-19 on our display, automotive, and cosmetics end markets in the first quarter, we were forced
to significantly downgrade our forecast to an organic decline in the low to mid-teens percentage range. Thanks
to sustained positive development in our semiconductor business, we most recently raised our forecast to an
organic decline of between -6% and -9%. For 2020 as a whole, Performance Materials achieved an EBITDA pre
of € 1,024 million (2019: € 803 million). This represented an organic decline of -7.5% compared with the
previous year, which was within our most recent forecast range of -6% to -9%. As consistently forecast, the
portfolio effect of 36.3% primarily resulting from the Versum Materials acquisition was in the mid-thirties
percentage range. The foreign exchange effect of -1.3% was also at the upper end of our forecast range from
the third quarter of -1% to -3%.
Performance Materials
Review of Forecast against Actual Business Developments
Report on Economic Position
Combined Management Report.
For the Life Science business sector, we originally forecast strong organic growth in EBITDA pre on the back of
the expected organic sales growth and a slight improvement in margins. However, the impact of the Covid-19
pandemic on the three Life Science business units became increasingly evident as the year progressed. Thanks
to a particularly strong fourth quarter, EBITDA pre amounted to € 2,405 million in fiscal 2020 and year-on-year
organic growth came in at 17.2%, thereby exceeding the forecast range that had already been significantly
raised to between 13% and 15% in the course of our reporting on the third quarter. Foreign exchange
development impacted EBITDA pre in the Life Science business sector by -3.8%, thereby developing in line with
our most recent forecast.
Life Science
For our Healthcare business sector, we originally forecast solid year-on-year organic growth in EBITDA pre
thanks to substantial anticipated earnings contributions from our new products, particularly MavencladⓇ, and a
decline in marketing and selling expenses and development expenses in relation to sales. This was expected to
offset the effect of the forecast downturn in sales of RebifⓇ. In light of the impact of Covid-19 on our fertility
business in particular in the first quarter, we significantly downgraded our forecast to a slight organic decline.
In 2020, EBITDA pre in the Healthcare business sector amounted to € 2,267 million thanks to a rapid recovery
from the middle of the year onward (2019: € 1,922 million). This is equivalent to an increase of 18.0% over
2019; the organic rise of 26.6% corresponded to the upper end of the forecast range we issued at the end of
the year. Both figures included € 365 million from the reversal of a provision for a patent dispute. By contrast,
the foreign exchange effect on EBITDA pre in 2020 as a whole was substantially more negative than expected
at the start of the year at -8.5%, although this was within the range of between -7% and -9% to which we had
adjusted in the course of our reporting on the third quarter of 2020.
Healthcare
For 2020, we originally forecast strong year-on-year organic growth in EBITDA pre for the Merck Group. This
assumption was based on the expectation of strong organic growth in Life Science, supported by solid organic
growth in Healthcare and slight organic growth in Performance Materials. Furthermore, because of the expected
unfavorable foreign exchange environment, we still expected moderate negative exchange rate effects to
burden EBITDA pre by between 0% and -3% compared with the prior year. In 2020, EBITDA pre amounted to
€ 5,201 million, equivalent to an increase of 18.6% compared with the prior year (2019: € 4,385 million). The
organic growth of 16.8% included in this figure was slightly above the forecast range of 14% to 16% we issued
in the third quarter of 2020. Both figures included € 365 million from the reversal of a provision for a patent
dispute. However, exchange rate effects had a more negative impact than expected at the start of the year,
which is why we narrowed our forecast range to between -3% and -5% in our reporting over the course of the
year. We ultimately closed 2020 at -4.6%.
EBITDA pre
81
Report on Economic Position Review of Forecast against Actual Business Developments
Combined Management Report.
Slightly to moderately
adverse foreign exchange
effect
83
- Portfolio effect in the mid-
single-digit percentage range
Merck Group
Net sales
~16,800 to 17,800
Foreign exchange effect due to
emerging market currencies and
the US Dollar
-
- Positive portfolio effect in the
mid-single-digit percentage
range, mainly resulting from the
acquisition of Versum Materials
Organic growth driven by
Healthcare and Life Science;
Performance Materials with
slight organic growth
0% to -3%
- Slightly negative foreign
exchange effect of
Portfolio effect in the mid-
single-digit percentage range
· Solid organic growth
-
Q3/2020
Q2/2020
Q1/2020
Forecast for 2020 in
the interim report:
Main comments
Forecast for 2020 in
the 2019 Annual
Report
€ 5.56
2,732
4,385
EPS pre
Business free cash flow
EBITDA pre
16,152
Actual results 2019 in
€ million
thereof
-
for
- Substantial growth
contribution by our newly
approved products, particularly
MavencladⓇ
- Negative foreign exchange
effect due to foreign exchange
developments in several
growth markets and of the US
Dollar
- Moderate negative foreign
exchange effect
-
Expected substantial
earnings contributions from
our new products, especially
MavencladⓇ, offset negative
mix effects associated with the
projected decline in RebifⓇ
sales
-
Negative foreign exchange
effect due to foreign exchange
developments in several
growth markets and of the US
Dollar
- Neutral to moderately
adverse foreign exchange
effect
Increase in the low-double-
digit teens percentage range
- Rise in EBITDA pre
€ 0.63
from the
release
of a
provision
- Improved management of
working capital offsets higher
investments in property, plant
and equipment
Forecast for 2020 in the interim
report:
Q1/2020
Organic stable
- Adverse portfolio effect in
the mid-double-digit million
range
- Stable development of the
base business in organic terms
· Slightly negative foreign
exchange effect
Marketing and selling
expenses as well as research
and development costs
decrease in percent of sales
due to systematic cost
management and strict
pipeline prioritization
- Solid organic growth
84
-
Report on Economic Position Review of Forecast against Actual Business Developments
Combined Management Report.
Healthcare
-4.6% currency)
-2.6% currency)
€ 6.70
+20.5%
Forecast for 2020 in the 2019
Annual Report
Net sales
EBITDA pre
patent
litigation
Business free cash flow
6,714
1,922
1,252
- Solid organic growth
Main comments
-20%
-30%
-10%
40%
10%
20%
30%
50%
60%
70%
80%
13.55%
20.31%
Jan.
0%
Feb.
2023
Apr.
2.20
€
Daily average number of Merck shares traded³
Year-end share price
Share price low
Share price high
Dividend²
2022
64.90%
-20.34%
-3.35%
4.76%
Key share price data¹
Merck shares
Dec.
Nov.
Sept. Oct.
Aug.
July
June
May
Mar.
• S&P 500 Life Sciences Tools & Services Index
At a glance
• Dow Jones European Chemical Index
Chair of the
Executive Board
and CEO
Member of the
Executive Board
Matthias Heinzel
Peter Guenter
Belén Garijo
Kai Beckmann
Executive Board
Member of the
Helene von Roeder
80
Member of the
Executive Board
The Executive board
To Our Shareholders
Chair of the Executive Board and CEO
Belén Garijo
Sincerely,
On behalf of the Executive Board, I thank you and all our other shareholders for your ongoing trust and support.
As you continue to read this Annual Report, you will see that we remain firmly positioned to both return to
growth in 2024 and generate long-term, sustainable value for our owners, shareholders, customers, patients,
employees, and society.
We continue to make strategic investments, enter collaborations, and adapt our businesses in order to
constantly improve our competitive position and anticipate emerging market needs even more proactively. In
Germany, the United States, Switzerland, China, the United Kingdom, Korea, and other countries across our
global network, we invested significantly in new and upgraded sites and capabilities. With these and other
significant capital expenditure projects, we are striving to move even closer and become more responsive to
customers and patients worldwide. We assume that this overall momentum in operational expenditure will
continue through 2025 and beyond. However, we reserve the flexibility to respond to further market changes.
Despite the disappointing news in December 2023 that the Phase III clinical trials of evobrutinib did not meet
their primary endpoints, we remain confident in the position of our Healthcare business sector as a global
specialty innovator. In addition to the continued resilience of our established product portfolio, we look forward
to the progress of many investigational therapies within our Healthcare pipeline, such as xevinapant in oncology
and enpatoran to treat autoimmune diseases such as systemic and cutaneous lupus erythematosus. Boosted by
various in-licensing of external innovation, including those announced in 2023, such as with Hengrui and
Abbisko, we aim to introduce one new product or major indication every 1.5 years on average.
Finally, I am pleased by the significant strides being made to achieve our three core sustainability targets. By
2030, we aim to have fully integrated sustainability into our value chains and contributed to human progress
for more than one billion people through sustainable science and technology. And by 2040, we expect to
achieve climate-neutrality and significantly reduce our resource consumption. After entering into virtual power
purchase agreements in 2023, renewable energy is expected to cover 100% of our current electricity purchases
in Europe, more than 90% in North America, and 70% worldwide from 2025.
We expect our Life Science business sector to recover in the course of the year with the expected end of the
destocking phase within Process Solutions on the one hand and improving conditions in Science & Lab Solutions
on the other hand. Within our Healthcare business sector, growth rates should begin to normalize and more
closely align with our mid-term targets. And within our Electronics business sector, we expect to benefit from
an upswing in customer demand for Semiconductor Solutions as the market gradually recovers.
Looking beyond 2024, our Group remains firmly positioned for long-term growth and impact as a leading
science and technology company with a clear purpose to advance human progress. In addition to favorable
macrotrends such as the digital transformation of markets by generative AI and machine learning technologies,
many other forces are expected to drive growth across each of our three sectors. They include novel drug
modalities in Life Science, growing patient needs for cancer, neurological and immunological treatments in
Healthcare, and AI-enabling chips and high-performance computing demanding more and novel materials in
Electronics. Our teams are closely monitoring these and other trends to help us anticipate potential scenarios
and adapt with speed and agility to protect or expand our competitive positions.
Looking forward, we expect that global economic and geopolitical challenges will continue to adversely affect
our activities through 2024. However, based on current forecasts, we anticipate a gradual return to organic
sales growth during the year.
7
The Executive Board
⚫ PHLX Semiconductor Sector Index
Member of the
Executive Board
CEO Electronics
• MSCI European Pharma Index
• Merck
• DAX ®
Share price development from January 1, 2023, to December 31, 2023, in %
Merck Shares
Merck Shares
To Our Shareholders
10
In 2023, our Executive Board and Investor Relations team held over 1,000 discussions with investors on topics
such as strategy, the business model, business performance, corporate governance, and sustainability at our
company during investor conferences, roadshows, and conference calls.
Our shareholder structure remained largely stable in 2023 compared with the previous year: Europe continues
to account for the largest proportion of the free float at around half, followed by the United States with around
29%. Compared with 2022, the proportion of the value-oriented investors fell slightly in favor of growth
oriented investors and GARP (growth at a reasonable price) investors. The top five investors held around 24%
of the free float at the end of 2023, up around two percentage points on the previous year.
At approximately 329,000 shares per day, the average daily trading volume of Merck shares in 2023 was up
around 2% on the prior-year figure of around 321,000. This meant Merck shares bucked the general trend of
lower turnover on German securities trading platforms in 2023 compared with the previous year.
Chief Financial Officer
The first six months were heavily influenced by uncertainties tied to the continued economic recovery, inflation,
rising interest rates and geopolitical tensions. The Covid-19 pandemic business continued to decline, which
created a difficult environment in the life science market. Moreover, customers of the Life Science business
sector mainly focused on cash preservation as well as working capital optimization, in light of high interest
rates. While the semiconductor market is preparing for artificial intelligence fueled growth, it has not yet
translated into volume growth for the materials sector. The existing portfolio of Healthcare had a strong year;
however, the negative results of the Phase III trials of evobrutinib had a share price impact in December. Taken
together, these factors explain why our share price underperformed the DAX® and relevant sector indices in
2023.
The stock markets got off to a restrained start in 2023 before finishing strongly, with some indices hitting
record levels in December as interest rate concerns eased. There was a significant level of sector divergence
with subdued performance in Life Sciences and Pharma. Consequently, our share price performance was
dampened during 2023.
2.20
Merck shares
9
Merck Shares
To Our Shareholders
More information can be found at our website.
Short biographies
CEO Life Science
CEO Healthcare
The resilience of our multi-industry business model was demonstrated with Healthcare largely offsetting
market-driven challenges in Electronics and Life Science. Despite the financial results, our share price declined
by around 20% in the course of the year. Merck shares underperformed compared with the DAX® index of
German blue-chip companies, which rose by around 20% over the year. Our share performance correlated
strongly to the share performance of the life sciences industry across the year and tracked the index (-3%)
until the December evobrutinib announcement. In comparison, the index for the pharmaceutical industry
outperformed Merck shares, rising by almost 5%. The semiconductor industry index rose by around 65% driven
by a handful of chip developers and their products for artificial intelligence applications. Merck shares closed at
€ 144.10 on December 29, 2023 (2022: € 180.90).
€
23,380
222.90
5,489
EBITDA²
20.1%
17.2%
Margin (% of net sales)¹
Belén Garijo
-19.3%
-5.6%
-1,239
-865
6,504
4,474
Operating result (EBIT)¹
22,232
20,993
Net sales
%
€ million
2022
2023
€ million
3,609
Change
-1,015
Margin (% of net sales)¹
-15.2%
-1.16
7.65
6.49
Earnings per share (in €)
-15.1%
-505
3,339
2,834
-15.6%
Profit after tax
28.0%
Margin (% of net sales)¹
-14.2%
-970
6,849
5,879
EBITDA pre¹
29.3%
26.1%
30.8%
201.10
Merck Group
Merck
5 Based on the number of shares in free float (129.2 million). Source: Bloomberg, Thomson Reuters.
4 Based on the theoretical number of shares (434.8 million).
3 Based on the floor trading systems of all German exchanges and the regulated market on Xetra®.
1 Share price-relevant figures relate to the closing price in XetraⓇ trading on the Frankfurt Stock Exchange.
2 2023 dividend subject to approval by the Annual General Meeting.
18,624
€ million
Market value of authorized shares 5 (at year-end)
78,651
62,651
Merck Shares
€ million
321,232
329,074
Number
180.90
144.10
€
156.10
135.45
€
Market capitalization (at year-end)
KEY FIGURES 2023
Dividend development since 2014
11
2023
Annual Report
| | |
1.40
1.85
2.20
2.20*
2014¹
2015
1
2016
2018
2019
2020
2021
2022
2023
1 Adjusted to the new number of shares after the share split (June 30, 2014).
* 2023 dividend subject to approval by the Annual General Meeting.
Earnings per share pre (€)¹
2017
We remain firmly positioned to return to growth in
2024 and generate long-term, sustainable value for
our owners, shareholders, customers, patients,
employees, and society.
To Our Shareholders Letter from Belén Garijo
We are grateful to our approximately 63,000 employees around the world for their exceptional dedication and
resilience and would like to thank our many partners and suppliers for their important contributions to this
performance. Furthermore, in recognition of the contribution of shareholders, we will propose to the Annual
General Meeting a dividend of € 2.20 per share for 2023.
Report of the Supervisory Board
Objectives of the Supervisory Board
with Respect to its Composition and
Profile of Skills and Expertise
Consolidated Financial
Statements
230 Consolidated Income Statement
231 Consolidated Statement of
Comprehensive Income
48
Macroeconomic and Sector-Specific
232
Consolidated Balance Sheet
Environment
Consolidated Cash Flow Statement
52
Review of Forecast against Actual
234
Business Development
55
Course of Business and Economic
Statement on Corporate Governance
Capital Structure and Corporate Bodies
of Merck KGaA
Compensation Report
224
48
Report on Economic Position
Table of contents
Corporate Governance
To our Shareholders
6
Letter from Belén Garijo
164
235
8
196
9
Merck Shares
Combined Management
Report
Fundamental Information about the
197
218
The Executive Board
Research and Development
Position
Notes to the Consolidated Financial
Statements
Report on Risks and Opportunities
301
Capital Structure, Investments and
94
Report on Expected Developments
Financing Assets
96
99
Report in Accordance with Section 315a
of the German Commercial Code (HGB)
Non-Financial Statement
336
Other Disclosures
339
Scope of Consolidation
155
Additional Information on Merck KGaA
in Accordance with the German
Commercial Code (HGB)
Other Information
349 Responsibility Statement
77
Employees
290
Contingent Liabilities
55
Merck Group
65
Life Science
69
Healthcare
73
Electronics
Consolidated Statement of Changes in
Net Equity
235
242
Group Structure
249
Operating Activities
267
Operating Assets, Liabilities and
76
Corporate and Other
General Disclosures
350
35
28
141
9
employees
62,908
AT A GLANCE
A strong team
1 Not defined by International Financial Reporting Standards (IFRS).
4,385
2019
16,152
2019
5,201
2020
17,534
2020
6,103
2021
nationalities
39%
women in leadership positions
Life Science
41%
38%
€5,952 million
North America
Net sales per region
44% 45%
Share of
net sales
Share of
EBITDA pre
19,687
Share of
net sales
Share of
Share of
net sales
NN
We are advancing
digital living.
Electronics
We help to create, im-
prove and prolong lives.
Healthcare
Together, we impact life
and health with science.
EBITDA pre
Internal Management System
2021
2022
8.49
Europe
€6,037 million
Latin America
€1,331 million
Middle East and
Africa
€737 million
Share of
EBITDA pre
18% 15%
Asia-Pacific
€6,936 million
13
Group
13
Merck
22
Strategy
10.05
-1.56
-15.5%
Operating cash flow
22,232
2022
5,879
2023
20,993
2023
€ million
EBITDA pre¹
6,849
Merck Group
Net sales
Merck Group
2 Not defined by International Financial Reporting Standards (IFRS); EBITDA corresponds to operating result (EBIT) adjusted by depreciation, amortization,
impairment losses, and reversals of impairment losses.
1 Not defined by International Financial Reporting Standards (IFRS).
-11.2%
-475
4,259
3,784
€ million
362
363
Independent Auditor's Report
Business Development 2019-2023
Financial Calendar
Overall, Group net sales of € 21.0 billion were about at the mid-point of the absolute guidance range. Due to
the aforementioned factors as well as negative foreign exchange effects and inflationary pressures, EBITDA pre
in 2023 was also within our guidance range at € 5.9 billion, albeit at the lower end of the corridor.
The competitive strength of our global business footprint was demonstrated by moderate Group exposure to
localized economic trends in 2023. Our business operations in Asia-Pacific, North America and Europe as well as
other geographic regions made important financial contributions.
The strong performance of our Healthcare business sector mainly offset these temporary, industry-wide
challenges. In particular, our new products experienced robust growth. Full-year net sales of our multiple
sclerosis medicine MavencladⓇ exceeded US$ 1 billion for the first time, joining our cancer medicine Erbitux®,
which maintained its blockbuster status for the second year in a row. Our immuno-oncology drug BavencioⓇ, to
which we regained sole ownership rights on June 30, 2023, generated organic net sales growth of 23.4%. This
was complemented by the solid performance of both our Fertility and our Cardiovascular, Metabolism, and
Endocrinology franchises.
Once again, we demonstrated the competitive strengths of our people, the diversification of our business
sectors, and our global footprint. In our Life Science business, demand declined as expected in 2023 due to the
end of the Covid-19 pandemic. Pronounced destocking by customers within Process Solutions has also been
longer in duration than expected. In parallel, our Electronics business faced a prolonged downcycle in
Semiconductor Solutions and the Display Solutions unit was affected by low customer demand.
At Merck, we have successfully navigated through many challenging times in our 355-year history. The year
2023 provided yet another opportunity to demonstrate our resilience to the world. Despite a difficult global
macroeconomic environment and the geopolitical situation, our Group performed robustly.
dear friends of turck,
CC
Dear shareholders,
6
233
To Our Shareholders
Merck Shares
9
The Executive Board
Letter from Belén Garijo
Letter from Belén Garijo
To our shareholders
8
6
For fiscal 2024, we expect to return to organic sales growth, which is likely to be slight to moderate. The
Healthcare business sector is expected to be the strongest growth driver, with MavencladⓇ and products from
the Cardiovascular, Metabolism & Endocrinology franchise making the main contributions to growth. For
Life Science, we assume that sales in the first half of the year will still be influenced by customer destocking of
increased inventories and that the expected recovery will thus mainly set in during the second half of 2024. We
do not expect any further significant contributions from demand for products in connection with Covid-19 in
2024. In the Electronics business sector, we forecast that the turnaround in the semiconductor materials
market will come in the second half of the year, leading as expected to organic sales growth with products from
the Semiconductor Materials business. The expected declining Display Solutions business will have a negative
impact as will the project business within the Semiconductor Solutions business unit, which, as expected, is
subject to stronger fluctuations owing to the dependency on major individual orders. Overall, we forecast
foreign exchange effects of 0% to -3% for the Merck Group.
This restriction to 10% of the share capital shall include the proportional amount of the share capital that is
attributable to shares that are issued under exclusion of subscription rights or sold during the term of
Authorized Capital 2022, based on an authorization to issue new shares or sell own shares by direct or
analogous application of section 186 (3) sentence 4 AktG. This restriction shall also include the proportional
amount of the share capital that is attributable to shares which may or must be issued in order to service bonds
carrying a conversion or option right or a conversion or option obligation, if the bonds are issued during the
term of Authorized Capital 2022 under exclusion of limited liability shareholders' subscription rights by
analogous application of section 186 (3) sentence 4 AktG.
It is likewise possible to exclude the subscription rights of limited liability shareholders with the approval of the
Supervisory Board in the case of capital increases in exchange for non-cash contributions, particularly for the
purpose of acquiring enterprises, parts of enterprises, or interests in enterprises. In addition, with the approval
of the Supervisory Board, limited liability shareholders' subscription rights can be excluded in order to enable
E. Merck KG to exercise its right pursuant to article 32 (3) of the company's Articles of Association to
participate in a capital increase by issuing shares or freely transferable share subscription rights.
It is likewise possible to exclude, with the approval of the Supervisory Board, the subscription rights of limited
liability shareholders in order to enable E. Merck KG to exercise its right pursuant to article 33 of the Articles of
Association to convert its equity interest into share capital, either in full or in part.
Moreover, with the approval of the Supervisory Board, the subscription rights of limited liability shareholders
can be excluded if and to the extent this is necessary to grant the holders or creditors of conversion or option
rights, and/or the holders or creditors of financing instruments carrying conversion or option obligations, which
were or are issued by the company or by a domestic or foreign company in which the company directly or
indirectly holds the majority of the votes and capital, subscription rights to the extent to which they would be
entitled after the exercise of the conversion or option rights or after the performance of a conversion or option
obligation.
Finally, with the approval of the Supervisory Board, the subscription rights of limited liability shareholders can
be excluded in order to offset any fractional amounts resulting from a capital increase.
The sum of shares issued on the basis of Authorized Capital 2022 under exclusion of limited liability
shareholders' subscription rights must not exceed a proportional amount of 10% of the share capital, taking
into account other shares of the company which, during the term of Authorized Capital 2022, are sold or issued
under exclusion of subscription rights or which are to be issued under bonds issued after April 22, 2022, under
exclusion of subscription rights; this limitation shall apply both at the time of this authorization taking effect
and at the time of this authorization being exercised.
To the extent that subscription rights are not excluded under the above provisions, they may also be granted to
limited liability shareholders by way of indirect subscription rights pursuant to section 186 (5) AktG or, in part,
by way of direct subscription rights, and otherwise by way of indirect subscription rights pursuant to
section 186 (5) AktG. Furthermore, the Executive Board is authorized, with the approval of the Supervisory
Board, to determine the additional details of the capital increase and its implementation, including the content
of rights attached to the shares as well as the terms and conditions of the share issue.
The Articles of Association also encompass contingent capital. The share capital is contingently increased by up
to € 66,406,298.40 composed of 51,081,768 shares (Contingent Capital I). The contingent capital increase
serves to grant exchange rights to E. Merck KG in accordance with article 33 of the Articles of Association to
enable the conversion of its equity interest. The shares carry dividend rights from the beginning of the fiscal
year following the year in which the conversion option is exercised.
46
97
Combined Management Report __ Report in Accordance with Section 315a of the German Commercial Code (HGB)
98
Moreover, the share capital is contingently increased by up to € 16,801,491.20 composed of up to 12,924,224
no par value bearer shares (Contingent Capital II). This contingent capital increase is only to be implemented
insofar as the bearers or creditors of option or conversion rights, or with an obligation to convert or exercise
options on warrant bonds, option participation certificates, option participation bonds, convertible bonds,
convertible participation certificates, or convertible participation bonds that are issued or guaranteed by the
company or a subordinate Group company on the basis of the authorization resolution of the Annual General
Meeting of April 28, 2023, to April 27, 2028, utilize their option or conversion rights, or to fulfill their conversion
obligation or obligation to exercise options insofar as they are obliged to fulfill their conversion or option
exercise obligation, or insofar as the company exercises an option, in full or in part, to grant shares in the
company instead of paying the sum of money due, and to the extent that in each case a cash settlement is not
granted, or own shares or other forms of fulfillment are used. Each issue of new shares shall take place at the
determined option or conversion price, pursuant to the aforementioned authorization resolution. The new
shares participate in the profit from the beginning of the fiscal year in which they are created; insofar as this is
legally permissible, the Executive Board may, with the approval of the Supervisory Board, and in deviation from
section 60 (2) AktG, stipulate that the new shares also participate in the profit for a past fiscal year. The
Executive Board is authorized, with the approval of the Supervisory Board and of E. Merck KG, to stipulate the
further details of the implementation of the increase in contingent capital.
Combined Management Report __ Report in Accordance with Section 315a of the German Commercial Code (HGB)
The Executive Board is authorized to increase the company's share capital with the approval of the Supervisory
Board and of E. Merck KG on one or more occasions, up to and including April 21, 2027, by a total of up to
€ 56,521,124.19 by issuing new no-par value bearer shares in exchange for cash and/or non-cash contributions
(Authorized Capital 2022). Limited liability shareholders are generally granted statutory rights to subscribe to
the new shares. However, the Executive Board is authorized, with the approval of the Supervisory Board, to
exclude limited liability shareholders' subscription rights, either in full or in part, in the case of a capital
increase in exchange for cash contributions pursuant to or by analogous application of section 186 (3) sentence
4 AktG, if the issue price of the new shares is not substantially lower than the stock exchange price of the
company's shares already listed and if the new shares issued under exclusion of these subscription rights do
not exceed a proportional amount of 10% of the share capital either at the time of Authorized Capital 2022
taking effect or being utilized.
The Articles of Association can be amended by a resolution at the Annual Meeting that requires the approval of
the general partners. Notwithstanding any statutory provisions to the contrary, the resolutions of the Annual
General Meeting are adopted by a simple majority of the votes cast. Where the law requires a capital majority
in addition to the voting majority, resolutions are adopted by a simple majority of the share capital represented
in the vote. The Articles of Association of the company encompass authorized and contingent capital.
According to the Articles of Association of Merck, the general partners not holding an equity interest who form
the Executive Board are admitted by E. Merck KG with the consent of a simple majority of the other general
partners. A person may be a general partner not holding an equity interest only if he or she is also a general
partner of E. Merck KG. In addition, at the proposal of E. Merck KG and with the approval of all general partners
not holding an equity interest, further persons who are not general partners not holding an equity interest may
be appointed to the Executive Board.
EBITDA pre³
For Group EBITDA pre, we also forecast a slight to moderate organic increase, which is expected to be driven
primarily by the Healthcare business sector. Apart from the expected sales growth, the termination of the
alliance with Pfizer Inc., USA, effective June 30, 2023 and the subsequent regain of the exclusive rights to
develop, manufacture and commercialize BavencioⓇ had a positive effect on EBITDA pre as did lower costs,
especially in research and development, as a result of the failure of evobrutinib to meet its primary endpoint as
demonstrated by the results of the clinical trials published on December 6, 2023. EBITDA pre of the Life Science
business sector is expected to be adversely impacted by negative mix effects, which we will mitigate as far as
possible with corresponding cost savings. In the Electronics business sector, a favorable mix effect on sales as
well as positive effects from active cost management are expected; however, the sale of a portfolio of licenses
and patents in fiscal 2023 will have an opposing effect. The rise in costs in Corporate and Other will be mainly
attributable to lower foreign currency hedging gains. The forecast foreign exchange development is likely to
lower Group EBITDA pre by between -1% and -4%.
Operating cash flow
The forecast for operating cash flow is generally subject to a higher fluctuation corridor than the forecast for
EBITDA pre. We provide an estimate of the development of operating cash flow only for the Group as a whole.
The development of operating cash flow will be in line with the expected positive performance of the operating
business. In addition, we expect positive effects from stringent management of working capital. Foreign
exchange is expected to have a negative effect. Accordingly, for the Merck Group, we forecast a moderate to
strong increase in operating cash flow. As regards the composition of operating cash flow, we refer to the
section entitled “Internal Management System" in the combined management report as well as the
Consolidated Cash Flow Statement in the Consolidated Financial Statements.
3 Not defined by International Financial Reporting Standards (IFRS); EBITDA corresponds to operating result (EBIT) adjusted by depreciation, amortization,
impairment losses, and reversals of impairment losses.
Combined Management Report __ Report in Accordance with Section 315a of the German Commercial Code (HGB)
Net sales
96
Report in Accordance with
section 315a of the
German commercial
code (HGB)
The following information is provided in accordance with section 315a of the German Commercial Code (HGB) in
connection with section 289a HGB and the explanatory report pursuant to section 176 (1) sentence 1 of the
German Stock Corporation Act (AktG).
As of December 31, 2023, the company's subscribed capital is divided into 129,242,251 no-par value bearer
shares plus one registered share. Each share therefore corresponds to € 1.30 of the share capital. The holder of
the registered share is E. Merck Beteiligungen KG. It is entitled and obliged to appoint one-third of the
members of the Supervisory Board representing the limited liability shareholders. If the holder of the registered
share is a general partner, he or she has no such right of appointment. The transfer of the registered share
requires the company's approval. The approval is granted at the sole discretion of the personally liable general
partner with an equity interest, namely E. Merck KG.
The company is not authorized to acquire its own shares.
96
Pursuant to the information on voting rights submitted to us in accordance with the German Securities Trading
Act (WpHG), on December 31, 2023, no shareholders owned direct or indirect investments exceeding 10% of
the voting rights.
Combined Management Report_
Non-Financial Statement
•
Chemical industry's Responsible Care® Global Charter,
•
Company network Together for Sustainability (TFS),
Pharmaceutical Supply Chain Initiative (PSCI),
Initiative Chemie³, a collaboration between the German Chemical Industry Association (VCI), the
German Employers' Federation of the Chemical Industry (BAVC), and the German Mining, Chemical and
Energy Industrial Union (IG BCE).
Strategic and organizational approach to sustainability
The world is facing numerous challenges that also affect us as a company. These include climate change,
international conflicts and economic crises, for instance. Our ambition is to leverage science and technology to
achieve sustainable progress for mankind.
We pursue three overarching sustainability goals. In 2023, we revised our sustainability strategy, which we had
communicated in 2020. In particular, we sharpened the second goal.
In 2030, we will achieve human progress for more than one billion people through sustainable science and
technology.
By 2030, we will fully integrate sustainability into our value chains.
By 2040, we will achieve climate neutrality and reduce our resource consumption.
We describe our sustainability strategy in the "Strategy" section of the combined management report within
this Annual Report for 2023 and, in more detail, in the Sustainability Report for 2023 in the chapter entitled
"Sustainability Strategy".
Measuring progress made with the sustainability strategy
We use 14 key indicators to record and assess our progress towards achieving our sustainability goals. We
defined these indicators back in 2021 and did not identify any significant non-financial performance indicators.
The key indicator "Percentage of employees trained in sustainability” was dropped in 2023 because we had
achieved the associated target. Instead, as of 2023, we began using several questions in our annual Employee
Engagement Survey to measure how mature the sustainability culture is within our organization.
United Nations Global Compact,
The company has not entered into any material agreements subject to a change of control pursuant to a
takeover offer, nor has it entered into any compensation agreements with the members of the Executive Board
or employees in the event of a takeover offer.
We support the following responsible governance initiatives:
Roles and responsibilities
95
99
**
Non-Financial statement*
The combined management report of Merck KGaA and the Merck Group for the fiscal year 2023 includes a
combined non-financial statement in accordance with sections 315b and 315c in conjunction with 289b to 289e of
the German Commercial Code (HGB) in the form of a separate chapter. The scope of consolidation of this non-
financial statement corresponds to that of the Annual Report for 2023. The concepts and results presented relate
to both Merck KGaA and the Merck Group. We explicitly state when, in individual cases, the information provided
deviates from this. Our non-financial statement orients towards the requirements of the Global Reporting Initiative
(GRI) standards. It also includes our reporting in accordance with the EU taxonomy regulation.
Deloitte GmbH Wirtschaftsprüfungsgesellschaft conducted a limited assurance engagement of the combined
non-financial statement. References to information not included in the management report are not part of the
non-financial statement. The additional content provided on both the company's websites as well as external
websites that are linked in this report are not part of the information assured by Deloitte. Our Sustainability
Report 2023 is produced in accordance with GRI Standards. It will be available online as of April 11, 2024 and
will also be subject to a separate limited assurance engagement by Deloitte. With this, we also disclose topics
set forth by the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-related
Financial Disclosures (TCFD).
Description of our business model
Our business model as well as our Group structure, governance and strategy are described under
“Fundamental Information about the Group".
Governance
The requirements we place on responsible corporate governance are derived from our company values on the
one hand and from the regulations, external initiatives, and international guidelines to which we are committed
on the other hand. We have integrated these requirements into our sustainability strategy and our Group-
wide guidelines. These guidelines comprise charters and principles that are valid for the entire company as
well as specific standards and procedures for individual business sectors and sites.
Some examples: Our Human Rights Charter aligns with the UN Guiding Principles for Business and Human
Rights. Our Group-wide Social and Labor Standards Policy reflects the labor standards of the International
Labour Organization (ILO). Our EHS Policy (Corporate Environment, Health and Safety Policy) for
environmental impact mitigation and health and safety forms the basis for implementing the chemical
industry's Responsible Care® Global Charter within our company. Our standard entitled Corporate Chemicals
Regulations Governance describes the processes and management structures required to ensure global
compliance with the pertinent chemical and product safety regulations.
We endeavor to comply with all applicable laws as a matter of principle. Where necessary, we review our
internal guidelines, standards and instruction manuals on compliant behavior and adapt them to reflect changes
in the regulatory landscape.
** The summarized non-financial statement was not subject to a content review as part of the audit of the financial statements but was subject to a separate
limited assurance audit by Deloitte.
Combined Management Report Non-Financial Statement
100
Based on the requirements set forth in charters, principles and policies, our internal standards give specific
guidance for operational processes. They are constantly updated by the relevant departments and are available
on our intranet. Our managers implement these standards in their respective areas of responsibility and ensure
that they are adhered to. In addition, we educate and train our employees on all guidelines that apply to them.
We employ management systems to steer processes and define goals, actions, and responsibilities. These
systems are based on standards such as the internationally recognized quality management standard
ISO 9001, good working practices (GXP) in the pharmaceutical industry and ISO 14001 for environmental
management. Our company regularly undergoes ISO 14001 and ISO 9001 certification, which are conducted
by an independent auditing firm. We hold group certificates for both standards.
99
Combined Management Report Report on Expected Developments
Against the backdrop of the ongoing highly dynamic development of macroeconomic, geopolitical and industry-
specific conditions, the forecast is also subject to greater uncertainty and volatility in fiscal 2024 than is
normally the case. In terms of expected inflation, we assume a slow normalization.
Globally used IT applications form the basis for the contractual delivery of products and solutions. The failure of
business-critical IT applications could therefore have a direct influence on our ability to deliver and on the
quality of our products. This also applies to the failure of a data center. To achieve the required service quality,
we use a quality management system certified to ISO 9001 that also applies to the provision of IT. In addition,
to reduce the risk of failure, we operate several redundantly designed data centers. Furthermore, insurance
solutions for cybercrime offenses are in place at Group level.
Likewise, complications with the changeover of IT systems could negatively impact the earnings situation. Close
monitoring of critical IT projects serves to mitigate this risk.
Despite the mitigation measures applied and functional continuity plans, the effects of cybercrime or the failure
of business-critical IT applications and their influence on EBITDA pre and operating cash flow are considered to
be possible and with a significant impact.
Environmental, climate-related, and safety risks
Risks arising from environment, climate as well as plant and equipment
As a company with global production operations, we are exposed to risks of possible damage to personnel, goods
and our reputation. These include physical risks stemming from exposure to droughts, storms, and floods.
Mitigation measures such as audits, consultations and trainings on environmental protection, occupational health
and safety minimize these risks to people as well as the environment. In order to ensure the continuity of plant
and equipment, we monitor these risks both at our own sites as well as at suppliers and contract manufacturers.
By adhering to high technical standards, our rules of conduct, and all legal requirements in environmental
protection as well as occupational health and safety, we ensure the preservation of goods and assets.
We have taken sufficient appropriate accounting measures for the environmental risks known to us. We monitor
regulatory risks in connection with the transition to a low-carbon economy, which could materialize in the mid- and
long-term through rising carbon prices through emissions trading systems, taxes or energy legislation. We mitigate
those risks with our energy and CO2 management measures. Mainly, we classify these as possible risks with
moderate impacts. However, a critical impact on EBITDA pre or operating cash flow cannot fully be ruled out.
Cyber Security is part of our Group Corporate Security Office. In addition, we have a Group Chief Information
Security Officer and a network of Information Security Officers within the business sectors, each supported by
dedicated networks. The individual sectors hold risk ownership and act as our first line of cyber security
defense. Our Global Cyber Security function acts as a second line of defense and has responsibilities regarding
cyber security risk governance and oversight. Our third line of defense consists of internal audits.
Risks due to climate change
During this assessment, we utilized two climate pathways (1.5°C and 4°C) considering different time horizons
(2030 and 2050) to identify climate-related risks and opportunities. Based on our findings, we determined the
potential effects of physical risks on our key sites and evaluated the impact of transitional risks on our business.
In line with our ongoing dedication to risk mitigation, we continuously develop innovative and sustainable
approaches. As a result, we foresee no significant deviations from our expectations regarding impacts on
EBITDA pre or operating cash flow.
For further details on climate-related risks, please see "Increased uncertainty due to climate risks" in the
"Notes to the Consolidated Financial Statements".
Combined Management Report_
Report on Risks and Opportunities
93
Overall view of the risk and opportunity situation and management
assessment
In 2022, we performed a qualitative climate risk and vulnerability assessment to identify transitional and
physical climate-related risks that are material to our activities. In 2023, in accordance with TCFD
recommendations, we conducted a quantitative climate scenario analysis to identify climate-related risks and
opportunities. Consequently, we conducted an evaluation in relation to impacts of transition risks and the
exposure related to physical hazards.
The most significant individual risks or risk clusters have been outlined in this report, with business- and
market-related risks being the most significant alongside IT and legal risks. Of particular significance are the
still ongoing global macroeconomic and geopolitical developments, increasing existing risks related to more
restrictive regulatory requirements regarding drug pricing and reimbursement, the demand for our products,
business interruptions at our production sites, lack of availability of good quality materials or services, and risks
related to R&D.
92
Report on Risks and Opportunities
Combined Management Report_
Report on Risks and Opportunities
91
Risks in connection with a settlement agreement concluded by the divested
Generics group
Citalopram: In connection with the generics business that was divested in 2007, Merck was accused of
breaching EU antitrust law through agreements entered into by its former subsidiary Generics (UK) Ltd., United
Kingdom, relating to the antidepressant Citalopram patented by Lundbeck A/S, Denmark. The European
Commission imposed a fine in June 2013. Appeals against the decision were unsuccessful. Following the
payment of the fine of around € 18 million, British health authorities brought legal claims for damages against
Merck and other companies in a mid-triple-digit million-euro amount in fiscal 2023 due to alleged infringements
of competition law. In addition, there were further claimants from various other jurisdictions who have not yet
quantified their claims. In response to the latest developments in the proceedings, the provision was adjusted
as of December 31, 2023, and is now recognized in a high single-digit million-euro amount. A cash outflow
within the next twelve months is considered possible.
Product liability risks
Operating in the chemical and pharmaceutical industries, we are exposed to product liability risks. Product
liability risks can lead to considerable claims for damages, costs to avert damages, and potentially loss of
reputation. In view of this, we have taken out standard liability insurance to mitigate such risks. However, it
could be that the insurance coverage available is insufficient for individual cases. Although the occurrence of
product liability claims in excess of the existing insurance coverage is considered improbable, individual cases
could still have a critical effect.
2
Human resources risks
Recruiting as well as retaining specialists and talent are therefore key priorities for the company and are
managed through the targeted use of, for instance, employer branding initiatives, global talent, and succession
management processes as well as competitive compensation packages. Nevertheless, employee-related risks
that affect business activities are possible; even though their impact is difficult to assess we evaluated a
potential impact on the qualitative rating scale as moderate.
Information technology risks
We use a variety of IT systems and processes to optimally support our globalization. Trends in information
technology offer various opportunities but also harbor risks.
Risks due to cybercrime and the failure of business-critical applications
Increasing international networking and the related possibility of IT system abuse are resulting in cybercrime
risks for us, such as the failure of central IT systems, the loss of the data integrity or the disclosure of
confidential data from R&D as well as business activities, the manipulation of IT systems in process control, or
an increased burden or adverse impact on IT systems as a result of virus attacks.
We maintain and operate an information protection management system based on ISO 27001. Our governance
framework contains organizational, process-related, and technical information security countermeasures based on
recognized international standards. In addition, we employ harmonized electronic and physical security controls (e.g.
access control and security monitoring) to bolster our ability to handle sensitive data, such as trade secrets.
Combined Management Report_
Our future growth is highly dependent on our innovative strength. Therefore, the expertise and engagement of
employees in all business sectors in which we operate are crucial to our success. The markets relevant to the
company are characterized by intense competition to recruit qualified specialists and talents, and by the
challenge of being perceived by the public as an attractive employer. Fluctuation risks specific to countries and
industries have to be identified ahead of time and specifically addressed in order to keep the skills and
expertise critical to success and business within the company.
We also expect a persistently volatile environment as regards the development of foreign exchange rates. For
2024, we forecast an unfavorable foreign exchange development, albeit to a weaker extent than in fiscal 2023.
The negative foreign exchange effects are expected to be primarily attributable to the development of the U.S.
dollar as well as individual Asian currencies. For the average euro/U.S. dollar exchange rate, our full-year
assumption ranges between 1.07 and 1.11 for 2024.
By implementing risk mitigation measures such as continually improving management actions (organizational
responsibilities and process improvements), utilizing existing insurance coverage, and taking accounting
precautions, we have successfully taken counteraction, particularly against significant individual risks.
Based on our assessment, we believe that the most promising opportunities arise from business-related
opportunities. The activities described hold significant opportunities for us in the medium to long term, beyond
the forecast period. We actively pursue the opportunities that arise and specify their expected effects in the
forecast development of EBITDA pre and operating cash flow. Additionally, we proactively seek out new
opportunities, assess their feasibility, and drive them forward where appropriate. If opportunities arise in
addition to the forecast developments, or these occur more quickly than anticipated, this could have positive
effects on our EBITDA pre or operating cash flow.
⚫ About stable to slightly negative
foreign exchange effect
EBITDA pre¹
•
Slight to moderate organic growth
⚫ Negative foreign exchange effect
-1% to -4%
⚫ Moderate organic decline to slight
organic growth
•
• About stable organic development
to moderate organic growth
About stable to slightly negative
foreign exchange effect
Slight to significant negative
foreign exchange effect
⚫ Moderate organic decline to
moderate organic growth
About stable to moderate negative
foreign exchange effect
⚫ Rise in costs due to lower
currency hedging gains
⚫ Moderate to strong growth
1 Not defined by International Financial Reporting Standards (IFRS); EBITDA corresponds to operating result (EBIT) adjusted by depreciation,
amortization, impairment losses, and reversals of impairment losses.
Fundamental assumptions
Organic growth in the low teens
percentage range
The overall risk of the Group, which is derived from the probability-weighted aggregation of the identified risks,
leads to the assessment that an existence-threatening risk-scenario, for which coverage and financing of the
losses are questionable, is improbable. We are convinced that we will also successfully manage the
aforementioned challenges in the future and benefit from diversification through our different products and
markets.
⚫ About stable to moderate negative
foreign exchange effect
⚫ About stable to slightly negative
foreign exchange effect
Combined Management Report Report on Expected Developments
94
94
Report on Expected
Developments
The following report provides a forecast for the development of net sales and EBITDA pre for the Merck Group
and the individual business sectors Life Science, Healthcare and Electronics as well as a forecast for Group
operating cash flow in 2024.
€ million
Net Sales
⚫ Moderate to solid organic growth
.
•
Life Science
Healthcare
Electronics
Corporate and
Other
Slight to moderate organic growth
Negative foreign exchange effect
0% to -3%
Slight organic decline to slight
organic growth
Merck Group
Operating cash flow
154
101
70
48
52
Liquid fossil fuels²
59
1,164
1,188
1,235
1,182
Natural gas
68
43
1,245
1,321
1,269
Direct energy consumption
78
2,337
2,432
2,463
2,382
Total energy consumption
Merck Group thereof: Merck KGaA
2022
1,294
2021
9
energy
0.2
Total energy sold
0
110
178
163
Steam, heat, cold
10
982
984
964
Biomass and self-generated renewable
950
10
1,092
1,138
1,142
1,113
Indirect energy consumption
0
38
36
38
35
Electricity
2020
In GWh
2023
2
2
2
2
Downstream leased assets (category 13)
42
2611
234
23
End-of-life treatment of sold products (category 12)
1,137
Franchises (category 14) 12
138211
1,164
Use of sold products (category 11)10
Processing of sold products (category 10)9
105
6
84
8
Downstream transportation & distribution (category 9)
Upstream leased assets (category 8)8
767
99
1,296
Investments (category 15)
0
1
2023
Energy consumption¹
In 2023, we signed virtual power purchase agreements (VPPAs) in Europe for a total of around 300 gigawatt
hours (GWh) of renewable energy per year. This means that 100% of our electricity currently purchased in the
European Union (EU) and Switzerland will be covered with renewable energy certificates as of 2025.
In 2023, we further strengthened our focus on purchasing electricity from renewable sources. In this period, we
sourced 51% of our purchased electricity from renewable energies, meaning direct supply contracts and energy
attribute certificates (2022: 47%). The share of our total energy consumption by renewable energies increased
to 23% in 2023 (2022: 20%).
We consumed 2,337 gigawatt hours of energy in 2023 compared with 2,432 gigawatt hours in 2022. As in the
previous year, our energy intensity relative to sales remained at 0.11 kWh/€ in 2023.
Energy consumption and renewable energy
We report to CDP on an annual basis. This organization assesses the ways in which companies are working to
lower greenhouse gas emissions and minimize the risks and consequences of climate change, along with their
strategy for doing so. Companies are rated from A to D-, with A being the top score. In 2023, we scored A-
(2022: B) for climate change.
Transparency on CO2 emissions and energy consumption
108
Environmental Matters
Combined Management Report Non-Financial Statement
Biogenic emissions (Scope 3), if present, are not being recorded.
12 This category is not relevant for us as we do not operate franchises, i.e. businesses operating under a license to sell or distribute another company's
goods or services. Out-licensing in the pharmaceutical sector is not regarded as franchising.
11 Due to high efforts for data preparation, we partly use 2020 data for 2022.
10 In 2023, we adapted the Category 11 calculations to the modified global warming potentials of the IPCC 6th assessment report (previously IPCC 5th
assessment report) and restated previous years accordingly.
9 Our company produces a huge variety of intermediate products for various purposes. Due to their many applications and our customer structure, the
associated greenhouse gas emissions cannot be tracked in a reasonable fashion.
8 Already covered under Scope 1 and 2 emissions.
7 We adjusted our calculation methodology to take into account the results of an internal employee survey on home office use.
6 We adjusted our calculation methodology to remove non-GHG relevant waste streams.
5 In 2023, we introduced a new and improved calculation methodology based on primary data from suppliers/logistics service providers and an energy-
based bottom-up calculation approach.
4 Due to high efforts for data preparation, we reference 2020 data for 2021.
3 We updated environmentally extended input-output analysis (EEIO) factors, and we adjusted our emission calculation approach for service categories
using primary supplier data.
1 In line with the Greenhouse Gas Protocol, for all previous years, greenhouse gas emissions were calculated based on the current corporate structure as of Dec. 31
of the reporting year and retroactively adjusted for acquisitions or divestments of (parts of) companies, or for changes in emission factors (portfolio-adjusted).
2 The reported figures contain 95-97% of our total spend. The difference stems from smaller sites that are not integrated in our Group-wide purchase
volume data. 2020 data are slightly over-reported (approx. 3%) as the currency conversion factor (USD to EUR) from 2021 was used. Non-categorized
spends are distributed pro rate to category 1 and 2.
1
2
0.1
94
0.01
0.0
Wastewater volume
In 2023, we generated a total of 11.1 million m³ of wastewater (2022: 12.4). This comprised around 7.6 million m³
of "direct discharge" water (2022: 8.6) into surface waters. 3.4 million m³ was classified as "indirect discharge"
(2022: 3.8) water and treated at external treatment plants.
Our wastewater
In 2023, we already exceeded our target set for 2025 to lower the Merck Water Intensity Score by 10% (baseline
year 2020). Initiatives that helped us reach our original goal include effects from shifts in product mix as well as
initiatives such as recycling of wastewater in Rio de Janeiro (Brazil), St. Louis (USA) and Mollet del Valles (Spain).
We have therefore set ourselves a new target: By 2030 we will reduce our sales-normalized water intake by 50%
compared with 2020 (2020: 792 m³ per million € net sales (100%), 2023: 580 m³ per million € net sales (-30%)).
In the past, our Gernsheim site in Germany was excluded from both the score and our water conservation
efforts because we must extract a minimum water quantity from our own wells to meet regulatory
requirements. Our new target will cover the entire Group, including Gernsheim.
We seek to minimize our impact on water availability in the vicinity of our sites. In 2023, we withdrew
12.1 million m³ of water in total (2022: 13.2). We assess local conditions to determine whether a sufficient
water supply is available. In our water conservation efforts, we pay particular attention to sites in water-scarce
areas. To measure how we improve our water efficiency, we have defined the Merck Water Intensity Score,
which relates the amount of water either purchased or withdrawn from our own wells at a site to the number of
hours worked, taking local water availability into account.
Using water more efficiently
These figures do not include the ground water that we use for safety measures at our Gernsheim site in
Germany. Here, the water is fed back directly into natural circulation.
0.002
0.06
0.06
0.06
2020
0.06
4.8
5.0
5.2
5.4
0.002
5.8
6.3
6.3
6.7
0.002
1.4
0.156
1.8
2021
Total wastewater volume (millions of m³)
Combined Management Report_ Non-Financial Statement
In addition to reporting on our climate action efforts, we also report water-related data to the CDP, which
collects environmental data from companies once a year and evaluates their processes and performance on a
scale from A to D-. As in the previous year, we were awarded a B for our water management practices in 2023.
Assessing our water management practices
We continuously work to optimize our production streams and purification processes to conserve water and
minimize residues. We have appointed an expert for each of our business sectors to provide guidance for our
sites. This approach aims to reduce the amount of pharmaceutically active ingredient residues as well as all
substances with water-hazardous properties. All wastewater from relevant sites is processed in wastewater
treatment plants before being discharged into the environment. This is done either in our own plants or by
offsite third parties such as municipal wastewater treatment plants.
0.100
3.4
3.8
3.8
4.1
Wastewater discharged to third parties
0.000
2022
7.6
9.5
9.2
Wastewater discharged directly
0.110
stress areas
Water
2023
2023
Merck
Group
11.1
12.4
13.3
13.4
8.6
1.9
1.8
0.162
Roles and responsibilities
Our regular EHS audits at our production and development facilities also review site-specific water management
practices. Our water management efforts focus more heavily on our manufacturing sites than our
administrative facilities as production generally poses a higher risk to aquatic ecosystems.
To this end, we have defined two targets: Firstly, we originally aimed to achieve a 10% reduction in our Merck
Water Intensity Score by 2025 compared with the baseline of 2020. In 2023, we met and surpassed this target,
successfully lowering the Merck Water Intensity Score by 25% in comparison with the baseline year 2020.
Consequently, we have set a new target based on a new and more transparent calculation. By 2030, we strive
to achieve a 50% reduction in our water efficiency ratio of water intake per revenues compared with the 2020
baseline. The new target covers the complete water intake of our company. Our 2020 baseline year was chosen
to align this new target with other existing environmental goals. Our second objective focuses on mitigating our
environmental impact. Specifically, we are committed to reducing potentially harmful residues in our
wastewater to levels below the established no-effect threshold.
To us, sustainable water management means obtaining freshwater or discharging treated wastewater without
negatively impacting aquatic ecosystems. We are also concerned with addressing water scarcity. To determine
whether a site is in a water-stressed area, we apply a risk factor of the Aqueduct Water Risk Atlas of the World
Resources Institute (WRI). We want to reduce the environmental impact of our wastewater and make our
processes more water efficient. In the medium term, we will also consider water-related risks in our supply
chain when purchasing important raw materials. In the long term, we aim to transparently map water use and
environmental impacts throughout the entire life cycle of our products.
Water management
109
Environmental Matters
Combined Management Report Non-Financial Statement
We currently only record purchased secondary energy this is primarily electricity and, to a lesser extent, heat,
steam and cold. Details on the local energy mix, including the respective percentage of primary energy,
renewable energy, etc. are not available. Data on local energy efficiency in electricity or heat generation are not
available either. Our production sites are located in countries with a widely varying energy mix.
-
2 Light and heavy fuel oil, liquefied petroleum gas (LPG), diesel, biodiesel, gasoline and kerosene.
The Group function Corporate Sustainability, Quality and Trade Compliance is responsible for water
management. At our sites, engineers work closely with our EHS managers to reduce water consumption and
treat wastewater. Further information can be found under "Environmental protection".
1 In line with the Greenhouse Gas Protocol, for all previous years energy consumption has been calculated based on the current corporate structure as of
Dec. 31 of the reporting year and retroactively adjusted for acquisitions or divestments of (parts of) companies, or for changes in emission factors
(portfolio-adjusted).
0.00
0.00
0.0
0.0
Steam, heat, cold
0.0
0.00
0.01
0.1
0.2
Electricity
0.0
Our commitment: Standards and procedures
Our Sustainable water management principles set the framework for three Group-wide standards that
detail how we integrate mechanisms of sustainable water management into our management system:
Sustainable Water Management Part 1 - Wastewater; Sustainable Water Management Part 2 - Water Use; and
Sustainable Management Part 3 Water Risk Management. All three standards are based on the commitments
we made under the Responsible Care® initiative.
-
12.1
13.2
13.5
14.0
stress areas
2023
Water
2023
Merck
Group
2022
2021
2020
Rain water and other sources
Drinking water (from local suppliers)
Groundwater
Surface water (rivers, lakes)
110
Environmental Matters
Non-Financial Statement
Combined Management Report
Total water withdrawal
millions of m³
Water withdrawal
The cooling water used in our production processes generally runs in a circular system. Depending on
regulatory standards and the energy footprint, we sometimes use freshwater for cooling in a once-through
system. However, this is only done in regions with high freshwater availability. For certain applications, we treat
production wastewater and reuse it. In 2023, we recycled a total of 20.5 million m³ of water (2022: 20.7).
For the most part, we draw water used for our production processes from our own wells and source drinking
water from local suppliers. In doing so, we do not want water extraction to impair any protected areas,
sensitive ecosystems or habitats. We extract less water from our own wells than the amounts permitted. We
simultaneously monitor potential trends that could lead to the reclassification of water sources, which involves
assigning heightened levels of protection to specific regions.
Water withdrawals from our own wells and local suppliers
Our Wastewater Standard defines criteria for assessing our wastewater discharges into ecosystems. It also
helps us achieve our targets regarding trace substances in wastewater from our operations. The Water Use
Standard sets out mandatory Group-wide requirements for the responsible consumption of water. The Water
Risk Management standard establishes a way for us to manage the risks that arise from direct or indirect water
extraction and covers risks such as contaminated rainwater and flooding. We perform internal EHS audits to
verify that our sites comply with our three standards. All sites are required to measure and assess the risks and
impacts of the hazardous substances in their wastewater. Moreover, they must also analyze withdrawal and
wastewater risks and comply with the respective requirements of the local authorities.
0.00
90
We use photovoltaics to produce power at multiple sites.
86
•
• Attracting and retaining talent
• Chemical product safety
⚫ Plant, process and transport safety
• Water management
• Climate action
• Environmental management
Topic
Social matters
Employee-related matters
Environmental matters
Diversity, equity and inclusion
Aspect
Pursuant to section 289c (3) and section 315c (2) of the German Commercial Code (HGB), we are obligated to
review topics for their double materiality. The principle of double materiality requires companies to disclose
non-financial information as soon as the following two criteria are met: Firstly, the information makes it
possible to understand how the company's activities affect non-financial aspects. And secondly, the information
is necessary to understand the course of business, results of operations and economic position of Merck KGaA
and the Merck Group. In 2023, we examined the topics identified within the scope of a materiality analysis in
accordance with the Global Reporting Initiative standards (GRI) for their double materiality.
Topics for the non-financial statement
103
Non-Financial Statement
Combined Management Report_
The Merck Sustainability Advisory Panel (MSAP) supports our company as an external expert committee for
sustainability. The panel is chaired by the Head of SQ. It comprises independent experts on sustainability-related
topics from various institutions worldwide whom we invite on an ad hoc basis. The MSAP advises our company on
selected issues and assesses planned activities. Moreover, the members apply their knowledge to help address
societal and political challenges and developments that could be strategically relevant for our businesses.
In 2023, the Sustainability Board met 11 times by video conference. In addition to climate-related issues and
new sustainability reporting requirements, it also addressed the adaptation of the strategy and new objectives
for circular economy and water management.
The Sustainability Board steers and monitors the Group-wide implementation of the sustainability strategy,
defines priorities and stipulates globally applicable sustainability policies. In addition, the Sustainability Board
ensures that the initiatives of our various business sectors, Group functions and subsidiaries align with our
global sustainability strategy. Moreover, it recommends corresponding initiatives to the Executive Board. Within
their respective area of responsibility, each Executive Board member is also responsible for sustainability,
reviews the priorities that have been set, and decides on the implementation of initiatives.
Group Corporate Sustainability is also responsible for coordinating the Merck Sustainability Board, which is
chaired by the Head of SQ, who simultaneously serves as Chief Sustainability Officer. The committee consists of
representatives from our business sectors and from key Group functions, such as Procurement,
Communications and Controlling.
The Group Corporate Sustainability unit is responsible for developing and shaping the sustainability strategy
and it informs the Executive Board at least once a year about the progress made and the need for action. It is
part of the Group function Corporate Sustainability, Quality and Trade Compliance (SQ), which reports to the
Chair of the Executive Board. At Executive Board level, responsibility for Environment, Social, Governance
(ESG) also lies with the Chair of the Executive Board.
Our Executive Board has Group-wide responsibility for our sustainability strategy. It has adopted our three
strategic goals (details can be found under "Strategy").
The following topics achieved the relevance threshold for double materiality in 2023. They cover fiscal year
2023 and pertain to our entire Group. Any deviations from the reporting framework are indicated on a case-by-
case basis.
Roles and responsibilities
⚫Health and safety
⚫ Patient safety
Across our business sectors, the Operations Leadership Committee (OLC) makes strategic decisions on issues
pertaining to emissions, energy, water, and waste. This body comprises representatives from Life Science,
Healthcare and Electronics as well as SQ. Decisions made by the OLC and any resulting actions are
implemented by the respective business sector. Once per quarter, the OLC members update their leaders on
matters relating to environmental protection and this information, if relevant, is then shared with the MSB.
Our commitment: Standards and standard operating procedure
The Group function Corporate Sustainability, Quality and Trade Compliance (SQ) is responsible for steering all
the related measures globally. SQ senior leadership approves operational standards and regularly reports on
environmental protection to the Merck Sustainability Board. Every year, SQ prepares a comprehensive
environment, health and safety report covering topics such as climate action, water management and waste
and recycling as well as plant and process safety. The Merck Sustainability Board uses this report to steer the
strategic direction and provide verification for our ISO 14001 and ISO 45001 certifications.
The Chair of the Executive Board and CEO of our company is responsible for environmental protection, which
also covers climate action, water management, waste and recycling, air emissions, biodiversity, and plant and
process safety. Her duties include approving overarching Group-wide guidelines such as our Environment,
Health and Safety (EHS) Policy. Furthermore, the Merck Sustainability Board (MSB) monitors the Group-wide
implementation of environmental protection goals.
-
Roles and responsibilities
Minimizing negative environmental impacts and taking meaningful climate action require a holistic approach
while also constantly monitoring practices and performance. Our goal is to decouple business growth from
negative environmental impacts wherever possible. Our production sites are located in established industrial
and commercial zones. Before acquiring a company and thus its facilities - we first conduct an environmental
risk assessment.
Environmental protection
Environmental Matters
104
Environmental Matters
Combined Management Report Non-Financial Statement
Responsible supply chain (including the mica supply chain)
As part of our approach to comprehensive risk and opportunity management, we also identify current and
potential risks and opportunities resulting from environmental, social and governance aspects. This includes
tracking information on the gross risks in terms of potential damage and probability, as well as the residual net
risks remaining after mitigation measures have been executed. As of the reporting date and pursuant to the
risk analysis of the material non-financial topics, no significant risks within the meaning of section 289c (3)
sentence 1 no. 3 and 4 of the German Commercial Code (HGB) from the company's own business activities or
from business relationships are known that are very likely to have or will have serious negative effects on non-
financial aspects. Additional risks are described in the “Report on Risks and Opportunities" in the combined
management report.
• Governance and compliance (including anti-corruption anti-competitive
behavior)
⚫Human rights
⚫ Data protection and cyber security
Other topics
Anti-corruption and anti-bribery
Respect for human rights
Digital ethics
•
⚫ Bioethics
⚫ Clinical studies
• Prices of medicines
• Interactions with health systems (including responsible marketing)
⚫ Sustainable innovation and research & development
102
Combined Management Report Non-Financial Statement
April 11, 2024
Percentage of relevant suppliers (in terms of
number and supplier spend) that are covered
by a valid sustainability assessment¹
⚫ Lost Time Injury Rate (LTIR)
• Environment, Health and Safety (EHS)
Incident Rate
⚫ Percentage of women in leadership positions
⚫ Result of the employee engagement survey
on sustainability culture²
Sustainability key indicator
Sustainable and transparent supply chain
Our people and communities; providing a
diverse and inclusive environment
Sustainability in our ways of working &
decision making
Focus area
Goal 2: By 2030, we will fully integrate sustainability into our value chains.
• Violations of Global Social and Labor
Standards Policy
Will be published in the SASB
index within the Sustainability
Report 2023 as of April 11, 2024
Further details
⚫ People treated with our Healthcare products
and pharma products enabled by our
Life Science business sector¹
• Percentage of newly published patent
families with positive sustainability impact
Sustainability key indicator
Impact of our products on health and
wellbeing
Sustainability innovation and technologies
Focus area
Goal 1: In 2030, we will achieve human progress for more than one billion people through
sustainable science and technology.
Our key indicators
Employee commuting (category 7)
Moreover, our annual Long-Term Incentive Plan (LTIP) for Executive Board members and senior executives
contains a sustainability factor. We use it to measure performance over a period of three years based on
selected key indicators for each of our three sustainability goals. Consequently, target achievement based on
the key financial performance indicators can increase or decrease by up to 20%. Details on how this
sustainability factor is calculated can be found in the "Compensation Report", which is subject to both a
formal audit and a separate content audit performed by Deloitte. In 2023 and for the first time, the company
tied 15% of variable employee compensation to sustainability parameters. Details on this can be found under
“Sustainable innovation and technology" within this non-financial statement.
Sustainable innovation and
technology
1 The key indicator is used to determine the sustainability factor for the Merck Long-Term Incentive Plan (LTIP).
Further details
Attracting and retaining talent
Sustainability Report 2023 as of
Will be published in the
Water management
Sustainability Report 2023 as of
April 11, 2024
Will be published in the
Climate action
1 The key indicator is used to determine the sustainability factor for the Merck Long-Term Incentive Plan (LTIP).
2 A new key figure will replace this key figure from the 2024 reporting year.
• Wastewater quality
• Water Intensity Score²
• Waste Score²
⚫ Indirect greenhouse gas emissions (Scope 3) Climate action
Percentage of purchased electricity from
renewable sources
Climate action
Further details
• Greenhouse gas emissions (Scope 1+2)1
Sustainability key indicator
Water and resource intensity
Climate change and emissions
Focus area
Goal 3: By 2040, we will achieve climate neutrality and reduce our resource consumption.
2 The key indicator "Percentage of employees trained on sustainability" is no longer applicable in 2023, as the target was achieved.
Human rights
Responsible supply chain
Health and safety
Plant, process and transport
safety
Diversity, equity and inclusion
Our approach to environmental management is founded on our Group EHS (Environment, Health and
Safety) Policy, which has been approved by our Executive Board. Aligned with the requirements of the
chemical industry's Responsible Care® Global Charter and the ISO 14001 environmental management
standard, this policy underscores our leaders' responsibility for environmental protection and health and safety.
It is also aimed at our suppliers, calling on them to likewise adopt high environmental sustainability and safety
standards. Our EHS policy thus complements the Supplier Code of Conduct of our Group Procurement
function. Through our Contractor EHS Management Standard, we aim to ensure that our contract partners also
take environment, health and safety aspects into account.
Material investments in environmental impact mitigation
1 The key indicator is used to determine the sustainability factor for the Merck Long-Term Incentive Plan (LTIP).
Combined Management Report Non-Financial Statement
Purchased goods & services (category 1)²
4,594
6,680
5,799
5,103
Total gross other indirect emissions (metric kilotons CO2
equivalents)
2023
2022
2021
2020
Other relevant indirect greenhouse gas emissions (Scope 3 of the GHG Protocol)¹
3,040
We have included the following gases in our calculation of direct and indirect CO2eq emissions:
Direct CO2 emissions: CO2, HFCS, PFCS, CH4, N2O, NF3, SF6.
Indirect CO2 emissions: CO2.
6 The figures presented here have been calculated in accordance with the market-based method.
5 In 2023, we adapted the Scope 1 calculations to the modified global warming potentials of the IPCC 6th assessment report (previously IPCC 5th
assessment report) and restated previous years accordingly.
4 In 2023, we adjusted our Scope 1 and Scope 2 calculations to reflect minor data corrections.
equivalent.
3 eq
1 In line with the Greenhouse Gas Protocol, for all previous years greenhouse gas emissions were calculated based on the current corporate structure as of Dec. 31
of the reporting year and retroactively adjusted for acquisitions or divestments of (parts of) companies, or for changes in emission factors (portfolio-adjusted).
2 Baseline for our emission targets is 2020.
0
7
15
14
14
7 We adapted the calculations to the complete Greenhouse Gas Protocol requirements.
227
3,572
2,5173
26
Efforts to prevent and monitor air, water and soil emissions entail significant expense on our part, as does proper
waste disposal. Moreover, we set up provisions for groundwater and soil remediation to ensure that we can
execute all the necessary measures. As of December 31, 2022, our provisions for environmental protection totaled
€ 149 million (2022: € 148 million), 96% (2022: 94%) of which was attributable to Merck KGaA, Darmstadt,
Germany. For details see Notes to the Consolidated Financial Statements under (27) "Other provisions".
78
32
Business travel (category 6)
326
576
85
Waste generated in operations (category 5)
2365
319
4,200
2644
Upstream transportation & distribution (category 4)
115
121
143
102
Fuel- and energy-related emissions, not included in Scope 1 or
2 (category 3)
3403
388
291
293
Capital goods (Category 2)²
264
242
79
1,236
Corporate Sustainability, Quality and Trade Compliance is responsible for overseeing all climate action efforts
throughout the Group, with our individual sites and business sectors worldwide implementing the necessary
measures at the local level. More information can be found under “Environmental protection”.
Roles and responsibilities
By 2040, we intend to have achieved climate-neutral operations throughout our entire value chain; this target
covers our Scope 1, 2 and 3 emissions.
Moreover, we aim to reduce our Scope 3 emissions across the entire value chain by 52% compared with 2020
(per euro of gross profit) by 2030. This target was also approved by SBTI.
We also aim to cover 80% of our purchased electricity with renewables by 2030.
In May 2022, this goal for 2030 was approved by the Science Based Targets initiative (SBTI), which
independently assesses and approves company targets based on its strict climate science criteria. This approval
by SBTi confirms that we are contributing to limiting global warming to 1.5 °C, thus complying with the
requirements of the Paris Agreement.
By 2030, we intend to lower our direct (Scope 1) and indirect (Scope 2) greenhouse gas emissions by 50%
compared with the base year 2020. We aim to achieve this mainly by reducing process-related emissions,
implementing energy efficiency measures and purchasing more electricity from renewable sources.
We want to do our part to preserve the climate and comply with the Paris Agreement on climate change.
Therefore, we have set our own objectives:
Climate action
106
Environmental Matters
Our commitment: Standards and legal frameworks
Non-Financial Statement
Annual external audits are used to monitor our certifications. As part of a defined sample procedure for the
Group certificate, a total of 34 sites were externally audited in 2023, with all audited facilities passing (2022:
12). In addition to external inspections, internal audits serve to ensure Group-wide compliance with our
requirements.
Since 2009, our company has held an ISO 14001 Group certificate that requires all production sites with more
than 50 employees to implement an environmental management system with predefined indicators such as
greenhouse gas emissions and water consumption. Other facilities are not obligated to undergo certification.
The annual internal audit reports and management reviews carried out under the Group certificate give us a
better overview of how all our sites are performing. As in the previous year, 95 of our sites worldwide were
covered by the ISO 14001 certificate in 2023.
ISO 14001:2015 Group certificate
In 2023, we recorded no (2022: two) significant incident-related releases of substances.
In the event of a major occurrence, our digital Rapid Incident Report System (RIRS) promptly notifies the SQ
and Group Communications functions, which, if necessary, inform the Executive Board. Major incidents could
include fatalities, accidents with multiple casualties, incidents that impact neighboring communities, or natural
disasters such as earthquakes and flooding. Through the RIRS, we can quickly coordinate with all those
involved and inform the other sites immediately of the respective event. In addition, employees as well as
external stakeholders can report any violations of our standards to Group Compliance.
To review critical situations, near misses and environmental incidents as quickly as possible and take
countermeasures, we have a set of reporting procedures in place that allow us to track the respective incident,
its degree of severity and all risk mitigation efforts. We record all incidents Group-wide and report them to the
Executive Board annually.
As a matter of principle, we conduct risk-based assessments along with audits of all our production facilities
every three years with the goal of analyzing and minimizing our environmental footprint. Conducted by SQ,
these assessments serve to ensure that our requirements are being met, with appropriate corrective measures
being implemented as needed. In our Group EHS audits, we assess our sites' performance on a five-tier scale
("excellent”, “good”, “fair”, “poor", and "critical”), which in turn determines how frequently audits are
conducted. If the findings are deemed to be good, we audit the facility less often, while incompliances can
increase the frequency. In 2023, we commissioned a total of 34 audits (2022: 41), one of them "excellent", 23
of them "good" and 10 of them "fair".
Environmental Matters
Assessing environmental impacts
325
15
105
Combined Management Report
We have three EHS standards in place to manage energy and process-related emissions consistently across the
Group, specifically "Energy Management", "Air Emissions" and "Emissions of Refrigerants". We use an internal
audit process to randomly check compliance with all EHS standards.
Reporting incidents and violations
In 2023, we reduced our greenhouse gas emissions by nearly 17% compared with the previous year, emitting a
total of approximately 1,463,000 metric tons of CO2 equivalents (CO2eq) (2022: 1,760,000).
1,827
325
14
Emissions reduced further
22
1,760
1,951
2,152
2023
Merck Group thereof: Merck KGaA
2022
1,518
2021
20203
2023
1,463
indirect CO2eq emissions (Scope 2)6
Our direct emissions (Scope 1) totaled 1,236,000 metric tons of CO2eq (2022: 1,518,000), with process-related
emissions accounting for 990.000 metric tons of CO2eq and fuel use accounting for the remainder. Indirect
emissions (Scope 2) totaled roughly 227,000 metric tons of CO2eq (2022: 242,000) calculated according to the
market-based method (approximately 381,000 metric tons of CO2eq according to the location-based method).
Greenhouse gas emission intensity (Scope 1 and 2) amounted to 0.07 Kg of CO2eq per € of net sales in this
period (2022: 0.08).
The Greenhouse Gas Protocol defines 15 categories for Scope 3 emissions from upstream and downstream
activities. In 2023, these emissions totaled around 4,594,000 metric tons of CO2eq (2022: 6,680,000).
Categories 1 and 2 (Purchased Goods and Services and Capital Goods) accounted for 62% (2022: 69%) of our
total Scope 3 emissions in this period.
Biogenic CO2 emissions?
Combined Management Report Non-Financial Statement
Environmental Matters
107
1,626
Total greenhouse gas emissions (Scope 1 and 2 of the GHG Protocol) 1,2
metric kilotons
direct CO2eq emissions (Scope 1)5
Total CO2eq³ emissions4
thereof:
158
211
164
187
not applicable
1 The table contains unadjusted turnover rates. The rate excludes employees who pause due to parental leave or a long-term illness, as well as
employees who are transitioning to the non-working phase of partial retirement.
2 The employee turnover rate is calculated as follows: Total number of leavers from the past 12 months divided by the average employee headcount
multiplied by 100.
3 The figures do not reflect the approximately 500 Allergopharma employees, who were not included in the employee turnover rate due to the divestment
of the business.
In 2023, the average length of service for employees Group-wide was 9.7 years (2022: 9.2 years), with 15.2
years (2022: 15.4 years) for Merck KGaA employees.
Roles and responsibilities
Group Human Resources (HR) supports and advises all business sectors and Group functions within our
organization regarding our human capital, especially topics related to recruiting, vocational training and
advanced training. Across all our sites, HR employees work with leaders from various functions and business
sectors to employ strategies that engage our people in line with Group-wide HR guidelines and requirements,
including attractive compensation models and benefits. In accordance with the audit plan, we conduct internal
audits every two to three years to ensure that we implement our guidelines effectively.
The Chair of the Executive Board and CEO is responsible for Group Human Resources. Our Chief HR Officer,
who leads the HR function and oversees all our HR activities, reports directly to the Chair of the Executive
Board and CEO. Our Business Services unit oversees the operational tasks of HR work, such as drafting
contracts and payroll accounting. The Chief Financial Officer is responsible for this unit.
Combined Management Report Non-Financial Statement
117
Our commitment: Group-wide policies and guidelines
As set down in our Social and Labor Standards Policy, we will respect our employees' legal rights to form
and join worker organizations of their own choosing, including labor organizations and trade unions, and will not
discriminate based on an employee's decision to join or not join a labor organization.
Our High-Impact Culture is founded on six behaviors: obsessed with customers and patients; act as the owner;
be curious and innovate boldly; simplify and act with urgency; raise the bar; disagree openly, decide and
deliver. We regularly inform managers and employees about these behaviors through global campaigns.
Our People Development and Learning Policy provides a Group-wide framework that guides employees in
managing their professional growth. It defines requirements for our development opportunities, roles and
responsibilities.
not applicable
A competitive compensation structure
We reward the performance of our employees in order to maintain a competitive edge in attracting and
retaining the best talent. Within our Group, we base compensation on the requirements of each position and
each employee's respective performance. We make no distinctions based on gender or any other diversity
criteria. To ensure we maintain a competitive compensation structure, we regularly review our compensation
policy based on data analyses and industry benchmarks. This enables us to compare internal factors and
market requirements in equal measure. Before making changes to our compensation structure, we consult with
key stakeholders such as employee representatives, as applicable.
Employee-Related Matters
Latin America
467
Europe
North America
In addition to individual performance, our annual incentive plan also measures company performance based on
financial and non-financial key indicators in our scorecard. The non-financial key indicators focus on the
company's priorities and are designed to support our High-Impact Culture as well as our sustainability strategy
and progress in terms of diversity, equality and inclusion. Furthermore, since 2022, we have included a
sustainability factor in our Long-Term Incentive Plan (LTIP). More information on the LTIP can be found in the
Notes of our Annual Report.
1,490
1,601
1,640
1,560
152
1,281
2,078
460
2,182
not applicable
Asia-Pacific (APAC)
Middle East and Africa (MEA)
1,394
2,015
1,905
1,824
not applicable
398
449
2,305
Strengthening our sustainability culture
200
Combined Management Report Non-Financial Statement
3,831
4,018
4,139
600
Low management (Role 3)
10,286
10,880
11,877
11,907
1,275
Other employees (below Role 3)
44,011
45,443
48,157
46,662
2,001
% of women (total)
43
43
by region
43
3,637
Middle management (Role 4 & 5)
48
191
Employee-Related Matters
118
Diversity, equity and inclusion
We are committed to promoting a strong sense of inclusion and belonging among our employees. Therefore, we
approach diversity, equity and inclusion (DE&I) with the same purpose as our other global business objectives
and aspirations. While we have always been a diverse organization we currently span 65 countries and have
about 63,000 employees from 141 nationalities - we recognize that our success depends on our ability to foster
equity and inclusion. In addition, our DE&I approach fuels our efforts to make positive impacts in the
communities where we live and work. We expect our leaders and managers to be mindful and considerate in
how they attract, hire, retain, and promote their people. We aim to help every employee maximize their
potential, regardless of their gender identity, culture, ethnicity, race, religion or creed, sexual orientation,
nationality, socioeconomic and family status, language, disability status, age, mindset, faiths, military service,
or political conviction.
We strive to create equitable outcomes and identify and eliminate any barriers that may hinder our employees'
contributions or their access to opportunities or career advancement. Ultimately, we believe diversity inspires
progress and strengthens our ability to innovate in all areas of our business.
Number of employees by hierarchical level
2023
2023
As of Dec. 31
2020
Since 2021, e-Learnings on our sustainability strategy are a mandatory training component for existing and
new employees. While this was the first step of our upskilling journey, we have extended our offer with
function- and hierarchy-specific educational activities. Furthermore, from 2023 on, we use the sustainability
questions from our annual employee engagement survey to measure the impact of our activities. The survey
results are only used internally. They help us to understand the maturity of a sustainability mindset in the
company and to detect and address functional, regional or hierarchical differences. The corresponding key
indicator "Result of the employee engagement survey on sustainability culture" replaces the previous year's
achieved key indicator "Percentage of employees trained on sustainability".
2021
Merck Group¹ thereof: Merck KGaA
Total employees
58,127
60,348
64,243
62,908
3,924
Senior management (Role 6+)
193
194
2022
38
Asia-Pacific (APAC)
1,247
9.55
9.48
3.41
50 or older
7.52
9.22
8.05
8.49
2.62
Turnover rate by region
10.05
Europe
6.00
5.91
5.52
3.48
North America
9.79
15.44
14.33
15.02
not applicable
5.64
10.60
7.74
5.79
44
9.96
3.48
Turnover rate by gender
Men
8.22
10.69
10.40
10.11
3.24
30 to 49 years old
Women
11.00
9.93
9.76
3.87
Turnover rate by age group
Up to 29 years old
11.30
16.64
15.91
14.39
8.22
1,354
14.66
11.90
2,024
2,779
2,685
2,697
65
Women
by age group
Up to 29 years old
974
1,451
87
1,542
32
30 to 49 years old
2,677
3,545
3,569
3,624
82
50 or older
1,070
1,358
1,358
12.84
3,639
3,575
not applicable
Latin America
11.40
12.95
13.38
13.19
not applicable
Middle East and Africa (MEA)
11.80
16.57
3,673
13.04
not applicable
Total number of leavers
4,721
6,354
6,358
6,336
152
by gender
Men
2,697
15.63
39
60
management (Role 6+)
8,007
7,963
805
thereof: number of employees in "other
employees (below Role 3)"
25,948
26,624
28,124
27,697
894
50 years or older (%)
25
25
25
26
33
thereof: number of employees in senior
management (Role 6+)
125
131
133
7,298
6,926
management (Role 3)
thereof: number of employees in low
8,484
494
30 to 49 years old (%)
60
10.16
60
60
53
thereof: number of employees in senior
management (Role 6+)
135
68
58
65
19
thereof: number of employees in middle
management (Role 4 & 5)
2,032
2,172
2,235
2,283
367
63
29
thereof: number of employees in middle
management (Role 4 & 5)
•
Inclusion Action Plan of the German Mining, Chemical and Energy Industrial Union (IG BCE)
•
Equal Opportunity Charter
German Diversity Charter association (signatory of the Charter and member of the association)
CEO Letter on Disability Inclusion
Strategy implementation
In 2023, we continued driving our global DE&I strategy. We accelerated the impact of our national DE&I
advocates in our 18 major countries and developed tailored roadmaps for each market. We also published our
Premier DE&I Report, providing detailed evidence of our strategy implementation and initiatives.
In 2021, we pledged to our people, partners, patients, and industry to intensify our DE&I efforts and set robust
aspirations. In 2023, we demonstrated that we are on track to meeting our 2030 goals.
Combined Management Report Non-Financial Statement Employee-Related Matters
Women's Empowerment Principles
120
We developed measures to achieve a more balanced gender structure at various hierarchical levels of our
business. We are making consistent progress and have increased the share of women in leadership (roles 4+)
to 39% (2022: 38%) and senior management positions (roles 6+) to 29% (2022: 27%) while maintaining a
44% proportion of women in our global workforce (2022: 43%). This means our share of women in leadership
has increased by 12 percentage points since 2015. Building on these efforts, we aim to achieve gender parity in
leadership positions by 2030. Moreover, we are committed to fair and equitable pay for all employees. Our
Executive Board comprises two female members (our CEO and CFO) and three male members, bringing the
share of women to 40% (2022: 20%).
Culture and ethnicity
With 23% (2022: 24%) of our employees based in the United States and 27% (2022: 27%) of net sales coming
from the United States it is crucial that we become an employer of choice among underrepresented racial and
ethnic groups in this market. Therefore, we plan to increase the share of employees in U.S. leadership (roles
4+) who are members of underrepresented racial and ethnic groups from 23% (2022: 21%) to 30% by 2030.
Additionally, due to our current performance in Asia, Latin America and the Middle East and Africa (MEA),
accounting for 39% (2022: 40%) of our Group sales, we aim to increase the global share of nationals from
Asia, Latin America and MEA in leadership positions (roles 4+) from 17% (2022: 16%) to 30% by 2030.
In 2023, we developed an Action Plan on Culture, Nationality and Ethnicity as well as a toolkit for leaders and
HR to accelerate our progress as regards these aspects.
Inclusion
Beyond our aspiration to foster specific types of diversity and equity, we are accelerating our efforts to create a
genuinely inclusive culture for all employees. To achieve this, we rolled out training courses to help leaders
reflect on how they can lead more inclusively. All leaders will be encouraged to complete these courses over the
coming years. At the end of 2023, 92% (2022: 64%) of our leaders had participated in this training program.
Committed to fair and equitable pay
Our commitment to pay equity is a crucial aspect of our DE&I strategy. To create transparency around
unexplained pay gaps and identify their underlying root causes, we started a gender pay equity analysis in 2021.
In the first step, we analyzed ten of our largest countries, covering approximately 80% of our total workforce. In
2023, we extended the analysis to all countries, except North America which is planned in 2024. The identified
adjusted gender pay gap continues to be less than 1.5%, which is below benchmarks in the industry. We have
developed a plan for a recurring analysis to continuously monitor pay data and to take effective actions as needed.
These include individual adjustments based on the results of the analysis, as well as educating our HR community
on the topic and taking other steps to ensure we make equitable and unbiased pay decisions.
Ensuring fair treatment for all
We do not tolerate any form of discrimination in our company, as stipulated with binding effect in our Code of
Conduct and Social and Labor Standards Policy. In January 2024, we published a new position paper on
disability inclusion to complement our existing papers on DE&I, non-discrimination and non-
harassment. In addition, we have established various reporting channels to ensure employees have a clear
point of contact should they experience harassment or discrimination in the workplace or any other violations of
our standards. Their first points of contact are their supervisors, HR or compliance teams, and they can also
make anonymous calls to our compliance hotline. In the reporting year, our HR Business Partners involved in
HR-related compliance case investigations participated in a training and upskilling program to equip them with
enhanced employee relations and investigation skills. In 2023, 30 (2022: 20) alleged cases of discrimination or
harassment were reported via the compliance hotline and other channels, seven (2022: seven) of which were
confirmed on our global reporting platform and appropriate action was taken.
Gender equity
9,651
•
Our commitment: Industry-wide initiatives and regulations
1,599
1,651
1,771
1,848
thereof: number of employees in low
management (Role 3)
3,161
3,341
3,607
3,695
Our Social and Labor Standards Policy categorically states that our company does not tolerate any form of
discrimination, physical or verbal harassment, or intolerance. To underscore our commitment to equality,
fairness, inclusion, and tolerance in the workplace, we also participate in industry-wide initiatives:
431
employees (below Role 3)"
9,698
9,939
10,382
10,481
1 Merck also employs people at sites of subsidiaries that are not fully consolidated. For the 2023 reporting year, we have aligned the scope of
consolidation also for the employee data in the non-financial reporting with the financial reporting. As of now, the figures relate to all employees who
are employed in fully consolidated subsidiaries that manage personnel.
2 The sharp decline in comparison with the previous year (8,485 employees) is attributable to the fact that in addition to Healthcare KGaA, which was
hived off in 2019, the two other business sectors, namely Life Science und Electronics, have now also been transferred to separate legal entities.
Roles and responsibilities
613
The Chief Diversity, Equity and Inclusion Officer is responsible for our global DE&I strategy and for steering its
related activities. In this role, she reports directly to the Chair of the Executive Board, whose Board
responsibilities include Group Human Resources. In addition, we have established a centralized Diversity
Council comprising high-ranking executives from all our business sectors and selected Group functions.
thereof: number of employees in "other
thereof: number of women in senior
8,880
thereof: number of employees in "other
employees (below Role 3)"
21,067
57
20,579
833
56
61
thereof: number of men in senior
management (Role 6+)
151
145
140
142
33
thereof: number of men in middle
management (Role 4 & 5)
2,353
2,418
2,468
2,517
386
thereof: number of men in low management
(Role 3)
57
57
% of men (total)
19,943
42
49
51
58
15
thereof: number of women in middle
management (Role 4 & 5)
1,284
1,413
1,550
5,934
1,622
thereof: number of women in low
management (Role 3)
4,352
4,669
5,123
5,150
475
thereof: number of women in "other
employees (below Role 3)"
19,245
214
6,211
6,754
6,757
14
thereof: number of employees in senior
management (Role 6+)
0
0
0
0
0
thereof: number of employees in middle
management (Role 4 & 5)
14
6
12
8
2
thereof: number of employees in low
management (Role 3)
199
241
263
249
39
8
8,365
15
15
800
thereof: number of men in "other
employees (below Role 3)"
24,766
25,500
27,090
26,083
1,168
Footnotes follow at the end of the table.
As of Dec. 31
15
Combined Management Report
Employee-Related Matters
119
2020
2021
2022
2023
2023
Merck Group¹ thereof: Merck KGaA
by age group
Up to 29 years old (%)
Non-Financial Statement
10.82
2,567
Total turnover rate
thereof: women
6,245
2,045
3,437
870
412
255
96
Average age
41.6
43.3
43.1
43.1
37.3
41.1
40.3
Total employees
64,243
15,847
28,244
8,485
192
681
1,239
2,755
264
99
30 to 49 years old
38,423
7,811
16,216
4,549
11,174
2,333
890
15,412
thereof: women
3,278
7,528
1,664
4,498
1,196
409
50 or older
15,894
5,283
8,498
16,909
1,441
3,490
2023
3,084
7,565
857
4,562
1,203
384
16,159
5,133
8,706
1,304
1,407
717
196
thereof: women
6,461
2,034
3,595
467
472
266
94
16,798
thereof: women
831
2,301
Up to 29 years old
8,743
2,233
3,294
535
2,634
440
142
thereof: women
4,150
1,250
995
213
1,323
224
87
30 to 49 years old
38,006
7,352
16,304
2,085
11,218
1,521
441
1,655
1,178
Roles and responsibilities
Our Life Science, Healthcare and Electronics business sectors have organizational structures in place to
implement our product safety strategy in line with their respective business requirements and customer needs.
This approach includes registering chemicals, classifying hazardous substances and highlighting risks using
safety data sheets, labels and digital communication tools.
Our Group standard provides a framework for governing the setup of effective operational processes for product
safety, hazard communication and chemical regulatory compliance throughout our business sectors. In
addition, the Group Chemicals Regulations Council fosters cross-sectoral alignment of strategic regulatory
activities required for existing and emerging chemicals regulations as well as sustainability and identifies
potential impacts for our company.
This approach also applies to innovative fields of development such as nanomaterials, which we use with the
greatest of care in line with the precautionary principle. Furthermore, our Group-wide Policy for Use and
Handling of Nanomaterials provides the necessary guidance on the use of these materials.
Combined Management Report
Non-Financial Statement
Environmental Matters
113
Legal requirements and internal guidelines
Our internal standard defines the roles, responsibilities and basic processes required to comply with national
and international regulations. In addition, we have also endorsed voluntary commitments of the chemical
industry such as the Responsible Care® Global Charter.
Using the Globally Harmonized System for Classification and Labelling of Chemicals (GHS) for hazard
communication enables us to streamline our internal processes and provide consistent, harmonized and high-
quality information to our customers.
In 2023, there was one incident of non-compliance with regulations concerning potential health and safety
impacts and the labeling of our chemical products. Some information and the REACH registration number was
missing on a safety data sheet which resulted in a fine in Italy. In this regard, to the best of our knowledge,
there were no negative impacts on human health or the environment.
Safety analysis of our products
Safe and sustainable by design implies that product safety starts during development. Therefore, at an early
stage of our product development process, we analyze innovations in terms of their impacts on human health
and the environment. We continuously evaluate the intrinsic hazards of both our existing and new products to
create relevant product safety information in line with applicable rules.
Product safety information
Chemical product safety is all about protecting human health and the environment from adverse impacts
resulting from the use of chemical products throughout their life cycle. To achieve this, we provide relevant
information to our customers and the public, which helps to raise awareness of the hazards and build a greater
understanding of how to mitigate risks and use the products safely.
To obtain the relevant information on hazard profiles, we employ industry-standard digital tools through which
we gather information available on the substances we use.
Combined Management Report
Non-Financial Statement
Employee-Related Matters
114
Product safety is one of our top priorities. During the product development phase, we investigate the potential
adverse impacts of chemical substances. Along the entire value chain of our products - from raw materials to
manufacture and commercialization – we provide relevant information on their hazardous properties and how to deal
with them. These instructions facilitate the safe handling and use of our products in line with pertinent regulatory
requirements. We publish this information primarily on the relevant digital channels. As paper safety data sheets are
still common in some countries, we can also provide these upon request through our customer service.
Chemical product safety
For the Lost Time Injury Rate (LTIR) we set ourselves the goal of lowering our Group-wide LTIR to
under 1.0 by 2025 (number of accidents Group-wide resulting in at least one missed day of work per
million hours worked). In 2023, our LTIR was 1.3 (2022: 1.2).
The EHS Leading Rate (EHS LR) reflects the number and the results of the analyses of near misses and
hazardous conditions or behaviors, as well as other proactive safety activities such as risk assessments.
Combined Management Report Non-Financial Statement
Environmental Matters
111
Plant, process and transport safety
We seek to minimize manufacturing process hazards wherever possible in order to prevent workplace accidents,
production outages and chemical spills. To this end, we regularly review our approach to plant and process
safety and continuously gauge it using our EHS key indicators.
Moreover, all our shipments are to reach our customers and sites safely, undamaged and with the required
safety information. Several of the materials we store and transport are classified as hazardous. The storage of
such dangerous goods and the transport thereof - whether by road, rail, air, or water - are governed by global
regulations. To minimize risks to people and the environment, we apply strict safety requirements across the
Group that also comply with applicable laws. We conduct regular reviews to ensure our own warehouses as well
as those of third parties comply with these regulations.
Roles and responsibilities
Overriding responsibility for plant, process and transport safety lies with the Group function Corporate
Sustainability, Quality and Trade Compliance (SQ), which coordinates plant and process safety for the company
and defines Group-wide EHS standards and regulations.
Our commitment: Internal standards and international rules
To ensure safe operation throughout the lifetime of a plant, our Group-wide EHS standards contain specific
rules for production plants and processes. These include specifications that determine how special risk analyses
and hazard assessments are to be carried out. We have also defined measures for the event of accidental
release of chemical substances and for fire protection.
Employee-Related Matters
Our Group-wide EHS standards stipulate the safety levels for the storage of hazardous materials at our sites.
Along with supplementary standard operating procedures and best practice documents, these EHS standards
describe the technology, equipment and organizational infrastructure needed to achieve the appropriate safety
levels. Contract warehouses must also adhere to our strict safety requirements. Before we sign a contract with
an operator, they must submit a statement detailing how they meet our prerequisites. Our Group-wide EHS
standards also define the technical and organizational requirements for such warehouses.
Assessing potential risks
Before commissioning a plant, we draft a safety concept, which is subject to continuous review throughout the
entire lifetime of the facility. It is updated as needed until the facility is decommissioned. This safety concept
contains an overview of potential risks and specifies corresponding protective measures. In the event that
alterations are made to a plant, we reassess the hazard and risk situation. Our Risk Management Process
guides all our sites in identifying and assessing risks and serves to devise further measures to minimize them.
We use internal EHS audits to complement the inspections conducted by our EHS and dangerous goods
managers in order to ensure that our sites comply with process, plant, transport, and storage safety
regulations. Normally, these audits are conducted every three years at production sites and every four years at
warehouse and distribution sites. If major shortcomings are identified, we re-audit the respective site the
following year. Conversely, we may decide to extend the period between audits at facilities where, based on the
findings from previous audits, we deem the potential risk to be low. Our sites are required to rectify any
deficiencies discovered during the audit, with the auditor subsequently checking whether the specified
corrective actions have been taken. In 2023, we conducted 34 EHS audits (2022: 41) in accordance with our
Group-wide EHS standards.
Combined Management Report
Non-Financial Statement
Environmental Matters
112
Keeping a close eye on safety
We track EHS performance indicators at all production and warehouse facilities, as well as at major research
sites, including both accidents and near misses. We investigate each individual incident and then devise
appropriate countermeasures in an effort to reduce the likelihood of such events reoccurring in the future. EHS
performance indicator data are reported once a month within each business sector, with the Executive Board
receiving reports on the topic once per year. Four indicators are particularly important to us:
Under our EHS Incident Rate (EHS IR), we track and evaluate all major and minor accidents and incidents
as well as further EHS-relevant incidents. The EHS IR covers both our own employees as well as those of
contractors. To calculate it, we state the number of incidents and the severity of the event in relation to the
number of hours worked. The lower the EHS Incident Rate, the safer the site is. In 2023, the ratio was 2.4
(2022: 2.8).
The EHS IR also contains our Loss of Primary Containment (LoPC) indicator. In 2023, we did not record any
significant incident-related releases of substances (2022: two).
Our Group Transport Safety Standard is based on the United Nations Recommendations on the Transport of
Dangerous Goods. This guideline is especially important for sites in countries with inadequate local regulations
covering the conveyance of hazardous materials.
Attracting and retaining talent
To ensure our ongoing success, we are focusing on the future by creating meaningful impacts and building needed
capabilities. At the same time, we must respond to changing demographics and adapt to the behaviors and
expectations of the highly competitive talent market. Therefore, in 2023, we continued to enhance our talent
acquisition strategy with a more personal, employee-focused approach. Our talent sourcing approach aims to build
inclusive pipelines and effectively recruit diverse talent with the needed competencies and capabilities to our
organization. In addition, our talent retention approach is inclusive in targeting various employee groups. In 2023,
we intensified our efforts to support internal mobility. For example, we launched a dedicated project to improve
organizational agility, up-skilling and re-skilling, retention, and engagement. Specific modules went live in 2023,
and we will roll out the complete platform with all functionalities during the course of 2024.
We have designed our compensation structure to provide valuable benefits to our employees and their families.
Our benefits offerings recognize the diversity and uniqueness of our employees while providing flexibility
wherever possible. Additionally, our international employee mobility programs create an environment suited to
the needs of a rapidly evolving workforce.
Employee age by region
As of Dec. 31
Number of employees
Worldwide
North America
Europe
Merck KGaA
Asia-Pacific
(APAC)
Middle East and
Latin America
2 The sharp decline in comparison with the previous year (8,485 employees) is attributable to the fact that in addition to Healthcare KGaA, which was
hived off in 2019, the two other business sectors, namely Life Science und Electronics, have now also been transferred to separate legal entities.
Africa (MEA)
Up to 29 years old
9,926
2,753
3,530
1,181
2,999
476
168
thereof: women
4,637
2022
Average age
1 Our company also employs people at sites of subsidiaries that are not fully consolidated. For the 2023 reporting year, we have aligned the scope of
consolidation also for the employee data in the non-financial reporting with the financial reporting. As of now, the figures relate to all employees who
are employed in fully consolidated subsidiaries that manage personnel.
27,409
Total number of employees
As of Dec. 31
Total number of employees
Men
Women
2023
2023
thereof:
2020
2021
1,537
2022
Merck KGaA²
58,127
60,348
64,243
33,204
24,923
34,274
26,074
36,452
27,791
62,908
35,499
3,924
2,387
Merck Group¹
41.5
43.5
42.9
479
43
41
40
39
77
50
51
51
54
21
7
8
7
2
50 or older
by gender²
Women
Men
by region²
Europe
30 to 49 years old
up to 29 years old
by age group²
6
2,206
2,803
3,071
1,710
not applicable
Latin America
396
579
460
445
North America
not applicable
118
156
165
126
not applicable
Rate of new employee hires¹ (%)
11
15
17
9
Middle East and Africa (MEA)
Asia-Pacific (APAC)
Latin America
Middle East and Africa (MEA)
6
4
8
not applicable
2
2
2
2
not applicable
1 Formula for calculating the rate of new employee hires: Total number of new employee hires divided by number of employees at the end of the fiscal
year.
6
2 Formula for calculating the rate of new employee hires by age/gender/region: New employee hires of the focus group divided by the total number of
new employee hires.
Combined Management Report
Non-Financial Statement
Employee-Related Matters
116
2023
2023
20203
2021
2022
Merck Group thereof: Merck KGaA
Staff turnover 1,2
Asia-Pacific (APAC)
not applicable
29
45
46
43
45
40
55
54
57
55
60
31
32
28
37
100
27
32
37
22
not applicable
33
31
29
8.22
not applicable
3,971
141
70
Number of nationalities
Number of nationalities in management
positions (Role 4 or above)
75
79
78
% of non-Germans in management positions
(Role 4 or above)
66
66
66
New employees
77
30
66
66
12
2023
2023
139
142
141
Merck Group thereof: Merck KGaA
Total employees
62,908
14,718
28,304
43.0
3,924
37.4
40.8
40.5
15,259
3,458
As of Dec. 31
1,169
Non-Financial Statement
Employee-Related Matters
115
Internationality of employees
As of Dec. 31
2023
2023
2020
2021
2022
Combined Management Report
2020
2021
2022
by gender
Women
Men
by region
Europe
3,016
4,101
4,569
2,493
3,653
50 or older
4,859
2,997
89
131
2,160
3,015
2,028
220
North America
1,789
2,855
6,113
1,181
5
971
Merck Group thereof: Merck KGaA
Total number of new employee hires
6,669
8,960
10,682
5,490
220
by age group
up to 29 years old
2,889
390
3,679
2,156
170
30 to 49 years old
3,347
4,610
5,397
2,944
45
433
671
4,314
50 or older
231
Health and safety
0
0
0
Latin America
not applicable
0
0
0
0
Asia-Pacific (APAC)
not applicable
0
0
0
0
North America
0
0
0
0
0
Europe
by region
0
0
0
0
0
0
not applicable
Middle East and Africa (MEA)
0
In 2023, 66% (2022: 46%) of our relevant suppliers were covered by a valid sustainability assessment; 94%
(2022: 82%) of our spend attributable to these suppliers was covered by suppliers with a valid sustainability
assessment.
To achieve our sustainability goals, our Procurement team is working closely with our suppliers. We aim to
create transparency in all our sourcing regions and fully integrate sustainability into all our value chains. To this
end, we have defined two key indicators to measure our journey towards increasing this transparency by
reviewing the sustainability performance of our relevant suppliers based on valid sustainability assessments.
Our definition of valid sustainability assessment includes assessments carried out over the last three years and
performed by a reliable, approved source. In accordance with our risk management approach, we define
relevant suppliers as suppliers, which either indicate a specific country and/or industry risk or contribute to a
significant percentage of our supplier spend (at least 50%). For the country risk evaluation, we have developed
our own comprehensive country risk score.
With our supplier management endeavors, we aim for compliance with fundamental environmental and social
standards in addition to high quality, reliable delivery and competitive prices. Therefore, we have introduced
relevant strategies, processes and guidelines to prevent violations of supply chain standards and continuously
improving our sustainability performance. Unless stated otherwise, the approaches presented apply to tier-1
suppliers, i.e. direct suppliers. Furthermore, our supplier management activities include special measures
particularly for tier-n suppliers, i.e. indirect suppliers, working in the area of conflict minerals.
Responsible supply chain
Social Matters and Respect for Human Rights
123
Non-Financial Statement Social Matters and Respect for Human Rights
Combined Management Report
Group-wide, all newly appointed site EHS managers must complete an EHS onboarding training that covers the
topics of occupational health and safety as well as our "BeSafe!" safety culture program. Through the "BeSafe!"
program, we raise employee awareness of occupational hazards and teach them rules for safe behavior. In
addition, we regularly provide occupational safety training at our sites covering both legal requirements and the
specific risks.
Clear rules of conduct
Through the LTIR, we record work-related accidents that involve at least one day of missed work. A work-
related accident is an injury that results from the type of work, in the course of doing said work, and that has
no internal cause. Work-related accidents are considered relevant if they occur on the premises, on business
trips, during goods transport, as a result of external influences (e.g. natural disasters), or due to criminal acts
involving personal injury. Commuting accidents and accidents during company sporting activities are not
included. First-aid incidents are generally not included in the LTIR since these usually do not result in more than
one day of missed work.
1 Including supervised temporary staff.
Men
0
0
0
0
0
0
0
0
0
0
Women
by gender
not applicable
0
0
0
Number of deaths
not applicable
0.4
1.1
per one million hours worked)
Lost Time Injury Rate (LTIR = workplace
accidents resulting in missed days of work
thereof: Merck KGaA
Merck Group
2022
2021
2020
2023
2023
Work-related accidents¹
Alongside this indicator, in the United States, we also use the Occupational Illness Rate to monitor work-
related illnesses and their long-term effects.
We use our EHS Incident Rate (EHS IR) to document incidents.
The LTIR measures the accidents resulting in at least one day of missed work per one million hours worked.
In comparison with the previous year, our LTIR increased slightly to 1.3 (2022: 1.2). The majority of
incidents resulting in lost time were slips, trips and falls, along with contusions and lacerations from the
operation of machinery and equipment. Once more, in 2023, we recorded no fatal accidents.
Our employees are required to immediately report any relevant occupational accidents to Corporate
Sustainability, Quality and Trade Compliance, where these accidents are assessed. If necessary, we then
implement additional safety measures. This procedure is common practice across all production facilities around
the world. We document the following occupational safety data across our sites worldwide:
Accident rates
122
Employee-Related Matters
Combined Management Report Non-Financial Statement
Together with the Group-wide health strategy BeHealthy, we launched the newly developed Merck Group
Employee Health Standard in October 2023. It describes the fundamental requirements that a site must fulfill as
regards employee health. In addition, the standard specifies our approach to ensuring workplace safety for our
employees while also promoting their health and well-being. Furthermore, we set out our Group-wide approach to
health and safety management, which is aimed at preventing workplace accidents and occupational illnesses.
We expect our contractors to comply with environmental as well as health and safety requirements throughout
the entire process, from starting a job to completion. This objective is reflected in our Group-wide Contractor
EHS Management Standard.
Our Corporate EHS Policy (Corporate Environment, Health and Safety Policy) describes our fundamental
approach to occupational health and safety, among other things. It is part of our EHS management system and
undergoes an external ISO 45001 audit every year. As part of a Group certificate, our occupational health and
safety management system was ISO 45001-certified at 66 sites at the end of 2023.
Our commitment: Standards and policies
Employees concerned about their health or safety are permitted to temporarily step back from their work until
the issue has been resolved. Globally, across the Group, they are encouraged to report such concerns via our
compliance hotline.
Our Health and Safety management system is the responsibility of Corporate Sustainability, Quality and Trade
Compliance, which in turn reports to the Chair of the Executive Board. This Group function sets objectives,
oversees the respective initiatives globally and conducts internal EHS audits. Local EHS managers and their
teams ensure that our individual sites comply with all occupational health and safety laws and regulations. They
are also responsible for local projects, campaigns, and programs.
Roles and responsibilities
In October 2023, we launched BeHealthy, our global employee health strategy, to our workforce. It is designed
to further strengthen the physical, mental, social, and workplace health of our employees. Moreover, in 2023,
we introduced a key indicator for health, planned to comprise our health index on the one hand and the
implementation status of the BeHealthy strategy on the other hand.
Generally, before starting any activity, we perform a hazard assessment to identify risks and do everything
possible to eliminate them before commencing the activity or commissioning a plant. If this is not feasible, we
put measures in place to minimize the likelihood of risks and their potential impacts. Hazard assessments are
the responsibility of our individual sites and are therefore conducted by them.
The lost time injury rate (LTIR) is an important indicator used to gauge the success of our occupational safety
efforts. It comprises all accidents worldwide that have resulted in at least one day of missed work per one
million hours worked. We determine the Group-wide LTIR both for our employees and supervised temporary
staff. Our objective is to lower the LTIR to below 1.0 by 2025.
We seek to promote the health of our employees and sustain their long-term performance ability, which in turn
necessitates a safe workplace. We are therefore constantly working to further strengthen our health and safety
culture.
121
1.3
We consider all applicable legal requirements, such as the German Supply Chain Due Diligence Act, and initiate
corresponding measures where necessary. Among other things and in conjunction with the implementation of
the German Supply Chain Due Diligence Act, we have implemented a risk management approach focusing on
human rights and environmental risks along our supply chain. This risk assessment is conducted annually and
ad-hoc when required.
1.2
by region
0.0
0.4
Middle East and Africa (MEA)
not applicable
0.6
0.6
0.4
0.8
Latin America
not applicable
0.1
0.3
0.1
0.1
Asia-Pacific (APAC)
not applicable
1.4
1.7
1.2
0.8
North America
1.6
2.2
1.7
2.1
2.4
Europe
1.6
1.3
1.2
Employee-Related Matters
Risk management process
•
7
6
2
thereof: number of incidents of discrimination
60
68
41
29
Number of confirmed Violations of Social and Labor Standards
Policy
184
136
121
108
Number of reported violations of Social and Labor Standards
Policy
2023
2022
2021
2020
Human rights violations
In addition, we published Rules of Procedure. These apply to tips or complaints that refer to human rights
and certain environmental risks or violations at our company and along the supply chain in line with the
German Supply Chain Due Diligence Act. In the reporting year, 184 violations of the Social and Labor
Standards Policy were reported to us in our own business operations, 60 of which were confirmed.
Furthermore, based on the complaint channels specified in the Rules of Procedure, there were no indications of
child or forced labor or violations of the right to collective bargaining or freedom of association in our own
business operations or in the supply chain in 2023.
We have set up a Group-wide whistleblowing and complaints system that can be used to report potential
violations of human rights, legal provisions and environmental issues, among other things. Our compliance
hotline is a central element of this. Our employees as well as external stakeholders can report suspected cases
via this Group-wide whistleblowing system in their respective national language, free of charge and
anonymously, either by telephone or a web-based application. We are committed to thoroughly investigate all
complaints that we receive and take countermeasures if necessary. More information on the compliance hotline
can be found under "Compliance Management".
Our complaint mechanisms
We inform the public about our approaches and measures as well as the results of our human rights due
diligence. We provide information on this annually in our Sustainability Report. Under laws in Australia, the
United Kingdom and Norway, we are additionally required to publish information in these countries on our
measures to combat forced labor and human trafficking. Apart from the UK Modern Slavery Statement and
the Merck Australia Modern Slavery Statement, we also published the Norway Transparency Statement
for the first time in 2023.
Our reporting practices
An online course trains our Managing Directors and senior management in how to meet the requirements of our
Social and Labor Standards Policy in their area of responsibility.
Creating awareness among our employees
We also assess human rights aspects at our sites through security audits and as part of the risk analysis. The
audits are one control mechanism of our security governance framework. Through increased risk transparency
and central follow-up of corrective and preventive actions (CAPA) we help ensure that our sites comply with
safety-related human rights aspects. Through the Together for Sustainability (TFS) initiative, we determine
whether our strategically important suppliers comply with human rights standards.
the International Trade Union Confederation and documented in the annual ITUC Global Rights Index. If
we identify a violation during the audit, we define remedial actions together with the responsible Managing
Director and/or local HR staff.
128
71
Non-Financial Statement Social Matters and Respect for Human Rights
1 As of 2023, the incidents of discrimination also include cases of harassment as a specific form of discrimination.
Non-Financial Statement Social Matters and Respect for Human Rights
Our approximately 25,000 internal and external Healthcare employees receive basic pharmacovigilance training
once a year that covers the procedure for reporting adverse effects or special circumstances associated with the
use of our medicinal products.
Our pharmacovigilance experts are regularly trained so that they gain and maintain the required experience
and knowledge to carry out their activities. We manage our training via a global learning platform and verify
compliance with our training requirements by producing training completion reports.
Internal and external training
Our product information explains to healthcare professionals and patients how to correctly use the respective
product and make informed treatment decisions. We review and update product information documents, such
as package leaflets, thereby, we want to ensure our medicinal products contain the latest information on safety,
efficacy and pharmaceutical formulation. In accordance with regulatory requirements, we submit modifications
to our leaflets to the respective regulatory authorities for approval. In 2023, there were no reportable incidents
of non-compliance with regulations concerning the labeling of our medicinal products.
Up-to-date labeling and product information
Regarding product safety risk assessments, we have successfully implemented in the past years an improved
benefit-risk management strategy to become a more proactive and benefit-risk-focused organization. This
strategy firmly establishes the concepts and principles for conducting benefit-risk assessments at each stage of
product development and post-marketing. In addition, our Benefit-Risk Action Team co-leadership model,
created in 2022, enables us to understand in even greater detail the benefit-risk profiles of our products and
enable early decision-making within our organization to protect patient safety. Ultimately, we aim to provide
the right medicine to the right patient at the right time.
Applying our proactive safety strategy to benefit-risk assessments
We also perform audits to our systems and processes to ensure that all our units and subsidiaries involved in
pharmacovigilance consistently meet all global requirements. In 2023, we conducted a total of seven
pharmacovigilance audits (2022: 19) and found no significant deviations in our pharmacovigilance systems
from these requirements and standards. We also conducted twelve external audits (2022: 16) at our vendors
and licensing partners involved in pharmacovigilance, helping us to improve our pharmacovigilance processes
and to comply with regulatory requirements.
Regulatory authorities conduct periodic inspections to verify that we comply with statutory requirements as well
as our own internal pharmacovigilance standards. We follow up on the findings of health authority inspections
and take necessary actions to ensure the ongoing compliance of our pharmacovigilance system. In 2023, we
had five pharmacovigilance inspections (2022: four).
Inspections and audits for drug safety monitoring
We rigorously aim to follow international guidance and standard procedures. These include the International
Council for Harmonisation (ICH) guidelines, the Good Pharmacovigilance Practices (GVP) established by the
European Medicines Agency (EMA), Title 21 of the Code of Federal Regulations governed by the U.S. Food and
Drug Administration (FDA), and other pharmacovigilance regulations issued by national health authorities. We
also aim to comply with relevant new statutory pharmacovigilance regulations in the countries where we
market our products.
Our commitment: Guidelines and statutory requirements
experts from our company. Throughout a medicinal product's entire life cycle, the MSEB reviews and assesses
important medical safety risks and benefit-risk issues and endorses appropriate measures to minimize risks,
such as updates to product information. The MSEB also assess human-related bioethical matters as appropriate
and is accountable for the use of our medicinal products in early and post-study access.
130
Social Matters and Respect for Human Rights
Non-Financial Statement
Combined Management Report
Our Medical Safety and Ethics Board (MSEB) is the governance board that oversees the safety and benefit-risk
assessments of our medicinal products throughout their clinical development and commercialization. This
internal board is chaired by our Chief Medical Officer and comprises experienced physicians, scientists and
Our Medical Safety and Ethics Board
Our Global Patient Safety unit hosts a Pharmacovigilance Intelligence Council that focuses on changes in
pharmacovigilance legislation and their impacts on our global and local pharmacovigilance systems. This council
enables us to make strategic decisions and govern changes in pharmacovigilance requirements, which fosters
our target to ensure continuous compliance with regulatory requirements.
Our experts help to ensure that all information on the risks and adverse effects of our medical products are
properly documented, tracked and reported to the respective health authorities in accordance with regulatory
requirements. Our Global Patient Safety unit analyzes all data and reassesses the benefit-risk profile based on
these data, where required. We then inform regulatory authorities, healthcare professionals and patients about
new risks, additional risk mitigation measures and potential changes in the benefit-risk profile. We convey this
information through stipulated regulatory reports, safety communications (as applicable) and corresponding
product label updates.
Our Global Patient Safety unit is responsible for drug safety. It continuously collects current safety data from a
wide variety of sources across the globe, including clinical studies, early access programs, spontaneous reports on
adverse effects, patient support programs, and articles published in medical and scientific journals. Our vision is to
embed a deep knowledge of safety into early decision-making as we evolve to practice predictive safety.
Roles and responsibilities
By 2025, we aim to deliver product specific safety and benefit-risk strategies to support the execution of all key
priority programs in line with internal and external stakeholders' expectations. These strategies will enable us
to understand in greater detail the benefit-risk profiles at each stage of product development and post-
marketing. During the reporting year, we worked toward achieving this goal by providing high-level safety and
benefit-risk contributions for development programs with priority in oncology, neurology and immunology.
Once we launch a new medicinal product, the number of patients being treated with the product increases
significantly. In rare circumstances, there may be adverse and potentially serious effects that were not detected
during clinical development, which is why we continuously monitor risks and assess the benefit-risk profiles of the
products after their market launch. Pharmacovigilance includes the process of monitoring a medicinal product on
an ongoing basis to detect and assess safety signals as part of signal management activities. Our
pharmacovigilance system and our pharmacovigilance business continuity management help to ensure continuous
monitoring of adverse effects, allowing us to proactively and transparently minimize and communicate any risks.
Emergency response procedures for business continuity are managed in accordance with global and local business
continuity plans, tested in regular, defined intervals or with mock scenarios. In addition, we provide healthcare
professionals and patients with the latest information on the safety of our marketed medicinal products. The scope
of continuous safety monitoring covers the entire life cycle of a product, ranging from development, market launch
and commercialization to the expiration or cancellation of its marketing authorization.
Continual monitoring of product safety risk profiles
Through a rigorous benefit-risk management process, we help to ensure that the benefits of our medicinal
products always outweigh the risks for patients. Every new medicine goes through a series of precisely defined
development stages. Before any medicinal product is administered to human subjects, we conduct extensive
preclinical testing both in vitro and in vivo. During clinical development, we diligently use all the collected data
to continuously evaluate the medicinal product's benefit-risk profile. If we consider the medicinal product's
benefit-risk profile to be positive, we then submit an application for marketing authorization to the relevant
regulatory authorities.
Patient safety
129
Combined Management Report
Combined Management Report
Combined Management Report Non-Financial Statement
Our Social and Labor Standards Policy defines the corresponding commitments and principles as they relate
to specific topics and sites. We regularly check compliance with the requirements using a risk-based approach.
Among other things, this takes into account risks that may arise if relevant laws and regulations change or if
there are violations of internationally recognized labor rights by governments and companies, as assessed by
Supplier Decarbonization Program
Through the TfS initiative alone, we have access to 1,860 valid scorecards on the assessment of our suppliers
(2022: 1,700), almost 1,790 of which completed a new assessment or re-assessment in 2023 (2022: 1,100).
In some cases, these were initiated by us and in other cases by other TFS members.
Through the TfS initiative, suppliers are assessed either based on information obtained during audits or based
on self-reported and publicly accessible information provided by EcoVadis, an independent rating agency.
EcoVadis assesses suppliers from more than 175 countries and more than 200 sectors across the four
categories of Environment, Labor and Human Rights, Ethics, and Sustainable Procurement. On top of the
assessments, suppliers are also monitored through a 360-degree news watch. The results are shared among
TfS member companies in compliance with all restrictions stipulated by antitrust law.
Together for Sustainability supplier assessments and audits
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To ensure that we work on the basis of industry standards and can rely on comparable data analytics and
expert analysis, we collaborate with our peer companies in industry initiatives. For example, we are a member
of Together for Sustainability (TFS), the Pharma Supply Chain Initiative (PSCI), the Responsible Mica Initiative,
and the Responsible Minerals Initiative (RMI). We call on our suppliers to allow us or trusted partners to
conduct assessments or audits to increase the transparency of our supply chain and identify fields of activity to
improve sustainability performance or mitigate infringement risks.
Our Responsible Minerals Sourcing Charter demonstrates our commitment to responsible sourcing of
minerals from conflict-affected and high-risk areas. It applies to all our legal entities and subsidiaries
worldwide. The charter complements the requirements set out in our Supplier Code of Conduct.
We expect all our suppliers and service providers to comply with our environmental and social standards, which
are primarily derived from the core labor standards of the International Labour Organization (ILO) and the
UN Global Compact. We expect our suppliers to ensure that their subcontractors respect the same rules. For
this purpose, our Supplier Code of Conduct details our expectations towards suppliers and business partners
regarding human rights, health and safety, business integrity, environmental protection, continuous
improvement, and management of their respective suppliers.
Our commitment: Guidelines and standards
Procurement is responsible for integrating sustainability requirements into the relevant stages of our sourcing
and supplier management processes. Our Center of Excellence for Sustainability coordinates the relevant
measures, such as updating our guidelines where necessary, examining processes and coordinating our
participation in external initiatives.
Roles and responsibilities
As part of our continuous improvement efforts, we worked on the recommendations from the audit and refined
our procedures. Additionally, we established a supply chain traceability system that further increases our supply
chain transparency. For our tin imports, which make up the majority of our conflict minerals imports, additional
control mechanisms were implemented. These mechanisms include supply chain mapping, information on the
country of origin of the mineral, request of audit reports from smelters and refiners, and the revision of
agreements, including audit rights, with our suppliers. After careful analysis of the potential risks, no specific
risks could be identified that would have required the development of an action plan. We remain in constant
contact with our suppliers, industry colleagues and cross-company collaborations to improve the transparency
and effectiveness of the framework.
Our aim is to source materials in a responsible and conflict-free manner and not to contribute to adverse
impacts through our activities. Therefore, we have a due diligence program that applies across all our business
sectors and takes into account applicable laws and international standards. Additionally, we have engaged an
external auditing firm to carry out an independent assessment in 2023 in order to verify our compliance with
regard to the requirements of the EU Conflict Minerals Regulation (EU) 2017/821.
We source and sell products that contain minerals commonly referred to as "3TG" (tin, tungsten, tantalum,
gold collectively also known as conflict minerals). These minerals involve the risk of being extracted, traded,
handled, and exported from conflict-affected and high-risk areas (CAHRAS) where human rights are not always
respected and violations thereof need to be prevented.
-
Due diligence process for responsible sourcing of minerals
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We calculate risk factors for suppliers and raw materials by multiplying risk probability and risk impact
according to current human rights risk standards. We also include criteria for identifying supplier relationships
impacted by key sustainability risks, such as mineral sourcing and animal welfare.
Risk Response Tracker: a system to create and monitor risk mitigation activities in inter-disciplinary teams.
Material Risk Assessments: to identify and mitigate the risks of the materials used in our most significant
finished products. This element focuses on our business sector Life Science. In 2023 we conducted
assessments for more than 2,500 of our critical materials.
Alert system: to notify our Procurement organization about risk events arising with any of our suppliers.
Supplier Risk Assessments: to capture the overarching risks at the supplier level we consider multiple risk
domains.
•
Our Supplier Decarbonization Program is a key element of achieving our Science Based Target. Through this
ten-year program that was defined as part of the decarbonization strategy in 2021, we aim to reduce
greenhouse gas emissions associated with purchased goods and services as well as capital goods.
In order to manage the large quantities of data on the CO2 emissions of our suppliers, we have an automated
carbon accounting tool in place to which we continuously add new functionalities. We offer our suppliers access
to solutions to reduce their Scope 2 emissions. In addition, we joined the Energize program as a new
sponsor. Energize is a collective initiative by a group of industry-leading pharmaceutical and fine chemical
companies that have committed themselves to engaging their suppliers to support the adoption of renewable
energy and reduce greenhouse gas emissions within their common supply chains. We offer all our suppliers the
opportunity to join the program for free and to find out more about renewable electricity options leading to
reduced Scope 2 emissions.
Mica supply chain
Mica is an important raw material for our effect pigments, which are used in automotive, cosmetic and
industrial coatings as well as plastics. We procure the majority of our mica from the Indian states of Jharkhand
and Bihar. We have special measures in place to comply with high social and environmental standards in our
mica supply chain.
We conduct special analyses to identify human rights and certain environmental risks. This enables us to
identify potential risks, weight them appropriately and prioritize them. These risk analyses are carried out
annually and on an ad hoc basis for our own business operations.
Risk analyses to determine human rights and environmental risks
We perform risk assessments to understand the potential impacts our operations and business relationships
could have on human rights. For instance, we investigate human rights risks at our sites as well as risks related
to product and service sourcing. These risk assessments enable us to derive the corresponding strategies and
measures. We track human rights risks through our strategic supplier risk process. More information on how we
engage with suppliers can be found under "Responsible supply chain".
Identifying actual and potential impacts on human rights
In 2023, our Executive Board approved our Group Policy Statement on Compliance with Human Rights and
Environmental Due Diligence Obligations in accordance with the German Supply Chain Due Diligence Act. It
applies to our own business operations, in other words to our entire workforces, as well as to our suppliers.
The statement describes how we undertake to comply with our human rights and environmental due diligence
obligations and provides information on the risks identified.
Our Human Rights Charter aligns with the UN Guiding Principles for Business and Human Rights. It is
our overarching human rights directive and defines the relevant requirements for our company. We expect our
employees as well as our suppliers and all companies with which we have business ties to comply with this
charter.
Our commitment: Guiding principles, charters and laws
Those responsible for the issue in the Group functions, business sectors and local units are tasked with
implementing our human rights due diligence processes in operations by integrating human rights due diligence
into existing processes, for instance.
Our Human Rights Officer from the Group function Corporate Sustainability, Quality and Trade Compliance (SQ)
is responsible for monitoring due diligence obligations concerning human rights and environmental matters. The
Executive Board is informed at least once a year of the work of the Human Rights Officer and the
implementation status of risk management and of the due diligence processes.
Our Executive Board has ultimate responsibility for human rights within our sphere of influence. The Executive
Board exercises this responsibility by requiring our Managing Directors to comply with human rights.
Roles and responsibilities
We view our human rights due diligence as a continuous process, which we constantly adapt and improve. This
also prompts us to continually review our approach. We closely monitor regulatory developments such as the
planned EU directive on human rights due diligence.
We are committed to upholding human rights, which is why we became a signatory to the UN Global Compact
back in 2005. We endeavor to prevent the risk of human rights violations as far as possible, not only at our own
sites but also along our entire supply chain. That is why we integrate human rights due diligence into our
business processes.
Human rights
To ensure security of supply, we select our suppliers based on criteria such as country risk, material risk,
supplier risk, and their strategic importance to the business. This process helps our Category Sourcing teams to
identify potential mitigation actions with relevant suppliers and supports them in making improvements. Our
risk management approach comprises four main elements:
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To maintain accuracy, our processes undergo constant review and improvement. We are also evaluating other
mica sources in accordance with our quality, social and environmental standards, both in India and other
regions. For example, we source a considerable amount of mica from Brazil. To monitor our suppliers'
adherence to these standards, we have conducted an audit through a third party.
We use a tracking system to help ensure that the mica we purchase is derived from sources qualified by our
company. We also use this tracking system to monitor the productivity of our mica sources. Based on written
records of the daily extraction quantities, we review the volumes of mica reported and supplied to the
processing facilities. Furthermore, we use a digital traceability solution to increase transparency in the mica
supply chain.
Evaluating and tracking mica sources
Since 2013, IGEP Consult, an Indian non-governmental organization, has conducted regular unannounced
monitoring to review labor standards throughout our supply chain. During these visits, IGEP officials monitor
occupational safety and compliance with laws preventing child labor. In 2023, its inspections focused on
checking the availability of physical examinations for workers and conducting mock fire drills. Additionally, we
regularly optimize the escalation process together with IGEP, which holds bi-weekly review meetings with
representatives of our company to assess suppliers. These meetings help to identify any required actions, which
our sourcing teams then discuss and implement with our suppliers. As a result, our suppliers have successfully
improved the working conditions at these sites.
Environmental Resources Management (ERM), a leading global provider of environmental, health, safety, risk,
and social consulting services, conducts external audits of mines and processing plants, investigating working
conditions as well as environmental, health and safety issues. The audit reports document any identified
shortcomings in this respect and propose corrective actions. Findings concerning safety of electrical installations
and installing proper emergency exit signs were successfully addressed. Our employees in Kolkata, India, and
Darmstadt, Germany, take action to address any identified issues. If the corrective measures are not respected,
we may suspend or even terminate our business relationship.
We have implemented a series of oversight mechanisms using a system that monitors and audits conformity
with our social and environmental standards. In addition to visits by our company's employees, regular
inspections are conducted by third parties, who conduct comprehensive announced audits as well as frequent,
unannounced monitoring.
Auditing our mica supply chain
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We do not tolerate child labor and contractually prohibit our suppliers from employing children. If one of our
suppliers were found to be using child labor, we would terminate the business relationship immediately. We are
driving initiatives and taking measures to improve the conditions of mica sourcing based on our high standards.
For example, we have contractually agreed with our suppliers to pay at least a living wage to mine workers and
workers in the processing units. Furthermore, we continuously review our monitoring processes to improve
their effectiveness.
measures.
Our mica suppliers are informed of our standards and have confirmed that they adhere to the principles of our
Human Rights Charter as well as the requirements of our Supplier Code of Conduct. In the event of non-
compliance with our standards, we work with suppliers to ensure the appropriate implementation of corrective
Combined Management Report Non-Financial Statement Social Matters and Respect for Human Rights
thereof: Merck KGaA
Reported violations of Data Privacy Guidelines
4
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Our Chief Compliance Officer oversees all Compliance departments and the subordinate Compliance Officers
and Compliance experts around the world. The Compliance Officers implement our compliance program within
their respective areas of responsibility (adapting to local regulations) and receive guidance from our Group
Compliance Center of Expertise. This is a centralized body that drives the design and evolution of our
compliance program across all business sectors and Group functions.
Our Chief Compliance Officer reports on the status of our compliance activities, potential risks and serious
compliance violations to the Executive Board and Supervisory Board twice a year at a minimum. As part of our
regular reporting processes, we compile a comprehensive compliance and data privacy report annually for the
Executive Board. This includes the status of our compliance program, continuous improvement initiatives and
key figures on compliance and data privacy cases. Additionally, we prepare a mid-year update to highlight
ongoing developments and the status of relevant projects and initiatives.
Continuous Improvement: Based on and applicable to all compliance program elements
.
Case Management: Timely response to reports of misconduct and implementation of corrective actions
Monitoring & Reporting: Tracking of compliance-related data; perform internal and external reporting
Programs & Tools: Comprehensive compliance programs and supporting tools contributing to internal
controls and overall governance
Training & Awareness: Appropriate training and additional measures to educate and keep awareness high
Our commitment: Guidelines and standards
Compliance Committee/Forums: Platform for compliance-related discussion and decision making, including
relevant key functions
•
•
•
•
Risk Assessment: Identifying internal and external critical risks in regular business operations
•
Our Group Compliance function is responsible for our compliance portfolio, which consists of the following
elements:
To cover these topics, we have Group-wide policies, standards and procedures in place that ensure our business
activities comply with the relevant laws, regulations and international ethical standards. Other compliance-
related issues, including the respective internal regulations and guidelines, such as Pharmacovigilance, Export
and Import Controls, and Environment, Health, Safety, Security, Quality, are managed by the responsible
functions.
Our Group Compliance function is responsible for the framework of the following core topics: the Merck Code of
Conduct, anti-corruption and anti-bribery (including healthcare compliance, third-party due diligence,
transparency reporting), anti-money laundering, and conflicts of interest.
Roles and responsibilities
As a global company, we have stringent requirements for effective compliance management. Importantly, we
seek to emphasize compliance by acting in line with our company values and believe that profitable business
operations should go hand in hand with the highest ethical standards.
Compliance management
Policies & Procedures: Global policies, procedures and standards to mitigate identified risks
Our compliance program builds on our company values and integrates these into our compliance framework,
which consists of Group-wide policies, standards and procedures for entrepreneurial conduct. The following are
mandatory for all our employees:
Merck Code of Conduct
Human Rights Charter
Good Pharmacovigilance/Laboratory/Manufacturing/Distribution Practices (GVP/GLP/GMP/GDP),
•
The Declaration of Helsinki, published by the World Medical Association,
The Good Clinical Practice (GCP) guidelines of the International Council for Harmonisation of Technical
Requirements for Pharmaceuticals for Human Use (ICH),
•
Our Standard on Human Research provides the framework for conducting clinical studies and helps ensure we
adhere to all applicable legal, ethical and scientific standards. Further quality documents detail for instance the
strategic direction of all quality related activities or disclose our position on data privacy. In addition to the
relevant national laws and regulations, these documents also include:
Our Quality Policy defines the strategic framework that ensures our products, services and systems deliver high
quality, safety and efficacy to our patients. It details the most relevant laws and codes, criteria and guidance
(e.g. for product development and manufacturing), and our senior management's responsibility to ensure
quality is embedded in everything we do.
Our commitment: International guidelines and requirements
We continuously analyze potential risks for study participants before and during our clinical studies. Our Medical
Safety and Ethics Board (MSEB) oversees the safety of the participants in our clinical studies and, as necessary,
reviews the benefit-risk profiles of investigational products.
Before administering a new product to humans, there must be sufficient evidence that it offers a potential
therapeutic benefit, is sufficiently safe for use in humans and has a positive benefit-risk ratio. We only take the
critical step of a first-in-human clinical trial after diligently conducting extensive preclinical testing. The decision
lies with a separate committee, the Human Exposure Group, chaired by our Global Chief Medical Officer.
We have established two internal committees to oversee our clinical studies. The Integrated Protocol Review
Committee is responsible for the studies performed by the company on products that are under clinical
development, while the Global Medical Decision Board is responsible for our own studies with approved
products as well as for all studies performed by independent investigators and supported by us (so-called
investigator-sponsored studies). Both bodies consist of medical-scientific experts and executives with long-
standing experience in clinical research.
Clinical development, including clinical studies and their related governance processes, are the responsibility of
our Global Development unit. The Head of Global Research & Development reports to the CEO Healthcare, who
is a member of the Executive Board.
Roles and responsibilities
We are improving our approach to research and development by committing to patient-focused drug
development that more actively involves patients, caregivers, and their advocates in our work. Their valuable
insights into disease and treatment management will help us make more informed decisions at each stage of
the medicine development process. We aim to make our studies easy for patients to understand while ensuring
all participants have positive experiences as they contribute to our understanding of the particular disease and
its treatment. At every level of our organization and based on the function, we are additionally either offering or
mandating to educate staff about the value of a close, more consistent patient interaction and the requirements
to protect our patients' independence and privacy.
If we encounter compliance concerns, we further analyze and verify the relevant information. Based on the
outcome, we decide whether to reject the potential third party, impose conditions to mitigate identified risks or
terminate the existing relationship.
We apply a risk-based approach to select the third parties with whom we do business. The greater the
estimated risk regarding a particular country, region, or type of service, the more in-depth we examine the
third party before entering into a business relationship. We also explore background information from various
databases and information reported by third parties.
For compliance management to be effective, it must not be restricted to the boundaries of our own company.
While our supplier management processes focus on vendor compliance with our standards, our global Third
Party Risk Management process governs interactions with sales parties, such as commercial agents,
distributors, dealers, and high-risk vendors. We expect our third parties worldwide to adhere to our compliance
principles. We collaborate only with parties who pledge to comply with relevant laws, reject all forms of bribery,
and adhere to environmental, health and safety guidelines.
Management and requirements of third parties
We take all potential conflicts of interest seriously. Employees must avoid situations where their professional
judgment could come into conflict with their personal interests. They must also disclose every potential conflict
of interest to their supervisor and document the disclosure. Such issues are typically resolved directly between
the employee and the supervisor but can also be routed to Human Resources, Legal, Compliance or other
relevant functions.
Proper compliance risk management is crucial to identify undetected risks and ensure our company remains
protected. For this purpose, we have a compliance risk assessment process covering all of our business sectors.
The assessment is based on a comprehensive risk matrix that improves objectivity and enables a data-driven
risk approach. It focuses on bribery and corruption risks, illustrated through in-depth risk categorization and
risk scenarios. It also utilizes country risk segmentation, classifying countries where we actively operate in
terms of their risk exposure regarding bribery and corruption by applying objective and consistent criteria. We
use the outcome as a model to prioritize initiatives and intensify activities in countries with higher risk levels.
Conflicts of interest
Risk assessment
Supplier Code of Conduct
Whistleblowing and Investigations Standard
Antitrust and Competition Law Policy
Conflict of Interest Policy
Anti-Money Laundering Group Standard
Anti-Corruption Standard
Anti-Corruption and Anti-Bribery
The International Ethical Guidelines for Health-related Research Involving Humans, published by
the Council for International Organizations of Medical Sciences (CIOMS),
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We acknowledge the affordability challenges many healthcare systems face amid growing financial pressures.
We recognize the unique characteristics of each health system and adapt our pricing based on local market
considerations, including unmet medical and treatment needs, health system capacity, infrastructure,
socioeconomic standards as well as affordability within the respective healthcare system and the ability of
patients to pay. We apply intra-country and inter-country equitable pricing approaches to all our brands.
This approach involves working closely with governments and other stakeholders. In addition, we continuously
monitor dynamic healthcare environments and markets, pricing and reimbursement systems as well as legal
and regulatory guidelines, adjusting our prices as necessary. We conduct annual price analyses to validate price
thresholds and provide guidance on local pricing to our subsidiaries for the following year. We aim to ensure
that they meet patient access needs by taking a consistent, data-driven approach.
To increase the availability, accessibility and affordability of our medicines in Africa, Asia, Latin America, and
the Middle East, we have adopted a new systematic approach known as the SHAPE program. This will enable us
to address these access barriers for underserved patient populations in low- and middle-income countries.
Additionally, we support innovative risk-sharing agreements and are working to improve data efficiency in
health systems to help distribute funds and resources more optimally.
Roles and responsibilities
Our Global Value Demonstration, Market Access & Pricing (GVAP) unit, formerly called GMAP, reporting directly
to a member of our Healthcare Executive Committee, evaluates market launch prices in coordination with the
respective franchises. In addition, the GVAP unit systematically evaluates our medicine portfolios and applies
equal access initiatives to them. Our local affiliates are responsible for managing prices and adapting them to
evolving local conditions in compliance with our pricing governance and the defined price approval process.
Our commitment: Medicine price guidelines and principles
The affordability of our health solutions is part of our broader patient value proposition. Our medicine pricing
adheres to the stipulations of our overarching Charter on Access to Health in Developing Countries and is
defined in detail in an internal guideline. Additionally, our Patient Access Programs Policy sets out standards for
offering medicines at affordable prices.
Value-based contracting models
We are committed to advancing value-based healthcare through pricing and contracting mechanisms that
comply with applicable local laws and regulations. In collaboration with payers, such as health insurance
companies, we have developed various product- and market-specific reimbursement and contracting models.
These help to provide patients with prompt access to our innovations.
In 2023, we continued to implement and maintain innovative risk-sharing agreements (RSAs) that provide
immediate access to MavencladⓇ for patients with multiple sclerosis (MS). We broadened access to this
medicine through specific agreements in eligible countries across Europe, Latin America and the Middle East
including Argentina, Hungary, Kuwait, South Africa and the United Arab Emirates.
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Social Matters and Respect for Human Rights
The prices of our products reflect the value they deliver to patients as well as broader society. We price our
products responsibly and work to prevent costs from becoming a barrier to treatment. In doing so, we strive to
deliver on our steadfast commitment to providing the broadest possible patient access. We also continue to
invest in meaningful scientific innovation to address the high number of unmet medical needs still faced by
many patients and their caregivers. Therefore, we adapt the prices of our medicines in different geographic and
socioeconomic segments according to people's ability to pay.
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We have set ambitious goals for our SHAPE program to improve access to our medicines for underserved
patient populations in low- and middle-income countries. The program covers both existing and upcoming
products, focusing on therapeutic areas such as head and neck, colorectal and bladder cancers as well as
thyroid disorders.
In 2023 we served more than 57 million patients in low- and middle-income countries with our healthcare
portfolio. Boosted by our SHAPE program, we aim to reach 80 million patients per year by 2030. As of 2023, 15
pilots have been initiated in countries such as Argentina, Brazil, Egypt, Indonesia, and Mexico as well as several
countries of Central America.
Tenders constitute a significant percentage of our global sales and are a crucial growth driver for our
established portfolio. We participate in government tenders for products used in public hospitals serving low-
income patients, often in low- and middle-income countries.
For some of our existing high-quality products, we offer second brands at affordable prices, particularly in
countries with a large percentage of low-income patients.
Patient access programs (PAPs) are self-sustaining commercial programs that provide registered medicinal
products for underserved populations. They primarily seek to address affordability challenges. We operate PAPS
in several countries.
Clinical studies
Our aim is to conduct high-caliber clinical research that is in compliance with applicable laws and regulations.
We set Group-wide requirements that aim to ensure that high ethical and scientific standards are met when
conducting clinical trials.
We only conduct clinical studies to investigate issues relevant to patients, healthcare professionals or society,
and only when our established methodology finds the given medicines show significant therapeutic promise and
a positive benefit-risk ratio. Accordingly, to ensure patient safety and avoid interrupting the development of
promising products, we carefully select patients based on known risk factors. These include age and
comorbidities, which we reflect in the design of our clinical studies. Notably, we only enroll the specific number
of patients needed to answer the posed scientific and medical questions. We reconcile and review the safety
reports from our clinical studies and marketed products and immediately address any unforeseen risks. Senior
boards such as the Pharmacovigilance Advisory Board and the Medical Safety and Ethics Board maintain
oversight of any emerging safety concerns. In addition, cross-functional Benefit Risk Assessment teams adapt
the benefit-risk assessment and development strategy of each product to ensure it delivers maximum safety
and efficacy to our patients. In addition, a sound, established scientific methodology must be available to
investigate these scientific or medical questions.
Protecting the safety, well-being, dignity, and rights of the patients and healthy volunteers participating in our
clinical studies is of utmost importance to us. We do not intentionally expose study participants to undue risk or
irreversible harm. Data privacy is also very important to us, and we maintain a strong focus on data protection
and confidentiality in compliance with statutory regulations.
Diversity, equity and inclusion in clinical trials
Based on our Standard on Human Research, we aim to conduct clinical studies that adequately represent the
diverse patient populations expected to use our products once they are approved. To ensure fair, balanced and
scientifically justified study representation, we cemented our commitment to Diversity, Equity and Inclusion in
clinical trials by collaborating with healthcare providers and community advocates to eliminate common barriers
to clinical trial participation.
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Programs for low- and middle-income countries
Prices of medicines
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0
1
0
0
0
0
0
0
0
1 These data only reflect incidents classified as significant.
Total number of identified leaks, thefts, or
losses of customer data
о
Total number of complaints from regulatory
bodies
0
0
0
0
0
received from outside parties
Total number of substantiated complaints
Customer Privacy¹
0
7
Patient-focused drug development
3
3
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Anti-Corruption and Anti-Bribery
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Roles and responsibilities
It is of critical importance to our business to protect our information systems, their contents and our
communication channels against any criminal or unwanted activities. These include e-crime and cyberattacks,
such as unauthorized access, information leakage and misuse of data or systems.
The mandate and goal of our Group Data Privacy unit is to mitigate risks and create a global framework for
data privacy-compliant business operations. This unit helps train our employees to handle data responsibly and
with clear accountability. It safeguards our company by providing data privacy risk assurance and ensuring
compliance with relevant data privacy laws globally. Group Data Privacy also contributes to creating value for
the development of digital business models.
Data privacy and cyber security
Since 2022, we have been looking at potential ethical risks that could result from projects by the Life Science
Data Intelligence and Analytics unit of our Life Science business sector with the aim of developing suitable
processes. The unit analyzes data from the business sector in order to obtain insights for our business.
In June 2023, online training on the CODE was assigned to approximately 12,000 managers with personnel
responsibility who can access the training in eight languages via our internal training platform. In addition, an
advanced training course is available specifically for employees working in the fields of data science, AI and
other digital areas of specialization. The course serves to illustrate the importance of the CODE and empowers
participants to make responsible decisions concerning the ethical aspects of data use and algorithms in digital
products and business models.
Ethical use of data and algorithms
Developments in the field of generative AI, for instance ChatGPT, are growing in importance. All our business
sectors are developing applications based on generative AI. To apply these innovative technologies responsibly
and to the benefit of all, an ethical framework is currently being developed. The DEAP is intensively evaluating
the guidelines. The aim is to roll out this framework company-wide in 2024.
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Together with the DEAP, we apply our Code of Digital Ethics (CODE) in order to address questions pertaining to
the ethical use of data and algorithms. The CODE serves as a guideline for our digital business models, as a tool
for analyzing ethical challenges, and a basis for practical DEAP recommendations. As one of our overarching
governance documents, it applies to all employees and is publicly accessible as well.
As a company, we want to position ourselves in the digital ethics sphere. We are therefore developing clear
ethical standards in this new field, primarily for critical areas, for instance handling health data. In this effort,
we collaborate with various stakeholders and experts.
Our commitment: Guidelines and standards
The panel comprises external international science and industry experts from the fields of digital ethics, law, Big
Data technologies, digital health, medicine, and data governance. In addition, we involve bioethics experts as
well as representatives from patient organizations as needed. The DEAP has its mandate from the Executive
Board; our employees may submit topics for the panel to discuss. As in the previous year, the panel held four
meetings in 2023. These focused on issues concerning the use of generative AI. Summary minutes of the DEAP
meetings have been accessible on our intranet since 2023 insofar as they do not contain any business secrets.
They also document the recommendations issued.
Group Data Privacy is an independent function, organizationally integrated into Group Compliance and Data
Privacy. We have a Group Data Privacy Officer and a network of local Data Privacy Officers at various sites
Group-wide. In line with external regulations, the Data Privacy Officers and their respective teams act
independently and without receiving internal or external instructions. Group Data Privacy regularly prepares
data privacy updates and a comprehensive data privacy report. This report is submitted to the Executive Board
and the Supervisory Board.
One of the main tasks of the DEAP is to support us in developing digital applications responsibly while
addressing ethics questions that could result from collecting and processing data as well as from the use of
these innovative technologies. It issues recommendations for our entrepreneurial activities.
Cyber security is part of our Group Corporate Security Office. In addition, we have a Group Chief Information
Security Officer and a network of Information Security Officers within the business sectors and Group functions
who hold risk ownership, act as our first line of cyber security defense and are supported by dedicated
networks. Our global Cyber Security function acts as a second line of defense and has responsibilities regarding
cyber security risk governance and oversight. Our third line of defense consists of internal audits.
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2022
2021
2020
2023
2023
Data Privacy
We maintain a central IT tool to provide a single source for data privacy processes, such as registering data
processing activities and reporting potential data privacy incidents. In 2023, we reported seven cases of minor
personal data breaches to the supervisory authority. One of them related to identified data leaks, theft, or loss
of customer data. However, none of these cases were sanctioned.
In line with the EU GDPR and our global approach to data privacy, we regularly conduct e-learning training
courses in ten languages. In 2023, the completion rate for our e-learning courses was 99%.
Training and IT tools
Our Group cyber security governance framework contains organizational, process-related and technical
information security countermeasures based on recognized international standards. In addition, we apply
harmonized electronic and physical security controls (e.g. access controls and security monitoring) to bolster
our ability to securely handle sensitive data, such as trade secrets.
Our Data Privacy Policy and the corresponding standards and procedures define our principles for processing
personal data. This approach allows us to achieve a high level of data protection for our employees, contract
partners, customers, and suppliers as well as patients and participants in clinical studies. Our Group-wide
understanding of data privacy is based on European legislation, in particular the European Union General Data
Protection Regulation (EU GDPR). We are also taking steps to meet local data privacy requirements, where
these are stricter than our Group-wide standards.
Our commitment: Guidelines and standards
Non-Financial Statement Social Matters and Respect for Human Rights
Non-Financial Statement Social Matters and Respect for Human Rights
Our Cyber Security organization strengthens resilience against cyberattacks and data breaches. It defines
policies and standards for cyber security (including data security) while providing oversight, tools and systems
to manage and monitor our overall cyber security risk exposure. The organization is also responsible for
providing cyber security monitoring and incident response capabilities across the entire company. Additionally,
we train our employees on how to protect data properly.
Roles and responsibilities
138
Digital ethics
135
Social Matters and Respect for Human Rights
Non-Financial Statement
Combined Management Report
Not all patients have the opportunity to take part in a clinical study and must therefore wait for a new
pharmaceutical product to be approved. Through our Early Access Program, we can, under specific
circumstances, enable patients to gain early access to new, potentially life-saving products. The offer is aimed
at people with serious conditions who have already received all available therapies without success. It allows
them to be treated with products that have already been clinically tested but have not yet been approved.
Furthermore, we offer patients who participated in one of our clinical studies post-study access to the
investigational product, provided that certain conditions are met. Here, too, we meet stringent statutory, ethical
and scientific standards. By performing a thorough assessment of all available data, we ensure that the
potential benefits outweigh the potential risks for patients.
Enabling early access to new medicines
We are obligated to disclose findings from our clinical studies. We strive to do this publicly in a complete,
accurate, balanced, transparent, and timely manner as laid out in our Standard on Clinical Trial Data
Transparency. We publish results from our clinical studies in medical journals in line with applicable laws and
industry codes. In particular, we adhere to the current version of the Good Publication Practice (GPP3) and
align with the recommendations of the International Committee of Medical Journal Editors (ICMJE). Our
Standard on Clinical Trial Data Transparency underscores our strong commitment in this area.
Bioethics
Disclosure of clinical studies and publication of results
Conducting clinical studies responsibly
The Research & Development Quality and Risk Management (RDQRM) unit applies a risk-based identification
strategy to determine areas that need to be audited. Quality assurance audits are performed internally within
Healthcare R&D (for example, process audits) and externally (e.g. investigator sites and vendor audits). We
respond immediately to observations made during audits by investigating their root causes and, according to
their criticality, defining and implementing corrective and preventive actions to improve processes, prevent
reoccurrence of irregularities and ensure compliance. As planned, in 2023, RDQRM concluded most of the audits
of the Annual Audit Plan.
Our clinical study processes and procedures are regularly inspected by relevant regulatory authorities to verify
their compliance with applicable laws and guidelines.
Regular supervision of clinical studies
The Principles for Responsible Clinical Trial Data Sharing, published by EFPIA and PhRMA, and the
IFPMA Principles for Responsible Clinical Trial Data Sharing.
The Joint Position on the Disclosure of Clinical Trial Information via Clinical Trial Registries and
Databases and the Joint Position on the Publication of Clinical Trial Results in the Scientific
Literature, published by the International Federation of Pharmaceutical Manufacturers & Associations
(IFPMA), the European Federation of Pharmaceutical Industries and Associations (EFPIA), and the
Pharmaceutical Research and Manufacturers of America (PhRMA),
As it is our aim is to develop and use new digital technologies responsibly, we evaluate ethical issues that may
arise from algorithms, artificial intelligence (AI) and data-based business models in an early stage. Since 2021,
the Merck Digital Ethics Advisory Panel (DEAP) has been focusing on complex ethical issues surrounding digital
technologies.
Every clinical study follows defined procedures to ensure it is conducted to high quality standards in line with
good working practices (GXP) for the development and manufacturing of drugs, the ethical principles of the
Declaration of Helsinki and other international guidelines and regulations. As in the previous year, in 2023,
none of the regulatory inspections conducted on our clinical research activities resulted in regulatory action.
-
133
Roles and responsibilities
Our goal is to conduct research in a responsible manner, which is why we develop ethical guidelines - also in
close collaboration with external experts in order to make well-founded decisions for responsible research.
Moreover, we discuss in our committees the ethical aspects of providing products such as organoids for both
academic research purposes and the biopharmaceutical industry. We carefully evaluate our position when it
comes to controversial topics. We always prioritize the well-being of and benefit for various groups of patients,
whether in clinical studies or during treatment with our medicines.
We neither participate in clinical programs that utilize human embryonic stem cells or cloned human cells for
the treatment of diseases, nor do we pursue such approaches ourselves. However, we use human embryonic
stem cells in our research and offer our customers several select stem cell lines. In both applications, we allow
the use of human embryonic stem cells only if clearly defined conditions have been met. For instance, we only
utilize stem cells for research purposes if our SCROC has reviewed the respective project and given approval. In
fiscal 2023, no projects required the approval of the SCROC (2022: one project). We exclusively make use of
cell lines that have been approved by the United States National Institutes of Health (NIH) and are allowed
under the German Embryo Protection Act as well as the German Stem Cell Law.
Stem cell research
"In accordance with the German Embryo Protection Act, we do not support the use of genome editing in human
embryos and clinical applications of germline interventions in humans. We recognize that there may be value in
responsibly conducted related research."
Using genome-editing techniques
136
Non-Financial Statement Social Matters and Respect for Human Rights
Combined Management Report
CRISPR/Cas opens up new possibilities in genetic engineering research that could bring about major advances
in the treatment of serious diseases. Laws in different countries allow for a varying degree of latitude in
applying this technique. Bioethical positions on germline editing have been evolving for years through academic
and social discourse. Our position on human germline editing is as follows:
Our Genome Editing Principle provides a binding ethical and operational framework for our employees. Apart
from our position on genome editing, it includes information on human germline editing. It sets clear
boundaries for us both as a supplier of customized CRISPR/Cas nucleases and genetically modified cell lines and
as a company that uses genome editing technologies in our research.
Our commitment to policies and standards
Furthermore, for ethical questions arising for instance in the context of forward-looking business decisions,
targeted Ethics Foresight projects can be initiated. We specifically engage external experts to work on these
projects. No Ethics Foresight projects were commissioned in 2023.
A further board, the Stem Cell Oversight Committee (SCROC), reviews and decides on all planned in-house
research activities involving the use of human embryonal or pluripotent stem cells, ensuring compliance with legal
requirements as well as our ethical guidelines. This also applies to joint projects with external partners. Up until
the end of 2022, the SCROC consisted of internal experts from our business sectors as well as external advisors
from the fields of bioethics, medicine, and law. In 2023 and in line with a resolution by the MEAP, we transformed
the SCROC into a primarily internal board. The reason for this is that research plans that call for separate
committee approval pursuant to the SCROC charter are currently not being carried out within the company.
All employees may address their concerns to the Bioethics team via our compliance hotline and a dedicated
e-mail address (accessible via the intranet).
Since 2010, the Merck Ethics Advisory Panel for Science and Technology (MEAP) has been making clear
recommendations on ethical questions in science and technology as well as on questions extending beyond the
field of traditional bioethics, in line with our transformation into a science and technology company. The
recommendations of the MEAP guide our actions and business activities.
This is complemented by further guidelines that form the ethical framework of our research and business
activities. Our Stem Cell Principle sets the ethical boundaries for the use of human stem cells in our research.
Our Fertility Principle regulates our fertility treatment and in-vitro fertilization research activities.
The members of the MEAP are renowned international experts from the fields of bioethics, medicine,
philosophy, law, and the natural sciences as well as technology and sustainability. The MEAP has its mandate
from the Executive Board and is chaired jointly by the two members of the Executive Board with responsibility
for the Healthcare and Life Science business sectors.
28
42
106
9
79
79
32
41
1
0
Bribery and corruption
6
1
2
1
81
Violation of cartel laws and fair competition rules
0
0
Confirmed cases by category
Number of confirmed cases
Reported compliance violations
Total number of reported compliance violations
141
Combined Management Report
Non-Financial Statement Anti-Corruption and Anti-Bribery
Compliance training
We provide regular compliance training (both classroom and online) on our Code of Conduct and critical
compliance topics such as anti-corruption, conflict of interest, antitrust, data privacy, anti-money laundering
and healthcare compliance standards. We require employees to take these courses based on their exposure to
risk. Some courses also apply to independent contractors and supervised workers, such as temporary
employees. In 2023, we launched a new Anti-Corruption, Anti-Bribery and Anti-Money Laundering e-learning
course based on the updated Global Anti-Corruption and Anti-Money Laundering standards introduced in 2022.
Anti-money laundering
Reporting potential compliance violations
We encourage all employees worldwide to report potential compliance violations. Depending on the type of
misconduct and the reporting person's preference, they can choose from various reporting channels. We
recommend using one of our central channels that are directly received and reviewed by a dedicated,
independent and qualified team within Group Compliance. Depending on the nature, content and type of report,
Compliance may investigate a submission directly or assign it to another responsible function for further
investigation. One central reporting channel is our global whistleblowing compliance hotline, which can be used
free of charge and anonymously to report violations. It is available in several languages by telephone or as a
web-based application. The compliance hotline is also available to external stakeholders. The relevant
information can be found in the "contact us" and the Compliance and Ethics section of our website.
Compliance-relevant cases with a particular risk profile are presented to the Compliance Case Committee,
comprising senior members of our Compliance, Legal, Data Privacy, Internal Auditing, and Human Resources
departments. The Committee's duties include assessing and classifying specific compliance issues and
addressing identified issues using appropriate measures.
In all Compliance-relevant cases, based on the investigation outcome and recommendations from Compliance
or the Compliance Case Committee, we aim to take appropriate remediation measures. These can include
disciplinary actions against employees who have committed a compliance violation. If the investigation
identifies a root cause that could lead to the risk of further compliance violations, we take additional preventive
and corrective actions.
Number of reported compliance incidents
Both the number of new Compliance-relevant cases and the number of cases with confirmed compliance
violations increased compared with the previous year. In 2023, 106 Compliance-relevant new cases with
reports via the compliance hotline and other channels were created. In 32 concluded cases, it was confirmed
that the principles of the Code of Conduct or other internal or external guidelines had been violated.
Non-Financial Statement
Anti-Corruption and Anti-Bribery
142
2023
2020
2021
2022
Merck
Group
2023
thereof:
Merck KGaA
Combined Management Report
We have implemented a global anti-money laundering (AML) program consisting of a global Anti-Money
Laundering Group Standard, training and a dedicated process to report and investigate red flags and any high-
risk transactions. Suspicious transactions are reported to the German Financial Intelligence Unit or other
authorities as required. We continuously work to improve our AML program. Following in-depth AML risk
assessments of jurisdictions with stricter regulatory frameworks than our AML program, we implemented
additional local AML programs where required.
Reporting in accordance with the EU Taxonomy
Regulation
The following tables present the share of sales, capital expenditure and operating expenditure attributable to
taxonomy-eligible and taxonomy-aligned economic activities in respect of the environmental objective "climate
change mitigation". The tables also contain information on the share of taxonomy-eligible economic activities
for the four additional environmental objectives:
Moreover, we apply various specific internal rules and regulations:
In addition to applicable laws and our own internal standards, we also strive to comply with the codes of
conduct of various international industry organizations, such as the Code of Practice published by the
International Federation of Pharmaceutical Manufacturers & Associations (IFPMA) and the Code of Practice of
the European Federation of Pharmaceutical Industries and Associations (EFPIA) or the regulations of the U.S.
Pharmaceutical Research and Manufacturers of America (PhRMA).
Our commitment: Group-wide guidelines and industry standards
143
Non-Financial Statement Anti-Corruption and Anti-Bribery
Combined Management Report
Our Global Regulatory Affairs unit has established a dedicated standard and corresponding process document
on the review and approval of our promotional materials for our Healthcare business sector. At the operational
level, the relevant business and all employees involved in our sales and marketing activities must adhere to our
internal policies, standards and procedures. To ensure that all promotional materials meet our standards as well
as local regulations end-to-end, we apply a harmonized Group-wide review and approval system.
For all interactions with healthcare stakeholders, we have established internal policies and review processes and
tools, such as record-keeping systems. Thereby, we want to ensure adherence to statutory requirements and
transparency obligations.
Roles and responsibilities
In some countries we inform consumers directly. For example, in the United States direct-to-consumer (DTC)
advertising for prescription medicines is permitted. In line with applicable local laws, we use DTC advertising in
these countries to help increase people's awareness of certain diseases and the available therapies.
We support health systems by collaborating with our healthcare stakeholders, such as professional medical
associations, patient and carer organizations, university clinics and other institutions that provide healthcare.
We follow clearly defined internal approval requirements and procedures for each type of interaction, in line
with applicable laws and codes. In countries with statutory or industry obligations on the disclosure of transfers
of value to healthcare stakeholders, we aim to comply with these obligations.
Interactions with health systems
Our audit planning aims to provide comprehensive risk assurance through the best possible audit coverage of
our processes, countries and projects. We take a risk-based approach to our annual audit planning process,
considering factors such as sales, employee headcount, systematic stakeholder feedback and the Corruption
Perceptions Index (CPI) published by the non-governmental organization Transparency International. If an
internal audit gives rise to recommendations, Group Internal Auditing performs a systematic follow-up and
monitors the implementation of the recommended corrective actions. In 2023, Group Internal Auditing
conducted 80 internal audits involving bribery and corruption-related risks (2022: 79), including 52 operational
and 27 IT audits and 1 special audit which may be conducted to meet legal requirements.
Compliance is ensured by Group Compliance and Group Internal Auditing as the second and third lines of
defense. As part of the audits, Group Internal Auditing regularly reviews functions, processes and legal entities
worldwide. These reviews include an assessment of the effectiveness of the respective compliance guidelines,
processes and structures in place. The units also check for violations of our Code of Conduct, Anti-Corruption
Standard, Anti-Money Laundering Group Standard, and Antitrust and Competition Law Policy.
•
Compliance audits
25
12
35
24
Other violations of Merck values, internal guidelines or
legal requirements
0
3
2
0
0
Other violations of the Merck Compliance Principles for
the relations with business partners
0
11
6
Fundamentals
Pharma Code for Conducting Pharmaceutical Business and Pharmaceutical Operations (Pharma Code)
•
Healthcare Ethical Guiding Principles
146
Non-Financial Statement Other Topics
Combined Management Report
We have dedicated corporate resources for our circular economy strategy and we are driving several circular
economy pilots and initiatives throughout the organization. In addition, we held a global circular economy
summit to provide a platform for best practice sharing with internal and external participants.
Within our R&D processes, we are committed to continuously improving and integrating sustainability and
circular economy criteria to assess the sustainability performance of our products and portfolio, enabling us to
create more sustainable products for our customers and society. We have integrated and tailored Design for
Sustainability (DFS) across all business sectors and use our overarching dashboard to monitor progress on key
sustainability criteria. In 2023, we assessed almost all relevant R&D projects and thus enhanced transparency
around the sustainability performance of our global R&D portfolio. We integrated a sustainability in R&D key
indicator to track progress and continued advancing the use of evaluation tools such as DOZN™ and
GreenSpeed. We aim to combine the insights from the R&D dashboard with those gained from our commercial
portfolio evaluation to steer our future R&D activities.
Our commitment: Aiming for circularity
145
Combined Management Report Non-Financial Statement Other Topics
M Ventures' sustainability investment strategy follows two fundamental approaches. First, it invests in
sustainable solutions relevant to our three business sectors, such as novel solutions for reducing emissions and
waste, green life science technologies and green electronics technologies. These solutions may be more energy-
or resource-efficient or may create products designed for circularity or with a lower carbon footprint. As many
of these technologies are still in their early stages, M Ventures is partnering with SEMI.org along with the
leading corporate venture capital funds to help accelerate the innovation and adoption of potential sustainable
semiconductor solutions. The second approach involves making investments that leverage our core
competencies to drive sustainability in other markets. These may include start-ups addressing sustainable
foods, bio-manufacturing or carbon capture and utilization.
Our venture capital fund, M Ventures, prioritizes sustainable innovations through equity investments. The
fund's mandate is to invest in innovative technologies and products that have the potential to significantly
impact our core business areas. In addition, the fund focuses on investments in two areas of high strategic
relevance to our company: digital technology and sustainability.
Our Group Science & Technology Office leads the implementation of our combined strategy for innovation as
well as data and digital, enabling innovation across our business sectors while harnessing the power of
advanced data and digital capacities. It aims to identify and integrate transformative and strategically relevant
technology trends into our business sectors while maintaining a Group-wide overview of our technology
roadmap and innovation portfolio. Fostering data and digital capacities is key to accelerating sustainable
innovation and enabling rapid action and personalized offerings. Innovation projects are incubated either
through our corporate innovation teams or in the business sectors.
The organizational set-up of our R&D activities reflects the overall structure of our company. All three of our
business sectors operate in independent R&D units that pursue their own innovation strategies. Group
Corporate Sustainability supports our business sectors and Group functions to advance sustainability within the
R&D and innovation processes. This includes the coordination and alignment of common core sustainability
criteria in line with our shared goals as well as quality and quantification requirements. In 2022, we created a
Group-wide dashboard, showing the potential contribution of our R&D portfolio to sustainable solutions. In
2023, we integrated a procedure describing the global sustainability evaluation in our R&D process.
In 2023, we continued our partnership with the patent information platform LexisNexis® PatentSightⓇ and
evaluated the sustainability impact of our intellectual property. In the reporting year, 29% (2022: 40%) of our
patent families published had a positive sustainability impact. However, this key indicator is not comparable
with the previous year's figure as LexisNexis® PatentSight® updated the underlying evaluation methodology.
Roles and responsibilities
Today, our products are already having positive impact on human progress and global health, namely our
medicines and our biological and chemical innovations that utilize the latest technologies. We want to
continuously improve the way we measure our progress by adapting to upcoming regulations and integrating
quantitative sustainability criteria into our product development processes across all business sectors.
The sustainable innovation that we envision and drive forward must align with and support the three goals of
our sustainability strategy. We define sustainable innovation as new or improved products, services,
technologies, or processes that generate economic benefits and have positive environmental and social
impacts. Therefore, we develop long-term solutions for our innovation and research activities that consider the
entire value chain and evaluate each product's impact over its lifecycle.
Sustainable innovation and technology
Other Topics
•
Standard on Medical Activities
For the collaboration with patient organizations:
•
Policy on Interactions with Patients, Patient Opinion Leaders, and Patient Organizations
Guideline Good Practice and Process Guidance: Engagement with Patients, Patient Opinion Leaders, and
Patient Organizations
11
Transparent reporting
Regular employee training
In 2023, we continued our Code of Conduct training curriculum on managing dilemmas in sector-specific
situations. Moreover, employees who are responsible for the promotion of our pharmaceutical products receive
regular training on current guidelines. Depending on their roles and responsibilities, new employees participate
in onboarding training dealing with the review and approval of promotional materials. Based on their roles and
responsibilities and in order to remain up-to-date, employees participate in mandatory e-learning courses and
classroom training on our policies and guidelines as well as important changes to the reporting requirements for
transfers of value.
Combined Management Report
Non-Financial Statement
Other Topics
144
We publish the financial and non-financial contributions we make to healthcare stakeholders in the healthcare
industry, such as healthcare professionals and healthcare organizations, as appropriate and in accordance with
local laws and codes. The published information includes the names of individual recipients, their addresses, the
purpose, and the contributed amount or value as required by the applicable laws and codes. In addition, before
publishing, we secure all necessary informed consent forms, as required by the applicable data privacy
regulations.
Fraudulent actions against Merck
1
0
Determination of taxonomy alignment
Technical screening criteria
In order to check the taxonomy alignment of the taxonomy-eligible economic activities, the relevant regulations
for the technical screening criteria under which certain economic activities qualify as contributing substantially
to the environmental objective as well as for determining whether the activity causes no significant harm to any
of the other environmental objectives were systematically analyzed. The basis for this was the Delegated Acts
on the EU Taxonomy, which were used for the identification of taxonomy-eligible economic activities. In these,
corresponding requirements are defined for the respective economic activities, which must be fulfilled for a
classification as taxonomy-aligned. For this purpose, interviews were conducted with business and project
managers and the physical climate risks at the sites were analyzed. Furthermore, operating permits, product
data sheets, environmental product declarations, energy performance certificates and internal training
documents were inspected, among other things.
Net sales, capital expenditure and operating expenditure in connection with the "climate change mitigation"
environmental objective were identified as taxonomy-aligned economic activities to a very small extent only. No
additional taxonomy-eligible and taxonomy-aligned net sales, capital expenditure or operating expenditure
were identified for the "climate change adaptation" environmental objective. From 2024, the degree of
taxonomy alignment will have to be reported for the other four environmental objectives in addition to the
degree of taxonomy eligibility. Based on the information currently available, the degree of taxonomy alignment
for the other four environmental objectives will also be very low. A more accurate statement is not yet possible
owing to the uncertain questions regarding the interpretation of the regulations and the current progress of the
project.
Minimum safeguards
The minimum safeguard frameworks include the OECD Guidelines for Multinational Enterprises, the United
Nations Guiding Principles on Business and Human Rights, the fundamental conventions of the International
Labour Organization, and the International Bill of Human Rights. The requirements profile of the frameworks
was systematized and compared with internal documents. This included an analysis of the Code of Conduct,
work instructions, guidelines and training documents. Compliance with the due diligence process required by
the framework in the area of human rights is ensured with respect to the individual business activities. Risk
analyses are carried out with regard to the minimum safeguard requirements and appropriate measures are
derived from these.
Combined Management Report
Non-Financial Statement
Other Topics
149
Determination of the taxonomy KPIS
The three key performance indicators (KPIs), namely net sales, capital expenditure and operating expenditure,
were mainly derived from existing financial reporting systems; for capital expenditure inquiries were made to
the Investment Controlling unit in some instances. The principle of materiality was applied.
Accounting and measurement policies
The EU Taxonomy Regulation and the corresponding Delegated Acts contain wording and requirements which,
even taking into account the supplementary publications of the EU Commission and the "EU Platform on
Sustainable Finance", are subject to interpretation and/or for which clarifications have not yet been published in
every case. The most significant interpretive issues and Merck's approach are presented below.
0
Ancillary activities that are operationally necessary for our core business do not qualify as independent
taxonomy-eligible economic activities. This applies, for example, to the transport of our products to our
customers, research and development activities, and the acquisition or construction of production buildings in
areas that cannot be allocated to a taxonomy-eligible target activity.
To check the taxonomy eligibility of an economic activity, Merck applies an end-product oriented approach for
manufacturing-related activities. This means that the end product must result from one of the economic
activities specified in the Delegated Act in order to qualify as being taxonomy-eligible. In the case of organic
basic chemicals, the corresponding economic activities qualify as taxonomy-eligible in the interpretation of
Merck only if the manufacturing activities of the named chemical products involve a significant transformation
process. In our interpretation, products that are merely passed on for sale, repackaged or mixed do not qualify
as taxonomy-eligible within the meaning of the EU Taxonomy Regulation.
Taxonomy KPIS
The share of operating expenditure for assets or processes associated with economic activities classified as
taxonomy-eligible or taxonomy-aligned is determined as follows: Share of total operating expenditure that is
taxonomy-eligible or taxonomy-aligned divided by total operating expenditure according to the EU Taxonomy
Regulation. Operating expenditure relevant within the scope of reporting under the EU Taxonomy Regulation
includes direct, non-capitalized research and development costs, low-value leases, building renovations,
maintenance and repair, and all other direct internal and external expenses related to the day-to-day
maintenance of property, plant and equipment that are necessary to ensure the continuous and effective
functioning of these assets. During the clinical and preclinical development phases in the Healthcare business
sector, it is unclear as to whether the activities will ever lead to regulatory approval and hence to marketable
products. Accordingly, the corresponding research and development activities have not been included as
taxonomy-eligible operating expenditure in the numerator for the economic activities of pharmaceutical
ingredients and medical products.
Operating expenditure
In order to exclude double counting, capital expenditure on products from taxonomy-aligned economic activities
and individual measures that have already been checked under category A (i.e. capital expenditure that relates
to assets or processes associated with taxonomy-aligned economic activities) are included under this category
only. Against this background, capital expenditure for production buildings, for example, is subject to a
taxonomy-eligibility check under category A only, while capital expenditure for administrative buildings is
included under category C.
changes in property, plant and equipment and intangible assets disclosed in the consolidated financial
statements (see Note (20) "Property, Plant and Equipment” and Note (19) "Other Intangible Assets" in
the Notes to the Consolidated Financial Statements).
150
148
Non-Financial Statement Other Topics
The share of capital expenditure on assets or processes associated with economic activities classified as
taxonomy-eligible or taxonomy-aligned is determined as follows: Share of total capital expenditure that is
taxonomy-eligible or taxonomy-aligned divided by total capital expenditure according to the EU Taxonomy
Regulation. At Merck and within the meaning of the EU Taxonomy Regulation, capital expenditure in the
reporting period comprises additions to property, plant and equipment (IAS 16), rights of use from leases
(IFRS 16), and intangible assets (IAS 38) with the exception of goodwill. Apart from the additions, advance
payments for the named assets are also included. The denominator also includes additions to property, plant
and equipment and intangible assets resulting from business combinations. The additions can be seen in the
Capital expenditure
The net sales KPI represents the ratio of net sales from taxonomy-eligible or taxonomy-aligned economic
activities in a fiscal year to the total net sales of the same fiscal year. The definition of relevant net sales for the
purposes of the EU Taxonomy Regulation corresponds to the definition of net sales in the consolidated financial
statements (see Note (9) "Net sales” in the Notes to the Consolidated Financial Statements).
Net sales
In the area of fossil gas, Merck operates a gas turbine and a co-generation facility to generate electricity and
heat from fossil gaseous fuels. The facilities serve to generate our own power and heat. These activities in the
area of electricity generation from fossil gaseous fuels as well as the operation of co-generation units with fossil
gaseous fuels have been classified as not material. Additional activities in the field of nuclear energy and fossil
gas are not performed or are performed to an insignificant extent only.
The purchase or performance of contract manufacturing services for active pharmaceutical ingredients or
medical products in the Healthcare and Life Science business sectors typically does not give rise to a taxonomy-
eligible economic activity, as Merck does not control the circumstances under which the contract manufacturing
is performed in many cases.
Combined Management Report
Other Topics
Taxonomy eligibility
Combined Management Report
Non-Financial Statement
1
The EU taxonomy for sustainable activities (hereinafter "EU Taxonomy") is a classification system that translates
the climate and environmental objectives of the European Union (EU) into criteria for sustainable economic
activities. For this purpose, the EU Taxonomy defines various key performance indicators and qualitative
information that Merck must disclose. The introduction of the disclosure obligation under Article 8 of Regulation
(EU) 2020/852 of the European Parliament and of the European Council dated June 18, 2020 on establishing a
framework to facilitate sustainable investment and amending Regulation (EU) 2019/2088 (hereinafter "EU
Taxonomy Regulation") and the Delegated Acts adopted in this regard is being carried out in multiple phases:
For the 2021 reporting period, key performance indicators were stated only for so-called taxonomy-eligible
economic activities and were limited to those that make a substantial contribution to climate change
mitigation or climate change adaptation as defined by the EU Taxonomy Regulation. An economic activity
qualifies as taxonomy-eligible if it is within the scope of the EU Taxonomy.
For the 2022 reporting period, apart from the degree of taxonomy-eligible economic activities making a
substantial contribution to climate change mitigation or climate change adaptation within the meaning of
the EU Taxonomy Regulation, it is also necessary to report the taxonomy-aligned share of the identified
economic activities. According to the EU Taxonomy, an economic activity qualifies as taxonomy-aligned if it
is taxonomy-eligible and makes a substantial contribution to one or more of the environmental objectives
without doing significant harm to the other objectives or failing to fulfill minimum social standards.
As well as the aforementioned information, the degree of taxonomy-eligible economic activities making a
substantial contribution to the following four additional environmental objectives of the EU will be included in
the disclosure obligation from the 2023 reporting period: 1) sustainable use and protection of water and
marine resources, 2) transition to a circular economy, 3) pollution prevention and control, and 4) protection
and restoration of biodiversity and ecosystems. Furthermore, new economic activities for the environmental
objectives of climate change mitigation and climate change adaptation have been added for which the degree
of taxonomy eligibility will be required to be disclosed in the 2023 reporting year. Reporting on the degree of
taxonomy alignment for the newly added environmental objectives is not planned for the time being.
From the 2024 reporting year, the degree of taxonomy eligibility and the degree of taxonomy alignment
will have to be reported for all six environmental objectives.
To ensure the legally compliant fulfillment of its disclosure obligations, Merck has established an interdisciplinary
project team that is continuously analyzing the existence of taxonomy-eligible and taxonomy-aligned activities in
close coordination with the representatives of the business sectors and various Group functions.
Identification of taxonomy-eligible economic activities
In the course of implementing the EU Taxonomy requirements, the business model of Merck underwent a
comprehensive analysis. Taxonomy-eligible economic activities were identified in line with a top-down approach
using structured inquiries submitted to the relevant specialist departments. For the environmental objectives of
climate change mitigation and climate change adaptation, the results of this analysis were supplemented by big
data-supported analyses as part of a bottom-up approach. Among other things, information was used that can
also be found in connection with the requirements of the REACH regulation as well as in the context of customs
declarations. The economic activities for the other four environmental objectives were also identified by
reference to existing reporting structures and hierarchies.
Combined Management Report
Non-Financial Statement Other Topics
147
As a result of this process, taxonomy-eligible activities generating net sales were identified only in conjunction
with the following economic activities:
Approach
Manufacture of energy-efficient building equipment in the Electronics business sector (environmental
objective "climate change mitigation"),
Transport by motorbikes, passenger cars and light commercial vehicles (activity 6.5 of the Delegated Act on
the "climate change mitigation" environmental objective), and
Electricity generation using solar photovoltaic technology (activity 4.1 of the Delegated Act on the "climate
change mitigation" environmental objective),
At Merck, such capital expenditure exists especially in connection with the environmental objective of climate
change mitigation in the following areas:
As Merck, owing to its business model, only engages in taxonomy-eligible economic activities in conjunction
with the manufacture of active pharmaceutical ingredients, manufacture of medical products, the manufacture
of electrical and electronic equipment and, to a small extent, the manufacture of energy-efficient building
equipment, it has only limited taxonomy-eligible capital expenditure in category A. There is no capital
expenditure in category B to date as Merck does not prepare any capital spending plans to transform
taxonomy-eligible economic activities into taxonomy-aligned economic activities. Furthermore, Merck has
capital expenditure resulting from the acquisition of products classified as taxonomy-eligible economic activities
or attributable to qualifying individual measures (category C). In order to be taxonomy-eligible, this capital
expenditure must correspond to one of the economic activities named in the Delegated Acts and be
implemented and operational within 18 months.
Capital expenditure related to the acquisition of products from taxonomy-eligible economic activities and
individual measures that carry out the target activities in a low-carbon manner or reduce greenhouse gas
emissions (category C).
•
Capital expenditure that is part of a plan to expand taxonomy-aligned economic activities or to transform
taxonomy-eligible economic activities into taxonomy-aligned economic activities (category B), and
Capital expenditure that relates to assets or processes associated with taxonomy-aligned economic
activities (category A),
•
With respect to capital expenditure, the EU Taxonomy Regulation differentiates between three categories of
capital expenditure:
Manufacture of electrical and electronic equipment in the Life Science business sector (environmental
objective "transition to a circular economy").
Manufacture of medical products in the Healthcare business sector (environmental objective "pollution
prevention and control"), and
Manufacture of active pharmaceutical ingredients in the Healthcare and Life Science business sectors
(environmental objective "pollution prevention and control"),
Renovation of existing buildings (activity 7.2 of the Delegated Act on the "climate change mitigation"
environmental objective and activity 3.2 of the Delegated Act on the "circular economy" environmental
objective).
Circular
Pollution
Biodiversity
Criteria for a substantial contribution
Climate change
adaptation
Economy
%
Y
T
Y
Y
Y
Y
Y
Climate change
mitigation
E
Water
DNSH criteria
Circular
E
E
Economic activities
("Do no significant harm")
Proportion
of
Taxonomy
-aligned or
Category
eligible
turnover
2022
Category
enabling transition-
activity al activity
safeguards
Minimum
Biodiversity
Economy
Pollution
%
CCM 7.2
N/EL N/EL N/EL N/EL N/EL N/EL
-3.7
1,415
1,509
-94
-6.2
783
774
-85
9
18,162
17,907
256
1.4
2,476
2,751
-275
1.2
2,283
2,198
0.0
0
0
78
74
4
5.5
25,851
25,680
171
0.7
Change
Dec. 31, 2023
5,481
Dec. 31, 2022
5,479
€ million
%
2
-10.0
67.1
152
15,534
-156
Y
Y N/EL N/EL N/EL N/EL N/EL
0.02
CCM 3.5
%
Economic activities
Code
Y
OpEx 2023
OpEx 2023
change Z
Climate
Climate z
change
Water
Pollution
Proportion of
Y
Y
Y
-50.5
14,848
686
4.6
10
25,851
11
-1
-12.1
25,680
171
0.7
The year-on-year change in individual items of Merck KGaA's balance sheet was substantially impacted by the
transfer of operating activities. These effects are discussed below and above in the "Effects of material
company agreements on the net assets, financial position, and results of operations" section. In terms
of the balance sheet for fiscal 2023, this primarily resulted in a reduction in inventories and trade accounts
receivable on the asset side of the balance sheet and in trade payables on the equity and liabilities side, while
other receivables increased.
Largely irrespective of the transfer of operating assets, one notable increase on the asset side of the balance
sheet related to fixed assets (€ +99 million). This was mainly due to the investments in property, plant and
equipment at the Darmstadt site.
The higher level of income from profit and loss transfers meant that other receivables and other assets also
increased (€ +649 million). On the equity and liabilities side, the biggest increase related to other liabilities
(€ +686 million), whereas financial liabilities decreased (€ -275 million). All in all, net assets rose slightly by
0.7%.
Inventories declined as a result of the transfer of operating activities (see “Effects of material company
agreements on the net assets, financial position, and results of operations"). At the balance sheet date,
they comprised the consumables and supplies required for site operations.
0.00
Y
308
Economy
649
1,617
€ million
Fixed assets
Intangible assets
Tangible assets
Financial assets
Current assets
Inventories
Assets
Trade accounts receivable
Cash and cash equivalents
Prepaid expenses
Equity and liabilities
€ million
Net equity
Provisions
Y; N; Y; N; Y; N; Y; N; Y; N; Y; N;
Other receivables and other assets
Net assets and financial position
160
Additional Information on Merck KGaA in Accordance with the German Commercial Code (HGB)
242
43
17.7
The year-on-year change in individual items of Merck KGaA's income statement was substantially impacted by
the transfer of operating activities. These effects are discussed below and above in the "Effects of material
company agreements on the net assets, financial position, and results of operations” section. As a
result, the income statement for fiscal 2023 mainly saw a decline in expense and income items relating to
operating activities, such as net sales, material costs, personnel expenses and other operating expenses.
In addition to the effects of the transfer of operating activities, higher profit transfers from subsidiaries and
lower tax expense in particular more than offset the higher level of other financial expenses, resulting in an
increase in total profit after taxes and profit transfers.
The reduction in other income primarily resulted from the fact that the prior-year figure included changes
relating to certain inventory items that were transferred as of January 1, 2023, as well as from the lower level
of insurance compensation payments.
The transfer of operating activities meant the total cost of materials decreased in line with net sales. By
contrast, the cost of materials in relation to sales increased to 44.3% (2022: 39.9%), as net sales in the past
fiscal year resulted solely from the intragroup oncharging of services whose performance involves a
proportionally higher level of material costs (see “Effects of material company agreements on the net
assets, financial position, and results of operations”).
Combined Management Report_
Additional Information on Merck KGaA in Accordance with the German Commercial Code (HGB)
159
The lower level of personnel expenses was due in particular to the transfer of around 4,400 employees to
different legal entities as the result of the transfer of operating activities (see "Effects of material company
agreements on the net assets, financial position, and results of operations"). The level of additions to
pension provisions was also lower. This was offset by salary increases for employees covered by and exempt
from collective agreements, as well as the collectively agreed inflation allowance.
Depreciation, amortization, and adjustments remained essentially unchanged as against the previous year.
The transfer of operating activities did not have a material impact on the amount of fixed assets (see “Effects
of material company agreements on the net assets, financial position, and results of operations").
The reduction in other operating expenses was due to the transfer of operating activities (see "Effects of
material company agreements on the net assets, financial position, and results of operations") and
mainly resulted from the lower level of external services for sales and advertising as well as other external
services and procurements.
Following the transfer of operating activities, the relevance of investment income as the largest income item is
increasing. It increased by € 188 million to € 2,203 million (2022: € 2,015 million) on the back of higher
income from profit and loss transfer agreements with subsidiaries in the Healthcare business sector. The
general rise in interest rates also led to an increase in the profit transfer from the Group financing company,
Merck Financial Services GmbH, Darmstadt. This was offset by lower dividends from other subsidiaries and
higher expenses from profit and loss transfer agreements.
The increased interest expense in the other financial result was primarily due to higher interest expenses in
respect of the Group financing company, Merck Financial Services GmbH, Darmstadt, as a result of rising
interest rates; this was offset by positive adjustments to the fair value of the plan assets in connection with
pension provisions.
Additions to provisions for uncertain tax obligations in particular led to a higher tax expense in the previous
year, whereas these did not occur to the same extent in 2023.
Combined Management Report_
Provisions for pensions and other post-employment benefits
968
environmentally
Liabilities
22,808
22,804
3
0.0
1,708
1,641
68
11.0
4.1
546
-517
-94.7
62
126
-64
-50.9
29
107
969
1,076
Financial liabilities
Trade accounts payable
Other liabilities
Deferred income
Change
Dec. 31, 2023
Dec. 31, 2022
€ million
%
24,065
23,965
99
0.4
181
192
-11
-5.6
Other provisions
Circular Z
(b) (b) (b) (b) (b) (b) Y/N Y/N Y/N Y/N Y/N Y/N Y/N
N/EL N/EL N/EL N/EL N/EL N/EL
T
E
%
CapEx 2023
Proportion of
CapEx 2023
Climate change
mitigation
Y; N; Y; N; Y; N; Y; N; Y; N; Y; N;
Climate change
adaptation
Pollution
Circular
Economy
Biodiversity
mitigation
Climate change
adaptation
Water
N/EL N/EL N/EL N/EL N/EL N/EL
(b) (b) (b) (b) (b) (b) Y/N Y/N Y/N Y/N Y/N Y/N Y/N
≥
Y
Y
Y
Y
Y
Y
E
0.06
Y
Y
Y
Y
Y
Y
%
O
≥
Climate change
0.00
Water
Circular
20,993 100.00
Turnover of taxonomy-non-eligible
activities (B)
B. TAXONOMY-NON-ELIGIBLE ACTIVITIES
A. Turnover of taxonomy eligible activities
(A.1 + A.2)
- 27.99 0.47
but not environmentally sustainable activities
(not taxonomy-aligned activities) (A.2)
Turnover of taxonomy-eligible
Total (A + B)
CE 1.2
EL N/EL N/EL
0.47 N/EL N/EL N/EL
27.52 N/EL N/EL N/EL
PPC 1.1
PPC 1.2
Manufacture of medicinal products
Manufacture of electrical and electronic
equipment
Manufacture of active pharmaceutical
ingredients (API) or active substances
(not taxonomy-aligned activities)
sustainable activities
EL N/EL N/EL
Economic activities
Criteria for a substantial contribution
DNSH criteria
economy
Biodiversity
Minimum
safeguards
activity activity
al
Category
Category transition-
enabling
CapEx
2022
eligible
aligned or
taxonomy
of
Proportion
Non-Financial Statement _ Other Topics
Combined Management Report
("Do no significant harm")
Pollution
E
Y
Y
enabling
Category transition-
Category
Proportion
153
Non-Financial Statement _ Other Topics
Combined Management Report.
al
("Do no significant harm")
Criteria for a substantial contribution
152
Total (A + B)
B. TAXONOMY-NON-ELIGIBLE ACTIVITIES
CapEx of taxonomy-non-eligible activities
(B)
A. CapEx of taxonomy eligible activities
(A.1 + A.2)
(not taxonomy-aligned activities) (A.2)
sustainable activities
DNSH criteria
activity activity
of
taxonomy
aligned or
Y; N; Y; N; Y; N; Y; N; Y; N; Y; N;
T
E
%
Biodiversity
Climate
change
change
Climate
Water
Pollution
Circular
economy
Biodiversity
Minimum
safeguards
eligible
OpEx 2022
Manufacture of medicinal products
CapEx of taxonomy-eligible but not
environmentally
Manufacture of active pharmaceutical
ingredients (API) or active substances
Transport by motorbikes, passenger cars and
light commercial vehicles (A.2)
but not environmentally sustainable activities
(not taxonomy-aligned activities)
0.00
0.04 N/EL N/EL N/EL EL N/EL N/EL
1,26
EL;
0.66 0.66 0.00 0.00 0.00 0.00 0.00
0.23 0.23 0.00 0.00 0.00 0.00 0.00
0.43 0.43
Y N/EL N/EL N/EL N N/EL
Y N/EL N/EL N/EL N/EL N/EL
Y N/EL N/EL N/EL N/EL N/EL
T
E
0.58
T
0.51
Y
Y
Y
Y
4.27 N/EL N/EL N/EL EL N/EL N/EL
285
0.00
EL N/EL N/EL N/EL N/EL N/EL
A.2 Taxonomy-eligible,
Of which transitional
Of which enabling
activities (taxonomy aligned) (A.1)
CapEx of environmentally sustainable
Renovation of existing buildings
Electricity generation using solar photovoltaic
technology
Manufacture of energy efficiency equipment
for buildings
A. TAXONOMY-ELIGIBLE ACTIVITIES
A.1 Environemtally sustainable activities
(taxonomy-aligned)
Code
༄༅། ། ། ། སྐ་༄་། ༞ རླ
2,377 100.00
ཟླ་
ཟླ་བ་སྐརྒྱལ་་ཞུ།།
6.33 2.02 0.00 0.00 4.31 0.00 0.00
5.67 1.35 0.00 0.00 4.31 0.00 0.00
1,26
N/EL N/EL N/EL N/EL N/EL N/EL
Profit after profit transfers and taxes
A.2 Taxonomy-eligible, but not
213
1,347
968
379
39.2%
Cash and cash equivalents
0
0
0.0%
1,448
1,641
-192
-11.7%
C. Prepaid expenses
74
74
0.0%
25,485
25,680
-195
-0.8%
Total assets
Equity and liabilities
A. Net equity
Subscribed capital
General partner's equity
Capital reserves
Retained earnings
Profit carried forward E. Merck KG
Net retained profit: shareholders
Other receivables and other assets
-39.8%
-50
126
Tangible assets
Financial assets
Change
Merck KGaA
01.01.2023
Merck KGaA
31.12.2022
€ million
%
192
192
0.0%
961
969
-8
-0.8%
168
22,809
5
0.0%
23,962
23,965
-3
0.0%
B. Current assets
Inventories
25
546
-521
-95.4%
Trade accounts receivable
76
22,804
168
397
397
Other liabilities
D. Deferred income
Total equity and liabilities
2,751
2,751
222
308
-86
0.0%
-28.0%
14,847
17,819
14,848
17,907
-1
0.0%
Trade accounts payable
-87
11
11
-1.7%
25,485
25,680
-195
-0.8%
Combined Management Report_
Additional Information on Merck KGaA in Accordance with the German Commercial Code (HGB)
158
Business development and results of operations
Merck KGaA's net sales decreased to € 1,628 million in fiscal 2023. The € 1,552 million reduction was mainly
due to the transfer of operating activities of the Life Science and Electronics business sectors into separate legal
entities with effect from January 1, 2023 (see "Effects of material company agreements on the net
assets, financial position, and results of operations"). Following the transfer, Merck KGaA no longer
generates any income from operating product and service business (2022: € 1,813 million).
In the past fiscal year, Merck KGaA's net sales exclusively comprised income from the intragroup on-charging
of services. This primarily related to site management services, IT services, strategic management costs and
license fees for the "Merck" umbrella brand. All in all, the intragroup on-charging of services was higher than in
the previous year due to the increase in on-charged site and administrative services in particular.
Results of operations
-0.5%
A. Fixed assets
Intangible assets
Financial liabilities
-4.7%
3,814
3,814
702
702
80
80
318
318
5,479
5,479
0.0%
0.0%
0.0%
0.0%
C. Liabilities
0.0%
0.0%
B. Provisions
Provisions for pensions and other post-employment benefits
1,487
1,509
-22
-1.5%
Other provisions
688
2,175
774
2,283
-86
-11.1%
-108
0.0%
Change
Assets
Due to the hive-downs and transfers described above in connection with the termination of the business lease
agreements (collectively referred to hereinafter as the "transfer of operating activities"), some balance sheet
items for 2023 are only comparable with the prior-year figures to a limited extent. To improve comparability,
additional information on the impact of the transfer of operating activities to Merck Life Science KGaA and
Merck Electronics KGaA on individual balance sheet items of Merck KGaA is provided. The following table shows
the balance sheet of Merck KGaA before (December 31, 2022) and after (January 1, 2023) the transfer of
operating activities. In terms of Merck KGaA's income statement for fiscal 2023, the transfer of operating
activities resulted in lower net sales, material costs, personnel expenses and other operating expenses in
particular (for details see the disclosures on the income statement in the “Business development and
results of operations" section.
Y N/EL N/EL N/EL N N/EL
Y
Y
Y
Y
Y
Y
0.00
T
0.02 0.02 0.00 0.00 0.00 0.00 0.00
0.00
0.00
E
0.00
T
0.02 0.02
0.00 0.00
1.99 0.00 0.00 0.00 1.83 0.16 0.00
0.00
A.2 Taxonomy-eligible, but not
sustainable activities
(not taxonomy-aligned activities)
EL;
N/EL
EL; EL; EL; EL; EL;
N/EL N/EL N/EL N/EL N/EL
Manufacture of active pharmaceutical
ingredients (API) or active substances
PPC 1.1
Manufacture of medicinal products
Manufacture of electrical and electronic
equipment
PPC 1.2
0.11 N/EL N/EL N/EL
1.73 N/EL N/EL N/EL
0.00
Of which transitional
Of which enabling
activities (taxonomy-aligned) (A.1)
(b) (b) (b) (b) (b) (b) Y/N Y/N Y/N Y/N Y/N Y/N Y/N
Water
mitigation
Climate change Z
adaptation
Climate change
Turnover 2023
Proportion of
Turnover 2023
Code
E
T
Combined Management Report_
Non-Financial Statement _ Other Topics
EL N/EL N/EL
151
Y N/EL N/EL N/EL N/EL N/EL
0.03 0.03
EL;
EL; EL; EL; EL;
N/EL N/EL N/EL N/EL N/EL N/EL
0.47 N/EL N/EL N/EL N/EL EL N/EL
- 27.99 0.47
28.49 0.03
1881 33 3 3 3 28
CCM 3.5
A. TAXONOMY-ELIGIBLE ACTIVITIES
A.1. Environmentally sustainable activities
(taxonomy-aligned)
Manufacture of energy efficiency equipment
for buildings (A1)
Turnover of environmentally sustainable
།་།་༄༅༅།།
0.00
EL N/EL N/EL
0.00
Combined Management Report_
Additional Information on Merck KGaA in Accordance with the German Commercial Code (HGB)
155
Additional Information on
Merck KGaA in
Accordance
with the
German commercial
code (HGB)
The Management Report of Merck KGaA has been combined with the Group Management Report. The Annual
Financial Statements and the Combined Management Report of the Group and Merck KGaA for fiscal 2023 are
filed with the electronic German company register and are available on its website.
Merck KGaA, headquartered in Darmstadt, Germany, is the parent company of the Group.
Following the transfer of the Life Science, Healthcare and Electronics business sectors into separate legal
entities, Merck KGaA primarily performs a holding company function for the Merck Group. As part of the
strategic management of the Group, this function makes strategically important decisions and ensures that
compliance provisions are observed by the central enabling Group Functions on a Group-wide basis. It also
performs Group-wide services for Group companies in the areas of information technology, strategic
management and site management, especially at the Darmstadt site. Merck KGaA employs around 4,000 of the
more than 11,000 employees at the Darmstadt site.
The financial statements of Merck KGaA have been prepared in accordance with the provisions of the German
Commercial Code (HGB), the German Stock Corporation Act (AktG), and the supplementary requirements of
the Articles of Association. The full version of the Annual Financial Statements of Merck KGaA together with the
unqualified auditor's opinion has been submitted to the electronic company register and published there.
Effects of material company agreements on the net assets, financial
position, and results of operations
Hive-down of the operating activities of the business sectors
Research and development expenses accounted for 2,445 Mio. € (2022:2,521 Mio. €) of the reported operating
expenditure, with 1,657 Mio. € (2022: 1,694 Mio. €) of this being attributable to the Healthcare business
sector.
As part of the strategic further development of Merck KGaA, the existing operating activities of the Life Science,
Healthcare, and Electronics business sectors within Merck KGaA, together with the relevant assets and liabilities
(hereinafter: "operating units"), were hived down at their carrying amounts into three separate legal entities
(hereinafter: "OpCo" or plural "OpCos") with the legal form of a GmbH or German limited liability corporation
and with economic effect from January 1, 2018 (operating hive-down).
Combined Management Report_ Additional Information on Merck KGaA in Accordance with the German Commercial Code (HGB)
156
The business lease agreement under which the Healthcare business sector was leased back to Merck KGaA was
terminated with economic effect from March 31, 2019. Merck Healthcare KGaA (formerly the Healthcare OpCo)
assumed the power of operational management for the Healthcare business sector from Merck KGaA with effect
from April 1, 2019. As a result of the termination of the business lease agreement, the leased objects allocated
to the Healthcare business sector at the end of the lease were transferred to Merck Healthcare KGaA.
The business lease agreement for the Electronics business sector (EL business lease agreement) was
terminated with economic effect from December 31, 2019 for the part of the distribution and sales function
belonging to the Electronics business sector. Accordingly, these functions were transferred from Merck KGaA to
the EL OpCo (then Merck Performance Materials Germany GmbH) with economic effect from January 1, 2020.
The contractual, process, procedural, and working relationships and leased objects allocated to the function
were transferred to the EL OpCo as a result. The EL business lease agreement for the other functions of the
Electronics business sector remained in place until December 31, 2022.
To facilitate the implementation and operation of the new ERP systems for the LS OpCo (then Merck
Life Science Germany GmbH) and the EL OpCo, the EL OpCo transferred the Darmstadt-based "Organics" and
"OLED" production operations, including the production-related Electronics shared functions (EL Production,
hereinafter: "ELP"), to the LS OpCo by way of a chain transformation in multiple steps on August 31, 2022. The
function that was spun off from the EL business lease agreement via EL Production (the ELP business lease
agreement) had been in place between Merck KGaA as the lessee and the LS OpCo as the lessor since this date.
By way of entries in the commercial register on November 1, 2022 (LS OpCo) and December 29, 2022
(EL OpCo), the LS OpCo and the EL OpCo changed their legal form to that of a German corporation with general
partners (Kommanditgesellschaft auf Aktien) and have since been operating under the names Merck
Life Science KGaA, Darmstadt, and Merck Electronics KGaA, Darmstadt.
As a result of the aforementioned hive-down and restructuring measures and the existing EL and ELP business
lease agreements, Merck KGaA continued to manage the operating business of the Electronics business sector
with the exception of part of the distribution and sales function until December 31, 2022. Furthermore, as a
result of the Life Science business lease agreement, Merck KGaA also ran the operating business of the
Life Science business sector.
Termination of the temporary business lease of the Life Science and Electronics
business sectors
Merck Life Science KGaA went live on January 1, 2023. It assumed the power of operational management for
the Life Science operating business and ELP from Merck KGaA at this date. Merck KGaA therefore terminated
the LS and ELP business lease agreements with effect from January 1, 2023.
- were
Merck KGaA also terminated the EL business lease agreement with effect from January 1, 2023. The power of
operational management for the Electronics business sector, with the exception of EL Production, was therefore
transferred from Merck KGaA to Merck Electronics KGaA at this date. As a result of the termination of the
business lease agreements, the leased objects allocated to the Life Science and Electronics business sectors and
EL Production - comprising current and non-current assets as well as certain liabilities and provisions
transferred to Merck Life Science KGaA and Merck Electronics KGaA respectively. In exchange, Merck
Life Science KGaA and Merck Electronics KGaA paid compensation in the amount of the balance of the
transferred carrying amounts under German commercial law. In addition, around 3,400 employees were
transferred from Merck KGaA to Merck Life Science KGaA and around 1,000 employees were transferred to
Merck Electronics KGaA. The remaining around 4,000 employees in Group functions remained with Merck KGaA.
Additional transfers involving the Life Science business sector
By way of a contribution agreement dated December 2, 2022, Merck KGaA also transferred the assets and
liabilities allocated to the Life Science business sector that were not previously included in the operating hive-
down of the Life Science business sector or the LS business lease agreement to Merck Life Science KGaA with
effect from January 1, 2023. This related to the "Packaging & Container" functional unit and the assets and
Combined Management Report_ Additional Information on Merck KGaA in Accordance with the German Commercial Code (HGB) 157
liabilities of the Hohenbrunn site. The assets and liabilities mainly included property, plant, and equipment, cash
and cash equivalents, pension provisions and other provisions and were contributed at their carrying amounts
under German commercial law in exchange for the grant of new shares in Merck Life Science KGaA.
Since the technical system requirements for the rollout of the business sector-specific enterprise resource
planning systems (hereinafter "ERP") were not in place at the OpCos at the time of the hive-down, the business
activities hived down to the OpCos have been temporarily leased back by the relevant OpCos to Merck KGaA.
Under the terms of a business lease agreement, Merck KGaA leased the entire operations from each of the
three OpCos with economic effect from January 1, 2018. In this context, it also leased all fixed assets and
acquired the current assets as well as certain liabilities and provisions at their carrying amounts under German
commercial law.
€ million
Y - Yes, Taxonomy-eligible and Taxonomy-aligned activity with the relevant environmental objective
N-No, Taxonomy-eligible but not Taxonomy-aligned activity with the relevant environmental objective
N/EL - not eligible, Taxonomy-non-eligible activity for the relevant environmental objective.
Pollution Prevention and Control: PPC
CE 1.2
0.16 N/EL N/EL N/EL N/EL EL N/EL
0.00
OpEx of taxonomy-eligible
but not environmentally sustainable activities
(not taxonomy-aligned activities) (A.2)
A. OpEx of taxonomy eligible activities (A.1
+ A.2)
2.02 0.02 0.00 0.00 1.83 0.16 0.00
97.98
2,817 100.00
"60 7-0-869
A. TAXONOMY-ELIGIBLE ACTIVITIES
A.1 Environemtally sustainable activities
(taxonomy-aligned)
Manufacture of energy efficiency equipment
for buildings
Renovation of existing buildings
OpEx of environmentally sustainable
activities (taxonomy aligned) (A.1)
Biodiversity and ecosystems: BIO
Of which enabling
environmentally
B. TAXONOMY-NON-ELIGIBLE ACTIVITIES
OpEx of taxonomy-non-eligible activities
(B)
Total (A + B)
(a)
(b)
Combined Management Report.
Non-Financial Statement
Other Topics
154
The Code constitutes the abbreviation of the relevant objective to which the economic activity is eligible to make a substantial contribution, as well
as the section number of the activity in the relevant Annex covering the objective, i.e.:
Climate Change Mitigation: CCM
Climate Change Adaptation: CCA
Water and Marine Resources: WTR
Circular Economy: CE
Of which transitional
€ million
Net sales
2023
-414
-685
Other financial result
9.3
188
2,015
2,203
Investment result
-28.6
329
-1,150
-821
Other operating expenses
-7.5
11
-142
-132
Depreciation, amortization, and write-downs
-53.7
675
-1,256
548
-581
-43.2
-93.1
-272
65.7
Personnel expenses
996
1,628
2022
%
€ million
3,180
-1,552
-48.8
Other income
105
-79
-43.0
Cost of materials
184
-1,269
1,148
-152
-13.2
-721
Profit transfers
-696
Profit before profit transfers and taxes
-18
2.7
Taxes
-16
-228
-677
164
197 Statement on Corporate Governance
Corporate Governance Compensation Report
Skills and Expertise, and Qualification Matrix
224 Objectives of the Supervisory Board with Respect to its Composition, Profile of
218 Report of the Supervisory Board
Compensation Report
Net sales declined from € 3,180 million in the previous year to € 1,628 million, largely as a result of the
€ 1,813 million in sales from operating product and service business that were no longer recognized as
anticipated following the transfer of operating activities. Sales in the reporting year relate solely to the
intragroup on-charging of services. The increase in on-charged site and administrative services in particular
meant that these were higher than the prior-year forecast of € 1,366 million.
164 Compensation Report
corporate Governance
No risks that could jeopardize the continued existence of the company have been identified.
Merck Financial Services GmbH, Darmstadt, will provide the company with sufficient financial resources as
needed and thus ensure liquidity.
In line with the Group's development, we expect investment income to see moderate growth compared with the
figure recorded in fiscal 2023. Accordingly, net income is forecast to be slightly higher than in 2023 overall.
Following the transfer of operating activities, net sales are becoming less relevant for Merck KGaA, while the
relevance of investment income as the largest income item is increasing. With this in mind, investment income
is replacing net sales as a key financial performance indicator starting from fiscal 2023, and a forecast for the
next fiscal year is provided below.
Forecast for 2024
Net income was above the forecast level due to higher investment income and lower taxes in particular. Taken
together, these more than offset the higher level of other financial expenses.
This Compensation Report describes the structure and application of the compensation system for the Executive
Board of Merck KGaA, Darmstadt, Germany, in fiscal 2023. It provides a transparent overview of the
relationship between compensation and performance, and presents the compensation awarded or due to the
members of the Executive Board and the Supervisory Board in fiscal 2023. Both, the Supervisory Board and the
Executive Board have jointly prepared the Compensation Report in accordance with section 162 of the German
Stock Corporation Act (AktG) as well as the German Corporate Governance Code in the version dated April
28, 2022. It is formally audited in accordance with section 162 (3) AktG as well as materially audited by
Deloitte Wirtschaftsprüfungsgesellschaft GmbH. The Compensation Report and the corresponding audit opinion
can be found on our website.
196 Capital Structure and Corporate Bodies of Merck KGaA
The legislation and regulations relating to the Compensation Report are geared toward the situation at a
German stock corporation ("Aktiengesellschaft" or "AG") and do not take into consideration the special
characteristics of a corporation with general partners ("Kommanditgesellschaft auf Aktien" or "KGaA"), such as
our company. Major differences between the two legal forms exist in terms of liability and management. In the
case of an AG, only the AG is liable as a legal entity, whereas the general partners of a KGaA also have
unlimited personal liability for the company's obligations (section 278 (1) AktG). Unlike the management board
members of an AG, the members of the Executive Board of our company are personally liable partners of both
Merck KGaA, Darmstadt, Germany, and the general partner E. Merck KG, Darmstadt, Germany, and not merely
employed members of a corporate board. Given the structural differences between an AG and a KGaA, several
recommendations of the German Corporate Governance Code apply to a KGaA only in a modified form.
In the course of the Annual General Meeting 2023 and in numerous discussions thereafter, Merck received
feedback from investors, all relevant shareholder associations and proxy advisors on the compensation of the
Executive Board as well as the presentation of the Compensation Report.
Fiscal 2023 was a challenging year, which ended with a satisfactory business result despite difficult
macroeconomic conditions. These challenging conditions were also evident in the share price development.
Ultimately, the diversified business model had a positive impact on our business results. The Life Science
business sector faced a noticeable decline in demand for products and services related to the Covid-19
pandemic and the destocking of our Process Solutions customers, which lasted longer than expected. At the
same time, the Electronics business sector was impacted by a prolonged downcycle in Semiconductor Solutions
and low customer utilization in Display Solutions. The Healthcare business sector made a positive contribution
to the company's success in fiscal 2023. Our new healthcare products led to robust growth. In particular, sales
of multiple sclerosis drugs and oncology drugs achieved good sales in our opinion.
166
Summary
-
Compensation for fiscal 2023
Corporate Governance Compensation Report
The exchange with our investors is an important and continuous process. During the Annual General Meeting 2024
and also as part of the review of the compensation system for the Annual General Meeting 2025, we will regularly
continue to obtain feedback and stay in dialogue with investors. In this way, we can ensure that we receive
constructive and valuable feedback, which can be considered in the upcoming review and potential adjustment to
the compensation system and decisions of the Personnel Committee. Accordingly, we will report on the feedback
received in the next compensation report.
In addition, we have again decided to follow the presentation and interpretation of section 162 (1) of the
German Stock Corporation Act (AktG) chosen last year for the compensation tables. In this context, we also
monitor the practices of other companies to align with common market practice where necessary.
Some discussions with investors focused on the level of the compensation of the Executive Board compared
with other companies. In this context, it should be noted that the position of the members of the Executive
Board as personally liable partners does explain a different level and structure of compensation. On a regular
basis, we initiate a compensation benchmark to assess the level of our compensation. To consider, the criteria
of country, size and industry as well as Merck's global business activities and the various business sectors, two
peer groups were used for comparison: the DAX® companies and a peer group of international competitors. The
latter peer group of international competitors represents our three business sectors (Life Science, Healthcare
and Electronics) and includes companies which are headquartered in Europe as well as in the USA.
Review of fiscal 2023
To provide a complete overview of the compensation system, we continue to describe the most important
components of the Compensation Report in detail and at the same time have improved the presentation.
In addition, we have further clarified the description of the maximum compensation, illustrating how the
different compensation components are limited.
The Combined Management Report for 2022 initially forecast a downturn in net sales in fiscal 2023 due to the
transfer of operating activities and the fact that the product-related sales of the transferred business sectors
are no longer recognized. The remaining business sector was expected to see a similar level of sales to 2022.
Net income was forecast to be slightly higher than in 2022.
At the Annual General Meeting 2023, the Compensation Report 2022 was approved with a voting result of
84.63% in accordance with section 120a (4) AktG. Only shareholders of Merck KGaA are entitled to vote at the
Annual General Meeting.
Approval of the Compensation Report 2022
In fiscal 2023, Marcus Kuhnert stepped down as Chief Financial Officer and Member of the Executive Board of
Merck as of June 30, 2023. On July 1, 2023, Helene von Roeder took over the position of Chief Financial Officer.
Since 2019, she had been a member of both the Supervisory Board of Merck KGaA, Darmstadt, Germany, and
the Board of Partners of E. Merck KG, Darmstadt, Germany. During that time, she was also Chair of the Audit
and Finance Committee. She has resigned from these mandates and left the Supervisory Board effective
April 17, 2023. Barbara Lambert was appointed to the Supervisory Board with effect from August 11, 2023.
The profit sharing ensures that the Members of the Executive Board act in line with the interests of both the
shareholders and owners. It is based on the average of the profit after tax of E. Merck Group, Darmstadt,
Germany, of the current year and the two previous years, to ensure a long-term orientation. Thus, the profit
sharing for the 2023 financial year considers the very successful years 2021, 2022 as well as the current
challenging year 2023.
165
Corporate Governance Compensation Report
For the members of the Executive Board, the contractually agreed compensation remained unchanged and
there were no increases in fiscal 2023. In 2021, the LTIP was revised with a term of four years (previously
three years). This extension of the performance cycle results in a one-time payout gap. As a consequence, the
members of the Executive Board will not receive any payout from the Long-Term Incentive Plan for fiscal 2023
and there will also be no other payment to bridge the gap. We will report on the target achievement and payout
of the LTIP tranche 2021, which runs until December 31, 2024, in the next Compensation Report.
As in the previous year, we are following suggestions from our investors, we are publishing the target corridor
of the respective key performance indicators of the sustainability factor for the second time at the beginning of
the performance cycle of the Long-Term Incentive Plan (LTIP).
Deviations of actual business development in fiscal 2022 from the previously
reported guidance
1,091
162
For fiscal 2023, no payment will be made from the LTIP. In 2021, an LTIP was introduced, with a performance
period of four years in total (previously three years). As a result, there is a one-time payout gap without
bridging payments. The LTIP is therefore not considered in the following graphics below. As a result, the
maximum values represent the sum of the base salary, additional benefits and service costs for fiscal 2023 as
well as the maximum amount of profit sharing.
Production and site operations
Administration
Average number of employees during the year
Personnel
The average number of employees by functional area:
Merck KGaA had 3,924 employees as of December 31, 2023 (2022: 8,485). The year-on-year decline of 4,561
employees was largely attributable to the transfer of operating activities (see "Effects of material company
agreements on the net assets, financial position, and results of operations”).
Personnel
Research
For fiscal 2023, we are proposing to the Annual General Meeting the payment of a dividend of € 2.20 per share.
Research and development (R&D) expenditure declined to € 69 million in fiscal 2023 (2022: € 289 million),
largely as a result of the transfer of operating activities (see “Effects of material company agreements on
the net assets, financial position, and results of operations"). Merck KGaA continues to recognize
expenses for global R&D services.
Research and development
The reduction in provisions was due in particular to the lower level of pension provisions, which primarily resulted
from pension payments and employees being transferred to other legal entities within the Merck Group.
Merck KGaA is also financed via the Group financing company, Merck Financial Services GmbH, Darmstadt, which
provides Merck KGaA with sufficient financial resources and hence ensures liquidity. Other liabilities rose by
€ 686 million and primarily relate to current loans and clearing account liabilities in respect of Merck Financial
Services GmbH, Darmstadt, in the amount of € 14,476 million (2022: € 13,963 million). Financial liabilities of
€ 2,476 million relate to bonds issued in previous years to finance the acquisitions of Sigma-Aldrich and Versum
Materials, Inc., United States, in particular. The € -275 million reduction in financial liabilities was attributable to
the repayment of bonds, which resulted in an increase in other liabilities from intragroup financing. Additional
information on the financing conditions and maturity structure of the bonds can be found in Note (21) "Financial
liabilities" of the Notes to the Financial Statements in accordance with HGB.
Merck KGaA was financed by equity in the amount of € 5,481 million (2022: € 5,479 million). This corresponds to
an equity ratio of 21.2% (2022: 21.3%). Equity increased in particular as a result of the net income generated in
fiscal 2023, which offset the dividend payments made during the year.
161
Additional Information on Merck KGaA in Accordance with the German Commercial Code (HGB)
Combined Management Report_
Dividend
Logistics
Marketing and sales
Other
Combined Management Report_ Additional Information on Merck KGaA in Accordance with the German Commercial Code (HGB)
As the parent of the Merck KGaA Group, Merck KGaA is largely subject to the same opportunities and risks as
the Group. Merck KGaA participates in these risks and opportunities via its equity investments and subsidiaries.
This can have consequences for its investment income or the valuation of shares in subsidiaries. More
information can be found in the Group "Report on Risks and Opportunities”.
8,375
4,008
122
74
523
43
614
66
341
2,940
869
3,085
2,615
2022
2023
Risks and opportunities
Total
Forecast for Merck KGaA
Summary of the compensation for the Executive Board members' performance up to December 31,
2023 (see page 8 below “Executive Board Compensation for 2023")
1.3% 9.4%
Min -
Performance-
related
compensation
Pension entitlement
compensation
Additional benefits
Base salary
performance-
related
Non-
The following diagram provides an overview of all the elements of the compensation system for Executive Board
members:
169
Corporate Governance Compensation Report
The performance-related compensation elements - profit sharing and the Long-Term Incentive Plan
on a multi-year performance period and as such are fully oriented toward the company's long-term
development. In addition, there is a strong reference to the company's share price, to provide for special focus
on our shareholders' interests. The key performance indicators selected for variable compensation are derived
from the corporate strategy and form part of our central controlling system. In this way, the variable
compensation of the Executive Board members is used as a strong steering tool to ensure a focus on our
objective of long-term profitable growth accompanied by strong cost discipline.
are based
-
Executive Board compensation includes three main components: base salary, profit sharing and the Long-Term
Incentive Plan. It is complemented by contributions to the company pension plan as well as additional benefits.
Additional compensation arrangements also exist for the members of the Executive Board, in particular malus
and clawback provisions and a Share Ownership Guideline.
Compensation components
Overview of the structure of the compensation
system
168
Corporate Governance Compensation Report
The Personnel Committee regularly reviews the amount and structure of the Executive Board compensation by
referring to the peer groups described and with the assistance of an independent compensation consultant.
The international peer group was defined considering the size, business area and geographic location of the
headquarters of the respective competitors. Overall, the peer group offers an appropriate ratio of companies
headquartered in Europe and the United States as well as a balanced coverage of the Life Science, Healthcare
and Electronics business sectors. Based on the size criteria of sales, number of employees and market
capitalization, Merck positions itself around the median of this international peer group.
• UCB
Thermo Fisher
• Novartis
• Philips
• GlaxoSmithKline
• Biogen
⚫ Entegris
• Bayer
Profit sharing
• Key performance indicator: Three-year average of the profit after tax
of the E. Merck Group
• Consideration of individual performance and individual contribution to
achieving the sustainability goals via the adjustment factor in a range from
0.8 to 1.2 based on the defined criteria set
• Individual, absolute capped amount
In addition, as compensation for the loss of entitlements to variable compensation from his previous
employment relationship, Peter Guenter received upon the initial appointment in fiscal 2021 a commitment to
compensation totaling € 1,500,000.00. The entitlement has been verified in the context of his initial
appointment based on supporting documents and the amount has been determined accordingly. The
compensation is to be paid in cash in four equal installments. The first installment was paid on July 1, 2021, the
second installment was paid on July 1, 2022, and the third installment was paid on July 1, 2023. The final
installment will be paid out on July 1, 2024, provided the employment relationship continues.
The additional benefits mainly include company cars for personal use, contributions to insurance policies and
expenses for personal protection.
Additional benefits
As base salary, the members of the Executive Board receive contractually fixed performance-independent
amounts that are paid in the form of 12 equal monthly installments. There was no increase of the base salary in
fiscal 2023.
Base salary
Performance-independent compensation
In addition, the compensation for which the members of the Executive Board have provided the underlying
service in full by December 31, 2023, but whose payment will be made in the following year, is disclosed on a
voluntary basis. This enables transparent information and ensures the link between performance and
compensation in the fiscal year. This year, the voluntary reporting only concerns profit sharing for 2023. The
Personnel Committee has provisionally determined the payout amounts of the profit-sharing by resolution and
informed the members of the Executive Board accordingly. The final amount will be paid to the members of the
Executive Board after the consolidated financial statements of E. Merck KG have been released. After amending
the compensation system of the Executive Board effective January 1, 2021, an additional one-year holding
period was introduced for the LTIP, which applies for the first time to the LTIP Tranche 2021. Therefore, the
performance period of the LTIP tranche 2021 will run until the end of fiscal 2024 and payout will be made in
April 2025. The LTIP tranche 2020, however, ran until the end of fiscal 2022 and was paid out in April 2023. As
a result, payout of the LTIP tranche 2021 can only be reported on a voluntary basis in the Compensation Report
2024. The obligation to report on the LTIP tranche 2021 applies for the first time in the Compensation Report
2025.
The following section reports on the compensation awarded or due in accordance with section 162 (1) AktG.
Accordingly, the following sections contain all amounts paid to individual members of the Executive Board
(active and former members) in fiscal 2023 (compensation awarded) as well as all amounts legally due but not
yet received (compensation due).
The performance-related and performance-independent components of the compensation system for the
Executive Board in fiscal 2023 are fully consistent with the Executive Board compensation system approved by
the Annual General Meeting 2021 with a voting result of 87.08%. The compensation system for the Executive
Board is published on our Website and applies to all members of the Executive Board since January 1, 2021.
The Personnel Committee ensures compliance with the compensation system by deciding by resolution on the
parameters of the compensation elements (e.g. target setting, determination of target achievement, etc.) as
well as on the amounts to be paid out.
Executive Board compensation for 2023
170
Corporate Governance Compensation Report
• Four-year holding period
• Sartorius
• Mandatory personal investment amounting to one third of the net payment
of the profit sharing in Merck shares
• In the event of other grossly non-compliant or unethical behavior or behavior
or actions that are contrary to our corporate values.
• Violation of internal regulations and guidelines (Merck Code of Conduct),
laws or other binding external specifications in the area of responsibility or
considerable violations of due diligence within the meaning of section 93 of
the German Stock Corporation Act
Potential applications:
Malus & Clawback
Other
components
• Four-year performance period with three-year achievement period and
subsequent one-year holding period
• Absolute capped amount totaling 250% of the individual grant
goals "Dedicated to human progress", "Partnering for sustainable business
impact" and "Reducing our ecological footprint"
Sustainability factor ranging from 0.8 to 1.2 based on the sustainability
•
• Key performance indicators: share price performance relative to the DAX®
(50%), EBITDA pre margin (25%), organic sales growth (25%)
• Performance Share Plan based on virtual shares (Merck Share Units)
Merck Long-Term Incentive Plan
Share Ownership Guidelines
• MSD
• DuPont
• AstraZeneca
Base salary
Non-performance-related
Compensation for fiscal 2023¹ - Chronological overview
1 The average calculation includes the compensation of Kai Beckmann, Peter Guenter and Matthias Heinzel. Peter Guenter's compensation payment is not
illustrated. Since Marcus Kuhnert left the Executive Board and Helene von Roeder became a member of the Executive Board during the year, their pro-rated
compensation would distort the illustration and have therefore not been considered.
⚫ 1/3 of profit sharing 2023 (to be held in shares for 4 years)
2/3 of profit sharing 2023 (free disposal)
• Service cost
• Additional benefits
• Base salary
23%
5,245
5,359
46%
Additional benefits
0.3% 8.4%
2023 -
1,659
Max -
Min
Ø further EB members¹
22%
45%
22%
6,814
2023-
7,037
Max
2,227
23%
Belén Garijo
Service cost
Profit sharing 2023
• Sanofi
• Lonza
• Danaher
• Air Liquide
+
DAX®
• Roche
• Infineon
• Bio-Rad
⚫ Agilent
International peer group
German
peer group
In addition to structuring the Executive Board compensation system, the Personnel Committee is responsible
for defining the specific amounts of compensation paid to the members of the Executive Board. The
compensation paid to the members of the Executive Board considers the responsibilities and duties of the
individual Executive Board members and in particular, their status as personally liable partners, their individual
performance and the economic situation as well as the performance and future prospects of the company.
Furthermore, Executive Board compensation is oriented toward the external peer environment of our company,
which comprises the DAX® companies as well as a group of selected international competitors:
Performance-related
At our company, unlike at publicly listed German stock corporations, it is not the Supervisory Board but the
Board of Partners of E. Merck KG, Darmstadt, Germany, that is responsible for designing and reviewing the
compensation system and deciding on the amount and composition of compensation paid to Executive Board
members. The Board of Partners has assigned this task to its Personnel Committee. As a result, the Personnel
Committee is responsible for the development and regular review of the compensation system, i.e. structuring
and examining of the performance-independent and performance-related compensation elements. The
Personnel Committee also takes into account the compensation system for managers and employees below
Executive Board level to ensure consistency and a uniform steering effect between the compensation systems.
Furthermore, the Personnel Committee is responsible for defining the annual targets and thresholds of the key
performance indicators for the performance-related compensation elements.
Determining the compensation of the Executive
167
Corporate Governance Compensation Report
1 In 2021, the revised LTIP with a performance cycle of four years (previously three years) was introduced which resulted in a one-time payout gap without
bridging payments. The LTIP tranche 2021 runs until December 31, 2024, and will be paid out in April 2025 due to the one-year holding period. That is the
reason why the LTIP tranche 2021 is not included in the chronological overview.
1/3 of net payout to be held in
Merck shares for at least four years
Three years performance cycle
2027
2026
2025
2024
2023
2022
2021
Board
In fiscal 2023, we continued to focus on achieving our three core sustainability targets. In the long term, we
want to fully integrate sustainability into our value chains, contribute to human progress for more than one
billion people through sustainable science and technology, continue to reduce our resource consumption, and
achieve climate neutrality. To encourage the implementation of our long-term sustainability targets,
corresponding key sustainability indicators and targets were also integrated in the sustainability factor of the
Long-term Incentive Plan granted in 2023 (LTIP 2023).
Moreover, for the determination of the specific compensation amounts, the relations between Executive Board
compensation, top management compensation and workforce compensation will be considered also based on a
multi-year assessment. Top management is defined as senior levels of management below the Executive Board
in Germany. The average compensation of an employee in full-time employment in Germany is considered in
the determination of the compensation of the remaining staff.
Performance of
The resulting final number of MSUs and the payout amounts of the LTIP tranche 2020 are shown in the
following table.
1 Cap of 150% for the performance indicator "Share price performance relative to the DAX®" was reached.
135.4%
110.0%
8.7%
11.1%
8.1%
131.7%
LTIP 2020 summary
30.5%
28.6%
25.6%
150.0%
58.6%
50.0%
0.0%
-20.0%
Total target achievement
31.6%
5.1%
Reference
Merck share
price at the
beginning
21,883
16,159
1,705
(until July 13, 2020)
Udit Batra
2,226
28,942
21,371
Grant amount
2,255
Stefan Oschmann
Payout amount
(€ thousand)¹
Reference
Merck share
price at the end
(in €)
MSUS
Total target Final number of
achievement
Number of
provisionally
granted MSUS
(in €)
(€ thousand)
(until April 30, 2021)
633
(weighting: 25%)
(weighting: 25%)
805.0
875.0
965.0
Greenhouse gas emissions in Scope 1+2 worldwide (in kt)
100%
92%
85%
Relevant suppliers with a valid sustainability assessment (% of supplier spend)
Reducing our ecological footprint
"Dedicated to human progress"
80%
65%
Relevant suppliers with a valid sustainability assessment (% of all relevant
suppliers)
Partnering for sustainable business impact
Number of people treated with pharmaceutical products of Merck Life Science
(in million)
650
609
555
Number of people treated as part of the schistosomiasis control program (in
million)
73%
Organic sales growth
We are convinced that with the help of science and technology, we can contribute to solving many global
challenges. In this context, our Healthcare business sector measures how many people worldwide will be
treated with our company's medical products. On the one hand, we look at the number of people treated
with products from the Healthcare business sector and, on the other hand we consider patients who are
offered treatment with our praziquantel tablets as part of the schistosomiasis control program. For the LTIP
tranche 2023, an additional sustainability key indicator has been introduced that relates to our Life Science
business sector. It covers people who are treated with drugs and medical products which are that are
manufactured using key Merck Life Science technologies and products. We intend to continuously increase
this sustainability goal and thus contribute to a significant improvement in medical care and the health
status of as many people as possible.
We measure our progress in embedding sustainability in our supply chains. We achieve this by increasing
the transparency of our supply chains and subjecting more suppliers to a sustainability assessment. We are
focusing particularly on suppliers for which we see a sustainability risks in the supply chain and those
suppliers who cover a relevant share of our supplier spend. In connection with this sustainability
assessment, it is important for us to increase the number of suppliers with a valid sustainability
assessment.
EBITDA pre margin
(weighting: 50%)
Share price performance relative to the DAX®
Target
achievement¹
value
Actual achieved
Upper target
corridor limit
Target
"Partnering for sustainable business impact"
Lower target
corridor limit
The targets and thresholds, the actual amounts, and the resulting target achievement for the LTI tranche 2020
are as follows:
The LTIP tranche 2020 was structured according to the former model without a one-year holding period and
without a sustainability factor. Consequently, the LTIP tranche 2020 has been paid out in April 2023.
The LTIP tranche allocated in fiscal 2021 was still without a sustainability factor but already included the one-
year holding period. Accordingly, the performance cycle is four years, consisting of the target achievement
cycle of three years and the one-year holding period which will continue to be influenced by the share price
development. Consequently, the target achievement cycle started on January 1, 2021, and was running until
December 31, 2023. The final payout amounts of the LTIP Tranche 2021 will be determined after calculating the
base price following the holding period and will be paid out in April 2025. The payout amounts will be published
in the next compensation report.
Target Achievement Long-Term Incentive Plan
179
Corporate Governance Compensation Report
On our path to climate neutrality, we have already joined the Science Based Targets Initiative and aim to
reduce both direct (Scope 1) and indirect emissions (Scope 2) by 50% by 2030 compared with 2020. This
target is to be achieved through the reduction of process-related emissions, energy efficiency measures,
and increased purchase of electricity from renewable sources. Particularly in the case of process emissions
(Scope 1), we aim to significantly reduce emissions by using new technologies.
"Reducing our ecological footprint"
LTIP 2020 target achievement
Maximum
105.53
173.46
Share holding obligation based on SOG (in € thousand)¹
Helene von Roeder
Marcus Kuhnert
Matthias Heinzel
Peter Guenter
Belén Garijo
Kai Beckmann
Share Ownership Guideline
The following table illustrates the investment volume of the members of the Executive Board in accordance with
the SOG. The numbers show the shareholding obligation arising from the profit-sharing. No conclusions can be
drawn as to the individual shareholdings.
1,529
The Share Ownership Guideline promotes an even stronger alignment of the interests of the members of the
Executive Board with the sustainable interests of our shareholders and additionally increases the corporate
responsibility of the members of the Executive Board in addition to their status as general partners.
Share Ownership Guideline
180
Corporate Governance Compensation Report
The performance cycle of the LTIP tranche 2022 is still running until December 31, 2025, and will be paid out in
April 2026.
1 Payout capped at 250% of the grant value. A pro-rata payout has been made for Stefan Oschmann and Udit Batra. The payout for Belén Garijo was
reduced to ensure compliance with the cap on direct compensation.
450
6,309
6,875
Since 2017, the members of the Executive Board are obliged to invest in and hold shares of Merck KGaA,
Darmstadt, Germany, as part of the Share Ownership Guideline (SOG) valid until fiscal 2021. Since the
introduction of the new compensation system at the beginning of fiscal 2021, the share ownership obligation
has been linked to the variable compensation element of profit sharing. Under the revised SOG, members of
the Executive Board are required to hold one-third of the net profit-sharing payout in shares for at least four
years. The shareholding obligation thus builds up gradually over the first four fiscal years after the introduction
of the new compensation system. The aim is that the Chairperson holds 200% of the base salary and the
members of the Executive Board to hold 100% of the base salary in shares of Merck KGaA. A corresponding
investment was made after payout of the profit sharing 2022 in fiscal 2023 as part of an automated purchase
via an external provider.
439
From profit
sharing 2021
1,224
From profit
sharing 2023
Through their status as personally liable general partners of Merck KGaA, Darmstadt, Germany, and
E. Merck KG, Darmstadt, Germany, the Executive Board members bear a unique entrepreneurial responsibility.
This is also reflected by the malus criteria set forth in profit sharing and by the German statutory regulations on
liability for damages stipulated in section 93 of the German Stock Corporation Act (AktG). In order to take even
greater account of the prominent position of entrepreneurial responsibility in compensation, a clawback
provision is implemented for the LTIP. Cases in which the clawback provision may be applied include violations
of internal rules and regulations (Code of Conduct), legislation, other binding external requirements in
responsibility, significant breaches of duty of care within the meaning of section 93 AktG, and other grossly
non-compliant or unethical behavior or actions that are contradictory to our company values. In these cases,
amounts that have already been allocated under the Long-Term Incentive Plan may be retained. The Personnel
Committee is entitled to demand the repayment of profit sharing and LTIP payouts from a member of the
Executive Board if it subsequently transpires that the payout was made wrongfully, either in full or in part. For
example, this is the case when targets are not actually met or are not met to the extent assumed when the
payout was calculated due to incorrect information being applied. The extent of these claims for restitution is
based on section 818 of the German Civil Code (BGB). The Personnel Committee may agree deadlines for the
assertion of claims for restitution with the members of the Executive Board.
Malus and clawback provisions
1 Gross amounts from profit sharing. Shareholding obligation is calculated on the respective net amounts.
Total
4,216
3,126
3,476
3,216
2,405
2024
sharing for
fiscal year
1,055
111 11
From profit
sharing 2022
In % of Annual
Base Salary
1,111
1,237
1,184
1,237 payout of profit
1,184
1,064
1,463
From profit
sharing 2024
Investment is
made after
135.4%
435
7,057
171
Corporate Governance Compensation Report
2,939
16,942
12,510
1,320
(until June 30, 2023)
Marcus Kuhnert
As part of the initial appointment as a member of the Executive Board, compensation commitments were
agreed with Helene von Roeder to compensate for the loss of entitlements to both short-term and long-term
variable compensation from her previous position on the Management Board at Vonovia SE. The loss of variable
compensation claims against Vonovia SE were proven on the basis of corresponding supporting documents. The
compensation for the loss of the short-term incentive for the year 2023 covers the period until her appointment
to the Executive Board of Merck KGaA (January 1, 2023 to June 30, 2023) and amounts to € 257,125. The
amount will be paid out in fiscal 2024. The compensation for the loss of long-term incentive fiscal 2023 covers
the period until her appointment to the Executive Board of Merck KGaA (January 1, 2023 to June 30, 2023) and
is based on the Long-Term Incentive Plan Rules of Vonovia SE for the year 2023, whose performance period
runs from the beginning of 2023 to the end of 2026. As a corresponding compensation payment, 50% of the
gross amount that would have resulted from Helene von Roeder's complete entitlement to the long-term
incentive for the year 2023 is to be reimbursed. However, the maximum payout amount according to Vonovia's
Long-Term Incentive Plan Rules will be considered. Therefore, the amount can only be calculated after the
publication of the 2026 annual financial statements of Vonovia SE and will be paid out in 2027. Should it not be
possible to calculate the payout amount, 50% of the allocation value of Vonovia's long-term incentive for 2023
will be paid out (€ 618,750). In this way, it is ensured that Helene von Roeder is only compensated for the
actual loss of long-term incentive. The entitlement to the compensation payment has arisen in full. In fiscal
2023, provisions of € 695,549 were made regarding this compensation.
3,910
18,670
1,970
Belén Garijo
3,406
19,637
14,500
1,530
Kai Beckmann
25,284
450
Pension entitlement
After leaving the Executive Board, Marcus Kuhnert retains a vested entitlement to the pension account, which
will be granted to him upon the occurrence of the pension event. In fiscal 2023, no pension contributions were
increased.
7,858
638
638
650
2022
2023
2022
2023
The members of the Executive Board are granted a pension obligation as a direct commitment. A fixed amount
is paid into a benefit account every year and interest is paid at the applicable statutory maximum technical
interest rate for the life insurance industry in accordance with section 2 (1) of the German Regulation on the
Principles Underlying the Calculation of the Premium Reserve (DeckRV). Once the pension event occurs, the
amount in the benefit account is paid out either in ten annual installments or as a one-time payment. The
pension event occurs upon retirement, in the event of occupational disability or death.
Contribution level
Kai Beckmann
Belén Garijo
€ thousand
as of December 31
Service cost
Present value of the pension obligation
IAS 19
Pension obligations
Peter Guenter
Neither the malus provision nor the clawback provision were exercised in fiscal 2023.
Target
Number of people treated with Merck Healthcare products (in million)
Helene von Roeder (since July 1, 2023)
1 Payout will be pro-rated based on the termination agreement.
176
Reference Merck
share price at the
Grant amount
(€ thousand)
beginning
(in €)
Number of
provisionally
granted MSUS
Marcus Kuhnert (until June 30, 2023)¹
Maximum payout
2,300
13,260
5,750
1,715
9,887
4,288
1,900
10,954
(€ thousand)
4,750
Matthias Heinzel
Kai Beckmann
"Partnering for
sustainable
EBITDA pre
margin in
relation to
target value
business impact"
-25%
"Reducing our
ecological footprint"
Organic sales
growth in
Peter Guenter
25%
target value
Amount paid
out in €
(0% - 250%
of the grant
in €)
Calculation of the MSUS
As part of the LTIP, members of the Executive Board are provisionally granted a certain number of virtual
shares, so-called share units of Merck KGaA, Darmstadt, Germany ("MSUs"). The number of MSUS is calculated
as follows: An individual grant in Euros is set for each Executive Board member. Every year, this grant is
divided by the definitive reference share price at the beginning of the performance cycle, resulting in the
number of MSUs that the respective member is provisionally entitled to receive.
Corporate Governance Compensation Report
In fiscal 2023, the allocation of the LTIP tranche 2023 was made on the basis of the following parameters:
LTIP Tranche 2023 allocation
Belén Garijo
relation to
vs. the DAX®
173.46
10,954
Corporate Governance Compensation Report
Achievement
150%
100%
0%
0%
-20%
0%
100%
50%
Target value
-x% points
+x% points
Actual value of EBITDA pre margin
or organic sales growth
177
Non-financial key indicators of the sustainability factor
With the introduction of the sustainability factor in fiscal 2022, our sustainability strategy also becomes
incorporated into the LTIP. On the basis of the sustainability goals ("Dedicated to human progress", "Partnering
for sustainable business impact" and "Reducing our ecological footprint"), the Personnel Committee defines
corresponding specific and measurable sustainability key indicators as well as associated target and threshold
values at the beginning of each tranche of the LTIP. These values are used to calculate target achievement at
the end of the relevant target achievement cycle. The following sustainability criteria were defined for the
selection of the sustainability key indicators:
Relevance and influence of the sustainability key indicators on the three overarching sustainability goals of
the sustainability strategy
•
Internal and external influence of the sustainability key indicators by management
Performance of the Merck
share price vs. the DAX®
1,900
150%
The number of MSUs actually allocated after the end of the target achievement cycle is based on the following
target achievement curves. The targets and thresholds for the key performance indicators of the EBITDA pre
margin and organic sales growth are defined by the Personnel Committee at the start of the performance cycle
and subsequently published in the Compensation Report.
4,750
1,400
8,071
3,500
700
4,036
1,750
The number of MSUs actually allocated to the Executive Board members after the end of the target
achievement cycle depends on the development of the financial performance indicators and the sustainability
factor during the three-year target achievement cycle.
Achievement
Based on the three financial performance indicators, the number of MSUs allocated may be between 0% and
150% of the provisionally granted MSUs. The resulting number of MSUs is then multiplied by the sustainability
factor.
The target achievement cycle is followed by a one-year holding period. The final payout amount may be
between 0% and a maximum of 250% of the amount originally granted and depends on the number of MSUS
actually allocated and the reference share price at the end of the performance cycle.
Financial key performance indicators
The relevant financial key performance indicators are:
The performance of the share price of Merck KGaA, Darmstadt, Germany, compared with the performance
of the DAX® with a weighting of 50%,
•
The EBITDA pre margin as a proportion of a defined target value with a weighting of 25%, and
•
The organic sales growth of the Merck Group as a proportion of a predefined target value with a weighting
of 25%.
The sustainability factor target achievement can range between 0.8 and 1.2 and is determined by the
predefined sustainability key indicators. Thus, the total number of MSUs actually allocated can amount to a
maximum of 180% of the provisionally granted MSUs.
Minimum
"Dedicated to
human progress"
share price
1 Payout amount of profit sharing in relation to the three-year average after tax.
2 Gross amount investment is based on net amount.
3 Pro-rated for January 1, 2023 until June 30, 2023.
4 Pro-rated for July 1, 2023 until December 31, 2023.
The profit-sharing 2023 will be paid out in April 2024, while one-third must be held in shares of Merck KGaA,
Darmstadt, Germany, for at least four years. Further details of the investment obligation can be found under
"Share Ownership Guideline”.
In fiscal 2023, the profit sharing for fiscal 2022 already explained in detail in the Compensation Report 2022
was paid out, which is thus reported as compensation awarded or due in fiscal 2023 in accordance with
section 162 of the German Stock Corporation Act (AktG). Further details can be found in the following table
from the previous year:
Profit sharing 2022 summary
Three-year
522
average profit
after tax of the
E. Merck Group
(€ million)
Performance
factor for
individual
performance
Payout amount (€
thousand)
thereof share
holding obligation
(1/3)
(€ thousand)²
Belén Garijo
Kai Beckmann
Peter Guenter
Matthias Heinzel
1.60
1.0
4,390
Average
individual profit-
sharing rate 2022
(in per mill)1
1,463
1,567
Sustained impact to support long-term solutions and not incentivize short-term actions
Dedicated to human progress
Sustainability Goal/Key Indicator
The following table shows the target corridor ex ante for the respective sustainability key indicators of the three
overarching goals for the 2023 LTI tranche.
178
Corporate Governance Compensation Report
Greenhouse gas emissions Scope 1+2
Percentage of relevant suppliers (in terms of number and supplier spend)
that are covered by a valid sustainability assessment
People treated with our Healthcare products (including schistosomiasis
30% control program) and pharma products enabled by our Life Science business
sector
1.0
Sustainability Key Indicator
Reducing our ecological footprint
30%
Partnering for sustainable business
impact
Dedicated to human progress
Weighting
Sustainability Goal
The Personnel Committee has defined the following sustainability key indicators and weightings for the 2023
tranche of the LTIP:
In addition, the Personnel Committee determines the weighting of the individual sustainability goal for each
tranche of the LTIP to emphasize priorities.
40%
50%
1.17
3,193
price at the
beginning
FY 2023
FY 2024
FY 2025
FY 2026
Performance cycle
Target achievement cycle
Holding period
Grant in €
Reference
Merck share
Sustainability factor
(0.8 - 1.2)
actually
achieved
(0% - 180%)
Reference
Merck
share price
at the end
0% - 200%
Number of
provisionally
granted
MSUS
Financial targets
(0% - 150%)
•
the Merck
Number of
MSUS
1.0
The Long-Term Incentive Plan is designed as a virtual performance share plan. It is based on a four-year
future-oriented performance cycle that is composed of a three-year target achievement cycle and, since the
2021 tranche, a subsequent one-year holding period. In addition to three financial performance indicators, the
LTIP has taken sustainability targets into account since fiscal 2022. These targets are linked to a sustainability
factor. The sustainability factor has a range of 0.8 to 1.2 and can increase or reduce the target achievement
resulting from the financial key performance indicators by up to 20%. The following graphic illustrates the
calculation of the Merck Share Units (MSUs) as well as the functionality of the sustainability factor.
Long-Term Incentive Plan (LTIP)
1,064
2,735
1.30
1.0
3,552
1,184
1.30
1.0
Long-Term Incentive tranche for fiscal 2023
3,552
Marcus Kuhnert
1.09
1.0
2,993
998
1 Payout amount of profit sharing in relation to the three-year average after tax.
2 Gross amount investment is based on net amount.
Corporate Governance Compensation Report
175
1,184
.
Good measurability and operationalization
Profit after tax of the E. Merck Group
2021
3,003
2022
3,288
2023
2,760
3,017
(€ million)
Three-year average
174
Profit after tax of the E. Merck Group
€ million
2020
1,915
2021
3,003
2022
3,288
Corporate Governance Compensation Report
2023
The three-year average that is relevant for fiscal 2023 was based on the profit after tax generated by the
E. Merck Group in 2021, 2022 and 2023 as illustrated in the following graphic and table:
Three-year average of the profit
after tax of the E. Merck Group
(in € billion)
to be held in Merck shares
for at least four years
Three-year average of the profit
after tax of the E. Merck Group
FY 2022
FY 2023
Payout in €
Adjustment factor
The maximum profit-sharing payment is capped individually. It amounts to € 4,810 thousand for Belén Garijo,
€ 3,500 thousand for Kai Beckmann, € 3,900 thousand for Peter Guenter, € 3,900 thousand for Matthias
Heinzel and € 3,300 thousand for both Marcus Kuhnert and Helene von Roeder. In fiscal 2023, the maximum
payout for Marcus Kuhnert is € 1,650 thousand due to leaving the Executive Board on June 30, 2023, and for
Helene von Roeder it amounts also to € 1,650 thousand due to her entry on July 1, 2023.
for individual
is immediately available
An average profit after tax of at least € 0.75 billion must be generated for the profit-sharing payment to be made.
This minimum threshold reflects the "pay-for-performance" approach of the compensation system. If the profit
exceeds this threshold, the individual profit-sharing rates are staggered as illustrated in the following graphic:
Profit sharing
Maximum limit
0
0.75
1.75
2/3
1/3
2,760
2,735
1,529
1,111
$1111
1.10
1.0
3,333
1.23
3,712
thereof
shareholding
obligation (1/3)
(€ thousand)²
1,237
1.23
1.0
0.52
1.0
3,712
1,567
1,237
522
0.52
3,017
Three-year average profit after tax of the E. Merck Group
(2020-2022)
4,587
Performance
factor for
individual
performance
Three-year average profit after tax of the E. Merck Group
(2021-2023)
3,017
The Personnel Committee has set the adjustment factor at 1.0 for all members of the Executive Board, taking into
account individual performance and contribution to the sustainability targets against the background of the agreed
criteria. This is in recognition of the achievements of the members of the Executive Board for fiscal 2023. The
Executive Board faced many challenges as a result of difficult macroeconomic conditions, headwinds from
competitors, and the fact that studies with Evobrutinib did not achieve the desired success in a late test phase. The
Personnel Committee acknowledges that, thanks to the commitment of the members of the Executive Board, fiscal
2023 could be closed satisfactorily under the given conditions. In addition to the economic aspect, the members of
the Executive Board continued to focus on our three key sustainability targets. Sustainable leadership and well-
thought-out decisions by the Executive Board have ensured that the Merck Group remains focused on long-term
growth.
Considering the relevant three-year average of the E. Merck Group's profit after tax, the individual sharing rates
and the performance factor, the profit sharing and the shareholding obligation for fiscal 2023 are as follows:
Profit sharing 2023 summary
Belén Garijo
Kai Beckmann
Payout amount
(€ thousand)
Peter Guenter
Marcus Kuhnert (until June 30, 2023)³
Helene von Roeder (since July 1, 2023)4
Three-year
average profit
after tax of the
Average
individual profit-
E. Merck Group sharing rate 2023
(€ million)
(in per mill)1
1.52
Matthias Heinzel
FY 2021
x performance and
sustainability goals
(0.8 - 1.2)
Individual rate
22,960
2,377
2,626
2,625
Total
268
268
225
Helene von Roeder (Entry: July 1, 2023)
4,717
5,197
401
396
400
Marcus Kuhnert (Left: June 30, 2023)¹
832
1,405
462
454
in %
Matthias Heinzel
893
1,357
437
435
19,808
1 The pension contribution for 2023 has been fully paid out into the pension account.
450
Corporate Governance Compensation Report
172
The following illustration shows the profit sharing for fiscal 2023:
Corporate Governance Compensation Report
173
The performance factor makes it possible to recognize outstanding performance by a member of the Executive
Board by multiplying profit sharing by a value greater than 1.0 up to 1.2. Similarly, multiplying by a value less
than 1.0 down to 0.8 can reduce profit sharing if the circumstances call for it.
⚫ Clear failure to achieve targets for relevant key performance
indicators in the area of responsibility
⚫ Failure to execute especially important projects or failing to
achieve other exceptionally important objectives in the area of
responsibility
Behaviors or actions that are contradictory to our company
values
⚫ Significant breaches of duty of care within the meaning of
section 93 of the German Stock Corporation Act or other
grossly non-compliant or unethical behavior
• Violations of internal rules and regulations (for instance the
Merck Code of Conduct), laws or other binding external
requirements in the area of responsibility
• Significantly failing to meet the sustainability goals and
performance criteria "Dedicated to human progress",
"Partnering for sustainable business impact" and "Reducing
our ecological footprint" (e.g. CO2 reduction, employee
satisfaction, customer satisfaction, Corporate Social
Responsibility, diversity)
Malus criteria for decreasing profit sharing
The members of the Executive Board are obligated to hold one-third of the payout of the profit sharing in
shares of Merck KGaA, Darmstadt, Germany, for at least four years. Further details are provided under the
heading "Share Ownership Guideline".
• Extraordinary performance in the execution of especially
important projects or the achievement of other exceptionally
important objectives in the area of responsibility
• Extraordinary performance leading to a clear overachievement
of targets for relevant key performance indicators in the area
of responsibility
Performance-related compensation comprises profit sharing as well as the Long-Term Incentive Plan (LTIP).
Profit sharing
The use of profit after tax as the key performance indicator, which also serves as the basis for dividend
payments, ensures very close alignment with shareholder interests.
To appropriately consider the individual performance of the Executive Board members, the Personnel
Committee may modify the payment by applying a factor ranging from 0.8 to 1.2. In determining the level of
this factor, the Personnel Committee applies the following criteria, which also include sustainability goals.
As regards profit sharing, an individual profit-sharing rate is contractually defined for the members of the
Executive Board as a per mille rate of the three-year average of the consolidated profit after tax of
E. Merck KG, Darmstadt, Germany. Fiscal 2023 and the two preceding fiscal years are included in the
calculation.
• Extraordinary contributions to the sustainability goals and
performance criteria "Dedicated to human progress",
"Partnering for sustainable business impact" and "Reducing
our ecological footprint" (e.g. CO₂ reduction, employee
satisfaction, customer satisfaction, Corporate Social
Responsibility, diversity)
Extraordinary success in connection with M&A activities of the
Merck Group
• Extraordinary success in the sustainable strategic, technical,
product-related or structural further development or
reorganization of the Merck Group
Bonus criteria for increasing profit sharing
Performance-related compensation
Contracts with the members of the Executive Board are usually concluded for a period of five years. If a
contract begins during the year, the fixed compensation, profit sharing and individual LTIP tranches are paid on
a pro rata basis.
Should members of the Executive Board be held liable for financial losses while executing their duties, this
liability risk is covered by a D&O insurance policy under certain circumstances. The D&O insurance policy has a
deductible in accordance with the legal requirements.
In fiscal 2023, a termination agreement was reached with Marcus Kuhnert regarding the early termination of
his membership in the Executive Board with effect from June 30, 2023. Initially, the term of his contract would
have ended on July 31, 2024. In accordance with the contract as well as with the compensation system, the
termination agreement regulates the continued payment of the fixed compensation of € 100,000 per month as
well as the payment of profit-sharing and LTI for the initial contract term until July 31, 2024. Furthermore, the
additional benefits will be paid out. It was stipulated that the variable compensation elements shall be
calculated and paid out according to the initial contractual terms and conditions. As a consequence, Marcus
Kuhnert shall receive the pro-rated amount of € 1,566,732 from profit-sharing for the time period from July 1,
2023, until December 31, 2023. According to the Share Ownership Guideline the amount of one third must be
invested in Merck shares and must be held for four years. Regarding fiscal 2024 the respective payout amounts
will be calculated at the end of the year and will be published in the Compensation Report 2024.
Compensation-related transactions
Obligations in connection with the termination of Executive Board membership
The contracts of the Executive Board members do not provide for ordinary termination. The right to
extraordinary termination for good cause in accordance with section 626 BGB is available to both parties
without observing a notice period.
The contracts of the Executive Board members may provide for the continued payment of fixed compensation
to surviving dependents for a limited period in the event of death. Above and beyond existing pension
obligations, no further obligations are provided for in the event of the termination of the contractual
relationships of the Executive Board members.
The amounts payable to Executive Board members are capped in the event of the early termination of the
contract without good cause justifying such termination. Pursuant to this, payments in connection with the
termination of an Executive Board member's duties shall not exceed twice the annual total compensation or
constitute compensation for more than the remaining term of the employment contract (severance cap). If an
Executive Board member's membership terminates due to the termination of the contract either by the
company or the Executive Board member before the four-year performance cycle of an open LTIP tranche
expires, the obligations resulting from the LTIP shall continue if there are specific reasons for the termination,
such as the contract is not renewed after it expires or if the Board of Partners determines this to be appropriate
at its own discretion; otherwise, the obligations shall expire.
Should obligations resulting from the LTIP continue to apply, any early severance payout is excluded. Likewise,
no early payout or severance for the profit-sharing payment is granted. If the compensation in the fiscal year in
which the Executive Board member's duties cease is expected to be significantly higher or lower than in the
previous fiscal year, the Board of Partners may decide to adjust the amount applied as the member's total
compensation at its own discretion.
Owing to his early termination, a post-contractual non-compete was agreed with Marcus Kuhnert with effect
until July 31, 2024. As compensation, the post-contractual non-compete agreement provides for the payment
of the fixed compensation as well as for the payment of the variable compensation until July 31, 2024, which
means for the regular remaining term of his contract. Further compensation will not be granted.
Corporate Governance Compensation Report
182
Post-contractual non-competition
Post contractual non-competition clauses have been agreed with the members of the Executive Board except
for Marcus Kuhnert. His contract provided for the option to agree on a post-contractual non-compete in the
event of termination of his membership of the Executive Board. In general, the post-contractual non-
competition clause involves the payment of compensation amounting to 50% of the member's average
compensation within the last twelve months and is paid for a period of two years. Other earnings, pension
payments and any severance payments are offset against this amount.
There was also a post-contractual non-competition agreement with Stefan Oschmann which came into force
upon the termination of his membership of the Executive Board. The parties agreed on a monthly compensation
of € 343,184 for the period from May 1, 2021, to April 30, 2023. The monthly pension of € 51,569 as well as
further additional income has been offset against this amount.
Loans, advances, payments by affiliates of Merck Group
In fiscal 2023, E. Merck Beteiligungen KG granted a loan of € 560,640.00 to Helene von Roeder. The loan bore
interest at 4% per annum and had to be repaid within three years of disbursement. The loan was fully repaid in
fiscal 2023.
LTI 2019 (2019 to 2021)
Corporate Governance Compensation Report
Besides this, neither loans or advances were paid to other members of the Executive Board during fiscal 2023,
nor any payments by affiliated companies.
During the fiscal year, no adjustments or changes were made to the employment contracts of the Executive
Board. In particular, the terms of the termination agreement with Marcus Kuhnert did not result in any
adjustments or changes to the original contract with Marcus Kuhnert.
LTI 2020 (2020 to 2022)
2,368
1,184
Compensation awarded or due pursuant to
section 162 AktG
181
183
Corporate Governance Compensation Report
4,761
100.0%
5,144
375
375
375
7.3%
375
1,200
21
€ thousand
2022
185
2,475
1,237
2,110
1,055
Base salary
Total compensation
Service cost
Compensation for the fiscal year
Others
Individual Disclosure of the Compensation of
the Executive Board
Chair of the Executive Board
In accordance with section 162 (1) of the German Stock Corporation Act (AktG), the compensation awarded or
due to each member of the Executive Board in fiscal 2023 and the respective relative share of total
compensation are presented transparently in the tables below. This includes all compensation elements that
were paid out or became legally due in fiscal 2023.
Former members of the Executive Board who only received pension payments in fiscal 2023 are shown in the
following table. The compensation awarded or due in fiscal 2023 in accordance with section 162 (1) AktG
consists entirely of non-performance-related compensation elements.
695
334
100.0%
100.0%
154
154
361
€ thousand
in %
2022
Pension payments
€ thousand
Member of the Executive Board
(until September 30, 2018)
Walter Galinat
Compensation awarded or due pursuant to section 162 AKtG
Others
LTI 2019 (2019 to 2021)
Merck LTIP
2,131
100.0%
633
2023
€ thousand
Karl-Ludwig Kley
Bernd Reckmann
To ensure a transparent presentation of the relation between business performance and the resulting
compensation, variable compensation for fiscal 2023 is also disclosed on a voluntary basis, with the variable
compensation components being allocated to the year in which the final performance was rendered, irrespective
of the actual date of payment or the legal due date. Owing to the introduction of the holding period, the
performance cycle of the LTIP tranche 2021 will run until December 31, 2024. We will report about the
performance of the LTIP tranche 2021 for the first time on a voluntary basis in the Compensation Report 2024.
To provide a complete picture of the total compensation of the Executive Board members, pension expense is
also reported on a voluntary basis.
The compensation of the current members of the Executive Board is shown in the following tables.
In fiscal year 2023 pursuant to section 162 AktG
Base salary
Additional benefits
For fiscal year 2023 as voluntary disclosure
Profit sharing for fiscal year 2022, payout in fiscal year 2023:
- Payout in cash
- Investment (in shares; 4-year holding period according to
Share Ownership Guideline)
LTIP tranche 2020 (Jan 1, 2020-Dec 31, 2022),
payout was in fiscal year 2023
Profit sharing for fiscal year 2023, payout in fiscal year 2024:
- Payout in cash
- Investment (in shares; 4-year holding period according to
Share Ownership Guideline)
Other compensation
Service cost as voluntary disclosure
The figures presented in the tables have been rounded in accordance with standard commercial practice. As a
result, the individual values may not add up to the totals presented.
Compensation awarded or due
695
756
2022
2023
Merck LTIP
Compensation awarded or due to current members of the Executive
Board in fiscal 2023
Investment (in shares; 4-year holding period)
Additional benefits
46.0%
23.0%
€ thousand
1,200
22
Base salary
Compensation awarded or due pursuant to section 162 AKtG
1,200
16
Profit sharing
Profit sharing 2021
Payout in cash
Investment (in shares; 4-year holding period)
Profit sharing 2022
€ thousand
1,903
951
2,128
Investment (in shares; 4-year holding period)
Profit sharing 2023
1,064
27.2%
13.6%
Payout in cash
Investment (in shares; 4-year holding period)
Merck LTIP
LTI 2019 (2019 to 2021)
LTI 2020 (2020 to 2022)
Payout in cash
2,128
1,064
€ thousand
1,200
16
1,200
22
Investment (in shares; 4-year holding period)
Profit sharing 2022
6,176
9,891
Service cost
Total compensation incl. service cost
638
10,527
638
10,529
638
6,814
638
10,529
15%
0.3%
1 Reduction of LTI 2019 and LTI 2020 payout due to maximum amount of direct compensation.
Member of the Executive Board
In the fiscal year
(pursuant to section 162 AktG)
For the fiscal year
(voluntary disclosure)
2023
2022
2023
2022
€ thousand
in %
Kai Beckmann
2,222
1,111
3,825
43.6%
2023
2022
2023
€ thousand
1,200
in %
23.3%
17
0.3%
€ thousand
1,200
21
For the fiscal year
(voluntary disclosure)
€ thousand
Profit sharing
Profit sharing 2021
Payout in cash
Investment (in shares; 4-year holding period)
Profit sharing 2022
Payout in cash
2,368
Investment (in shares; 4-year holding period)
Profit sharing 2023
1,184
1,200
17
(pursuant to section 162 AktG)
In the fiscal year
Member of the Executive Board
(since January 1, 2021)
3,406
3,406
Others
Compensation awarded or due pursuant to
section 162 AktG
7,820
100.0%
7,895
Compensation for the fiscal year
Service cost
Total compensation
435
8,255
439
8,334
4,555
435
4,990
7,814
439
8,253
Base salary
Additional benefits
Corporate Governance Compensation Report
Peter Guenter
Payout in cash
2,131
Pension
100.0%
462
4,059
454
5,382
462
5,226
Base salary
Additional benefits
Profit sharing
Profit sharing 2021
454
5,222
Payout in cash
Investment (in shares; 4-year holding period)
186
In the fiscal year
(pursuant to section 162 AktG)
Marcus Kuhnert
Member of the Executive Board
(until June 30, 2023)
For the fiscal year
(voluntary disclosure)
Corporate Governance Compensation Report
4,764
4,928
3,597
Others
Compensation awarded or due pursuant to
section 162 AktG
Compensation for the fiscal year
Service cost
Total compensation
1,590
795
For the fiscal year
(voluntary disclosure)
2023
€ thousand
1,200
16
2,475
1,237
2022
€ thousand
1,200
12
2,368
1,184
4,768
100.0%
2023
LTI 2020 (2020 to 2022)
2022
2022
1,044
522
Merck LTIP
LTI 2019 (2019 to 2021)
LTI 2020 (2020 to 2022)
3,300
44.8%
2,939
Investment (in shares; 4-year holding period)
2,939
Compensation awarded or due pursuant to
section 162 AktG
633
100.0%
7,180
Compensation for the fiscal year
2,193
7,158
Others
Payout in cash
Profit sharing 2023
1,995
998
€ thousand
600
in %
9.1%
26
0.4%
€ thousand
1,200
26
€ thousand
600
26
€ thousand
1,200
26
1,769
885
Profit sharing 2022
Payout in cash
1,995
Investment (in shares; 4-year holding period)
998
30.4%
15.2%
2023
LTI 2019 (2019 to 2021)
Merck LTIP
Investment (in shares; 4-year holding period)
437
5,579
Compensation for the fiscal year
9,891
100.0%
9,889
Compensation awarded or due pursuant to
section 162 AktG
5,198
Others
3,910
39.5%
4,629
3,058
1,529
LTI 2020 (2020 to 2022)
LTI 2019 (2019 to 2021)
LTIP¹
3,910
5,304
435
5,739
5,148
437
Payout in cash
Profit sharing 2021
Profit sharing
Additional benefits
€ thousand
1,200
12
0.3%
in %
25.2%
1,200
16
€ thousand
2022
2023
(pursuant to section 162 AktG)
(since April 1, 2021)
In the fiscal year
Member of the Executive Board
Matthias Heinzel
5,585
Investment (in shares; 4-year holding period)
Payout in cash
2,927
1,463
29.6%
14.8%
2023
For the fiscal year
(voluntary disclosure)
(pursuant to section 162 AktG)
In the fiscal year
(since May 1, 2021; previously member of the Executive Board)
Chair of the Executive Board
Belén Garijo
184
Corporate Governance Compensation Report
Additional benefits
Base salary
Payout in cash
2,368
Investment (in shares; 4-year holding period)
Profit sharing 2023
1,184
49.7%
24.8%
Payout in cash
2022
Service cost
2023
in %
15.2%
1,463
Investment (in shares; 4-year holding period)
Profit sharing 2023
2,927
Payout in cash
Profit sharing 2022
2,447
1,224
Investment (in shares; 4-year holding period)
Payout in cash
Profit sharing 2021
Profit sharing
1,500
91
€ thousand
2022
€ thousand
1,500
89
€ thousand
1,500
91
0.9%
89
€ thousand
1,500
Total compensation
6,558
6,954
9,500
8,000
11,500
9,800
AktG
Compensation
Peter Guenter
8,000
Kai Beckmann
€ thousand
Maximum
compensation
pursuant to
section 87a
Maximum limit
for Direct
Overall compensation limit
Compliance with the defined maximum compensation is ensured by the Personnel Committee setting the
amounts of the variable compensation components by resolution. The defined maximum compensation and the
maximum limit for the direct compensation of the members of the Executive Board are shown in the following
table.
In addition, there is a contractually agreed maximum limit on the direct compensation, i.e. the sum of base
salary, profit-sharing, and LTIP. In this context, it is stipulated that capping, if necessary, shall be applied first
to the LTIP and then to profit sharing. To ensure compliance with this cap, the 2020 LTIP payment for Belén
Garijo was reduced accordingly by € 476,514 thousand.
In addition to the maximum compensation, there is a separate contractually agreed payment cap for each of
the performance-related compensation elements. A maximum amount has been set for the amount of profit
sharing for all members of the Executive Board (please find more details in the paragraph “profit sharing”). The
payout from the Long-Term Incentive Plan cannot exceed 2.5 times the individual award value, even in cases of
exceptional performance.
Belén Garijo
9,500
Matthias Heinzel
8,000
858
429
4,377
In fiscal 2023, Helene von Roeder resigned from the Supervisory Board effective April 17, 2023, and Barbara
Lambert joined the Supervisory Board effective August 11, 2023. There were no payments to former members
of the Supervisory Board in the fiscal year.
The compensation awarded or due and the respective relative share of the total compensation for the current
members of the Supervisory Board is presented in the following table. The compensation components are allocated
to the year in which the service was rendered, regardless of the actual time of payment or its legal due date.
Accordingly, the members of the Supervisory Board receive fixed compensation of € 47,000 per year, which is
due and paid out in the reporting year. The Chair receives double, and the Vice Chair receives one and a half
times this amount. In addition to their fixed compensation, Supervisory Board members who are also members
of the Audit Committee, which was established in the meeting of the Supervisory Board on February 26, 2021,
receive annual compensation of € 15,000. The Chair of the Audit Committee receives additional annual
compensation of € 30,000. Moreover, the members receive additional compensation of € 750 per meeting they
attend. There are no variable compensation components.
396
Compensation for the Supervisory Board
members in fiscal 2023
190
Corporate Governance Compensation Report
9,500
8,000
Helene von Roeder (since July 1, 2023)
9,500
8,000
Marcus Kuhnert (until June 30, 2023)
9,500
€ 9,500,000 each for ordinary members of the Executive Board. The sum of the compensation awarded or due
in accordance with section 162 AktG less any pension payments and plus pension expenses is below the defined
maximum compensation in accordance with section 87a AktG for all members of the Executive Board.
€ thousand
The maximum compensation for the fiscal year is € 11,500,000 for the Chair of the Executive Board and
Compliance with the defined maximum compensation
10,189
Merck LTIP
LTI 2019 (2019 to 2021)
LTI 2020 (2020 to 2022)
Others
Pension
Corporate Governance Compensation Report
100.0%
Udit Batra
(until July 13, 2020)
2023
€ thousand
188
2022
in %
€ thousand
Member of the Executive Board
4,011
Compensation awarded or due pursuant to section 162 AktG
572
189
Corporate Governance Compensation Report
(December 31, 2022: € 123.1 million).
Payments to former members of the Executive Board and their surviving dependents are made in the form of
pension payments, as a temporary continuation of the basic salary in the event of death, as part of the profit-
sharing and the LTIP, as well as compensation for a post-contractual non-compete clause. In the 2023 financial
year, they amounted to € 14.4 million (previous year: € 21.7 million). Provisions for defined benefit pension
commitments in accordance with IAS 19 amounted to € 123.8 million as of December 31, 2023
Payments to former members of the Executive Board and their
surviving dependents
443
443
55.5%
LTI 2020 (2020 bis 2022)
2,226
Others
1,166
29.1%
3,953
Pensions
619
15.4%
The maximum compensation limits the compensation awarded or due in the fiscal year, i.e. the total of all non-
performance-related and performance-related compensation elements awarded or due in a fiscal year. Pension
payments are not included in the maximum compensation.
in %
The compensation of the Supervisory Board members is defined in Article 20 of the Articles of Association of
Merck KGaA, Darmstadt, Germany, and corresponds to the compensation system for the Supervisory Board
that was adopted by the 2023 Annual General Meeting with 99.64% of the votes cast.
€ thousand
(pursuant to section 162 AktG)
For the fiscal year
(voluntary disclosure)
2023
2022
2023
€ thousand
600
(since July 1, 2023)
in %
98.5%
2022
9
1.5%
600
9
1,044
522
2022
€ thousand
€ thousand
In the fiscal year
Member of the Executive Board
Helene von Roeder
401
7,581
396
2,589
401
7,559
Base salary
Additional benefits
Profit sharing
Profit sharing 2021
Payout in cash
Investment (in shares; 4-year holding period)
Profit sharing 2022
Payout in cash
Investment (in shares; 4-year holding period)
Profit sharing 2023
Payout in cash
Investment (in shares; 4-year holding period)
Merck LTIP
LTI 2019 (2019 to 2021)
LTI 2020 (2020 to 2022)
Others¹
€ thousand
Compensation awarded or due pursuant to
section 162 AktG
Payout in cash
Investment (in shares; 4-year holding period)
LTIP
LTI 2019 (2019 bis 2021)
Marcus Kuhnert
Member of the Executive Board
953
2023
2022
in Tsd. €
600
600
in %
100.0%
100.0%
in Tsd. €
Stefan Oschmann
435
(until April 30, 2021)
2023
Profit sharing 2021
Profit sharing
(until June 30, 2023)
Others (waiting allowance)
Compensation awarded or due pursuant to section 162 AKtG
100.0%
Compensation for the fiscal year
3,128
Service cost
268
609
Total compensation
268
3,396
1 Compensation payment for short-term variable remuneration (€ 257 thousand) and long-term variable remuneration (provision of € 696 thousand; final
calculation and payment in 2027).
Corporate Governance Compensation Report
187
Compensation awarded or due to former members of the Executive
Board in the fiscal year
The compensation awarded or due to former members of the Executive Board during the fiscal year is also
presented below. Tranches of the LTIP already allocated before a member of the Executive Board left the
company continue to run until the end of the originally contractually agreed term and are settled and paid out
after the end of the performance period. In addition, some members who have already left the Executive Board
receive fixed payments from pension plans.
The following tables show the compensation awarded or due to former members of the Executive Board in fiscal
2023 in accordance with section 162 (1) AktG and the respective relative share of total compensation.
Compensation awarded or due includes all amounts received by the former members of the Executive Board in
the fiscal year (compensation awarded) or all amounts legally due but not yet received (compensation due). For
former members of the Executive Board who left the Executive Board in the last ten years, the information is
indicated by name. In accordance with the provisions of section 162 (5) AktG, no personal information is
provided on former members of the Executive Board who left the Executive Board more than ten years ago, i.e.
before December 31, 2012.
Compensation awarded or due
877
Ever since we were established in 1668, we have continuously reinvented ourselves and adopted a long-term
mindset. This approach is rooted in responsibility, care and respect: for our work, our employees, our
customers, patients, society, and our planet. We want to become the global 21st century science and technology
pioneer and are committed to working towards a better future: sustainable progress for humankind.
We are Merck, a science and technology company. We are pioneers of human progress, driven by our curiosity.
We are working toward a better future in a special organizational setup and are bringing together different
disciplines under one roof with the three business sectors Life Science, Healthcare and Electronics.
Our Life Science business sector provides the tools, high-grade chemicals and consumables that accelerate
scientific breakthroughs and enable the biopharmaceutical industry to ensure that medicines are safe and
effective for a global population.
In our Healthcare business sector, we advance innovation through our research, enable life-changing therapies
for serious illnesses, treat patients with cancer, cardiovascular, diabetes, thyroid disorders, and multiple
sclerosis, and help people to realize their wish to have a child.
In our Electronics business sector, we are the company behind the companies, advancing digital living. Our
semiconductor and display solutions are used in the manufacture of many components for electronic devices.
We are thus changing the way in which information is processed and made accessible.
In addition, our specialists also explore visionary new solutions at the interfaces of our three diversified
business sectors.
The founding family, now in the 13th generation, is still the majority owner. This is made possible by our
company structure: a corporation with general partners (Kommanditgesellschaft auf Aktien - KGaA). In a
KGaA, the total capital is divided between general partners and limited partners. The founding family holds a
70.274% stake in the listed Merck Kommanditgesellschaft auf Aktien (Merck KGaA), Darmstadt, as general
partner via the Group's ultimate parent company, E. Merck Kommanditgesellschaft, Darmstadt. The remaining
29.726% of the share capital of Merck KGaA is traded on the regulated market of the Frankfurt Stock Exchange
and other stock exchanges.
Merck Group
Combined Management Report
Fundamental Information about the Group Merck
14
14
We hold the global rights to the Merck name and brand. The only exceptions are Canada and the United States.
In these countries, we operate as MilliporeSigma in the Life Science business, as EMD Serono in the Healthcare
business and as EMD Electronics in the Electronics business.
Apart from our three business sectors, our financial reporting presents five regions: Europe, North America,
Asia-Pacific, Latin America, the Middle East and Africa. As of December 31, 2023, we had 62,908 employees¹
worldwide. The figure as of December 31, 2022, was 64,232 employees¹. We have summarized further details on
our employee structure and important aspects such as Diversity, Equity, and Inclusion in the "Non-Financial
Statement".
For fiscal 2023, we exercise the option of publishing the Statement on Corporate Governance on the Group's
website in accordance with section 315d HGB in conjunction with section 289f (1) sentence 2 HGB. It is
available at https://www.merckgroup.com/en/investors/corporate-governance/reports.html.
Merck
The assessment of business development and the allocation of financial resources are carried out by the entire
management of the company for the Life Science, Healthcare and Electronics business sectors as well as the
supporting corporate functions. In addition to the Chair of the Executive Board and CEO Belén Garijo, the
Members of the Executive Board are Matthias Heinzel, CEO Life Science, Peter Guenter, CEO Healthcare, Kai
Beckmann, CEO Electronics, and Helene von Roeder, Chief Financial Officer (CFO). Helene von Roeder was
appointed CFO as of July 1, 2023, succeeding Marcus Kuhnert on the Executive Board of Merck.
Fundamental Information
about the Group
33%
Growth
13
nanomaterials.
Across our Life Science business sector, we collaborate with the global scientific community to deliver
innovations and to this end, we offer a broad and deep product portfolio as well as global Contract Testing
Development Manufacturing Organization (CTDMO) services ranging from process development to
commercialization. In 2023, we continued to execute our strategy as a diversified life science company to
strengthen our three business units, Process Solutions, Life Science Services, and Science & Lab Solutions.
Our R&D teams in the three business units have launched more than 8,500 products to respond to growth
trends, including those launched through our "faucet program" for antibodies, reference materials and
We are a leading global provider of products and services for a wide range of customers, including research
labs, biotech and pharmaceutical companies, diagnostic labs, and the industrial sector.
Life Science
Fundamental Information about the Group Merck
Combined Management Report
15
In 2023, Life Science generated 44% of Group sales and 45% of EBITDA pre (excluding Corporate and Other).
In recent years, we have steadily expanded our presence in growth markets. Europe and North America
generated 70% of Life Science's sales in 2023; Asia-Pacific and Latin America accounted for 29% of sales.
1 Merck also employs people at sites of subsidiaries that are not fully consolidated. This number refers to people employed in fully consolidated subsidiaries.
24%
Asia-Pacific
(APAC)
28,304
45%
Europe
O
5,952
14,718
North America
15,259
25%
Process Solutions
Life Science Services
€ 70 million investment will enable large-scale manufacturing of high-purity reagents for quality control and
testing for biopharma customers.
In June, we announced the expansion of production capacity for highly purified reagents at the site in
Nantong, China, a major transportation hub in the Yangtze River Delta region. The approximate
Also in May, we signed a non-binding memorandum of understanding with the Korean Ministry of Trade,
Industry and Energy and Daejeon City, Korea, for a new Asia-Pacific bioprocessing center aimed at
supporting the region's healthcare ecosystem. The planned bioprocessing facility would support commercial
manufacturing for biotech and pharmaceutical customers in this region.
The investment includes a new facility in Glasgow, which will house molecular biology and sequencing
services. Testing capacity in current buildings will be expanded to include biosafety testing, analytical
development and viral clearance suites. The latest investment follows our recent testing expansions in
Rockville, Maryland, USA, and Shanghai, China. With its BioRelianceⓇ testing services portfolio, Life Science
performs more than 20,000 studies annually in the United Kingdom for more than 400 customers globally.
BioRelianceⓇ contract testing services and the recently formed Millipore® CTDMO Services are part of the
Life Science Services business unit.
16
16
Merck
The Process Solutions business unit continued to focus on delivering its product offering for the pharmaceutical
development and manufacture of filtration devices, chromatography resins, single-use assemblies and systems,
processing chemicals, and excipients.
Fundamental Information about the Group
In May, we announced an investment of € 35 million in biosafety testing facilities at our Glasgow and
Stirling sites in Scotland. Biosafety testing is a step in the drug development and manufacturing process to
ensure that drugs are safe, effective and compliant with regulatory requirements. Through the expansion,
we plan to create nearly 500 new jobs, bringing our Life Science workforce to over 1,200 employees across
the two sites.
We have started building a new € 30 million expansion in Allentown, Pennsylvania, USA, which will join the
existing facility to create a two-building "distribution campus".
Investments to expand capabilities and production
In March, we opened a lateral flow assay development lab in St. Louis, Missouri, USA, an innovative space
where customers collaborate with our technical experts to troubleshoot point-of-care testing.
The Science & Lab Solutions business unit serves customers in the pharmaceutical, biotech industries and other
industries in production, testing and research, as well as public authorities and research institutions. We provide
customers with access to a broad portfolio including reagents, consumables, devices, instruments, software,
and services for scientific discovery in addition to lab water instruments, consumables and services,
microbiology and biomonitoring products, test assays, analytical reagents, and flow cytometry kits and
instruments.
Science & Lab Solutions
The Life Science Services business unit offers traditional and novel modalities, including monoclonal antibodies,
high-potency active pharmaceutical ingredients (HPAPIs) and antibody-drug conjugates as well as viral and
gene therapies, including mRNA. In addition to manufacturing, Life Science Services includes sales and
marketing, research and development and supply chain operations. Our integrated CTDMO services support
clients from preclinical phases to commercial production.
Combined Management Report
6,037 North America
23%
Europe
4%
Rest of World
0
19%
Europe (ex-Germany/UK)
29%
United States
German Retail/
Undisclosed
17%
Source: Nasdaq Shareholder Identification; Total Shares Outstanding: 129.2 million.
Identified investors by type as of November 2023
3%
Hedge
19%
Index
19%
Value
Source: Nasdaq Shareholder Identification.
1%
Others
United Kingdom
21%
11
9%
Germany
29%
1,169
Latin America
3,458
737
Middle East and Africa (MEA)
5%
Middle East and Africa (MEA)
2%
4%
Employees by region as of December 31, 2023¹
Number/in %
Merck Group
33%
Asia-Pacific
(APAC)
6,936
1,331
GARP (Growth At
Reasonable Price)
To Our Shareholders
Merck Shares
Identified investors by region as of November 2023
In July, Life Science announced a € 23 million expansion of its facility in Lenexa, Kansas, USA, adding lab
space and production capacity to manufacture cell culture media. Cell culture media is used in processes as
varied as vaccine manufacturing, gene therapy and monoclonal antibody manufacturing. The company's
strategic investments to expand capacity in existing production facilities in the Lenexa, Kansas, USA, and
Nantong, China, sites with dry powder media manufacturing lines will increase both local and global
production capacity.
Since September, CTDMO can offer integrated services for all critical stages of mRNA development,
manufacturing and commercialization, including products and testing, with the opening of two new GMP-
grade mRNA drug substance manufacturing sites in Darmstadt and Hamburg, Germany. The new sites are
part of the company's ongoing € 1 billion investment to advance mRNA technologies and build its global
mRNA network and capabilities in addition to key acquisitions such as AmpTec and Exelead. With this
€ 28 million investment, we can provide mRNA services at different scales and applications from preclinical
to commercial.
In November, we completed the second phase of our new € 29 million Biologics Testing Center in Shanghai,
China, expanding our first biosafety laboratories, which we inaugurated in 2022, in this market. This
expansion enables us to provide local access to a broad range of testing for cell line characterization and lot
release, from preclinical development to commercialization.
Sustainable packaging solutions*
96 Report in Accordance with Section 315a HGB1
94 Report on Expected Developments
77 Report on Risks and Opportunities
Corporate and Other
76
Electronics
73
99
Healthcare
Life Science
65
55
55
Merck Group
Course of Business and Economic Position
52 Review of Forecast against Actual Business Developments
69
Non-Financial Statement
104
Environmental Matters
Merck
Fundamental Information about the Group
Combined Management Report
1 German Commercial Code.
It is our aim to ensure that our communication is inclusive and so we strive to use language that is both non-discriminatory and easy to read. This report
attempts to use gender-neutral language, which may not yet be consistent in all instances. Even if masculine forms are used, all genders are explicitly
meant.
The figures presented in this combined management report have been rounded. This may lead to individual values not adding up to the totals presented.
The Statement of Corporate Governance according to section 315d HGB in conjunction with section 289f (1) sentence 2 HGB is available at
https://www.merckgroup.com/en/investors/corporate-governance/reports.html.
This combined management report contains certain financial indicators such as operating result (EBIT), EBITDA, EBITDA pre, net financial debt and
earnings per share pre, which are not defined by International Financial Reporting Standards (IFRS). These financial indicators should not be taken into
account in order to assess the performance of Merck in isolation or used as an alternative to the financial indicators presented in the consolidated financial
statements and determined in accordance with IFRSS.
* The management report of Merck KGaA has been combined with the Group management report and published in the 2023 Merck Annual Report as well as in
the annual financial statements of Merck KGaA. The management report also contains the combined non-financial (Group) statement of Merck KGaA, which
we issue pursuant to sections 289b-289e and 315b-315c HGB. The 2023 Annual Report is an additional, non-official publication, which does not comply
with the requirements of the European Single Electronic Format (ESEF). The official annual financial report for fiscal 2023, prepared in accordance with the
ESEF format, has been filed with the electronic German Federal Gazette (elektronischer Bundesanzeiger) and is available on the website of the German
company register.
155 Additional Information on Merck KGaA in Accordance with HGB1
Anti-Corruption and Anti-Bribery
Other Topics
144
139
123
114
Social Matters and Respect for Human Rights
Employee-Related Matters
Macroeconomic and Sector-Specific Environment
33
48
35 Research and Development
BavencioⓇ is also approved in the first-line treatment of advanced renal cell carcinoma in combination with
axitinib and it is a standard of care as a monotherapy in metastatic Merkel cell carcinoma (MCC), a rare form of
skin cancer.
Through our subsidiary Ares Trading SA, we regained exclusive worldwide rights to develop, manufacture and
commercialize BavencioⓇ from Pfizer as of June 30, 2023.
We have made progress in changing the standard of care globally for patients with locally advanced or
metastatic urothelial carcinoma (UC) as we continue to obtain additional regulatory approvals and
reimbursement decisions for our anti-PD-L1 antibody Bavencio® (avelumab) (for further details see "Research
and Development"). BavencioⓇ is approved as a first-line maintenance treatment for advanced UC in 71
countries. It has become a standard of care in the treatment of this disease based on the results of the JAVELIN
Bladder 100 trial, the only Phase III study of an immunotherapy to demonstrate a significant overall survival
benefit in the first-line maintenance setting.
Erbitux® (cetuximab) remains our best-selling cancer drug with € 1 billion in sales in 2023. The drug is a
standard of care for patients with epidermal growth factor receptor (EGFR)-expressing, RAS wild-type
metastatic colorectal cancer (mCRC) as well as both recurrent and/or metastatic and locally advanced
squamous cell carcinoma of the head and neck (SCCHN). With more than 200 active clinical trials involving
ErbituxⓇ, including more than 15 Phase III studies, we are also continuously advancing our broad-based
lifecycle management strategy.
Oncology
In 2023, Healthcare generated 38% of Group sales and 41% of EBITDA pre (excluding Corporate and Other).
Europe and North America generated 53% of Healthcare's net sales in 2023. In recent years, we have steadily
expanded our presence in growth markets. In 2023, Asia-Pacific and Latin America accounted for 40% of sales.
In Healthcare, we operate as a global specialty innovator in the Neurology & Immunology and Oncology
franchises as well as in the therapeutic areas of fertility and cardiovascular, metabolic and endocrinological
disorders. The Healthcare business sector discovers, develops, manufactures, and markets pharmaceutical and
biological prescription drugs to treat cancer, multiple sclerosis (MS), infertility, and growth disorders as well as
certain cardiovascular and metabolic diseases. Our R&D pipeline is focused on strengthening our position in the
fields of oncology, neurology and immunology.
In September 2023, we received U.S. Food and Drug Administration approval of a supplemental Biologics
Licensing Application for BavencioⓇ, converting the MCC indication from accelerated approval into full approval
approximately four years earlier than anticipated. As a result, BavencioⓇ is the first MCC treatment to receive
full approval in the U.S. market.
Healthcare
Merck
Fundamental Information about the Group
Combined Management Report
* The contents of this chapter or section are voluntary and therefore not audited. However, our auditor has read the text critically.
In March, Life Science launched its open-source code library for Palantir Foundry on GitHub®. Our source code,
"Foundry DevTools", was published under an open-source license in collaboration with Palantir. We have been
partnering with Palantir since 2017 to build our data and analytics capabilities and contribute to the digital
product portfolios of our Life Science, Healthcare and Electronics business sectors. The source code is freely
accessible to all Foundry developers worldwide.
Digitalization
Four years after its inception in 2019, the SMASH Packaging plan has entered its next generation, called SMASH
2.0. So far, more than 100 packaging improvement projects have been completed or are underway, removing
tens of thousands of metric tons of CO2 without sacrificing safety, quality, or performance. Key achievements
include avoiding more than 300 metric tons of packaging and achieving a 23% reduction of expanded
polystyrene (EPS), also known as Styrofoam. 72.5% of the paper-based materials sourced directly for packing
and shipping products therefore aligns with the so-called zero deforestation standards.
17
In 2023, we also continued to expand the availability of Tepmetko® (tepotinib), our oral MET inhibitor designed
to inhibit the oncogenic MET receptor signaling caused by MET (gene) alterations, with additional regulatory
approvals. TepmetkoⓇ is now available in 43 markets globally.
In the therapeutic area of SCCHN, we advanced our global Phase III development program for xevinapant, an
IAP (inhibitor of apoptosis protein) inhibitor in 2023, with enrollment completed in the Trilynx study. The
recruitment of patients in the XRay Vision study is ongoing (for further details see "Research and
Development").
In fiscal 2023, we also continued to advance our efforts in novel medicines. For the first antibody-drug
conjugate (ADC) developed in our labs, the anti-CEACAM5 ADC M9140, we completed the dose-finding portion
of our Phase I study (for further details see "Research and Development").
Internal Management System
Strategy
Merck
28
22
13
13
Fundamental Information about the Group
Management Report*
Combined
MavencladⓇ, a short-course oral therapy for the treatment of adults with various forms of highly active RMS,
reached blockbuster status in fiscal 2023 with total net sales of more than US$ 1 billion, and is approved in 95
countries worldwide, including those of the European Union, Switzerland, Australia, Canada, and the United
States.
In Neurology & Immunology, we aim to provide transformative treatment solutions to support people living with
neurological and immune-mediated conditions while significantly improving quality of life for them and their
caregivers. With over two decades of experience in MS, our current portfolio includes two approved products for
the treatment of relapsing MS (RMS) - Rebif® (interferon beta-1a) and MavencladⓇ (cladribine tablets).
Rebif®, a disease-modifying drug, has been a standard treatment in RMS for over 20 years with more than
1.9 million patient-years of therapy since approval.
Neurology & Immunology
Within our DDR portfolio, we continue to advance the development of our potent and selective inhibitor of
ataxia telangiectasia and Rad3-related (ATR), tuvusertib (M1774). We initiated the Phase Ib/IIa DDRiver NSCLC
322 study of tuvusertib in combination with cemiplimab in participants with non-squamous non-small cell lung
cancer (NSCLC) (for further details see "Research and Development").
Beyond our ADC platform, we are also evaluating small-molecule DNA damage response (DDR) inhibitors as
this therapeutic class has the potential for better outcomes in patients with cancer.
Combined Management Report Fundamental Information about the Group Merck
18
48 Report on Economic Position
28%
ConcorⓇ/Concor Cor®, containing bisoprolol, is a beta-blocker for treating hypertension and cardiovascular
diseases such as coronary heart disease and chronic heart failure. In addition to ConcorⓇ/Concor Cor®, the
ConcorⓇ family includes fixed-dose combinations such as Concor Plus®/Lodoz® (bisoprolol with
hydrochlorothiazide).
Fertility
20
20
In 2021, we started our "Level Up" growth program and are continuing to invest significantly more than
€ 3 billion in innovation and capacity expansion. Despite difficult market conditions in 2023, we plan to continue
our "Level Up" growth program and will adjust the timeframe of our investments in line with market demand.
The Electronics business sector consists of three business units: Semiconductor Solutions, Display Solutions and
Surface Solutions. Three cross-functional boards support the business units: Technology Leadership Board,
Supply Chain Leadership Board, and Commercial Leadership Board. They define cross-sector standards, steer
portfolio management, drive forward the exchange on good practice, and promote transparency.
Electronics accounted for 18% of Group sales in 2023, and its share of EBITDA pre (excluding Corporate and
Other) was 15%. In 2023, Asia-Pacific generated 67% of Electronics' net sales, Europe and North America
accounted for 30% of sales.
Semiconductor Solutions
Semiconductor Solutions is the largest business unit in terms of sales within Electronics. It comprises our
product and service offering for the semiconductor industry. We are developing materials and solutions to make
the next generation of devices - we help make chips smaller, faster, more powerful and more sustainable.
Semiconductor Solutions supplies products for major production steps in wafer processing, including doping,
patterning, deposition, planarization, etching, and cleaning. It also supplies delivery equipment for
semiconductor manufacturing. Specialty cleans, photoresists, and conductive pastes for semiconductor
packaging complement the portfolio. Intermolecular is our center for complex material solutions in Electronics,
located in San Jose, California, USA. There, we explore, test, and develop combinations of different materials
for next-generation electronics.
Our Semiconductor Solutions business unit consists of the following business fields: Formulations, Thin Films,
Specialty Gases and Delivery Systems & Services.
The Formulations business field comprises the Patterning and Planarization production steps. This includes
lithography products for surface treatment such as photoresists and the associated auxiliaries, anti-
reflective coatings and materials for directed self-assembly (DSA). The Planarization business comprises
CMP materials (chemical-mechanical planarization).
The Thin Films business field supplies solutions and productions for our customers in the fields of dielectrics
(organosilanes and spin-on dielectrics) and metallics product offerings. Many of our materials are used for
leading edge nodes, which is the enabler of advanced chips for generative AI.
The Delivery Systems & Services (DS&S) business field, with its systems business, develops and installs
reliable delivery equipment to ensure the safe and responsible handling of specialty chemicals and gases for
semiconductor manufacturing. At many sites of the industry, production facilities and delivery systems are
operated and maintained by our MEGASYS® Total Gas and Chemical Services employees.
In 2023, the semiconductor market was impacted by a cyclical downturn, mainly due to advance spending on
consumer electronics (PCs, smartphones, game consoles) in previous years due to the Covid-19 pandemic. The
situation was amplified by inflation and high interest rates during the fiscal year. These developments prompted
consumers to postpone purchases of electronic devices.
Semiconductor manufacturers continue to invest at a high level. This is also evidenced by the strong growth of
our equipment business (part of DS&S) in 2023 despite the currently weak semiconductor market. In view of
the expected long-term increase in demand, we continue to expand global production capacity for our specialty
gas, liquid chemical and slurry delivery systems.
Latin America
6%
€ million/in % of net sales
Net sales by region
With evobrutinib, we had originally aimed to commercialize a first-in-class Bruton's tyrosine kinase (BTK)
inhibitor for RMS. In December, we shared the outcome from the EVOLUTION clinical trials, which showed that
the investigational drug did not meet its primary endpoint of annualized relapse rate for up to 156 weeks
compared to oral teriflunomide.
Fundamental Information about the Group Merck
Combined Management Report
The Specialty Gases business field provides high-purity gases for semiconductor manufacturing. These
gases are crucial for precise deposition, doping, etching, and cleaning during wafer fabrication. With a
strong commitment to meeting the semiconductor industry's stringent requirements, our Specialty Gases
business supports the industry in the development of advanced electronic devices.
We are a major supplier of materials and solutions for the semiconductor and display industries. We have a
portfolio of materials, systems and services as well as R&D and a global production network close to our
customers. We have built our portfolio to cater to the continued digitalization and the unabated growth of data.
The demand for increasingly sophisticated semiconductor chips and displays will continue to rise, not least
thanks to developments such as Artificial Intelligence (AI), 5G (fifth-generation mobile networks) and
autonomous driving. In recent years, we have developed into a relevant player in the global electronic
materials market. In addition, we offer decorative and functional solutions for surfaces of all kinds.
Our Fertility franchise is a global market leader in fertility drugs and treatments.
* The contents of this chapter or section are voluntary and therefore not audited. However, our auditor has read the text critically.
Infertility is an increasing challenge globally due to demographic changes and lifestyle adjustments such as
delayed childbearing. Based on the latest data from WHO, one in six people worldwide is affected by infertility.
According to the latest data, more than five million babies have been born worldwide with the help of Gonal-f®,
a therapeutic within our Fertility portfolio. It contains the active ingredient follitropin alfa (r-hFSH alfa), which is
a recombinant form of the natural hormone FSH and is available in a convenient and ready-to-use pre-filled
injection pen. Treatment with Gonal-f® can result in increased follicles, oocytes, and embryos compared to
urinary gonadotropins, thereby improving the chances of pregnancy and live birth.
To support and meet the needs of a variety of patients, in addition to Gonal-fⓇ, we offer another key product
called PergoverisⓇ. It is a product that combines recombinant human follicle-stimulating hormone (r-hFSH) and
recombinant human luteinizing hormone (r-hLH). This represents another treatment option for women with
severe FSH and LH deficiency. PergoverisⓇ is also available in a ready-to-use liquid version in a pre-filled
injection pen, eliminating the need for mixing.
In September 2023, we announced our new employee "Fertility Benefit" program. The new offer is available to
our employees in a number of countries and to their partners, regardless of their marital status. Apart from
financial assistance, we offer employees facing fertility issues additional information services related to fertility
disorders.
Combined Management Report
Fundamental Information about the Group Merck
Cardiovascular, Metabolism & Endocrinology
19
EuthyroxⓇ, with the active ingredient levothyroxine, is a leading medicine for the treatment of hypothyroidism,
a disease with high prevalence but still low diagnosis rates in most emerging markets.
GlucophageⓇ, containing the active ingredient metformin, is a drug for first-line treatment of type 2 diabetes
and is available in more than 100 countries. In recent financial years, GlucophageⓇ has been approved by
further health authorities for use in prediabetes when intensive lifestyle changes failed.
SaizenⓇ, containing the active ingredient somatropin, is our main endocrinology product and is indicated for the
treatment of multiple growth hormone disorders in children and adults. SaizenⓇ can be delivered with the
EasypodⓇ electromechanical injection device, the only growth hormone injection device able to wirelessly
transfer data such as injection times, dates and doses to the web-based software system Growzen® Connect.
AluettaⓇ (the SaizenⓇ pen) is now available in 67 countries with the objective of expanding the reach of
SaizenⓇ, offering additional options for healthcare practitioners and patients and expanding our devices
portfolio.
In endocrinology, we build evidence in the digital health space and leverage technology to provide new
solutions for patient engagement, partnership with healthcare practitioners and better payer value proposition.
Minimizing the ecological footprint of our operations*
We are continuously taking action to further reduce the negative ecological impact of our operations on our
planet with a holistic approach that includes our locations, products, logistics and patients. A portfolio-related
activity to reduce the ecological footprint of our operations is the partnership we entered in May with Novo
Nordisk, Eli Lilly and Sanofi to pioneer the world's first cross-industry solution for recycling materials from
injection pens after use by patients.
Cardiovascular, Metabolism & Endocrinology (CM&E), which includes the medicines Glucophage®, Euthyrox®,
ConcorⓇ, and SaizenⓇ, is the largest franchise of the Healthcare business sector in terms of sales.
Denmark was chosen because of the existing recycling infrastructure in the country. Today, the four companies
involved in this partnership account for around six million injection pens used in Denmark annually. The
ambitious target for the first 12 months is for 25% of all injection pens distributed by the four companies in
Denmark to be recycled, amounting to more than 25 metric tons of plastic.
Electronics
-1.60%
2.70%
17.30%
110.00%
50.0
50.8
1.50%
0.80%
Gabriele Eismann
88.5
Member of the Supervisory Board
Sascha Held
13.10%
2.10%
0.70%
112.0
112.8
Wolfgang Büchele
0.50%
85.00%
Barbara Lambert (since August 11, 2023)
89.3
30.5
50.0
50.8
50.0
50.8
Anne Lange
42.00%
1.50%
-66.00%
50.8
Renate Koehler
45.30%
1.50%
Birgit Biermann (since July 14, 2022)
50.0
Michael Kleinemeier
42.00%
-1.40%
20.70%
10.50%
59.5
65.8
Jürgen Glaser
116.00%
23.5
50.8
5.90%
695
7,409
-11.30%
41.80%
-11.80%
-60.60%
10,189
4,011
Stefan Oschmann (until April 30, 2021)
Udit Batra (until July 13, 2020)
Former Member of the Executive Board
609
-9.70%
43.20%
17.00%
-0.30%
7,180
7,158
288.90%
32.60%
3,597
4,768
Matthias Heinzel (since April 1, 2021)
Marcus Kuhnert (until June 30, 2023)
Helene von Roeder (since July 1, 2023)
185.10%
633
2,131
-70.30%
-43.80%
Further former members
-43.00%
6.70%
-3.50%
443
443
Bernd Reckmann (until April 29, 2016)
67.10%
10.30%
8.80%
6,999
695
Karl-Ludwig Kley (until August 31, 2016)
-10.10%
22.30%
-47.00%
-77.80%
1.50%
154
Walter Galinat (until September 30, 2018)
-16.30%
-19.40%
756
45.30%
1.20%
50.8
52.60%
56.80%
7.30%
59.40%
-16.20%
9.50%
17.70%
-16.10%
241,958
3,288,000
284,881
2,759,954
Profit after tax of the E. Merck Group (IFRS)
Profit after tax of the Merck KGaA (HGB)
Earnings development
1.40%
1.90%
4.20%
7.40%
2.00%
6.60%
1.70%
-2.20%
8.90%
3.90%
11.00%
Corporate Governance Compensation Report
194
Report of the Independent Auditor
To Merck Kommanditgesellschaft auf Aktien, Darmstadt/Germany
Total
compen-
sation
Meeting fees
€
€
€
€
€
€
duties
Compensation
for committee
Fixed
compensation
-0.50%
Total
compen-
sation
2022
Compensation
for committee
duties
2023
Fixed
compensation
Compensation awarded or due
191
Corporate Governance Compensation Report
Board
Responsibilities of the Executive Directors and of the Supervisory
We have audited the accompanying compensation report of Merck Kommanditgesellschaft auf Aktien,
Darmstadt, Germany, ("the Company") for the financial year from January 1 to December 31, 2023, including
the related disclosures, which has been prepared to comply with Section 162 German Stock Corporation Act
(AktG).
Meeting fees
Peter Emanuel Merck
6,184,000
62,552
99
Average compensation of an employee
42.00%
25.40%
3.70%
8.00%
65.0
65.8
Christian Raabe
87.30%
70.10%
1.50%
50.0
50.8
Alexander Putz
-1.60%
1.50%
50.0
50.8
Dietmar Oeter
42.00%
1.50%
50.0
Helene von Roeder (until April 17, 2023)
23.4
80.0
-70.80%
Average number of employees
6,152,000
Personnel expenses without pension expenses
42.00%
1.50%
50.0
50.8
Simon Thelen
42.00%
25.40%
63,642
97
3.70%
65.0
65.8
Daniel Thelen
1.50%
50.0
50.8
Helga Rübsamen-Schaeff
42.00%
50.80%
6.10%
1.20%
4,761
2022 2023/2022
Peter Guenter (since January 1, 2021)
5%
47.0 79%
65.8
6%
3.8
23%
23.5
50.8 22.0
7%
3.8
30.5
3%
0.8
37%
ལྦ། །། T
47.0 93%
47.0 93%
47.0 93%
47.0 93%
47.0 93%
Alexander Putz
Dietmar Oeter
Peter Emanuel
Merck
Anne Lange
59.5
3.8
7%
50.8 47.0 94%
3.8
50.0
6%
3.0
50.8 47.0 94%
7%
3.8
50.0
6%
3.0
Renate Koehler
94%
6%
94%
47.0
47.0
50.8
7%
50.8
7%
3.8
50.0
6%
50.0
47.0 93%
Kleinemeier
Michael
Sascha Held
15.0
84%
94.0
sand
in %
sand
thousand
112.8
3%
3.8
70.5
13%
94.0
Wolfgang Büchele
in %
sand
in %
in %
sand
thou-
thou-
€
83%
7%
79%
3.8
72%
47.0
Jürgen Glaser
93%
47.0
14, 2022)
(since July
Birgit Biermann
60%
18.4
17%
2023)
Barbara Lambert
47.0 94%
50.8
7%
3.8
47.0 93%
Gabriele Eismann
15.0
89.3 70.5 80%
4%
(since August 11,
5,144
3.8 7%
3.8
The comparative presentation in accordance with section 162 (1) no. 2 AktG shows the annual change in the
compensation of current and former members of the Executive Board as well as members of the Supervisory
Board, the development of earnings of the Merck Group and the development of the average compensation of a
full-time employee of Merck KGaA over the last five years.
Comparative presentation of compensation and
earnings development
192
Corporate Governance Compensation Report
Supervisory Board member Helene von Roeder received an additional € 150,000 (2022: € 150,000) for 2023 in this function as a member of the corporate bodies of E. Merck KG.
Supervisory Board member Peter Emanuel Merck received an additional € 80,000 (2022: € 80,000) for 2023 in this function as a member of the corporate bodies of E. Merck KG.
Supervisory Board member Daniel Thelen received an additional € 140,000 for 2023 in this function as a member of the corporate bodies of E. Merck KG (2022: € 140,000).
Supervisory Board member Simon Thelen received an additional € 140,000 (2022: € 140,000) for 2023 in this function as a member of the corporate bodies of E. Merck KG and an
additional €3,000 (2022: € 3,000) for 2023 as a member of the Supervisory Board of Merck Healthcare KGaA.
Supervisory Board member Michael Kleinemeier received an additional € 140,000 (2022: € 140,000) for 2023 in this function as a member of committees of E. Merck KG,
Darmstadt, Germany.
Supervisory Board member Wolfgang Büchele received an additional € 140,000 (2022: € 140,000) for 2023 in this function as a member of the corporate bodies of E. Merck KG.
Supervisory Board member Helga Rübsamen-Schaeff received an additional € 150,000 (2022: € 150,000) for 2023 in this function as a member of the corporate bodies of
E. Merck KG and an additional € 6,000 (2022: € 6,000) for 2023 as a member of the Supervisory Board of Merck Healthcare KGaA.
50.0
6%
3.0
65.0
5%
3.0
23%
50.0
6%
3.0
47.0 94%
65.8 47.0 72% 15.0
50.8 47.0 94%
7%
3.8
6%
For employee compensation, the average personnel expenses excluding company pension costs are used. This
reflects the total compensation of employees worldwide.
For members of the Executive Board, the compensation awarded or due in the fiscal years 2021, 2022 and
2023 is used in accordance with section 162 AktG. For the years 2020 and 2019, the allocated compensation is
used excluding the service costs according to the German Corporate Governance Code (DCGK) sample table in
the Compensation Report of the respective fiscal year.
Comparative presentation
in € thousand/change in %
-11.00%
37.90%
25.00%
-0.90%
7,895
7,820
Kai Beckmann (since April 1, 2011)
-6.90%
43.30%
22.20%
3.8
9,891
Belén Garijo (Chair since May 1, 2021)
Member of the Executive Board
Change
2020/2019
Change
2021/2020
Change
2022/2021
thou-
2023
Change
193
Corporate Governance Compensation Report
9,889
23%
47.0 72% 15.0
47.0 93%
Simon Thelen
17%
112.0
3%
13%
in % thousand
in %
€
thou-
་།༄་། ་། ་།
སྦྱོརྞྞཞཞ | འ ཀ།
3%
9.5 16%
5%
3.0
15.0 23%
50.0
6%
50.0
6%
3.0
50.8 47.0 94%
50.8 47.0 94%
65.8 47.0 72%
6%
65.0
23%
88.5
50.0
Daniel Thelen
50.8
7%
3.8
47.0 93%
Schaeff
Helga Rübsamen-
80.0
4%
3.0
6%
38%
3%
0.8
38%
59%
13.8
17, 2023)
Roeder (until April
Helene von
47.0 72%
Christian Raabe
23.4 47.0 59% 30.0
thou-
Signed:
The executive directors and the supervisory board of Merck Kommanditgesellschaft auf Aktien,
Darmstadt/Germany, are responsible for the preparation of the compensation report, including the related
disclosures, that complies with the requirements of section 162 AktG. The executive directors and the
supervisory board are also responsible for such internal control as they consider necessary to enable the
preparation of a compensation report, including the related disclosures, that is free from material
misstatements, whether due to fraud or error.
In particular, the Annual General Meeting passes resolutions concerning the approval of the Annual Financial
Statements, the appropriation of net retained profit, the approval of the actions of the Executive Board
members and the Supervisory Board members, the election of the auditor, amendments to the Articles of
Association, the compensation system for the Executive Board, and the control and profit and loss transfer
agreements of Merck KGaA. The shareholders of Merck KGaA exercised their rights at the virtual Annual
General Meeting using the Internet-based Annual General Meeting system and via video communication. In
addition, the shareholders were again given the opportunity to submit statements on the agenda to the
company prior to the Annual General Meeting. They were able to exercise their voting rights personally,
through an authorized representative or a proxy appointed by the company, or by postal vote. The proxies were
in attendance throughout the duration of the Annual General Meeting. All the documents and information
concerning upcoming General Meetings (including a summary explanation of shareholder rights) are also posted
on our website. The introductory speech by the Chair of the Executive Board was published in advance on the
Internet on April 17, 2023, in order to make it available to interested shareholders and members of the public
and thus satisfy the high transparency requirements of the Merck Group.
The 28th Annual General Meeting of Merck KGaA was held in Darmstadt, Germany, on April 28, 2023. In 2023,
the Executive Board again decided, with the approval of the Supervisory Board, to hold the 2023 Annual
General Meeting in virtual form, i.e. without the shareholders and their proxies attending in person. In doing so,
it exercised the option that the legislation provided with the transitional provision of section 26n (1) of the
Introductory Act to the German Stock Corporation Act (EGAktG) in relation to virtual annual general meetings
in accordance with section 118a (AktG). Shareholders and shareholder representatives participated in the
Annual General Meeting virtually. The meeting was broadcast audiovisually on the Internet in full. At 72.59%,
the proportion of share capital represented at the meeting (including postal votes) was slightly higher than in
the previous year. In 2022, the proportion of share capital represented was 70.34%. The Annual General
Meeting service provider does not forward voting instructions to Merck in advance of the Annual General
Meeting but keeps them in the system until the count takes place.
The General Meeting of Merck KGaA
Based on the provisions of the German Stock Corporation Act, the Articles of Association of Merck KGaA, and
the rules of procedure of the various committees, Merck KGaA has adopted a set of rules for the Executive
Board and its supervision that meet the requirements of the German Corporate Governance Code. The
investors, who bear the entrepreneurial risk, are protected as provided for by the German Corporate
Governance Code. We take suggestions from the capital market on corporate governance seriously and hold
discussions with investors and shareholder representatives.
The general partner E. Merck KG holds around 70% of the total capital of Merck KGaA (equity interest); the
shareholders hold the remainder, which is divided into shares (share capital). E. Merck KG is excluded from the
management of business activities. The general partners with no equity interest (Executive Board) manage the
business activities. Nevertheless, due to its substantial capital investment and unlimited personal liability,
E. Merck KG has a strong interest in ensuring that the businesses of Merck KGaA operate efficiently in
compliance with procedures. Merck KGaA's participation in the profit/loss of E. Merck KG in accordance with
articles 26 et seq. of the Articles of Association further harmonizes the interests of the shareholders and of
E. Merck KG. E. Merck KG appoints and dismisses the Executive Board. In addition, E. Merck KG has created
bodies - complementing the expertise and activities of the Supervisory Board - to monitor and advise the
Executive Board. This applies primarily to the Board of Partners of E. Merck KG.
Merck KGaA
198
Corporate Governance
Statement on Corporate Governance
For a clearer understanding, the following gives a general explanation of the application of German company
law at Merck KGaA with additional references to the Annual General Meeting and shareholder rights.
The German Corporate Governance Code is geared toward the conditions found in a German stock corporation
("Aktiengesellschaft" or "AG") and does not take into consideration the special characteristics of a corporation
with general partners ("Kommanditgesellschaft auf Aktien” or “KGaA") such as Merck KGaA. Given the
structural differences between an AG and a KGaA, several recommendations of the German Corporate
Governance Code are to be applied to a KGaA only in a modified form. Major differences between the two legal
forms exist in terms of liability and management. In the case of an AG, only the AG is liable as a legal entity,
whereas the general partners of a KGaA also have unlimited personal liability for the company's obligations
(section 278 (1) AktG). At Merck KGaA, this pertains to both E. Merck KG - which is excluded from
management and representation pursuant to article 8 (5) of the Articles of Association as well as to the
managing general partners who collectively make up the Executive Board of Merck KGaA. The members of the
Executive Board of Merck KGaA are therefore subject to unlimited personal liability. Unlike an AG, their
executive authority is not conferred by the Supervisory Board, but rather by their status as general partners.
Consequently, in addition to other responsibilities typical of the supervisory board of an AG (see description of
the procedures of the Supervisory Board), the supervisory board of a KGaA does not have the authority to
appoint the management board, draw up management board contracts, or specify the compensation of the
management board. This legal form also involves special features with regard to the Annual General Meeting.
For example, in a KGaA, many of the resolutions made require the consent of the general partners (section 285
(2) AktG), including in particular the adoption of the Annual Financial Statements (section 286 (1) AktG).
Merck KGaA applies the German Corporate Governance Code analogously where these regulations are
compatible with the legal form of a KGaA. In order to enable shareholders to compare the situation at other
companies more easily, we base corporate governance on the conduct recommendations made by the
Government Commission of the German Corporate Governance Code to a broad extent and refrain from
adopting our own, equally permissible, code. All recommendations of the German Corporate Governance Code
in the version dated April 28, 2022, the intent and meaning of which are applied, have been complied with
since the last Declaration of Conformity was submitted in February 2023.
-
Joint report of the Executive Board and the
Supervisory Board including Declaration of
Conformity
The Statement on Corporate Governance contains the Declaration of Conformity, relevant
information on practices within the company, and a description of the procedures of the corporate
bodies, as well as targets for the percentage of positions held by women and the diversity policy.
Governance
statement on corporate
Corporate Governance
Statement on Corporate Governance
199
Declaration of Conformity
thou-
Accounting and audits of financial statements
In order to ensure a high level of protection for insider information, the Executive Board issued internal insider
guidelines applicable throughout the Merck Group worldwide. The guidelines inform employees about their
responsibilities under insider trading laws and give clear instructions for compliant behavior. In addition, they
describe the function of the Insider Committee in detail. Moreover, our Code of Conduct, which is binding for all
employees, also contains an explicit, detailed reference to the ban on using insider information. Within the
scope of obligatory training courses on the Code of Conduct as well as specific training courses on insider law,
all employees are instructed on the key stipulations of insider trading.
Dealing properly with insider information is very important to us. Our Insider Committee examines the
existence of insider information, ensures compliance with legal obligations, and prepares any necessary
measures. The members of the Insider Committee are appointed by the Executive Board; at least two members
work in Group Legal & Compliance. The Insider Committee meets at regular intervals or when circumstances
require. The Chief Financial Officer is vested with the authority to make the final decision on handling potential
insider information.
Dealing with insider information
Regular press conferences, investor meetings on the occasion of investor conferences, and roadshows offer
another platform for dialog. The company presentations prepared for this purpose are also available on the
Merck KGaA website. In addition, the Investor Relations team is available to private and institutional investors
who wish to receive further information. To ensure the greatest possible transparency, all documents
concerning the General Meeting are available on the company website. Additionally, at least some parts of the
General Meeting are generally webcast live on the Internet. The Annual General Meeting on April 28, 2023, was
again held virtually and hence was webcast live on the Internet in full.
Information subject to disclosure requirements, as well as information that is not, can be accessed worldwide
on the Merck KGaA website (www.merckgroup.com), which is the company's most important publication
platform. In addition to a comprehensive financial calendar, quarterly statements and/or quarterly and half-
year financial reports covering at least the past five years are available there in German and English. In line
with the legal requirements, ad hoc announcements are also published on the website. These contain
information on circumstances and facts that could impact the Merck share price.
It is Merck KGaA's objective to provide the latest information to all shareholders, media, financial analysts, and
interested members of the public, while creating the greatest possible transparency. For this reason, Merck
uses a wide range of communication platforms to engage in a timely dialog with all interested parties about the
company's situation and business changes. Merck's principles include providing factually correct,
comprehensive, and fair information.
Reporting
Information on corporate governance practices
200
Corporate Governance Statement on Corporate Governance
For the Supervisory Board
signed Wolfgang Büchele
For the Executive Board
signed Belén Garijo
Darmstadt, February 2024
With regard to future compliance with the current recommendations of the Government Commission of the
German Corporate Governance Code, the Executive Board and the Supervisory Board declare the following: The
company will comply with the recommendations of the Code in the version dated April 28, 2022."
In accordance with section 161 AktG, applying the provisions of the German Corporate Governance Code
correspondingly, the Executive Board and the Supervisory Board issued the following Declaration of Conformity
with the recommendations of the Government Commission of the German Corporate Governance Code:
"Declaration of the Executive Board and the Supervisory Board of Merck KGaA on the recommendations of the
Government Commission of the German Corporate Governance Code pursuant to section 161 of the German
Stock Corporation Act (AktG). Since the last Declaration of Conformity in February 2023, we have complied
with all the recommendations of the Government Commission of the German Corporate Governance Code in the
version dated April 28, 2022, as published in the official section of the German Federal Gazette.
197
Statement on Corporate Governance
Merck KGaA prepares its Consolidated Financial Statements and Combined Management Report in accordance
with the International Financial Reporting Standards (IFRS) effective at the end of the reporting period and
adopted by the European Union and the additional provisions of section 315e (1) of the German Commercial
Code (HGB). The Consolidated Financial Statements and the Combined Management Report are prepared by
the Executive Board and examined by an auditor, taking into account the German generally accepted standards
for the audit of financial statements promulgated by the Institute of Public Auditors in Germany (Institut der
Wirtschaftsprüfer, IDW).
Further information can be found under "Merck KGaA" in the "Statement on Corporate Governance".
Wirtschaftsprüfungsgesellschaft
Deloitte GmbH
Frankfurt am Main, Germany, February 16, 2024
This report is not intended to be used by third parties as a basis for any (asset) decision. We are liable solely to
Merck Kommanditgesellschaft auf Aktien, Darmstadt, Germany, and our liability is also governed by the
engagement letter dated July 24/28, 2023, agreed with the Company as well as the "General Engagement
Terms for Wirtschaftsprüfer and Wirtschaftsprüfungsgesellschaften (German Public Auditors and Public Audit
Firms)" promulgated by the Institut der Wirtschaftsprüfer (IDW) in the version dated January 1, 2017 (IDW-
AAB). However, we do not accept or assume liability to third parties.
Liability
We issue this report as stipulated in the engagement letter agreed with the Company. The audit has been
performed for the purposes of the Company and the report is solely intended to inform the Company about the
result of the audit.
Corporate Governance
The audit of the content of the compensation report described in this report comprises the formal audit required
under section 162 (3) AktG including the issuance of a report on this audit. Since our audit opinion on the audit
of the content is unmodified, this audit opinion includes that the disclosures required under section 162 (1) and
(2) AktG are contained, in all material respects, in the compensation report.
Other Matter - Formal Audit of the Compensation Report
195
Corporate Governance Compensation Report
In our opinion, on the basis of the knowledge obtained in the audit, the compensation report for the financial
year from January 1 to December 31, 2023, including the related disclosures, complies, in all material respects,
with the accounting principles of section 162 AktG.
Audit Opinion
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
audit opinion.
An audit involves performing audit procedures in order to obtain audit evidence for the amounts stated in the
compensation report, including the related disclosures. The choice of the audit procedures is subject to the
auditor's professional judgment. This includes assessing the risk of material misstatements, whether due to
fraud or error, in the compensation report, including the related disclosures. In assessing these risks, the
auditor considers the system of internal control, which is relevant to preparing the compensation report,
including the related disclosures. Our objective is to plan and perform audit procedures that are appropriate in
the circumstances, but not to express an audit opinion on the effectiveness of the Company's system of internal
control. An audit also comprises an evaluation of the accounting policies used, of the reasonableness of
accounting estimates made by the executive directors and the supervisory board as well as an evaluation of the
overall presentation of the compensation report, including the related disclosures.
Our responsibility is to express an opinion on this compensation report, including the related disclosures, based
on our audit. We conducted our audit in compliance with German Generally Accepted Standards for Financial
Statement Audits promulgated by the Institut der Wirtschaftsprüfer (IDW). These Standards require that we
fulfill the professional responsibilities and that we plan and perform the audit so that we obtain reasonable
assurance as to whether the compensation report, including the related disclosures, is free from material
misstatements.
Auditor's Responsibilities
Christoph Schenk
Wirtschaftsprüfer
Intended Use of the Report
Signed:
€ 397,196,314.35
(German Public Auditor)
General partner E. Merck KG
holds equity interest
Board of Partners of
E. Merck KG
€ 168,014,927.60
Shareholders hold share capital
Supervisory board
MONITORING
Annual General Meeting
€ 565,211,241.95
Total capital of Merck KGaA
capital structure and
corporate Bodies of
Merck KGaA
196
Corporate Governance Capital Structure and Corporate Bodies of Merck KGaA
(German Public Auditor)
Wirtschaftsprüfer
Daniel Weise
Executive Board of Merck KGaA
General partners with no equity interest
Statement on Corporate Governance
and workflows to enhance
Data Privacy compliance
BUSINESS
COUNSELING
Creates high value
business advice
and provides
tailored solutions
Corporate Governance
205
Before an Executive Board member takes on honorary offices, board positions, or other sideline activities, this
must be approved by the Personnel Committee of the Board of Partners of E. Merck KG. The Chair of the
Executive Board, Belén Garijo, the Chief Financial Officer until June 30, 2023, Marcus Kuhnert, and the Chief
Financial Officer from July 1, 2023, Helene von Roeder, are also members of the Executive Board of
E. Merck KG. This does not, however, create conflicts of interest.
-
reporting and evaluating potential data privacy violations, and processing requests from data subjects. Our
understanding of data privacy throughout the Group is based on European legislation in particular, including the
data privacy principles of the EU's General Data Protection Regulation (EU GDPR), which has been in force since
May 2018. However, we also comply with and implement local data privacy regulations.
Corresponding training and awareness measures are a core element of any data privacy management system.
The effective communication of relevant standards, procedures and other guidelines in the form of regular
training is important, as are regular awareness measures in order to establish an appropriate culture of data
privacy within our company. Our data privacy services comprise general awareness measures, such as e-
learning on data privacy that is mandatory for all Merck employees, and broad-based communication using
various channels including e-mail and the company intranet, as well as targeted training, e.g. interactive
training for certain subsets of employees and standardized training sets focusing on specific topics and tailored
to corresponding groups of companies.
Risk and opportunity management
For detailed information, including a description of the main characteristics of the entire internal control system
and risk management system and the statement on the appropriateness and effectiveness of these systems,
please refer to the “Internal control system” section of the "Report on Risks and Opportunities” in the
Management Report.
Avoidance of conflicts of interest
Within the framework of their work, all Executive Board and Supervisory Board members of Merck KGaA are
exclusively committed to the interests of the company and neither pursue personal interests nor grant
unjustified advantages to third parties.
The Data Privacy organization has put specific guidelines in place to ensure that Data Privacy processes comply
with the relevant regulations. The Group Data Privacy Policy defines the standards according to which data is
processed, stored, used, and transmitted at Merck. This enables us to provide a high level of privacy when it
comes to processing the data of our employees, contract partners, customers, suppliers, patients, healthcare
practitioners, and participants in clinical trials. The statutory documentation requirements are realized in a
central IT tool that also serves as the basis for other key data privacy processes: documenting processing
activities, performing a general risk audit and if required by law a specific data privacy impact assessment,
Systems, processes, templates
Monitoring & Reporting
Training & Awareness
Appropriate training and
additional measures to
educate and keep
awareness high
In its report to the General Meeting, the Supervisory Board discloses any conflicts of interest involving its
members and how they were dealt with. Consultancy agreements as well as other service and work contracts of
2
Tracking of data privacy
key metrics; internal and
external reporting
incl. forum
6
3
5
4
Individuals' Requests
Responses to requests
for information and data
deletion by data subjects
Policies & Procedures
Global data privacy policies,
standards and procedures
Risk Assessment &
Documentation
Identify internal &
external risks; records of
processing activities
Programs & Tools
a Supervisory Board member with Merck require the approval of the Supervisory Board. In fiscal 2023, there
were neither conflicts of interest nor consultancy agreements or other service or work contracts with
Merck KGaA involving Supervisory Board members.
Frankfurt am Main, Chair
Kai Beckmann
206
Weinheim, CEO Life Science
Marcus Kuhnert (until June 30, 2023)
Königstein, Chief Financial Officer
Helene von Roeder (as of July 1, 2023)
Frankfurt am Main, Chief Financial Officer
Memberships of
(a) statutory supervisory boards and
(b) comparable German and foreign supervisory bodies of corporations
(b) ⚫ Banco Bilbao Vizcaya Argentaria S. A., Bilbao, Spain (listed)
⚫L'Oréal S. A., Clichy, France (listed)
(a) ⚫Bundesdruckerei GmbH, Berlin, Germany (not listed)
⚫ Bundesdruckerei Gruppe GmbH, Berlin, Germany (not listed)
Matthias Heinzel
(b)
Galapagos N.V., Mechelen, Belgium (listed)
• Zentiva Group a.s., Prague, Czech Republic (not listed)
No mandates
(b) ⚫ Döhler Group SE, Darmstadt, Germany (not listed)
No mandates
The general partners with no equity interest (Executive Board) manage the business activities in accordance
with the laws, the Articles of Association, and the rules of procedure. They are appointed by E. Merck KG with
the approval of a simple majority of the other general partners. The members of the Executive Board are jointly
responsible for the entire management of the company. Certain tasks are assigned to individual Executive
Board members based on a responsibility distribution plan. Each Executive Board member promptly informs the
other members of any important actions or operations in his or her respective business area. Among other
things, the Executive Board is responsible for preparing the Annual Financial Statements of Merck KGaA and of
the Merck Group as well as for approving the quarterly and half-year financial statements of the Merck Group.
In addition, the Executive Board ensures that all legal provisions, official regulations, and the company's
internal policies are observed, and works to achieve compliance with them by all the companies of the Merck
Group. A Group-wide guideline defines in detail which transactions require prior approval by the Executive
Board.
The Executive Board provides the Supervisory Board and its Audit Committee with regular, up-to-date, and
comprehensive reports about all company-relevant issues concerning strategy, planning, business
development, risk situation, risk management, and compliance. The rules of procedure of the Executive Board
and of the Supervisory Board regulate the further details and ensure that the Supervisory Board is kept
adequately informed by the Executive Board.
7
•
Corporate Governance Statement on Corporate Governance
Berlin, CEO Healthcare
Darmstadt, CEO Electronics
Adherence to environmental and safety standards
Our thinking and actions with regard to environmental protection and safety are based on the principle of
sustainability and the guidelines for responsible action as set out by the International Council of Chemical
Associations (ICCA) in its Responsible Care Global Charter, which emphasizes overall responsibility for products,
supply chains, and society. We have signed up to this charter and declared its principles to be binding
throughout the Group in our Environment, Health and Safety (EHS) Policy.
We also adopt environmental safety and protection targets with the aim of permanently improving our
environmental protection and safety:
We have set ourselves the goal of climate-neutral business operations along the entire value chain by
2040. By 2030, we aim to reduce our direct (Scope 1) and indirect (Scope 2) emissions by 50% compared
with 2020. Our goal is to achieve this primarily by reducing process-related emissions and implementing
energy efficiency measures. In terms of our Scope 3 emissions, we want to reduce emissions throughout
the entire value chain by 52% (per € of value added) by 2030. These short-term targets for 2030 were
approved by the Science Based Targets Initiative (SBTi) in May 2022. The independent initiative assesses
and approves companies' targets based on its strict climate science criteria. By receiving this confirmation,
we are helping limit global warming to 1.5 °C, meeting the requirements of the Paris Agreement.
In addition, we are aiming to source 80% of our purchased electricity from renewable energies by 2030.
We also intend to reduce the environmental impact of our waste, reduce water intensity, and improve the
quality of our wastewater by 2030. Having achieved our short-term targets for waste and water
consumption to 2025 ahead of schedule in 2023, we have adopted new ambitions for the period to 2030.
By the end of the decade, we want to achieve a circularity rate of 70% in our waste flows and improve our
water intensity (per euro of value added) by 50%.
To improve occupational safety, we aim to lower the lost time injury rate (LTIR) to below 1 by 2025.
Merck has also rolled out BeHealthy, a global program aimed at maintaining and promoting employee health.
The objective of the program is to strengthen the physical, mental, social and workplace-related health of all
employees for the long term. The focal points of the content are healthy leadership, mindfulness, and delivering
a diverse healthcare offering that is accessible globally.
Based on the EHS Policy, many guidelines specify how the sites and employees of the Merck Group are to
observe the principles in their daily work. The Group function Corporate Sustainability, Quality and Trade
Compliance steers these global activities and ensures compliance with statutory requirements, internal
standards, and business needs throughout the entire Group. In this way, Group-wide risks are minimized, and
continuous improvement is promoted in the areas of environment, health, safety, security, and quality.
Peter Guenter
We report on our ecological, environmental and social performance transparently in accordance with the
internationally recognized principles of the Global Reporting Initiative (GRI), the standards issued by the
Sustainability Accounting Standards Board (SASB), and the recommendations of the Task Force on Climate-
related Financial Disclosures (TCFD).
207
Procedures of the Executive Board,
Supervisory Board, Board of Partners, and its
Committees
Members of the Executive Board of Merck KGaA
Information on memberships of statutory supervisory boards and comparable German and foreign supervisory
bodies (section 285 no. 10 HGB in conjunction with section 125 (1) sentence 5 AktG).
Member
Belén Garijo
Corporate Governance Statement on Corporate Governance
8
Training & Awareness
misconduct and case
1
7
Monitoring & Reporting
2
Tracking of Compliance-
related data; perform
internal & external
reporting
8
3
Global policies, procedures
and standards to mitigate
identified risks
Compliance
Committee / Forum
Platform for Compliance-
related discussion and
decision making including
relevant key functions
BUSINESS
COUNSELING
Is a core activity
reflected into the
daily cross- and
sector-specific
advice
Programs & Tools
5
Policies & Procedures
of corrective actions
misconduct and implementation
Timely response to reports of
Corporate Governance Statement on Corporate Governance
201
The Supervisory Board commissioned Deloitte GmbH Wirtschaftsprüfungsgesellschaft, Munich, to audit the
Consolidated Financial Statements and the Combined Management Report for 2023. Deloitte GmbH
Wirtschaftsprüfungsgesellschaft, Munich, is obliged to inform the Supervisory Board without delay of any
grounds for disqualification or bias occurring during the audit if these cannot be immediately rectified.
Additionally, the auditor shall immediately report to the Supervisory Board any findings and issues that emerge
during the audit that have a direct bearing upon the tasks of the Supervisory Board. The auditor shall inform
the Supervisory Board or note in the audit report any circumstances determined during the audit that would
render inaccurate the Declaration of Conformity made by the Executive Board and the Supervisory Board. It has
also been agreed with the auditor that in order to assess whether the Executive Board has fulfilled its
obligations in accordance with section 91 (2) of the German Stock Corporation Act (AktG), the audit will also
cover the company's early warning risk identification system. Moreover, the auditor is required to examine and
evaluate the accounting-relevant internal control system as part of its audit insofar as this is necessary and
appropriate for assessing the accuracy of financial reporting.
Since 2023, Deloitte GmbH Wirtschaftsprüfungsgesellschaft, Munich, has been the auditing firm responsible for
the statutory audit of the Annual Financial Statements and Consolidated Financial Statements of Merck KGaA.
The auditor responsible for auditing the Consolidated Financial Statements changes regularly as required by
law. Daniel Weise is currently leading the audit engagement. Mr. Weise has been the auditor in charge of the
engagement since fiscal 2023. Deloitte GmbH Wirtschaftsprüfungsgesellschaft, Munich, has assured the
company that it is independent of the group entities in accordance with the requirements of European law and
German commercial and professional law, and that it has fulfilled its other German professional responsibilities
in accordance with these requirements. The Supervisory Board has found no grounds to doubt the
independence of Deloitte GmbH Wirtschaftsprüfungsgesellschaft, Munich. Neither party identified any conflicts
of interest. The Audit Committee reviews the quality of the audit, including the performance of the auditor in
charge of the engagement, annually on the basis of objective indicators.
Further reports
The Combined Management Report of Merck KGaA and the Merck Group includes a combined non-financial
declaration that incorporates the non-financial declaration of the Merck Group in accordance with section 315b
HGB and the non-financial declaration of Merck KGaA in accordance with 289b HGB and section 315b (1) HGB
in conjunction with section 298 (2) HGB. It is included as a separate chapter of the Combined Management
Report. An overview of the information contained in the combined non-financial declaration can be found at
"Topics for the non-financial statement”. In addition, Merck publishes a sustainability report that meets the
requirements of the Global Reporting Initiative (GRI) standards and contains reports in accordance with the
standards published by the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-
related Financial Disclosures (TCFD). This will be available from April 11, 2024, as an online version on the
company's website at https://www.merckgroup.com/en/sustainability-report/2023. In addition, the
remuneration report, which is also published on the company's website, is included as a separate item of the
disclosures on corporate governance.
Values and compliance
-
First and foremost, responsible entrepreneurship means acting in accordance with the law also known as
compliance. All our activities are required to adhere to the applicable laws, regulations, and international ethical
standards around the world. Compliance violations would result not only in possible legal action but also could
seriously compromise our reputation as an employer and business partner.
Our Group Compliance function is responsible for the core topics: Merck's Code of Conduct, anti-corruption and
anti-bribery (including healthcare compliance, third-party due diligence, transparency reporting), anti-money
laundering, and conflicts of interest. Group-wide and local policies, procedures, and processes are in place for
these important compliance topics in order to ensure that our business activities are consistent with the
relevant laws, regulations, and international ethical standards.
Corporate Governance Statement on Corporate Governance
Our compliance management system encompasses eight core elements and ongoing consultation with the
business fields that make up our compliance portfolio:
Elements of our compliance program
Continuous Improvement
Based on and applying to all
Compliance Program Elements
Risk Assessment
Identifying internal and external critical
risks in regular business operations
Case Management
4
management
Comprehensive Compliance
The Executive Board informs the Board of Partners and the Supervisory Board at least quarterly of the progress
of business and the situation of the company. In addition, the Executive Board informs the aforementioned
boards at least annually of the company's annual plans and strategic considerations.
A further focus area of the Compliance Program is ensuring legally and ethically correct dealings with medical
stakeholders and adhering to the transparency requirements. The Compliance organization has agreed on
extensive measures with the affected areas of the company in order to establish an internal framework of rules
as well as the corresponding processes for approving and documenting interactions with healthcare
professionals that ensure Merck complies with reporting obligations. We, of course, also ensure compliance with
the respectively valid data protection regulations.
The importance of compliance is also reflected in the subsidiaries, which ensure via country representatives that
compliance measures are implemented effectively in the countries. Compliance tasks in the countries are
largely performed by full-time compliance officers. In terms of the functional structure, compliance officers in
the countries report directly and indirectly to the Group Compliance Officer. A separate responsibility was
created for Group functions. Regular regional and global compliance meetings are held to promote the
exchange of information within the Compliance organization. This is supplemented by a global concept for local
compliance forums and global compliance committees, at which relevant compliance-related topics are
discussed with senior management. These constitute an important element of risk assessment and quality
assurance.
Newcomer trainings are run for newly appointed compliance officers. These seminars serve to build up
compliance expertise and strengthen cooperation within the Compliance organization. This Group-wide network
is used to steer the global Compliance Program. The Compliance organization is also involved in the relevant
due diligence processes for the incorporation of new business units as well as possible divestments and
acquisitions, and the subsequent integration of companies. Within the scope of the global compliance program,
a high degree of importance is given to regular compliance trainings of the Merck Compliance Training Plan,
which are conducted as web-based training courses and classroom sessions. The various training topics
addressed, particularly on the Code of Conduct, anti-corruption and bribery, conflicts of interest, anti-money
laundering, antitrust and competition law, and healthcare compliance, serve to sensitize employees and
management on the consequences of compliance violations.
Corporate Governance Statement on Corporate Governance
204
As described in various compliance training courses and the Code of Conduct, whistleblowers may choose from
various reporting channels. The choice of reporting channel may depend on the reason for the report and the
whistleblower's preferences in the respective circumstances. Reports to the central reporting channels,
including the Compliance hotline, are received directly by an independent and qualified team at Group
Compliance and examined. The report may be forwarded to a different responsible function for further
processing depending on the nature and content of the report. Employees and individuals from outside the
company can report potential compliance violations to the Compliance hotline by telephone or via a web-based
application in their respective language. The Compliance hotline is available 24 hours a day, free of charge. The
system enables anonymous, two-way communication. If there is evidence of a compliance violation,
corresponding corrective measures are taken based on concrete action plans. If necessary, disciplinary
measures are taken which can range from a simple verbal warning up to the dismissal of the employee who
violated a compliance rule. Merck has set up a Compliance Case Committee to guide these processes. The
Compliance Case Committee consists of senior members from various Group governance functions; they are
involved in reviewing certain compliance violations and initiating appropriate and necessary measures. The joint
work in the Compliance Case Committee enables processes between the various Group functions to be
coordinated optimally and designed efficiently and potential risks to be addressed adequately.
Our Group Compliance Officer reports on the status of our compliance activities, potential risks and serious
compliance violations to the Executive Board and Audit Committee twice a year at a minimum. As part of our
regular reporting processes, we compile a comprehensive compliance and data privacy report annually for the
Executive Board. This includes the status of our compliance program, continuous improvement initiatives and
key figures on compliance and data privacy cases. Additionally, we prepare a mid-year update to highlight
ongoing developments and the status of relevant projects and initiatives.
Data privacy
Our data privacy management system encompasses various elements of our portfolio alongside the pillars of
people and communication. The portfolio is composed as follows:
Elements of our Data Privacy program
Continuous Improvement
Based on and applying to all
Data Privacy Program Elements
Incident Management
Response to reports of
Group Data Privacy at Merck is integrated into the Group's Compliance organization. As required by law, this
department operates independently and without being required to follow instructions. The department regularly
prepares data privacy updates and produces a comprehensive data privacy report at regular intervals as part of
our broader compliance reporting efforts. The Group Data Privacy Officer has a team of dedicated local data
privacy officers working in countries that are particularly privacy-sensitive for Merck. Other individuals around
the world also serve as local Data Privacy Officers alongside their core activity for Merck. The tasks of these two
groups of local data privacy officers include implementing and applying the global data privacy policy in the
countries, performing regular efficiency tests, and promoting awareness of data privacy. They also advise the
company on relevant and critical matters relating to data privacy. A Center of Expertise also provides support in
the form of structures and tools.
The Group Compliance Officer is responsible for the establishment, maintenance, and further development of
our global Compliance Management System. Among other things, the Group Compliance Officer and its team,
consisting of a global Compliance Center of Expertise and compliance officers, take appropriate measures to
help lower the risk of serious compliance violations and implement the compliance program across Merck
globally. Our Compliance Center of Expertise is a central body responsible for designing and structuring our
compliance program in all business areas and Group functions.
The Compliance department monitors observance of the Code of Conduct with support from corresponding
monitoring and training programs throughout the company. Suitable controls and tailored training programs
across the company ensure monitoring of the Code of Conduct. All employees are called upon to report
potential compliance violations, so that Merck can take the necessary and appropriate action. In cooperation
with Group Internal Auditing, the Compliance Office regularly reviews the implementation of Group-wide
compliance measures at the subsidiaries. The audits regularly focus on the local compliance structure, the
compliance measures taken, and the existence of corresponding compliance guidelines and processes.
customers, suppliers, distributors etc.) to comply with these principles or to have their own comparable
principles. Our Business Partner Code of Conduct describes our expectations and requirements regarding
human rights, health and safety, integrity, environmental protection, and continuous improvement. While
supplier management ensures compliant behavior of suppliers, global business partner risk management
encompasses the relations with sales-related business associates such as distributors, commercial agents,
dealers and high-risk suppliers.
Appropriate training and
contributing to internal controls
additional measures to educate
and keep awareness high
202
and overall governance
Living our values together is the underlying principle of our compliance management system. The Compliance
department adopts a specific brief in this respect.
A global framework for ethical and legally compliant business processes serves to minimize risk. We achieve
this by identifying specific compliance risks and requirements. Suitable policies and effective controls are
implemented in order to reduce risk. Our goals also focus on our employees. We achieve this by informing
employees about the applicable compliance rules and ethical standards and by giving them the responsibility for
complying with these requirements. This serves to strengthen employees' sense of responsibility and
accountability. As compliance is the second line of defense against risks, it is important that we consistently
safeguard what really matters. This is why we regularly monitor key indicators that allow us to assess risks and
the effectiveness of controls. Compliance not only contributes to company growth but also creates targeted
value added by allowing us to advise the business sectors and help them to navigate the respective compliance
requirements. Our advice takes into account and adapts to changing business requirements.
Based on a corporate culture that places the fundamental company values
responsibility, respect, integrity, and transparency
-
-
courage, achievement,
at the center of our entrepreneurial actions, our Code of
Conduct (https://www.merckgroup.com/company/responsibility/en/regulations-and-
guidelines/code-of-conduct.pdf) helps us implement these when dealing with one another daily. The Code
of Conduct applies to all Merck employees in all countries and at all levels of our organization.
With its Code of Conduct, Merck has established a set of rules intended to help our employees to act
responsibly and to make the right decisions in their daily work.
The Code of Conduct explains the company principles for dealings with business associates, shareholders,
colleagues, and employees, and within the scope of our responsibility for society. Therefore, it supports all
employees in acting ethically - not only in their dealings with one another but also outside the company.
Accordingly, the Code of Conduct is also the main set of rules for our Compliance Program. Merck has aligned
the content of its Code of Conduct with the Merck values and integrated important topics such as data privacy,
healthcare compliance, and bioethics.
To Merck, compliance means observing legal and internal regulations and the basic ethical principles anchored
in the company's values. With the Code of Conduct and the various unit-specific ethical compliance rules, the
values are integrated into daily work and business practice. We also expect our business partners (e.g.
Corporate Governance Statement on Corporate Governance
203
Programs & supporting tools
The Executive Board passes its resolutions in meetings that are normally held once a month.
Barbara Lambert
208
of the
Supervisory
Board
5/5
May 09, 2014
5/5
(a) Merck Electronics KGaA, Darmstadt,
Germany (not listed)
May 28, 2020
Attendance
of meeting
5/5
Apr. 26, 2019
5/5
(a) AVW Versicherungsmakler GmbH, Hamburg,
Germany (not listed)
Apr. 26, 2019
1/1
until
⚫ Deutsche Wohnen SE, Berlin, Germany
(listed)
No board positions
Apr. 17, 2023
Apr. 26, 2019
Member of the
Corporate Governance Statement on Corporate Governance
209
Member
Peter Emanuel Merck²
Hamburg, Managing Partner of Golf-Lounge
GmbH, Hamburg (Independent Shareholder
Representative)
Dietmar Oeter
Seeheim-Jugenheim, Vice President Corporate
Quality Assurance
Supervisory
Board since
Alexander Putz
Höchst, IT Business Partner Darmstadt Site
Helene von Roeder
Frankfurt am Main, at that time Member of the
Executive Board (CTO) of Vonovia SE, Bochum
(Independent Shareholder Representative)
Memberships of
(a) other statutory supervisory boards and
(b) comparable German and foreign supervisory bodies of
corporations
No board positions
No board positions
Michelstadt, Chemical Laboratory Assistant (full-
time member of the Merck Joint Works Council)
Christian Raabe
(b)
⚫ E. Merck KG, Darmstadt, Germany¹
(not listed)
Helga Rübsamen-Schaeff
(b)
⚫ E. Merck KG, Darmstadt, Germany¹
(not listed)
1 Internal board position.
2 Members delegated according to article 6 (5) of the Articles of Association.
The Supervisory Board performs a monitoring function. It supervises the Executive Board's management of the
company. In comparison with the supervisory board of a German stock corporation, the role of the supervisory
board of a corporation with general partners (KGaA) is limited. This is due to the fact that the members of the
Executive Board are personally liable partners and therefore are responsible for the management of the
company. In particular, the Supervisory Board is not responsible for appointing and dismissing general partners
or for regulating the terms and conditions of their contracts. This is the responsibility of E. Merck KG. Similarly,
the Supervisory Board does not have the authority to issue rules of procedure for the Executive Board or a
catalog of business transactions requiring approval. This is also the responsibility of E. Merck KG (article 13 (3)
sentence 1 and (4) sentence 1 of the Articles of Association).
However, the fact that the Supervisory Board has no possibility of directly influencing the Executive Board
restricts neither its information rights nor its audit duties. The Supervisory Board must monitor the legality,
regularity, usefulness, and economic efficiency of the Executive Board. In particular, the Supervisory Board has
the duty to examine the reports provided by the Executive Board. This includes regular reports on the intended
Corporate Governance Statement on Corporate Governance
⚫ Merck Electronics KGaA, Darmstadt,
Germany (not listed)
210
The members of the Board of Partners of E. Merck KG and of the Supervisory Board may be convened to a joint
meeting if so agreed by the chairpersons of the two boards.
The Supervisory Board has adopted rules of procedure for its activities that are available on the company's
website at: https://www.merckgroup.com/company/who-we-are/management-and-company-
structure/supervisory-board/EN/Rules-of-Procedure-Supervisory-Board-EN.pdf.
The rules of procedure prescribe that the Supervisory Board may form committees. The Supervisory Board has
formed a Nomination Committee and an Audit Committee.
The Nomination Committee comprises three shareholder representatives. Its members are Wolfgang Büchele
(Chair), Helga Rübsamen-Schaeff, and Simon Thelen. The Nomination Committee is responsible for proposing
to the Supervisory Board suitable candidates for its proposal to the Annual General Meeting. In addition to the
legal requirements and the recommendations of the German Corporate Governance Code, the objectives of the
Supervisory Board with respect to its composition, the qualification matrix, and the diversity policy must be
taken into consideration.
The Audit Committee comprises three shareholder representatives and three employee representatives. The
members of the Audit Committee are Helene von Roeder (Chair) until April 17, 2023, and Barbara Lambert
(Chair) since August 11, 2023, Wolfgang Büchele, Jürgen Glaser, Sascha Held, Christian Raabe, and Daniel
Thelen.
The German Stock Corporation Act and the German Corporate Governance Code in the versions currently
applicable to the company state that at least one member of the Audit Committee shall have professional
expertise in accounting and at least one additional member of the Audit Committee shall have professional
expertise in auditing. Accounting and auditing also include sustainability reporting and its audit and assurance.
The Chair of the Audit Committee should have professional expertise in at least one of the two areas. As
financial experts, Helene von Roeder and Barbara Lambert both have particular knowledge and experience of
the application of reporting principles and internal control and risk management systems. They are also familiar
with auditing and, in this context, with sustainability reporting. Helene von Roeder's aforementioned knowledge
is based, among other things, on her previous role as a member of the Management Board of Vonovia SE, to
which she belonged first as Chief Financial Officer (CFO) and later as Chief Technology Officer (CTO). She was
also the Chair of the Audit Committee of the company's Supervisory Board and the Finance Committee of the
Board of Partners of E. Merck KG (stepping down on April 17, 2023). Helene von Roeder thus qualifies as a
financial expert within the meaning of section 100 (5) of the German Stock Corporation Act (AktG) and
Recommendation D.3 of the German Corporate Governance Code. Barbara Lambert's aforementioned
knowledge is based, among other things, on her education and many years of activity as an auditor and a
business policy, as well as other fundamental issues pertaining to corporate planning, especially financial,
investment, and HR planning, the profitability of the Merck Group, and the course of business. In particular, this
also includes IT security and sustainability issues, which fall within the responsibility of the Audit Committee.
The regular reports pertaining to Group Internal Auditing, risk management, the internal control system, and
compliance are received by the Audit Committee of the Supervisory Board. In addition, by means of
consultation with the Executive Board, it creates the basis for supervision of the management of the company
by the Supervisory Board in accordance with section 111 (1) AktG. The Supervisory Board and the Audit
Committee examine the Annual Financial Statements as well as the Consolidated Financial Statements and the
Combined Management Report, taking into account the auditor's reports. Moreover, the Audit Committee
discusses the quarterly statements and the half-year financial report, taking into account in the latter case the
report of the auditor on the audit review of the abridged financial statements and the interim management
report of the Group, and reports to the Supervisory Board. The adoption of the Annual Financial Statements is
not the responsibility of the Supervisory Board, but of the Annual General Meeting. The Supervisory Board and
the Audit Committee normally meet four times a year. Further meetings may be convened if requested by a
member of either the Supervisory Board or the Executive Board. As a rule, resolutions of the Supervisory Board
are passed at meetings at the instruction of the Chair. In exceptional cases a resolution may be passed by
other means, details of which are given in the rules of procedure.
⚫ Merck Life Science KGaA, Darmstadt,
Germany¹ (not listed)
5/5
Apr. 26, 2019
Düsseldorf, Member of the Supervisory Board of
AiCuris Anti-infective Cures AG, Wuppertal
⚫ AVW Versicherungsmakler GmbH, Hamburg,
Germany (not listed)
(a) Merck Healthcare KGaA, Darmstadt,
Germany (Chair) (not listed)
⚫ Merck Life Science KGaA, Darmstadt,
Germany¹ (not listed)
• 4SC AG, Martinsried, Germany (listed)
• AiCuris Anti-Infective Cures AG, Wuppertal,
Germany (not listed)
(b) ⚫ E. Merck KG, Darmstadt, Germany¹
(not listed)
Daniel Thelen
Cologne, Program Manager Infrastructure at DB
InfraGO AG, Frankfurt am Main (Independent
Shareholder Representative)
Simon Thelen²
May 09, 2014
5/5
(b) E. Merck KG, Darmstadt, Germany¹
(not listed)
Apr. 26, 2019
5/5
(a)
Cologne, Senior Physician at the Clinic for Trauma
and Hand Surgery, University Hospital Düsseldorf
(Independent Shareholder Representative)
Merck Healthcare KGaA, Darmstadt,
Germany¹ (not listed)
Corporate Governance
5/5
Statement on Corporate Governance
No board positions
Apr. 26, 2019
5/5
Sascha Held
(Vice Chair of the Supervisory Board)
Riedstadt, Application Consultant (full-time
member and Chair of the Merck Joint Works
Council)
Birgit Biermann
Bochum, Member of the Central Board of
Executive Directors of the German Mining,
Chemical and Energy Industrial Union (IG BCE),
Hannover
Gabriele Eismann
5/5
Seeheim-Jugenheim, full-time member of the
Works Council
Bingen, former Regional Director of the German
Mining, Chemical and Energy Industrial Union (IG
BCE), Darmstadt
Michael Kleinemeier
Heidelberg, Managing Director of e-mobiligence
GmbH, Heidelberg
Renate Koehler
Darmstadt, Pharmacist and until January 02,
2024, Manager of Engel-Apotheke pharmacy,
Darmstadt (Independent Shareholder
Representative)
Givrins (Switzerland), Supervisory and
Administrative Board Member (Independent
Shareholder Representative)
Apr. 26, 2019
Jürgen Glaser
of the
Supervisory
Board
of meeting
Supervisory
Board since
Jul. 1, 2009
Supervisory Board
The Supervisory Board has 16 members. The Supervisory Board was composed as follows in fiscal year 2023:
Attendance
Member
Wolfgang Büchele
(Chair of the Supervisory Board)
Römerberg, Chair of Exyte GmbH, Stuttgart
(Independent Shareholder Representative)
Memberships of
(a) other statutory supervisory boards and
(b) comparable German and foreign supervisory bodies of
corporations
(a) ⚫Gelita AG, Eberbach, Germany (Chair)
(not listed)
⚫ Merck Life Science KGaA, Darmstadt,
Germany¹ (not listed)
⚫ Merck Electronics KGaA, Darmstadt,
Germany¹ (Chair) (not listed)
(b) ⚫ E. Merck KG, Darmstadt, Germany¹
(not listed)
• Wegmann Unternehmens-Holding GmbH &
Co. KG, Fürstenfeldbruck, Germany (Chair)
(not listed)
⚫ KNDS NV, Amsterdam, Netherlands
(not listed)
No board positions
Member of the
Jul. 14, 2022
5/5
(a) adidas AG, Herzogenaurach, Germany (listed)
May 09, 2014
No board positions
⚫ SRH Holding (SdbR), Heidelberg (not listed)
No board positions
(a) Deutsche Börse AG, Eschborn, Germany
(listed)
Synlab AG, Munich, Germany (listed)
(b)
.
Implenia AG, Opfikon, Switzerland (listed)
(a) Merck Life Science KGaA, Darmstadt,
Germany¹ (Chair) (not listed)
Apr. 26, 2019
Apr. 26, 2019
5/5
Aug. 11, 2023
1/1
Anne Lange
Riedstadt, Application Engineer (full-time member
and Vice-Chair of the Merck Joint Works Council)
Footnotes follow at the end of the table.
⚫ UBS Switzerland AG / Credit Suisse AG
(Group Mandate), Zurich, Switzerland
(not listed)
5/5
⚫ Merck BKK, Darmstadt, Germany (not listed)
(b) ⚫ E. Merck KG, Darmstadt, Germany¹
(not listed)
5/5
Apr. 26, 2019
SIRONA Dental Systems GmbH, Wals, Austria
(not listed)
•
(a)
5/5
(b)
The Supervisory Board and the Audit Committee conduct regular self-assessments every two years. These take
the form of an internal efficiency review based on an extensive questionnaire. The questionnaire includes
feedback on cooperation within the Supervisory Board, corporate governance, accounting, risk management,
and the dialog with the Executive Board and the Audit Committee. The next self-assessment of the Supervisory
Board is scheduled for 2024.
Defining the required knowledge in more detail, a further provision of the German Stock Corporation Act also
states that the members of the Supervisory Board must be collectively familiar with the sector in which their
company operates. This requirement is addressed in the Supervisory Board's qualification matrix, which
stipulates that the Supervisory Board should have at least four members who possess such knowledge of the
sector. We currently meet this requirement (see also "Objectives of the Supervisory Board with Respect
to Its Composition, Profile of Skills and Expertise, and Qualification Matrix"). Information on the
independence of the shareholder representatives can be found under "Objectives of the Supervisory Board
with Respect to its Composition, Profile of Skills and Expertise, and Qualification Matrix".
member of the Board of Directors of Banque Pictet & Cie SA until 2022. Among other things, she is also a
member of the Supervisory Board and Chair of the Audit Committee of Deutsche Börse AG and a member of the
Board of Directors of UBS Switzerland AG. In these roles, she regularly participates in the training offered by
the respective companies. Barbara Lambert thus qualifies as a financial expert within the meaning of
section 100 (5) of the German Stock Corporation Act (AktG) and Recommendation D.3 of the German
Corporate Governance Code. Furthermore, the Vice Chair of the Audit Committee, Daniel Thelen, qualifies as a
financial expert within the meaning of section 100 (5) of the German Stock Corporation Act (AktG) and
Recommendation D.3 of the German Corporate Governance Code. A fully qualified lawyer with a Master of
Business Administration (MBA) and many years of experience as a member of the Audit Committee, he has
particular knowledge and experience of the application of reporting principles and internal control and risk
management systems. Finally, Wolfgang Büchele also has expertise in the area of accounting. His expertise
results from his role as CEO of Exyte GmbH, his many years as a member of the executive boards of other
companies, and his membership of other supervisory bodies. Wolfgang Büchele thus also qualifies as a financial
expert within the meaning of section 100 (5) of the German Stock Corporation Act (AktG) and Recommendation
D.3 of the German Corporate Governance Code.
211
Corporate Governance Statement on Corporate Governance
212
Corporate Governance
Some of the responsibilities that lie with the supervisory board of a German stock corporation are fulfilled at
Merck by E. Merck KG. This applies primarily to the Board of Partners of E. Merck KG. Accordingly, the Board of
Partners as well as the composition and procedures of its committees are described below.
Board of Partners of E. Merck KG
The Board of Partners has nine members. The Board of Partners was composed as follows in fiscal 2023:
Member
Johannes Baillou
(Chair of the Board of Partners)
Vienna, Austria, Vice Chair of the Executive
Board and General Partner of E. Merck KG
Simon Thelen
(Vice Chair of the Board of Partners)
Cologne, Senior Physician at the Clinic for
Trauma and Hand Surgery, University
Hospital Düsseldorf, Düsseldorf
Wolfgang Büchele
Statement on Corporate Governance
Römerberg, Chair of Exyte GmbH, Stuttgart
(b) comparable German and foreign supervisory bodies of corporations
(a) ⚫Merck Life Science KGaA, Darmstadt, Germany (not listed)
(a) statutory supervisory boards and
The Board of Partners may delegate the performance of individual duties to committees. Currently, the Board of
Partners has three committees in place: the Personnel Committee, the Finance Committee, and the Research
and Development Committee.
normally meets four times a year. The members of the Executive Board of Merck KGaA are invited to all
meetings of the Board of Partners, unless the Board of Partners resolves otherwise in individual cases. The
members of the Board of Partners may convene a joint meeting with the Supervisory Board of Merck KGaA if so
agreed by the chairpersons of the two boards.
213
Corporate Governance Statement on Corporate Governance
The Board of Partners supervises the Executive Board in its management of the company. It informs itself
about the business matters of Merck KGaA and may inspect and examine the company's accounts, other
business documents, and assets for this purpose. According to article 13 (4) of the Articles of Association of
Merck KGaA, the Executive Board requires the approval of E. Merck KG for transactions that are beyond the
scope of the Group's ordinary business activities. For such transactions, approval must first be obtained from
the Board of Partners of E. Merck KG. The Board of Partners convenes as and when necessary; however, it
(b) ⚫Travel Asset Group Ltd., London, United Kingdom (Chair) (not listed)
(a) Merck KGaA, Darmstadt, Germany (listed)
Personnel Committee
Cologne, Program Manager Infrastructure at
DB InfraGO AG, Frankfurt am Main
Merck Electronics KGaA, Darmstadt, Germany (Vice Chair) (not listed)
Merck Life Science KGaA, Darmstadt, Germany (Vice Chair) (not listed)
Merck Healthcare KGaA, Darmstadt, Germany (not listed)
•
•
(a) Fortas GmbH, Rösrath, Germany (Chairman) (not listed)
Daniel Thelen
• AiCuris Anti-Infective Cures AG, Wuppertal, Germany (not listed)
The Personnel Committee has four members: Johannes Baillou (Chair), Wolfgang Büchele, Michael Kleinemeier,
and Frank Stangenberg-Haverkamp. The Personnel Committee meets at least twice a year. Further meetings
are convened as and when necessary. Meetings of the Personnel Committee are attended by the Chair of the
Executive Board of Merck KGaA unless the Committee decides otherwise. Among other things, the Personnel
Committee is responsible for the following decisions concerning members and former members of the Executive
Board: contents and conclusion of employment contracts and pension contracts; granting of loans and salary
advances; changes to the compensation structure and adaptation of compensation; approval for taking on
honorary offices, board positions, and other sideline activities; and division of responsibilities within the
Executive Board of Merck KGaA. The Personnel Committee passes its resolutions by a simple majority; in
matters concerning the Chair of the Executive Board, unanimity is required. The Chair of the Committee
regularly informs the Board of Partners of its activities.
The Finance Committee has four members: Wolfgang Büchele (Chair) since May 9, 2023, and Helene von
Roeder (Chair) until April 2, 2023, Johannes Baillou, Daniel Thelen, and Simon Thelen. The Finance Committee
holds at least four meetings a year, some of which are joint meetings with the Audit Committee of the
Supervisory Board of Merck KGaA. At least one meeting is a joint meeting with the auditor of Merck KGaA.
Further meetings are convened as and when necessary. Meetings of the Finance Committee are attended by the
Chief Financial Officer of Merck KGaA. Other members of the Executive Board of Merck KGaA may attend the
meetings upon request of the Finance Committee. These meetings regularly include the Chair of the Executive
Board. Among other things, the Finance Committee is responsible for analyzing and discussing the Annual
Financial Statements, the Consolidated Financial Statements, and the respective reports of the auditor, as well
as the half-year financial report and the quarterly statements. In addition, the Finance Committee addresses
Merck's net assets, financial position, results of operations, and liquidity, as well as accounting issues. Upon
request of the Board of Partners, the Finance Committee examines investment projects that must be approved
by the Board of Partners and provides recommendations pertaining thereto. It passes its resolutions with a
simple majority. The Chair of the Committee regularly informs the Board of Partners of its activities.
Second management level of Merck KGaA below the Executive Board: 31.8% of positions held by women,
also corresponding to full headcounts at the date on which the targets were defined.
First management level of Merck KGaA below the Executive Board: 35.5% of positions held by women,
corresponding to full headcounts at the date on which the targets were defined.
December 31, 2024, in order to implement the obligations under section 76 (4) AktG as follows:
•
On December 21, 2021, the Executive Board of Merck KGaA therefore set the new targets to be achieved by
We foster diversity within the company, which also includes ensuring a balance of genders in management. To
this end, we pursue both voluntary and legally required objectives, and we work continuously and sustainably
to achieve them. As a global company with correspondingly aligned global (leadership) structures, we are
striving to increase the proportion of management positions held by women (managers, experts, and project
managers in roles 4 and above)¹ as a voluntary goal. Our aim is to achieve gender parity by the end of 2030.
In addition, Merck KGaA is subject to the statutory obligations under section 76 (4) AktG.
Finance Committee
Stipulations pursuant to section 76 (4) AktG (target for the percentage
of positions held by women on the two upper management levels
below the Executive Board)
⚫ Merck Electronics KGaA, Darmstadt, Germany (not listed)
Stipulations to promote the percentage of
management positions held by women
214
Corporate Governance Statement on Corporate Governance
The Research and Development Committee has four members: Helga Rübsamen-Schaeff (Chair), Johannes
Baillou, Katharina Kraft, and Simon Thelen. The Research and Development Committee is convened as and
when necessary but holds at least two meetings a year. Meetings of the Research and Development Committee
are attended by members of the Executive Board of Merck KGaA upon request of the Committee. These
meetings regularly include the Chair of the Executive Board as well as the CEO Life Science, the CEO
Healthcare, and the CEO Electronics. Among other things, the Research and Development Committee is
responsible for reviewing and discussing the research activities of the Life Science, Healthcare, and Electronics
business sectors. It passes its resolutions with a simple majority. The Chair of the Committee reports to the
Board of Partners on the insights gained from the meetings.
Research and Development Committee
pursuant to section 76 (4) and section 111 (5)
of the German Stock Corporation Act (AktG)
Memberships of
• 4SC AG, Martinsried, Germany (listed)
Merck Healthcare KGaA, Darmstadt, Germany (Chair) (not listed)
Helene von Roeder (until April 2, 2023)
Frankfurt am Main, at that time Member of
the Executive Board (CFO) of Vonovia SE,
Bochum
Mannheim, Senior Strategy Manager at BASF
SE, Ludwigshafen
Katharina Kraft
Heidelberg, Managing Director of e-
mobiligence GmbH, Heidelberg
Michael Kleinemeier
Merck Life Science KGaA, Darmstadt, Germany (not listed)
Helga Rübsamen-Schaeff
•
Merck Electronics KGaA, Darmstadt, Germany (not listed)
Merck Healthcare KGaA, Darmstadt, Germany (not listed)
Merck Life Science KGaA, Darmstadt, Germany (not listed)
•
•
•
(a) ⚫Merck KGaA, Darmstadt, Germany (listed)
(a) Merck KGaA, Darmstadt, Germany (listed)
⚫ Merck Life Science KGaA, Darmstadt, Germany (not listed)
Düsseldorf, Member of the Supervisory
Board of AiCuris Anti-infective Cures AG,
Wuppertal
Darmstadt, Chair of the Executive Board and
General Partner of E. Merck KG, Darmstadt
•
AVW Versicherungsmakler GmbH, Hamburg, Germany (not listed)
Merck KGaA, Darmstadt, Germany (listed)
(a)
(b)
⚫ AVW Versicherungsmakler GmbH, Hamburg, Germany (not listed)
⚫ Deutsche Wohnen SE, Berlin, Germany (listed)
(a) • Merck KGaA, Darmstadt, Germany (listed)
Frank Stangenberg-Haverkamp
• Merck Life Science KGaA, Darmstadt, Germany (Chair) (not listed)
(b) ⚫ SRH Holding (SdbR), Heidelberg (not listed)
No board positions
⚫ KNDS NV, Amsterdam, Netherlands (not listed)
Wegmann Unternehmens-Holding GmbH & Co. KG, Fürstenfeldbruck, Germany
(Chair) (not listed)
.
(b)
• Gelita AG, Eberbach, Germany (Chair) (not listed)
Merck Electronics KGaA, Darmstadt, Germany (Chair) (not listed)
(a) Merck KGaA, Darmstadt, Germany (listed)
Stipulations pursuant to section 111 (5) AktG (target for the
percentage of positions on the Supervisory Board held by women)
The first management level comprises all managers of Merck KGaA with a direct reporting line to the Executive
Board of Merck KGaA or who belong to the Global Executive Group. The second management level comprises all
managers of Merck KGaA who report to managers with a direct reporting line to the Executive Board of
Merck KGaA or the Global Executive Group.
The statutory target of 30% pursuant to section 96 (2) AktG is already applied to the Supervisory Board of
Merck KGaA; this eliminates the obligation to stipulate a further target for the percentage of positions held by
women on the Supervisory Board (see section 111 (5) sentence 5 AktG).
At the meeting in February 2023, the Supervisory Board intensively addressed the Annual Financial Statements
and Consolidated Financial Statements for 2022, the Combined Management Report, the reports of the auditor
(KPMG AG Wirtschaftsprüfungsgesellschaft, Berlin, "KPMG"), including the audit report on the non-financial
declaration for fiscal 2022, and the proposal for the appropriation of net retained profit. The auditor (KPMG)
explained the audit reports including the focus areas of the audit. The Executive Board and the Head of Group
Accounting reported on the financial statements. Furthermore, the Supervisory Board resolved on the report and
the objectives of the Supervisory Board with respect to its composition and the profile of skills and expertise
including the qualification matrix, the Declaration of Conformity with the German Corporate Governance Code, and
the Statement on Corporate Governance. The Supervisory Board also adopted the proposals to be made to the
Annual General Meeting (including the creation of new Contingent Capital II) and approved the plan to hold the
Annual General Meeting in virtual form. The Executive Board reported on business performance in 2022 and
presented the plans for fiscal 2023, which was likely to be challenging in light of geopolitical tensions in particular.
The Supervisory Board met in April 2023 to resolve on the amendment to the rules of procedure of the Audit
Committee and the election of Daniel Thelen as the Vice Chair of the Audit Committee. The meeting was held
after Helene von Roeder stepped down as a member of the Supervisory Board and the Audit Committee
effective April 17, 2023. The Chair of the Supervisory Board informed the Supervisory Board members about
this development at the meeting. As part of the amendment to the rules of procedure of the Audit Committee,
the Supervisory Board transferred the responsibility for resolving on sustainability topics of relevance to the
company to the Audit Committee.
A total of five Supervisory Board meetings were held in fiscal 2023. All of the meetings were held in person. At
four of these five meetings, the Supervisory Board intensely discussed the reports of the Executive Board, as
well as company developments and strategic issues together with the Executive Board. The Chair of the Audit
Committee or, in the case of the meetings in May and July 2023, the Vice Chair reported comprehensively on
the previous meetings of the Audit Committee at these meetings of the Supervisory Board.
Key topics of the Supervisory Board meetings
The cooperation with the Executive Board was characterized by an intensive dialog on the basis of mutual trust.
During fiscal 2023, the Executive Board provided the Supervisory Board with regular written and verbal reports
on the business development of Merck KGaA and the Merck Group. In particular, the Supervisory Board was
informed about the market and sales situation of the company in the context of macroeconomic developments,
and the financial position of the company and its subsidiaries, along with their earnings development and
corporate planning. Within the scope of quarterly reporting, the sales and operating results were presented for
the Merck Group as a whole and broken down by business sector. In addition to the Supervisory Board
meetings, the Chair of the Supervisory Board also maintained, and continues to maintain, a regular exchange of
information with the Chair of the Executive Board.
Cooperation with the Executive Board
The Supervisory Board again properly executed its duties in 2023 in accordance with the law as well as the
company's Articles of Association and rules of procedure. In particular, the Supervisory Board monitored the
work of the Executive Board diligently and regularly.
The meeting in May 2023 focused on the report of the Executive Board on business performance in the first
quarter and the forecast for fiscal 2023. The Executive Board discussed developments in the first quarter of
Report of the
supervisory Board
218
Seven Supervisory Board members are university graduates and hold doctorates.
Moreover, the members of the Supervisory Board have a background in one or more of the following fields of
specialization: chemistry, pharmaceutics, mathematics, law, business administration and economics, physics,
process technology, and computer sciences.
The members of the Executive Board contribute knowledge of various fields including medicine (pharmacology,
physical education), (astro)physics, information technology, and electrical engineering. In addition, the majority
of members of the Executive Board hold a university and doctorate degree.
In order to translate the tremendous innovative potential of a science and technology company into sustainable
business success, interdisciplinary educational backgrounds are a key element of our diversity policy both for
the Executive Board and for the Supervisory Board. The current composition of both boards illustrates this
interdisciplinary aspect to a very high degree.
Educational background
Corporate Governance Report of the Supervisory Board
Corporate Governance
Report of the Supervisory Board
219
The Supervisory Board has an onboarding process aimed at enabling the quick and efficient induction of new
members. Most recently, Barbara Lambert received corresponding training upon joining the Supervisory Board.
Corporate governance is a high-priority topic for the Supervisory Board. In its own estimation, the Supervisory
Board has an adequate number of independent members. There were no conflicts of interest as defined by the
German Corporate Governance Code involving Supervisory Board members during the year under review.
Dialog with the stakeholder groups set out in the German Corporate Governance Code is an important aspect of
opinion-forming within the company. Among other things, this takes the form of surveys in connection with the
materiality analysis as well as direct discussions. For example, we take the related investor suggestions
extremely seriously. In fiscal 2023, the Chair of the Supervisory Board held discussions with investors on
Supervisory Board-specific topics, including investor meetings with Allianz Global Investors GmbH and DWS
Investment GmbH. In particular, the topics discussed included the qualification matrix and the independence of
the Supervisory Board with a view to the Supervisory Board election in 2024 as well as the remuneration of the
Supervisory Board. Mr. Büchele stated that the qualification matrix plays a significant role in the selection of
candidates and that a particular focus has been placed on sustainability and digitalization. Independence,
internationality and diversity are other important factors. Mr. Büchele also stated that the company is planning
to reduce the term of office of the Supervisory Board members. Mr. Büchele reported that consideration was
being given to possibly adjusting Supervisory Board compensation to reflect the development of the market in
recent years in order to remain competitive with regard to attracting the best candidates. Ahead of the
Supervisory Board election in 2024, the Supervisory Board also actively engaged in dialog with the biggest
investors in order to determine their expectations and opinions. Among others, initial meetings with Blackrock,
Amundi and Union Invest already took place in December 2023.
Corporate governance and Declaration of
Conformity
At its meeting in February 2024 to approve the financial statements, the Supervisory Board also assessed the
Annual Financial Statements of Merck KGaA, the proposal for the appropriation of net retained profit, the
auditor's report presented in accordance with Article 27 (2) of the Articles of Association, the Consolidated
Financial Statements of the Merck Group, and the Combined Management Report of Merck KGaA and the Merck
Group in accordance with Article 14 (2) of the Articles of Association, and took note of the auditor's reports of
Deloitte GmbH Wirtschaftsprüfungsgesellschaft, Munich. The discussion of the relevant agenda item at this
meeting was also attended by the auditors who sign the audit opinion on the Annual Financial Statements of
Merck KGaA and the Consolidated Financial Statements of the Merck Group. This was also the case for the
meeting of the Audit Committee. Based on the recommendation of the Audit Committee and its own review, the
Supervisory Board approved the Annual Financial Statements for Merck KGaA, the Consolidated Financial
Statements of the Merck Group, the Combined Management Report of Merck KGaA and the Merck Group
prepared by the Executive Board, and the report presented by the auditor in accordance with Article 27 (2) of
the Articles of Association. The Supervisory Board gave its consent to the proposal of the Executive Board for
the appropriation of net retained profit after conducting its own review.
The Audit Committee assessed the Annual Financial Statements of Merck KGaA, the proposal for the
appropriation of net retained profit, and the auditor's report. It also examined the Consolidated Financial
Statements of the Merck Group as well as the Combined Management Report for Merck KGaA and the Merck
Group, including the non-financial declaration, and took note of the auditor's reports of Deloitte GmbH
Wirtschaftsprüfungsgesellschaft, Munich. In particular, it focused on the key audit matters of particular
importance in the audit opinion, the resulting risks for the financial statements, the approach adopted during
the audit as described, and the conclusions drawn by the auditor. On completion of its assessment, the Audit
Committee raised no objections and thus recommended that the Supervisory Board approve the Annual
Financial Statements for Merck KGaA, the Consolidated Financial Statements of the Merck Group, the Combined
Management Report of Merck KGaA and the Merck Group prepared by the Executive Board, and the report
presented by the auditor in accordance with Article 27 (2) of the Articles of Association.
220
Corporate Governance Report of the Supervisory Board
In addition, the auditor audited the calculation of Merck KGaA's participation in the profit of E. Merck KG in
accordance with Article 27 (2) of the Articles of Association, as well as the combined non-financial declaration.
The Annual Financial Statements of Merck KGaA, the Consolidated Financial Statements of the Merck Group,
and the Combined Management Report for Merck KGaA and the Merck Group, including the non-financial
declaration and the proposal of the Executive Board for the appropriation of net retained profit, were submitted
firstly to the Audit Committee and then to the Supervisory Board together with the auditor's reports.
For the Consolidated Financial Statements prepared in accordance with International Financial Reporting
Standards and for the Combined Management Report, the auditors issued the unqualified auditor's report that
is reproduced in the Annual Report of the Merck Group.
The auditors issued an unqualified audit opinion on the Annual Financial Statements of Merck KGaA in
accordance with German Auditing Standards.
The Annual Financial Statements of Merck KGaA, the Consolidated Financial Statements of the Merck Group,
and the Combined Management Report for Merck KGaA and the Merck Group, including the accounts, were
audited by Deloitte GmbH Wirtschaftsprüfungsgesellschaft, Munich.
Annual Financial Statements and Consolidated
Financial Statements
In parts of its meetings, the Supervisory Board regularly meets without the members of the Executive Board
being present. Additionally, the employee representatives gather for a preparatory meeting ahead of each
Supervisory Board meeting. The employee representatives also gather immediately after each Supervisory
Board meeting to discuss the topics addressed at the meeting. Among other things, this includes a discussion of
topics which should be placed on the agenda for the next Supervisory Board meeting.
At the meeting in July 2023, the Executive Board reported on the comparatively good business performance in the
second quarter of 2023 in spite of the challenging environment. The non-financial statement, which forms part of
the Combined Management Report, was a further topic of discussion. The Supervisory Board resolved to
commission the auditor (Deloitte GmbH Wirtschaftsprüfungsgesellschaft, Munich) to conduct a limited assurance
review of the non-financial declaration for fiscal 2023. In addition, the auditor (Deloitte GmbH
Wirtschaftsprüfungsgesellschaft, Munich) was commissioned to conduct the formal and material audit of the
compensation report for fiscal 2023. Another topic addressed by the meeting was the amendment to the Articles of
Association of Merck KGaA following the departure of Marcus Kuhnert and the appointment of Helene von Roeder to
the Executive Board. All of the training undertaken by the Supervisory Board was on the subject of sustainability.
At the Supervisory Board meeting in November 2023, the Executive Board provided an overview of business
performance in the third quarter of 2023 in an extremely challenging business environment. The background to
this business performance was then discussed in detail by the Supervisory Board. Other topics discussed
included the report by the Research and Development Committee for Healthcare and Merck KGaA's transactions
with related parties within the meaning of section 111a et seq. of the German Stock Corporation Act (AktG).
There were no transactions requiring the approval of the Supervisory Board in accordance with section 111b (1)
AktG. This was followed by an overview and an intensive discussion of the Group and business sector
strategies, also in the context of external developments. The Chair of the Executive Board also reported on the
Global Leadership Summit (GLS), at which Merck managers discussed the geopolitical environment and its
impact on Merck as well as the priorities of the Merck Group.
2023 and provided an outlook concerning expected business performance in 2023 as a whole. The Supervisory
Board extensively discussed the contributions of the individual business sectors to the company's financial
performance. The report of the Research and Development Committee of the Board of Partners of E. Merck KG
for Life Science and Electronics was an additional focus of the meeting. Finally, the Supervisory Board
addressed Merck's global strategy.
Pursuant to section 111 (5) AktG, the Supervisory Board of companies that are listed or subject to
codetermination must stipulate binding targets for the percentage of positions on the Supervisory Board and on
the Management Board held by women. However, Merck KGaA is not required to stipulate targets pursuant to
section 111 (5) AktG for the following reasons:
To efficiently lead and manage the Group, the Executive Board must have in-depth knowledge of the key
industries and business sectors in which the company operates. For each of the areas Life Science, Healthcare,
and Electronics, there should be at least one member of the Executive Board with in-depth expertise in
accordance with the diversity concept.
The Executive Board covers the full range of the necessary industry experience.
217
Gender
Management
experience
Educational
background
Our
diversity
strategy
Industry
knowledge
Internationality,
global mindset
Industry experience
Age
Merck is pursuing a Group-wide, global diversity strategy. At Merck, diversity stands for a culture of inclusion,
mutual esteem, and respect. To demonstrate this open and dynamic company culture, we promote diversity,
equal opportunity, and inclusion throughout the Group - and do so at all levels, including the Executive Board
and Supervisory Board.
Diversity policy pursuant to section 289f (2)
no. 6 of the German Commercial Code (HGB)
215
Corporate Governance Statement on Corporate Governance
1 This group makes up around 7% of the total workforce; see the description under "Diversity and management".
In turn, the obligation to stipulate a target for the percentage of positions held by women on the Executive
Board pursuant to section 111 (5) AktG and the minimum composition requirement for the Executive Board
pursuant to section 76 (3a) AktG are not applicable to the legal form of a corporation with general partners
(Kommanditgesellschaft auf Aktien), as a corporation with general partners neither has a management board
comparable to that of a stock corporation, nor does the Supervisory Board have personnel authority over the
Executive Board. Rather, the Executive Board of Merck KGaA consists of personally liable general partners (see
also the description of Supervisory Board procedures). In line with its diversity policy, however, Merck also
continues to pursue representation of both genders as an objective for the Executive Board.
We believe that a diverse workforce boosts the innovative strength of the Merck Group and contributes
materially to our business success. That is why Merck is furthering a culture of diversity independent of factors
such as age, gender, disability, ethnic or cultural background, religion, industry experience, and educational
background. As part of our global diversity strategy, we have developed a diversity policy to strategically steer
the topics of diversity and inclusion in our corporate bodies; this focuses on the following key criteria:
In addition to the aspects presented below, reference is made to the objectives of the Supervisory Board with
respect to its composition and the profile of skills and expertise and qualification matrix of the Supervisory
Board (see the information under "Objectives of the Supervisory Board with Respect to Its Composition,
Profile of Skills and Expertise, and Qualification Matrix"). The statements made therein form part of the
diversity policy for the Supervisory Board presented here.
The Group-wide diversity strategy encompasses both voluntary as well as legally defined objectives that we
continuously and sustainably work to achieve (see also the "Diversity and Inclusion” section of the Non-
Financial Statement and the Sustainability Report for 2023). In this context, it should be noted that, with
respect to the Executive Board of Merck KGaA, many rules can only be applied correspondingly. This is because
the Executive Board comprises personally liable general partners of Merck KGaA and is not a management
board with employed members of a corporate body (for details, please also see the "Joint Report of the
Executive Board and the Supervisory Board").
Statement on Corporate Governance
Corporate Governance Statement on Corporate Governance
The current Executive Board fulfills both of the aforementioned objectives: All required aspects of the
competency profile are covered by at least one member of the Executive Board. Likewise, two members of the
Executive Board possess multiple years of experience working within the Merck Group prior to their
appointment to the Executive Board.
The key prerequisites for high-performance leadership teams are the diversity of the individual competency
profiles and a balance between an internal and external management perspective. Therefore, the Executive
Board as a whole must have in-depth knowledge and experience in the following key areas of importance to the
company: strategy and planning, finance and accounting, sales and operations, human resources, legal and
compliance, and information technology, as well as ecological and social sustainability. In addition, it is
important for the composition of the Executive Board to ensure a good balance of members from within and
outside the company. Our diversity policy seeks to derive inspiration and innovation from outside the company
and to identify the latest trends of relevance to the core businesses of the company, while ensuring
sustainability and continuity in line with our corporate culture.
Management experience
The Executive Board meets this objective with management experience in these regions, e.g. in the following
countries: Denmark, United Kingdom, Malaysia, Singapore, Spain, and United States. In addition, 40% of the
Executive Board members are not German citizens.
Corporate Governance
Internationality and global mindset
As a science and technology company with global operations and major markets on five continents with more
than 64,000 employees at locations in 66 countries, internationality and the associated global mindset is one of
our key success factors. According to our diversity policy, the Executive Board's internationality derives from
leadership experience or national origin, relative to our key sales markets or those locations that are
organizationally and culturally relevant to our employee development efforts. For both criteria, Europe, North
America, and Asia-Pacific are currently the key regions.
Gender diversity also plays a crucial role, since it enables us to benefit from a larger talent pool and allows us
to develop a better understanding of important customer groups as a company.
Gender
The current composition of the Executive Board and the Supervisory Board satisfies this objective. The age
range of the Supervisory Board is 35 years, while the age range of the Executive Board is currently ten years.
Our boards are to have a balanced age structure. This permits future-oriented and consistent succession
planning and is a key element of sustainable company management and monitoring. Maximum age limits apply
to both boards. A maximum age of 70 applies to members of the Executive Board, while the standard age limit
for Supervisory Board members is 75. Our diversity policy aims for an age range of at least ten years between
the youngest and the oldest member of the respective board.
Age
216
Additionally, Merck continues to pursue representation of both genders as an objective for the Executive Board.
The Board of Partners of E. Merck KG appointed Belén Garijo as the new Chair of the Executive Board effective
May 1, 2021, making it the first time a woman had been appointed to this position. Helene von Roeder has
been a member of the Executive Board and the Chief Financial Officer of Merck since July 1, 2023. This means
that women account for 40% of the members of the Executive Board. The statutory target of 30% pursuant to
section 96 (2) AktG already applies to the Supervisory Board of Merck KGaA and is currently met.
6.49
7.65
6.49
7.65
17
486
Diluted
Alexander Putz
Dietmar Oeter
Peter Emanuel Merck
Anne Lange
(from Aug. 11, 2023)
Barbara Lambert
Renate Koehler
Michael Kleinemeier
Jürgen Glaser
Gabriele Eismann
Birgit Biermann
Christian Raabe
Sascha Held (Vice Chair)
Additionally, in accordance with recommendation C.1 of the German Corporate Governance Code in the version
dated April 28, 2022, the Supervisory Board has prepared a qualification matrix and reports on the status of
implementation below.
Qualification matrix
227
Objectives of the Supervisory Board with Respect to its Composition, Profile of Skills and Expertise, and Qualification Matrix
Corporate Governance
The objective of the Supervisory Board regarding its composition is that, as a rule, all members shall belong to
the board for an uninterrupted period of no more than twelve years. This objective is also met at the present
time (with the exception of Wolfgang Büchele; see the discussion under "Independence" above). The length of
membership of the Supervisory Board members is set out in the "Procedures of the Executive Board,
Supervisory Board, Board of Partners, and its Committees" section of the Statement on Corporate
Governance.
Regular limit on the length of Supervisory Board membership
As a rule, the members of the Supervisory Board shall not exceed the age of 75. This objective is met at the
present time.
Age limit
Moreover, no one shall be proposed for election to the Supervisory Board who simultaneously serves on a board
of or advises a major competitor of the company, or who, owing to another function, such as advisor to major
contractual partners of the company, could potentially become involved in a conflict of interest. No Supervisory
Board member serves on a board of or advises a major competitor. Moreover, no Supervisory Board member
performs a function that could lead to a lasting conflict of interest.
No material conflicts of interest
1 Not defined by International Financial Reporting Standard (IFRS).
In addition, the shareholder representatives do not believe that membership of the Board of Partners of
E. Merck KG conflicts with independence. The Board of Partners exists to complement the skills and expertise of
the Supervisory Board and its activities. Like the Supervisory Board, it supports the Executive Board in an
independent advisory and control function. This is not expected to lead to material and not merely temporary
conflicts of interest. It should also be taken into account that, due to its substantial capital investment and
unlimited personal liability, E. Merck KG has a strong interest in the businesses of Merck KGaA operating
efficiently and in compliance with procedures, thus counteracting from the outset any conflicts of interest
between E. Merck KG and Merck KGaA and hence any corresponding conflicts of interest between the members
of the respective corporate boards.
Helene von Roeder
Helga Rübsamen-Schaeff
Management Experience
The Supervisory Board shall have at least four members with in-depth knowledge of and experience in fields
that are important to the company, including at least one expert for the Life Science and Healthcare/Electronics
business sectors. This requirement is met at the present time. At present, more than four members of the
Supervisory Board have in-depth knowledge and experience in the fields of Life Science, Healthcare and
Electronics. In addition, more than four Supervisory Board members also have executive experience in
companies that also or exclusively operate in the Life Science and Healthcare/Electronics business sectors.
In-depth knowledge of the fields relevant to the company
228
Corporate Governance Objectives of the Supervisory Board with Respect to its Composition, Profile of Skills and Expertise, and Qualification Matrix
• Criterion met, based on a self-assessment by the Supervisory Board. A dot means at least "good knowledge" and thus the ability to understand the
relevant issues well and make informed decisions on the basis of existing qualifications, the knowledge and experience acquired in the course of work as
a member of the Supervisory Board (for example, many years of service on the Audit Committee) or the training measures regularly attended by all
members of the Supervisory Board.
2 According to the German Corporate Governance Code, experience in the fields of accounting and auditing requires own activity in these areas.
3 Not Supervisory Board or Board of Partners at Merck.
1 Including internal control system & risk management system.
•
•
•
(until Apr. 17, 2023)
•
Adminis-
tration
Bodies³ Sustainability
Auditing2
or Control
Management Sustainability
Experience Reporting1,2
Business
External
Supervisory
Accounting
incl.
Sector
Knowledge
(HC and
LS/EL)
Simon Thelen
Daniel Thelen
Data and
Digital
The Supervisory Board shall have at least three members who have experience in managing or supervising a
medium- or large-sized company. The Supervisory Board has more than three members who have the
corresponding experience. They include Supervisory Board members who were or still are members of the
management or executive board at relevant companies, as well as Supervisory Board members who have
gained experience in supervisory bodies of German or foreign companies of this size.
Exercising their own professional judgment, the shareholder representatives satisfied themselves that this
indicator does not contradict their assessment that Wolfgang Büchele is, on the whole, independent of the
company and its Executive Board. In his work on the Supervisory Board and its committees and in the exercise
of his duties, Mr. Büchele continues to demonstrate the necessary critical distance from the company and its
Executive Board, along with the capacity for objective judgment. Moreover, Mr. Büchele has confirmed in a
personal statement that he considers himself to be independent of the company and its Executive Board.
226
For the purposes of targeted further training, the Supervisory Board is offered an information event with internal
and external speakers at least once a year. In fiscal 2023, a training event on sustainability for all Supervisory
Board members was held on May 10, 2023. The event, which featured high-profile internal and external speakers,
encompassed the topics of "Sustainability in the Corporate Environment" as well as the legal dimensions of aspects
and developments in the area of sustainability and ESG that are relevant to the Supervisory Board (e.g. climate-
related litigation, greenwashing, due diligence obligations in supply chains, and sustainability reporting in
accordance with the CSRD). The company generally covers the cost of training measures for the Supervisory Board.
New members of the Supervisory Board - including Barbara Lambert in 2023 also undergo an onboarding
process prepared by employees of the Legal department in accordance with the onboarding plan.
The Supervisory Board attended all of the meetings in full. Helene von Roeder attended the meeting in
February prior to stepping down from the Supervisory Board, while Barbara Lambert attended the meeting in
November following her appointment to the Supervisory Board. The members of the Audit Committee attended
all meetings of the Audit Committee. Helene von Roeder attended the meeting in February, while her successor
Barbara Lambert attended the meeting in November. The members of the Nomination Committee attended all
meetings of the Nomination Committee.
Personnel matters and training
Corporate Governance Report of the Supervisory Board
223
The meeting in October 2023, which was held as a video conference, heard a report on the search for candidates
for the Supervisory Board to be proposed for election at the 2024 Annual General Meeting. In particular, a well-
known headhunting firm was commissioned in order to ensure that the criteria of the candidate profiles were
satisfied to the greatest possible extent. Potential candidates were selected on the basis of several selection
interviews and discussed at the meeting. The Nomination Committee then resolved to propose the candidates it
deemed most suitable to the Supervisory Board of Merck KGaA for election at the 2024 Annual General Meeting.
At the meeting in July 2023, which was held as a video conference, the members of the Nomination Committee
met with the aim of recommending a suitable replacement for Helene von Roeder to the Supervisory Board.
Following a brief discussion regarding potential candidates, Barbara Lambert was proposed to the Supervisory
Board of Merck KGaA as a suitable candidate for its proposal for election by court appointment.
The Nomination Committee met twice in fiscal 2023.
Nomination Committee
At the meeting in November 2023, which was held in person, the Chief Financial Officer presented the initial
observations and findings of the financial reporting health check. In particular, this included a discussion of the
internal control system and the IT systems used to support financial reporting. The Chief Financial Officer and the
Head of Group Accounting then reported on the net assets, financial position, and results of operations of the
Merck Group in the third quarter of 2023. It was noted that the income statement was showing lower net sales
than in the same quarter of the previous year due to the sustained difficult environment. The Audit Committee
discussed the report on the third quarter in detail. It then reviewed the contractual terms for the annual audit of
the financial statements and evaluated the audit of the financial statements and non-audit services following an
extensive presentation by the Head of Group Accounting. Finally, the planned scope of the audit of the financial
statements on the basis of the statutory provisions and the provisions of the European Securities and Markets
Authority (ESMA) and the defined schedule were discussed with Deloitte GmbH Wirtschaftsprüfungsgesellschaft,
Munich. The reports on Group Internal Auditing and compliance and data protection were then presented.
The meeting of the Audit Committee in July 2023, which was also held in person, began with a detailed
discussion of the report on the net assets, financial position, and results from operations of the Merck Group for
the second quarter of 2023. The auditors (Deloitte) shared their initial impressions following the handover of
the audit engagement and presented the results of the audit review of the half-year financial report. The
auditors also presented an overview of the process planning for the audit of the Annual Financial Statements
and the planned focal points. Next, the Audit Committee resolved on the list of the individual audit and non-
audit related services. A further focal point was the report on the key developments regarding the accounting-
related internal control system (ICS), which the Audit Committee discussed in detail. This was followed by the
risk management status report for the first half of 2023.
Darmstadt, February 2024
222
The report on the net assets, financial position, and results of operations of the Merck Group for the first
quarter of 2023 was presented to the meeting in May 2023, which was held in person. The Audit Committee
then discussed the report in detail. The Audit Committee also discussed the start date of the audit period with
the auditors (Deloitte). The auditors shared their initial impressions following the handover of the audit
engagement and provided an overview of the planning for the audit review of the half-year financial report.
At the meeting in February 2023, which was held in person, the Chief Financial Officer and the Head of Group
Accounting reported on the 2022 Consolidated Financial Statements and the Annual Financial Statements of
Merck KGaA, which were then discussed in detail by the Audit Committee. This included a discussion of the
sustainability topics contained in the non-financial statement. The auditor (KPMG) also reported on the audit of
the financial statements and discussed the focus areas of the audit. The declaration of auditor independence
was acknowledged and evaluated. The meeting also reviewed and resolved on the proposal on the
appropriation of net retained profit to be submitted to the Supervisory Board, including the dividend payment
by Merck KGaA for fiscal 2022. Furthermore, the Audit Committee acknowledged and discussed the written risk
report. In addition, the Audit Committee proposed that the Supervisory Board resolve the creation of a new
authorization to issue convertible bonds and/or bonds with warrants, accompanied by the simultaneous creation
of new Contingent Capital II. The Head of Group Internal Auditing then presented the report from Group
Internal Auditing for 2022. The compliance and data protection report was also presented and discussed. The
details of the non-audit services approved in fiscal 2022 were also discussed.
The Audit Committee prepares the negotiations and resolutions of the Supervisory Board on the approval of the
Annual Financial Statements and Consolidated Financial Statements and the proposal to the Annual General
Meeting on the election of the auditor. The adoption of the Annual Financial Statements is not the responsibility
of the Audit Committee or the Supervisory Board but of the Annual General Meeting. The Audit Committee also
ascertains the independence of the auditor, assigns the audit mandate to the auditor, and determines the focus
areas of the audit and the fee agreement. Furthermore, the Audit Committee monitors the accounting process,
the effectiveness of the internal control system, the risk management system and the internal auditing system,
and compliance. The Chair of the Audit Committee and the auditor also engage in a regular dialog outside of
the meetings of the Audit Committee.
The Audit Committee meets four times a year. Further meetings are convened as and when necessary. The
Audit Committee is generally responsible for accounting and auditing matters. This includes sustainability
reporting and auditing the sustainability reports. In particular, its responsibilities include auditing the Annual
Financial Statements, the Consolidated Financial Statements, and the respective reports of the auditor, as well
as the half-year financial report and the quarterly statements. The Audit Committee discusses the assessment
of audit risk, the audit strategy and audit planning, and the results of the audit with the auditor. The Chair of
the Audit Committee regularly discusses the progress of the audit with the auditor and reports back to the
committee. The other responsibilities of the Audit Committee include assessing the performance of the auditor,
and especially the performance of the auditor in charge of the engagement. The Audit Committee is also tasked
with sustainability. This topic was assigned to it at the Supervisory Board meeting in April 2023.
Audit Committee
The Supervisory Board of Merck KGaA had a Nomination Committee and an Audit Committee in fiscal year 2023.
Committees
Merck KGaA, including the compensation of the Executive Board and Supervisory Board, can be found in the
Statement on Corporate Governance.
After discussing corporate governance issues in detail, the Executive Board and the Supervisory Board adopted
the updated Declaration of Conformity in accordance with section 161 AktG and issued it jointly in February 2024.
The statement is permanently available on the website of Merck KGaA (https://www.merckgroup.com/en/
investors/corporate-governance/reports.html). More information about corporate governance at
221
Corporate Governance Report of the Supervisory Board
Corporate Governance Report of the Supervisory Board
from the Supervisory Board on April 17, 2023), Helga Rübsamen-Schaeff, Daniel Thelen, and Simon Thelen. In
determining the independence of Wolfgang Büchele, the shareholder representatives took account of the fact
that he has been a member of the Supervisory Board for more than twelve years, which the German Corporate
Governance Code considers to be an indicator of a lack of independence.
The Supervisory Board of Merck KGaA
Chair
Corporate Governance Objectives of the Supervisory Board with Respect to its Composition, Profile of Skills and Expertise, and Qualification Matrix
The Supervisory Board shall have an appropriate number of independent shareholder representatives as
members. In any case, at least five of the shareholder representatives on the Supervisory Board shall be
independent. According to the Articles of Association of Merck KGaA, six members representing the
shareholders are to be elected by the Annual General Meeting, and two members are to be delegated. Taking
this and the special ownership structure of Merck KGaA into account, the shareholder representatives consider
five shareholder representatives to be an appropriate number of independent members. In the opinion of the
shareholder representatives, the objectives concerning independent members are met at the present time. The
shareholder representatives consider the following members to be independent: Wolfgang Büchele, Michael
Kleinemeier, Renate Koehler, Barbara Lambert, Peter Emanuel Merck, Helene von Roeder (until stepping down
Independence
Six women are currently members of the Supervisory Board of Merck KGaA. This corresponds to a share of
women of 37.5%. The Supervisory Board has undertaken to comply with the minimum quotas set out in
section 96 (2) sentence 2 AktG separately for the shareholder and employee representatives. When nominating
candidates for election to the Supervisory Board or making proposals for delegations, the Supervisory Board
shall examine whether the percentage of women can be increased by suitable candidates. The Supervisory
Board considers the 37.5% share of female members to be satisfactory at the present time. This is due to the
percentage of women in leadership positions at Merck and in consideration of the composition of the
Supervisory Boards of other companies of comparable size.
Women on the Supervisory Board
The Supervisory Board shall have at least three members with business experience in the main sales markets of
Merck KGaA. Currently, the main sales markets of Merck KGaA are Europe, America, and Asia-Pacific. The
present composition of the Supervisory Board satisfies this objective. More than three Supervisory Board
members have entrepreneurial experience in a wide range of European countries. More than three Supervisory
Board members have experience in management positions in companies that operate globally.
Internationality
In accordance with recommendation C.1 of the German Corporate Governance Code in the version dated
April 28, 2022, the Supervisory Board has specified the following objectives regarding its composition, and
reports below on the status of implementation.
Objectives of the Supervisory Board with
Respect to its composition
knowledge and experience in the application of accounting principles and internal control and risk management
systems, and the expertise in the field of auditing shall consist of special knowledge and experience in the
auditing of financial statements. Accounting and auditing also include sustainability reporting and its audit and
assurance. The Chair of the Audit Committee shall have appropriate expertise in at least one of the two areas
and shall be independent. When proposing Supervisory Board candidates for election or delegation, the
Supervisory Board will always give top priority to these prerequisites, which are essential for fulfilling its legal
duties. Overall, the Supervisory Board's policy is to optimally meet its monitoring and advisory duties by
ensuring diversity among its members. In particular, diversity includes internationality as well as different
experience backgrounds and career paths. The proportion of women on the Supervisory Board is also
considered to be an aspect of diversity. When preparing proposals for election or delegation to the Supervisory
Board, the Supervisory Board shall consider in each case to what extent different, complementary specialist
skills, professional and life experience, and an appropriate representation of both genders benefit the work of
the Supervisory Board. Additionally, the Supervisory Board shall support the Executive Board in its efforts to
increase diversity within the company.
225
Wolfgang Büchele
Objectives of the Supervisory Board with Respect to its Composition, Profile of Skills and Expertise, and Qualification Matrix
For the Supervisory Board of Merck KGaA, professional qualifications and personal expertise are the two most
important prerequisites for appointments to positions on the Supervisory Board. In accordance with the German
Stock Corporation Act, at least one member of the Supervisory Board must have knowledge and expertise in
the area of accounting, and at least one additional member of the Supervisory Board must have knowledge and
expertise in the auditing of financial statements. The expertise in the field of accounting shall consist of special
The Supervisory Board of Merck KGaA currently comprises 16 members, of whom eight represent the
shareholders and a further eight represent the employees. The eight employee representative members are
elected by employee delegates pursuant to the provisions of the German Co-determination Act (MitbestG).
These consist of six company employees, including a senior executive, as well as two union representatives.
The Supervisory Board has no statutory right of proposal with respect to the election of delegates or employee
representatives to the Supervisory Board. Two of the eight shareholder representatives are appointed under a
delegation right of E. Merck Beteiligungen KG. The Supervisory Board also has no statutory right of proposal
with respect to the exercise of this delegation right. The other six shareholder representatives are elected by
the Annual General Meeting. In accordance with section 124 (3) sentence 1 AktG, the Supervisory Board shall
propose Supervisory Board members to the Annual General Meeting for election. These proposals require a
majority of the votes of the shareholder representative members of the Supervisory Board. The next scheduled
election to the Supervisory Board will take place at the 2024 Annual General Meeting. The Annual General
Meeting is not required to follow the election proposals. Accordingly, the appointment objectives and
competency requirements set out by the Supervisory Board below do not constitute requirements to be met by
those eligible to elect or delegate members. Instead, they are intended to express the objectives pursued by
the Supervisory Board in office with regard to its advisory and monitoring functions.
General notes on the composition of the
Supervisory Board
According to recommendation C.1 of the German Corporate Governance Code in the version dated April
28, 2022, the Supervisory Board shall specify concrete objectives regarding its composition as well as preparing
a qualification matrix for the entire board. In its composition, the Supervisory Board shall take into account the
number of independent members, consider the principle of diversity, specify an age limit, and disclose the term
of Supervisory Board membership. The qualification matrix for the Supervisory Board shall also comprise
expertise regarding sustainability issues relevant to the enterprise.
Initial situation
skills and Expertise, and
qualification matrix
profile of
Composition,
objectives of the
supervisory Board with
Respect to its
224
Corporate Governance Objectives of the Supervisory Board with Respect to its Composition, Profile of Skills and Expertise, and Qualification Matrix
Corporate Governance
Business Administration
Wolfgang Büchele (Chair)
Experience in other supervisory or control bodies
Net sales
Cost of sales
Gross profit
Note
2023
2022
9
20,993
22,232
10
-8,600
-8,527
12,392
13,705
Marketing and selling expenses
11
-4,510
-4,714
Administration expenses
€ million
-1,392
Consolidated Income Statement
Consolidated Financial Statements Consolidated Income Statement
230 Consolidated Income Statement
231 Consolidated Statement of Comprehensive Income
232 Consolidated Balance Sheet
233 Consolidated Cash Flow Statement
234 Consolidated Statement of Changes in Net Equity
235 Notes to the Consolidated Financial Statements
235
General Disclosures
249
Operating Activities
267 Operating Assets, Liabilities, and Contingent Liabilities
290
Employees
301
Capital Structure, Investments and Financing Assets
336
Other Disclosures
339
Scope of Consolidation
230
-1,306
Research and development costs
12
-277
3,484
4,287
Income tax
15
-650
-948
Profit after tax
2,834
3,339
The Supervisory Board must have at least four members who have in-depth knowledge of business
administration and at least one member who has professional expertise in accounting or auditing. This
requirement is met at the present time.
thereof: attributable to Merck KGaA shareholders (net income)
thereof: attributable to non-controlling interests
2,824
3,326
34
10
14
Earnings per share (in €)
Basic
-322
40
Profit before income tax
Finance costs
-2,445
-2,521
Impairment losses and reversals of impairment losses on financial assets (net)
42
-51
-6
Other operating income
13
445
Financial statements
Other operating expenses
-830
-1,170
Operating result (EBIT)¹
3,609
4,474
Finance income
40
197
90
14
consolidated
242 Group Structure
Finally, the qualification matrix for the Supervisory Board shall also comprise expertise regarding sustainability
issues relevant to the enterprise. The majority of the Supervisory Board members have such expertise.
Sustainability expertise
In addition, the Supervisory Board shall have at least four members who have experience as members of other
supervisory or control bodies (not including membership of the Board of Partners of E. Merck KG). This
requirement is also met at the present time.
232
2,834
2022
2023
981
957
Other non-current non-financial assets
22
99
3,339
Non-current income tax receivables
15
9
10
Note
Deferred tax assets
115
15
36
33
98
Fair value adjustments
39
Cash flow hedge reserve
Items of other comprehensive income that may be reclassified to profit or
loss in subsequent periods
Changes recognized in equity
Tax effect
Fair value adjustments
Net defined benefit liability
34
-300
48
-187
1,440
-236
Equity instruments
Changes recognized in equity
Tax effect
Changes in remeasurement
1,140
1,514
€ million
-98
499
321
Other current non-financial assets
22
633
705
Current income tax receivables
36
15
446
Cash and cash equivalents
35
1,982
1,854
Assets held for sale
6
473
Other current financial assets
128
104
Consolidated Statement of Comprehensive
Income
Consolidated Financial Statements Consolidated Statement of Comprehensive Income
231
1,310
36,102
36,334
Current assets
Inventories
24
4,637
4,632
Trade and other current receivables
25
4,004
4,114
Contract assets
26
Profit after tax
Consolidated Cash Flow Statement
Reclassification to profit or loss
194
Non-current receivables
25
28
27
Other non-current financial assets
Consolidated Financial Statements.
12
8
34
thereof: attributable to non-controlling interests
5,696
1,783
thereof: attributable to Merck KGaA shareholders
5,708
1,791
62
2,368
3
-1,043
3
8,204
Consolidated Balance Sheet
€ million
Non-current assets¹
Goodwill¹
Note
Dec. 31, 2023
Dec. 31, 2022
18
17,845
18,389
Other intangible assets¹
19
6,551
7,335
Property, plant and equipment¹
20
9,056
Investments accounted for using the equity method
1,259
-1,015
1,157
Changes recognized in equity
Tax effect
Reclassification to assets
Reclassification to profit or loss
Fair value adjustments
Cost of cash flow hedge reserve
Changes recognized in equity
Tax effect
1,109
-28
-31
160
3
2
-34
158
Reclassification to assets
Currency translation difference
Changes taken directly to equity
Reclassification to profit or loss
Changes recognized in equity
-1,018
-71
-15
1,228
-1,003
11
5
10
-95
16
-15
-17
39
91
-5
-5
Comprehensive income
Other comprehensive income
22
12,393
38
48,495
233
Consolidated Financial Statements. Consolidated Cash Flow Statement
Consolidated Cash Flow Statement
€ million
Profit after tax
Depreciation/amortization/impairment losses/reversals of impairment losses
Changes in inventories
Changes in trade accounts receivable
Changes in trade accounts payable/refund liabilities
Changes in provisions¹
Changes in other assets and liabilities¹
Neutralization of gains/losses on disposal of fixed assets and other disposals
Other non-cash income and expenses
Operating Cash Flow
Payments for investments in intangible assets
Payments from the disposal of intangible assets
Payments for investments in property, plant and equipment
2 Previous year's figures have been adjusted, see note (2) "Reporting principles".
Payments from the disposal of property, plant and equipment
1 Previous year's figures have been adjusted, see note (6) "Acquisitions and divestments".
9,514
30
2,545
2,499
Refund liabilities
9
877
912
Current income tax liabilities
15
1,433
1,483
Other current non-financial liabilities²
29
1,479
1,786
Total equity and liabilities¹
8,699
48,495
48,535
Trade and other current payables¹
Payments for investments in financial assets
Proceeds from the disposal of other financial assets
-89
-604
-8
-413
-43
101
188
279
-755
-445
-150
-48
-72
21
16
3,784
4,259
2,030
Payments for acquisitions less acquired cash and cash equivalents (net)
1,880
2,834
Payments for the acquisition of non-financial assets
Proceeds from the disposal of non-financial assets
Dividend payments to non-controlling interests
Payments from divestments
Investing Cash Flow
Dividend payments to Merck KGaA shareholders
Profit withdrawal by E. Merck KG
Proceeds from new borrowings of financial debt from E. Merck KG and E. Merck
Beteiligungen KG
Repayment of financial debt to E. Merck KG and E. Merck Beteiligungen KG
Payments from new borrowings of other current and non-current financial debt²
Repayment of other current and non-current financial debt²
Financing Cash Flow
Changes in cash and cash equivalents
Changes in cash and cash equivalents due to currency translation
Cash and cash equivalents as of January 1
Cash and cash equivalents as of December 31 (consolidated balance sheet)
Note
2023
2022
3,339
12,201
1,153
38
Non-current liabilities¹
Non-current provisions for employee benefits
33
2,192
2,030
Other non-current provisions
27
277
299
Non-current financial debt
37
9,239
9,200
-216
-275
136
-1,807
26,005
-1,531
26,754
75
48,535
Total assets¹
Total equity
34
Equity capital
565
Capital reserves
3,814
565
3,814
Retained earnings
20,228
18,463
Gains/losses recognized in equity
Equity attributable to Merck KGaA shareholders
2,073
26,680
3,086
25,927
Non-controlling interests
78
1,005
19
-537
1,287
13,042
13,015
Current liabilities¹
Current provisions for employee benefits²
33
83
81
Current provisions
27
575
372
Current financial debt
37
702
1,228
Other current financial liabilities²
1,130
21
15
38
-364
-12
-854
510
219
-2,494
Other non-current financial liabilities²
38
147
141
Other non-current non-financial liabilities²
29
17
19
Non-current income tax liabilities
15
39
Deferred tax liabilities¹
-2
Items of other comprehensive income that will not be reclassified to profit
or loss in subsequent periods
2,511
1 None of the regulations was applied early.
with Covenants
January 1, 2024 No material impact
December 19, 2023
October 31, 2022
Non-current Liabilities
Amendments to
IAS 1
Regulations published but not yet endorsed by the European Union
Deferral of Effective
Date
December 19, 2023
January 23, 2020
July 15, 2020
Liabilities as Current or
Non-Current
Liabilities as Current or
Non-current;
Classification of
Amendments to
IAS 1
November 20, 2023
Date of endorsement by
EU law
January 1, 2024 No material impact
Standard/Interpretation
Amendments to IAS 7
Amendments to IAS 21
Amendments to IFRS 7
Title
237
Notes to the Consolidated Financial Statements General Disclosures
Consolidated Financial Statements
Under the regulations on global minimum taxation, Merck is obliged to determine the effective tax rate for each
country in which its business units operate within the meaning of the legislation and, where the effective tax
rate is lower than the minimum tax rate of 15%, to pay a top-up tax in the amount of the difference.
Jurisdictions where Merck has material operating activities and where the nominal tax rate is below 15% are
Ireland and Switzerland. Merck is currently taking action to ensure that it satisfies the reporting obligations and
tax compliance requirements arising from the legislation. When it comes to determining the effective tax rate,
the legislation provides for numerous specific adjustments that can lead to effective tax rates that differ from
those calculated in accordance with IAS 12.86. The complexity of applying the legislation, the extensive
The legislation on global minimum taxation was published in the German Federal Law Gazette on December 27,
2023, and came into force on January 1, 2024. The exception provided by IAS 12 for the recognition and
disclosure of information about deferred tax assets and liabilities in connection with income taxes relating to
global minimum taxation was applied for fiscal 2023.
Ensuring global minimum taxation within the OECD (Pillar II)
The planned allocation of taxing rights between jurisdictions as part of the OECD rules is currently still being
negotiated. An analysis of the available drafts found that the rules are likely to apply to Merck. Due to the
status of the negotiations and the lack of clarity concerning the participation of key nations, it is not currently
possible to make a reliable statement about the expected impact.
Allocation of taxing rights (Pillar I)
Based on the information currently available, Merck expects the efforts to achieve international convergence on
tax rules as part of the OECD's Inclusive Framework to have an impact on the Group's taxation. Although the
tax rules apply to the ultimate parent company of the Group, E. Merck Kommanditgesellschaft, top-up taxes
could be payable in a number of jurisdictions, and this could have an impact on the Merck Group.
Impact of efforts to achieve international convergence on taxation
January 1, 2025 Currently under review
January 1, 2024 No material impact
Date of publication
May 25, 2023
August 15, 2023
May 25, 2023
January 1, 2024 No material impact
Expected impact on the
consolidated financial
statements
Expected to be
effective for the first
time for financial years
beginning on or after
Lack of Exchangeability
Supplier Finance
Arrangements
Supplier Finance
Arrangements
January 1, 2024 No material impact
Expected impact on
the consolidated
financial statements
Required date of
first-time
application¹
Amendments to
IFRS 16
Amendments to IAS 8
Amendments to IAS 1
Standard/Interpretation
March 2, 2022 No material impact
February 12, 2021
Date of endorsement Impact on the consolidated
by EU law financial statements
March 2, 2022 No material impact
Date of publication
February 12, 2021
Disclosure of Accounting
Policies
Title
Standards and amendments to standards effective for the first time in fiscal 2023
The accounting and measurement policies used in the consolidated financial statements are presented in the
respective Notes and are indicated there.
The Executive Board of Merck KGaA prepared these consolidated financial statements on February 14, 2024,
and approved them to be forwarded to the Supervisory Board. The Supervisory Board is responsible for
examining the consolidated financial statements and declaring whether it approves them.
These consolidated financial statements have been prepared in accordance with the International Financial
Reporting Standards (IFRSS) effective at the end of the reporting period and adopted by the European Union
and the additional provisions of section 315e (1) of the German Commercial Code (HGB). The fiscal year is the
calendar year. These consolidated financial statements have been prepared in euros, the reporting currency.
The values presented in the consolidated financial statements have been rounded. This may lead to individual
values not adding up to the totals presented.
(2) Reporting principles
The German Corporate Governance Code declaration (declaration of conformity) in accordance with
section 161 of the German Stock Corporation Act (AktG) was issued and can be viewed at
https://www.merckgroup.com/en/investors/corporate-governance/reports.html.
https://www.unternehmensregister.de. Shares in Merck KGaA are traded on the regulated market of the
Frankfurt Stock Exchange and on other exchanges.
These consolidated financial statements for the year ended December 31, 2023, were prepared for Merck
Kommanditgesellschaft auf Aktien (Merck KGaA), Frankfurter Strasse 250, 64293 Darmstadt, Germany, entered
in the commercial register of the Darmstadt Local Court under HRB 6164. The ultimate parent company of the
Group is the parent company of Merck KGaA, E. Merck Kommanditgesellschaft (E. Merck KG), Darmstadt. The
consolidated financial statements of E. Merck KG can be accessed at
Amendments to IAS 12
additional data requirements as a result and changes to the tax rules of individual nations meant that it was not
yet possible to quantify the impact precisely and fully at the reporting date. For example, it is possible that the
specific adjustments provided for the calculation of minimum taxation will not result in a tax burden for Merck
even though the effective tax rate calculated in accordance with IAS 12.86 is lower than 15%. Conversely,
minimum taxation may apply even if the effective tax rate is higher than 15%.
Amendments to IAS 12
Definition of Accounting
Estimates
Deferred Tax related to
Assets and Liabilities
arising from a Single
Transaction
International Tax Reform
Pillar Two Model Rules
IFRS 17 Insurance
Contracts;
Interpretation
Standard/
Amendments to standards effective for the first time from fiscal 2024
Date of publication
September 22, 2022
Lease Liability in a
Sale and Leaseback
Classification of
Title
236
Notes to the Consolidated Financial Statements General Disclosures
Consolidated Financial Statements
November 19, 2021 No material impact
September 8, 2022
November 19, 2021
May 18, 2017
June 25, 2020
December 9, 2021
November 8, 2023 See below
May 23, 2023
August 11, 2022 No material impact
May 7, 2021
Amendments to IFRS 17;
Initial Application of
IFRS 17 and IFRS 9 -
Comparative Information
IFRS 17; Amendments to IFRS 17
Based on a preliminary calculation and taking account of the data available as of the reporting date, Merck
anticipates an additional annual tax expense in a mid-double-digit million-euro amount.
Change in the recognition of liabilities and provisions
In order to increase transparency, the tranche of the Merck Long-Term Incentive Plan that is payable in the
months following the reporting date has been reported in other current non-financial liabilities rather than
current provisions for employee benefits since January 1, 2023. This resulted in a reclassification in the amount
of € 158 million. The changes in provisions and other assets and liabilities in the operating cash flow were
adjusted by € 166 million accordingly.
Increased uncertainty due to climate risks
In the past, inventories were increased in order to limit the risks in connection with supply chain disruption.
Accordingly, there is a heightened risk of subsequent write-downs if it is not possible to process or sell these
inventories. Furthermore, the impact of the trade restrictions concerning semiconductor materials that were
imposed between the United States of America and China in the fourth quarter of 2022 has been examined
since fiscal 2022. No impairment losses have been recognized to date. However, there is considerable
uncertainty with regard to future developments.
Impact of trade restrictions, sanctions, and supply chain bottlenecks
The war in Ukraine has not had any material effects on the Merck Group's net assets, financial position, or
results of operations owing to its limited business volume in Russia, Ukraine, Belarus, and the Republic of
Moldova. In fiscal 2023 and 2022 alike, the total share of Group net sales generated in the aforementioned
countries amounted to less than 1.5%. Furthermore, the conflict in the Middle East did not have a material
impact on the Merck Group's net assets, financial position, and results of operations in the reporting period. In
fiscal 2023 and 2022 alike, the share of Group net sales generated with customers in Israel was less than 1%.
Direct impact of armed conflicts
The higher interest rates also resulted in a rise in the discount rates applied in performing impairment testing
and determining the fair values of financial and non-financial assets compared with the previous year (see Note
(18) "Goodwill” and Note (43) “Information on fair value measurement” in particular).
The sustained high level of interest rates in fiscal 2023 affected our customers' refinancing costs, especially in
the Life Science business sector, resulting in lower customer demand.
Impact of higher interest rates
for the Group in fiscal 2023. As in the previous year, Merck was able to offset these increased procurement
costs by passing on price rises to the market. The assumptions concerning the long-term salary and pension
trends applied in calculating pension obligations were reviewed again in fiscal 2023 to reflect the development
of inflation, as they had been in the previous year. Compared with the previous year, however, this resulted in
an adjustment and an increase in defined benefit obligations in connection with the measurement of defined
benefit pension plans only in certain countries (see Note (33) "Provisions for employee benefits").
239
Notes to the Consolidated Financial Statements General Disclosures
Consolidated Financial Statements
The high rate of inflation slowed in fiscal 2023. Procurement costs for materials and energy in particular, which
were mainly reflected in the increased cost of sales, remained above the level seen in previous years. As in the
previous year, the cost of purchasing natural gas and electricity came to a low triple-digit million-euro amount
Impact of inflation
The continued dynamic development of the macroeconomic environment means that the degree of uncertainty
in the preparation of the consolidated financial statements remains high. In particular, uncertainties included
the sustained high level of inflation, the development of interest rates, geopolitical challenges, and efforts on
the part of various nations to reduce international dependencies along with the related trade restrictions and
sanctions. This applies in particular to the recoverability of non-financial assets. Based on the information
currently available, there is no evidence of significant impairment losses to date. Furthermore, as in previous
years, there are no grounds to suggest that the going concern assumption should not have been applied in
preparing the consolidated financial statements.
Increased uncertainty due to the macroeconomic situation
Dealing with discretionary decisions and sources of estimation uncertainty
The preparation of the consolidated financial statements requires Merck to make discretionary decisions on the
applicable accounting and measurement policies as well as estimates to a certain extent. The discretionary
scope and estimation uncertainty are assessed on a company-specific basis. Discretion describes the need to
make assumptions concerning recognition or measurement when applying accounting policies. Sources of
estimation uncertainty affecting the selection of the valuation techniques to be applied relate in particular to the
parameters used therein. The degree of estimation uncertainty may vary considerably depending on the
availability and reliability of the input factors.
As a globally active science and technology group, Merck is subject to transition-related and physical climate
risks that could have a potentially negative impact on its net assets, financial position, and results of operations
and lead to increased estimation uncertainty in accounting. To determine the potential impact of climate risks, a
structured climate risk analysis is currently being conducted as part of a project aimed at implementing the
recommendations of the "Task Force on Climate-Related Financial Disclosures" (TCFD) with the support of an
external consulting firm and an insurance company.
(3) Discretionary decisions and sources of estimation uncertainty
Reduction targets for greenhouse gas emissions
Consolidated Financial Statements
Physical climate risks describe the risks that could result from longer-term changes in the general climatic
conditions. For example, physical climate risks can have an accounting impact in the form of the necessary
shortening of the economic life of items of property, plant, and equipment ("stranded assets"); the risk of
operational disruption; or increased future expenses due to necessary adaptations to safeguard sites. In
determining physical climate risks as part of the current TCFD project, the long-term impact of climate change
was simulated for 100 site clusters of the Merck Group using two global warming scenarios for 2030 and 2050
that took account of risks due to flood, fire, wind, extreme heat, precipitation, drought, extreme cold,
thunderstorms, and hail. All in all, the identified physical climate risks have not led to any material direct
accounting impact. However, there is significant estimation uncertainty due to the long-term nature of the
underlying analyses and the high degree of uncertainty concerning future development.
Merck has concluded several virtual purchase agreements for the purchase of electricity from renewable energy
sources as an additional measure to mitigate climate risks, and it also intends to increasingly purchase such
electricity physically. After signing two virtual power purchase agreements in 2022, renewable energy sources
will account for 90% of the electricity consumed by Merck in the United States and 55% of its global electricity
consumption in the future. A further three virtual power purchase agreements were concluded in Spain in 2023
(see the disclosures in Note (42) “Management of financial risks” in addition to the existing virtual power
purchase agreements that are in place with wind and solar farm project developers in the United States and
Spain). This will further increase the proportion of energy consumption covered by renewable energy sources.
Merck participates in EU emissions trading and purchases emission certificates where the certificates allocated
by the public authorities are not sufficient to cover Merck's greenhouse gas emissions. The impact of this EU
emissions trading is currently immaterial to Merck's net assets, financial position, and results of operations.
Physical climate risks
The most significant transition-related climate risks to the net assets, financial position, and results of
operations are in the Electronics business sector, which is responsible for well in excess of half of the Group's
direct (Scope 1) and indirect (Scope 2) greenhouse gas emissions. The majority of these greenhouse gas
emissions take the form of process-related emissions resulting from the production of specialty gases for the
semiconductor and electronics industries. In order to achieve the climate goals it has adopted, the Group
intends to reduce the emissions in its business with these specialty gases by making technological
improvements to the production process in particular. The recoverability of the assets recognized in connection
with these products depends on the successful implementation of the technological improvements in
production, as they could largely prevent the risk of long-term price rises due to the increased pricing of
greenhouse gas emissions. Furthermore, based on the information currently available, the implementation of
Merck's sustainability strategy is not expected to result in a significant decline in net sales in this business.
There have been no indications of impairment of the assets concerned to date, nor has it been necessary to
adjust their remaining useful lives. There is significant estimation uncertainty due to the long-term nature of
the underlying analyses and the high degree of uncertainty concerning future development.
Transition-related climate risks describe the consequences for companies as a result of the transition to a more
sustainable economic system.
Transition-related climate risks
recognition of a shadow price for the CO2 emissions of major projects.
•
reduced emissions in the supply chain (e.g. switching to sea transportation), and
•
energy efficiency measures,
increased purchase of electricity from renewable sources,
•
reduction in process-related emissions,
•
The goals described above are to be achieved through the following measures in particular:
240
Notes to the Consolidated Financial Statements General Disclosures
Merck has set itself the goal of reducing its direct (Scope 1) and indirect (Scope 2) greenhouse gas emissions
by 50% in comparison with the 2020 base year in the period from 2020 to 2030. By 2030, 80% of its
purchased electricity will come from renewable sources. Merck also plans to reduce the indirect emissions along
the entire value chain (Scope 3) in terms of metric kilotons of CO2 equivalents per euro of gross profit by 52%
by 2030 and to achieve climate-neutral business operations along the entire value chain (Scope 1-3) by 2040.
In 2022, the Science Based Targets Initiative confirmed that the targets for 2030 and the necessary measures
support its ambition and that of the Paris Agreement to limit global warming to 1.5°C.
(1) Company information
1.065
0.985
1,342.189
The respective loss from the net position of the monetary items is recognized within other operating expenses and
reported separately as a loss from hyperinflation accounting (see Note (14) "Other operating expenses").
1, 2022. The index applied stood at 1,859.4 as of the balance sheet date (December 31, 2022:
1,128.5/January 1, 2022: 686.9). In accordance with the requirements of IAS 21 "The Effects of Changes in
Foreign Exchange Rates" for financial statements in non-hyperinflationary reporting currencies, the prior-year
amounts have not been restated.
238
Notes to the Consolidated Financial Statements General Disclosures
Consolidated Financial Statements
Argentina (since 2018) and Türkiye (since April 2022) are classified as hyperinflationary economies in
accordance with IAS 29 "Financial Reporting in Hyperinflationary Economies." Accordingly, business activities in
these countries are no longer reported at historical cost but are presented adjusted for inflation. In Argentina,
Merck uses a combination of the wholesale index IPIM (Índice de precios internos al por mayor) and the
consumer price index IPC (Índice de precios al consumidor). The index applied stood at 37,078.3 as of the
balance sheet date (December 31, 2022: 14,227.31/January 1, 2022: 7,396.8). In Türkiye, the Consumer Price
Index (CPI) published by the Turkish Statistical Institute is applied retrospectively with effect from January
Hyperinflation
The financial statements of consolidated companies not using the euro as their functional currency are
translated into the reporting currency, the euro. Assets and liabilities are measured at the closing rate while
income and expenses are translated at average monthly rates. Any currency translation differences arising
during consolidation of Group companies are recognized in equity.
Translation of financial statements into the reporting currency (Euro)
When the financial statements of consolidated companies are prepared, business transactions that are
conducted in currencies other than the functional currency are translated using the exchange rate on the date
of the transaction.
Transactions in non-functional currency
However, some subsidiaries, particularly in the Electronics business sector, use the U.S. dollar as their
functional currency rather than the local currency.
The subsidiaries of Merck KGaA conduct their business largely in the respective local currency, which they use
as their functional currency.
Functional currency
Currency translation
Accounting and measurement policies
For the same reason, liabilities in connection with wages and salaries have been reported in other non-financial
liabilities rather than other financial liabilities since January 1, 2023. With regard to the comparative period
(December 31, 2022), this resulted in the reclassification of € 127 million to other non-financial liabilities (of
which € 121 million to other current non-financial liabilities).
After adjusting the amounts for inflation, the balance sheet items and income and expenses are translated into
the reporting currency, the euro, at the closing rate in accordance with IAS 21.42.
32.728
Exchange rates of most significant currencies
€ 1 =
0.931
1,428.798
33.845
1.107
1.005
1,357.642
31.336
1.054
Dec. 31, 2022
7.420
140.716
Dec. 31, 2023
7.854
156.462
7.088
137.989
7.667
151.913
0.972
1,412.674
33.695
1.082
2022
2023
Closing rate
Average rate
U.S. dollar (USD)
Taiwan dollar (TWD)
South Korean won (KRW)
Swiss franc (CHF)
Japanese yen (JPY)
Chinese renminbi (CNY)
The exchange rates of the most significant currencies in these consolidated financial statements were as follows:
General Disclosures
-1,075
235
Capital increases
Dividend payments
Comprehensive income
Gains/losses recognized in equity
Profit after tax
Jan. 1, 2023
€ million
Dec. 31, 2022
consolidation/Other
Change in scope of
Transactions with no change of
control
reserves
E. Merck KG including changes in
Profit transfer to/from
Capital increases
Dividend payments
Comprehensive income
Profit transfer to/from
Gains/losses recognized in equity
E. Merck KG including changes in
Transactions with no change of
control
3,814
565
Total equity
controlling
interests
Non-
to
Merck KGaA
shareholders
equity
recognized in
Retained
earnings
reserves
Equity capital
Capital
Gains/losses
Equity
attributable
Dec. 31, 2023
consolidation/Other
Change in scope of
reserves
15,134
Profit after tax
€ million
519
-1,613
-420
1,637
697
-716
-868
-11
-12
-239
-284
-2,743
-1,892
23
4
1,077
Notes to the consolidated
Financial statements
1,281
Jan. 1, 2022
-1,364
-1,732
For details see Note (34) "Equity".
Equity
Consolidated Statement of Changes in Net
234
Consolidated Financial Statements Consolidated Statement of Changes in Net Equity
2 The lines "Repayments of bonds" and "Repayments of other current and non-current financial debt" as well as "Proceeds from the issuance of bonds"
and "Payments from new borrowings of other current and non-current financial debt", which were presented separately in the previous year, have been
summarized to improve clarity.
1 Prior-year figures have been adjusted, see note (2) "Reporting principles".
1,854
1,982
35
1,899
1,854
-7
-31
-39
160
-1,555
41
1,824
-1,893
78
8
1,783
-1,013
2,796
-1,043
-2
-1,041
1,791
-1,013
2,834
10
2,824
2,824
26,005
78
25,927
-28
-284
-284
-16
Notes to the Consolidated Financial Statements General Disclosures
21,338
Consolidated Financial Statements
26,754
75
26,680
2,073
20,228
3,814
565
-746
-746
-1
-746
5
5
-300
3,086
Total equity
-1
shareholders
-239
-239
5,708
12
5,696
1,261
4,435
2,368
-2
1,261
1,109
3,339
14
3,326
21,416
Non-
controlling
interests
3,326
-11
-251
2,370
565
equity
Retained
earnings
18,463
3,814
Capital
reserves
Equity capital
Equity
attributable
78
Gains/losses
recognized in
26,005
25,927
3,086
18,463
3,814
565
-868
-868
to
Merck KGaA
-868
6,092
2,731
2,545
816
299
88
-1
97
EBITDA4
184
-603
206
5,489
390
Adjustments²
losses
103
-6
-6
Reversals of impairment
104
1
42
27
1,782
109
1,673
EBITDA pre
526
848
34
-6
2,820
6,222
2,543
1,663
394
3,609
316
953
Investments in property,
-21,741
-16,115
-5,626
-636
-3,146
-1,843
Liabilities by business sector
48,495
42,273
10,275
8,522
23,476
Assets by business sector
(in % of net sales)²
28.0%
25.0%
31.6%
30.4%
EBITDA pre margin
5,879
-397
6,276
913
(segment result)²
-77
-713
Consolidated Financial Statements Notes to the Consolidated Financial Statements
248
(8) Segment Reporting
Operating Activities
249
Operating Activities
Merck agreed to make an upfront cash payment of US$ 70 million (€ 64 million) for acquired rights and future
development activities to be performed by the seller. An option fee will also be payable to Abbisko if the option
is exercised. Abbisko will receive additional payments for the achievement of certain regulatory and commercial
milestones as well as tiered royalties on net sales by Merck. The acquisition of the rights resulted in the
recognition of an intangible asset not yet available for use in the amount of € 45 million.
On December 4, 2023, Merck announced the conclusion of an in-licensing agreement with Abbisko Therapeutics
Co. Ltd., China (Abbisko), including an exclusive license to commercialize pimicotinib in China, Hong Kong,
Macau, and Taiwan as well as an exclusive commercialization option in the rest of the world. Pimicotinib is an
orally administered, highly selective and potent small-molecule antagonist of colony stimulating factor-1
receptor (CSF-1R).
In-licensing agreement with Abbisko Therapeutics Co. Ltd., China, on drug
candidates for the treatment of tenosynovial giant cell tumor
Merck agreed to make an upfront cash payment of € 160 million for acquired rights and future development
activities to be performed by the seller. Additional milestone payments will be due on the achievement of
certain development, approval, and commercialization milestones. The agreement also includes tiered royalties
on potential net sales. The acquisition of the rights resulted in the recognition of an intangible asset not yet
available for use in the amount of € 147 million.
On October 30, 2023, Merck announced the conclusion of an in-licensing agreement with Jiangsu Hengrui
Pharmaceuticals Co. Ltd., China (Hengrui), including an exclusive worldwide license (excluding China) to
develop, manufacture and commercialize the PARP1 inhibitor HRS-1167 and a corresponding option for SHR-
A1904, an antibody-drug conjugate.
In-licensing agreement with Jiangsu Hengrui Pharmaceuticals Co. Ltd., China, on
drug candidates for the treatment of metastatic colorectal cancer
248
Group Structure
Consolidated Financial Statements Notes to the Consolidated Financial Statements
Merck made upfront payments of € 188 million in conjunction with the agreement. Moreover, Debiopharm
received a right to future milestone payments of up to € 710 million in total, dependent on the achievement of
certain development and sales milestones, plus royalties on future net sales. The transaction became effective
in April 2021. The upfront cash payment resulted in the recognition of an intangible asset not yet available for
use in the amount of € 118 million, an asset under other financial assets for claims for reimbursement in
respect of Debiopharm, and a prepayment for future development activities.
On March 1, 2021, Merck announced its entry into an in-licensing agreement with Debiopharm International SA,
Switzerland (Debiopharm), for the exclusive rights for the development and global commercialization of the
drug candidate xevinapant (Debio 1143) and for the development of preclinical follow-on compounds.
Xevinapant is currently being investigated in a Phase III study for patients with untreated high-risk locally
advanced squamous cell carcinoma of the head and neck in combination with platinum-based chemotherapy
and standard fractionation intensity-modulated radiotherapy.
In-licensing agreement with Debiopharm International SA, Switzerland, on drug
candidates for the treatment of head and neck cancer
Since the termination agreement came into force on June 30, 2023, Merck has held the exclusive global rights
for development, manufacturing, and commercialization and has full control over BavencioⓇ. Pfizer's previous
even split of the net amount of sales less defined expense components was replaced by a 15% royalty on
defined net sales of BavencioⓇ that is reported in the cost of sales (see Note (10) "Cost of sales"). While
Merck and Pfizer will continue to run their respective clinical studies on Bavencio®, Merck will control all future
research and development activities. Merck will also have sole responsibility for manufacturing the product and
serving the supply chain.
On March 27, 2023, Merck announced the termination of the alliance agreement with Pfizer on the co-
development and co-commercialization of BavencioⓇ with effect from June 30, 2023.
According to the collaboration agreement, each company bore one half of the development expenses during the
development period. In the commercialization phase, Merck recognized the majority of net sales from the
commercialization of BavencioⓇ while Merck and Pfizer evenly split the net amount of sales less defined
expense components up until the termination of the agreement. The net sales recognized by Merck in
connection with BavencioⓇ amounted to € 713 million in fiscal 2023 (fiscal 2022: € 611 million). Merck
recognized a high double-digit million-euro amount in research and development expenses in fiscal 2023, as in
the previous year, in addition to profit transfer expenses of € 143 million up until the termination of the
agreement (2022: € 255 million).
On November 17, 2014, Merck formed a global strategic alliance with Pfizer Inc., United States (Pfizer), to co-
develop and co-commercialize the anti-PD-L1 antibody avelumab. From 2017, avelumab was approved for the
treatment of several cancer indications under the trade name BavencioⓇ. The overriding objective of the
strategic alliance was to share the development risks and to expand the two companies' presence in immuno-
oncology. The execution of the collaboration agreement was not structured through a separate vehicle. Upon
entry into the agreement in 2014, Pfizer made an upfront cash payment of US$ 850 million (€ 678 million) to
Merck, which was recognized in the income statement until the end of 2019.
Strategic alliance with Pfizer Inc., United States, to jointly co-develop and co-
commercialize active ingredients in immuno-oncology and its termination
effective June 30, 2023
247
Group Structure
Consolidated Financial Statements Notes to the Consolidated Financial Statements
Estimates are to be made, especially when it comes to determining the transaction price and progress on the
performance obligation.
Determination of the appropriate timing of income recognition.
•
145
Identification of an appropriate income recognition method and
Accounting and measurement policies
4,322
Segment reporting
In addition to the direct activities of the central Group functions, Corporate and Other includes income and
expenses, assets, and liabilities, as well as cash flows that cannot be allocated to the reportable segments as
they are managed at Group level in central Group functions. This relates in particular to expenses and income
for the foreign currency hedging of transactions in operating business, financial expenses, and financial income,
which include interest expenses and interest income, and income tax expenses and income. Financial liabilities,
pension provisions and income tax assets and liabilities are also allocated to Corporate and Other. Moreover,
the column serves as the reconciliation to the Group figures.
2,225
1,850
Impairment losses³
Depreciation
Operating result (EBIT)²
77
77
Group
20,993
20,993
3,659
8,053
9,281
Intersegment sales
Net sales¹
Corporate and
Other
segments
Electronics
Healthcare
Life Science
€ million
operating
Total of
reportable
250
Operating Activities
Information by business sector – 2023
-
Consolidated Financial Statements Notes to the Consolidated Financial Statements
The segment information is derived from the financial figures, which are based on the IFRSS applied in the
Consolidated Financial Statements. Transfer prices for intragroup net sales were determined on an arm's-length
basis for all of the business sectors. Fixed assets are allocated to the segments on the basis of the degree of
utilization. Depreciation expenses are allocated on the same basis. Fixed assets are always recognized by the
buyer at the amortized Group cost following intragroup transactions. Services performed by the Group functions
are allocated on the basis of planning data. Any deviations in the actual costs incurred are not allocated to the
reportable operating segments but continue to be recognized in the Corporate and Other column.
Apart from net sales, the success of a segment is mainly determined by EBITDA pre (segment result). EBITDA
pre is a key figure that is not defined by International Financial Reporting Standards (IFRS). However, it
represents the most important variable used to steer the Merck Group. To permit a better understanding of
operational performance, EBITDA pre excludes depreciation and amortization, impairment losses, and reversals
of impairment losses in addition to specific adjustments presented below.
The Merck Group's business activities are broken down into the three operational business sectors of
Life Science, Healthcare, and Electronics, as well as the central Group functions. This segment structure reflects
the internal organizational and reporting structure. The Life Science business sector encompasses business with
tools, chemicals, and equipment for academic labs, biotech, and pharmaceutical manufacturers, as well as the
industrial sector. The Healthcare business sector discovers, develops, manufactures, and markets prescription
drugs and biopharmaceuticals. The Electronics business sector supplies materials for the semiconductor and
display industries and surface design. The three business sectors differ in terms of their products and services,
their customers, their sales structures and processes, and the regulatory environment in which they operate.
However, the activities that are bundled in each individual business sector are extremely similar in terms of
these criteria. The central Group functions also encompass service activities that are the same for all business
sectors, such as procurement and human resources, as well as other central Group functions that are not
allocated to any of the business sectors. Resource allocation and the assessment of business development are
performed at the level of the business sectors by the Executive Board of Merck KGaA as the chief operating
decision-maker.
1,807
31.6%
Investments in intangible
48,535
5,341
-16,571
-5,949
-744
-3,111
-2,094
Liabilities by business sector5
43,195
10,857
8,135
24,203
Assets by business sector5
(in % of net sales) 2
30.8%
29.7%
As part of the accounting treatment of collaboration and licensing agreements, significant discretionary
decisions have to be made in the following areas:
36.2%
EBITDA pre margin
(segment result)²
6,849
-579
7,428
1,192
2,477
3,760
EBITDA pre
345
6,504
-696
117
-22,521
7,200
228
Investments in property,
344
6 According to the consolidated cash flow statement.
5 Previous-year figures have been adjusted, see note (6) "Acquisitions and divestments".
4 Not defined by International Financial Reporting Standards (IFRS); EBITDA corresponds to operating result (EBIT) adjusted by depreciation,
amortization, impairment losses, and reversals of impairment losses.
3 Without impairments on financial assets and inventories.
2 Not defined by International Financial Reporting Standard (IFRS).
1 Excluding intersegment sales.
statement)?
consolidated cash flow
277
3
274
28
174
72
provisions (according to
Non-cash changes in
assets6
275
20
256
13
136
107
Investments in intangible
plant and equipment
1,531
97
1,435
397
694
plant and equipment5
1,138
55
82
Total of
Operating result (EBIT)²
Intersegment sales
Net sales¹
€ million
Information by business sector 2022
6 Excluding provisions for pensions and other post-employment benefits.
5 According to the consolidated cash flow statement.
4 Not defined by International Financial Reporting Standards (IFRS); EBITDA corresponds to operating result (EBIT) adjusted by depreciation,
amortization, impairment losses, and reversals of impairment losses.
3 Without impairments on financial assets and inventories.
2 Not defined by International Financial Reporting Standard (IFRS).
1 Excluding intersegment sales.
statement)6
consolidated cash flow
381
154
227
100
94
33
provisions(according to
Non-cash changes in
assets5
216
35
181
58
69
54
reportable
2,385
92
operating
Healthcare
7,839
Adjustments²
3,678
EBITDA4
losses
Reversals of impairment
Impairment losses³
Depreciation
1,798
232
232
20
187
105
1,693
545
303
4,474
-801
5,275
572
1,895
-61
61
22,232
22,232
4,013
Group
Corporate and
Other
segments
Electronics
Life Science
10,380
61
2,808
845
24
Collaboration and licensing agreements
25, 42
As the partner companies do not have customer characteristics, these collaboration agreements do not fall directly
within the scope of IFRS 15, and any income from upfront payments, milestone payments, and royalties is
reported under other operating income. Reimbursements of research and development costs made between the
collaboration partners are recognized on a net basis in research and development costs. Merck recognizes the
consideration received in the course of collaboration agreements for bundled obligations arising from granting
rights to intellectual property as well as other goods and services promised as income over the performance
period in line with industry practice. Income is caught up cumulatively upon receipt of uncertain future milestone
payments attributable to contractual obligations that have already been fulfilled. This refers in particular to
milestone payments subsequent to regulatory approval. Furthermore, collaboration agreements in the Healthcare
business sector typically allocate the net sales generated in specific markets, or with specific products, to the
respective collaboration partners in the event of a successful approval; in turn, defined income and expense items
are carried by the collaboration partners according to fixed allocation ratios. Under these circumstances, Merck
recognizes the net sales from the commercialization of products to third-party customers, if Merck takes on the
role of a principal within the meaning of IFRS 15. Expenses resulting from payments made to collaboration
partners in connection with profit share agreements are reported under Note (14) "Other operating expenses".
(6) Acquisitions and divestments
Accounting and measurement policies
Business combinations
The balance sheet items goodwill, other intangible assets, and deferred taxes are significantly influenced by
purchase price allocations conducted within the scope of business combinations. As observable market prices
are mostly not available for the acquired other intangible assets, Merck regularly relies on the expertise of
external professionals when it comes to business combinations. The following overview shows the methods
typically used to measure intangible assets within the scope of purchase price allocations:
Customer relationships
Technology
Trademark
Measurement method for determining fair value
Multi-period excess earnings method
Relief from royalty method
Relief from royalty method
Results from foreign currency hedging of expected business combinations, if they meet the requirements for
hedge accounting, are offset against the carrying value of the net assets acquired.
Where management considers it to be appropriate, the optional concentration test set out in IFRS 3.B7B is
applied in individual transactions in order to determine the presentation of the transaction in the consolidated
financial statements.
Significant discretionary decisions and sources of estimation uncertainty
Business combinations
In particular, estimation uncertainty and discretionary decisions in conjunction with purchase price allocation
relate to:
planning of future cash flows;
the customer churn rate, which indicates how existing customer relationships will change in the future;
the license rate for technologies, which estimates royalty savings on the basis of comparable transactions
of similar technologies;
the discount factor, which is applied for maturity- and risk-based discounting of expected cash inflows; and
the useful life and the degree of technical obsolescence which depend, among other things, on assumptions
about technological developments.
Divestments
The assessment as to when a non-current asset, disposal group, or discontinued operation meets the
prerequisites of IFRS 5 for classification as "held for sale" is subject to discretionary judgment.
Consolidated Financial Statements Notes to the Consolidated Financial Statements
Group Structure
244
Acquisitions in the previous year
Acquisition of Exelead Inc., United States
On December 30, 2021, Merck signed a definitive agreement to acquire Exelead Inc., United States (Exelead),
a biopharmaceutical contract development and manufacturing organization (CDMO). The transaction closed on
February 22, 2022, after regulatory clearances and the satisfaction of other customary closing conditions. The
purchase price amounted to US$ 793 million (€ 702 million) in cash. The determination of the fair values for
Exelead was completed by December 31, 2022.
Exelead specializes in complex injectable formulations, including the lipid nanoparticles that are key
components of mRNA (messenger ribonucleic acid) therapeutics for treating Covid-19 and other indications.
The aim of the acquisition is to use Exelead's capacities and expertise to expand the service range for mRNA
contract development and manufacturing and to provide a fully integrated offering across the entire mRNA
manufacturing process. The business was integrated into the Life Science Services business unit, which is part
of the Life Science business sector.
Acquisition of the chemicals business of Mecaro Co. Ltd., Korea
On December 30, 2022, Merck successfully completed the acquisition of the chemicals business of Mecaro Co.
Ltd., Korea (Mecaro), trading as M Chemicals Inc., Korea (M Chemicals), after obtaining the necessary
regulatory clearances; the acquisition had been announced on August 17, 2022. Mecaro is a Korea-based,
publicly listed manufacturer of heater blocks and chemical precursors for semiconductors.
The acquisition forms part of the Level Up growth program of the Electronics business sector. M Chemicals
primarily develops and produces precursors used in thin film deposition. The total purchase price involved
payments totaling € 90 million, of which € 80 million and € 9 million were due and were paid in 2022 and 2023
respectively.
243
No preliminary purchase price allocation had taken place by the time the 2022 consolidated financial statements
were prepared. The total difference between the purchase price and the net assets acquired, amounting to
€ 46 million, was therefore recognized as goodwill on a preliminary basis at this date. The purchase price
allocation was completed in 2023 and served to reduce goodwill by € 5 million, which mainly resulted in a
reclassification to other intangible assets.
Group Structure
The list of shareholdings presents all of the companies included in the consolidated financial statements as well
as all of the shareholdings of Merck KGaA (see Note (48) "List of shareholdings").
242
Group Structure
(5) Scope of Consolidation
Accounting and measurement policies
Scope of Consolidation
Subsidiaries that are immaterial to the assessment of the net assets, financial position, and results of
operations of the Group are not included in consolidation but are instead reported in non-current financial
assets (see Note (36) "Other financial assets”).
The scope of consolidation changed as follows in the reporting period:
Fully consolidated companies as of Dec. 31, 2022¹
Additions
Retirements
Fully consolidated companies as of Dec. 31, 2023
Companies rated at-equity as of Dec. 31, 2022
Companies rated at-equity as of Dec. 31, 2023
Non-consolidated subsidiaries as of Dec. 31, 2022
Non-consolidated subsidiaries as of Dec. 31, 2023
Companies established
Acquisitions
Materiality
Liquidations/mergers
Divestments
Immateriality
Loss of control
1 Previous year has been adjusted for better comparability with note (48) "List of shareholdings".
313
2
-9
306
2
2
31
34
The list of non-consolidated subsidiaries mainly comprises non-operating shelf companies as well as entities
subject to liquidation procedures, which were subsequently measured at fair value through other
comprehensive income.
Overall, the impact of subsidiaries not consolidated due to immateriality on net sales, profit after tax, assets,
and equity was less than 1% relative to the entire Merck Group. The two companies accounted for using the
equity method are Syntropy Technologies LLC, United States, and MM Domain Holdco Limited, United Kingdom.
There is also one (2022: two) joint operation within the meaning of IFRS 11 (Resonac Versum Materials Co.
LTD, Japan, formerly: Showa Denko Versum Materials 2 Co., Ltd., Japan). This joint operation is immaterial to
the presentation of the net assets, financial position, and results of operations. The effects of the existing
contractual arrangements also have no potentially significant effect in these contexts.
7 Excluding provisions for pensions and other post-employment benefits.
Group Structure
Acquisition of Erbi Biosystems Inc., United States
Erbi is the developer of Breez™, one of the few micro-scale, fully automated, functionally closed and continuous
perfusion cell culture platform technologies on the market. By integrating Breez™ into its existing MobiusⓇ
portfolio, Merck can offer a full range of bioreactors, cell retention systems, and devices as well as cell culture
media. The business is allocated to the Process Solutions business unit in the Life Science business sector.
36,325
9
36,334
12,201
12,201
48,526
26,005
26,005
12,201
12,201
48,535
26,005
26,005
Non-current liabilities
Other non-current provisions and liabilities
11,729
11,729
Deferred tax liabilities
1,279
8
1,287
13,007
8
13,015
Current liabilities
Trade payables and other liabilities
2,498
1
2,499
2,406
Merck acquired all the shares in Erbi Biosystems Inc., United States (Erbi), on December 1, 2022. The purchase
price amounted to € 78 million in cash.
2,406
1
No preliminary purchase price allocation had taken place by the time the 2022 consolidated financial statements
were prepared. The total difference between the purchase price and the net assets acquired, amounting to
€ 72 million, was therefore recognized as goodwill on a preliminary basis at this date. The purchase price
allocation was completed in 2023 and served to reduce goodwill by € 21 million, which mainly resulted in a
reclassification to other intangible assets.
Adjustments to the prior-year consolidated balance sheet to reflect the purchase price allocations
completed in fiscal 2023
In the case of the Erbi and M Chemicals acquisitions, the carrying amounts of the assets and liabilities as of the
acquisition date were recognized as preliminary fair values in the previous year because the completion date
Consolidated Financial Statements Notes to the Consolidated Financial Statements
Group Structure
245
was shortly before the reporting date. The completion of the purchase price allocations for both companies in
2023 resulted in the following adjustments:
€ million
Non-current assets
Goodwill
Intangible assets (excluding goodwill)
Property, plant and equipment
Other non-current assets
Current assets
Current assets
Total assets
Equity
Equity
Dec. 31, 2022
as reported
Adjustments for
Erbi and M
Chemicals
Dec. 31, 2022
adjusted
18,415
-26
18,389
7,302
34
7,335
8,203
8,204
Significant discretionary decisions and sources of estimation uncertainty
Consolidated Financial Statements Notes to the Consolidated Financial Statements
In January 2024, Merck announced measures for Life Science to streamline processes to become more efficient,
customer focused, and agile. The implementation of these measures will adversely impact profit before tax in a
mid-double-digit million-euro amount in 2024.
Note
Goodwill
Determination of recoverable amount
17,845
yes
18
IAS 36
high
Other intangible assets
Identification and measurement of intangible assets within the
scope of business combinations
6,551
yes
6, 19
IFRS 3
high
In-licensing of intangible assets
IAS 38
medium
Determination of amortization
IAS 38
medium
Identification of impairments or reversal of impairments
IAS 36
high
Property, plant, and equipment
9,056
no
20
Determination of depreciation
analysis
Identification of impairments or reversal of impairments
Sensitivity
IFRS
In addition to out-licensing agreements for selling intellectual property, Merck enters into collaboration
agreements in the Healthcare business sector in which the Group works with partners to develop
pharmaceutical drug candidates and, if regulatory approval is granted, to commercialize them.
Collaboration agreements
The accounting and measurement policies for the in-licensing of intellectual property are presented in Note
(19) "Other intangible assets".
In-licensing agreements
Merck primarily enters into material out-licensing agreements for intellectual property in the Healthcare
business sector. The granting of a license typically constitutes a distinct performance obligation that must
usually be recognized at a point in time. Due to the uncertainty of development results and regulatory events,
contingent consideration is typically recognized when the event in question has occurred. Sales-based and
usage-based royalties are recognized when the contract partner makes the corresponding sales or uses the
intellectual property. As out-licensing transactions in the Healthcare business sector do not form part of
ordinary activities and the licensees do not constitute customers within the meaning of IFRS 15, the
corresponding income from upfront payments, milestone payments, and royalties is reported in other operating
income (see Note (13) "Other operating income").
Out-licensing agreements
Accounting and measurement policies
(7) Collaboration and licensing agreements
246
Group Structure
Consolidated Financial Statements Notes to the Consolidated Financial Statements
Assets held for sale as of December 31, 2023, included equity and debt components in connection with the
M Ventures portfolio company Calypso Biotech B.V., Netherlands (Calypso). Calypso is a biotech company that
develops drug candidates for the treatment of autoimmune diseases. It was allocated to "Corporate and other".
The company was acquired in full by Novartis AG, Switzerland, on January 8, 2024. The disposal group included
non-current equity instruments in a mid-double-digit million-euro amount that were measured at fair value
through other comprehensive income subsequent to initial recognition, and a convertible bond issued by
Calypso in a mid-single-digit million-euro amount that was measured at fair value through profit or loss
subsequent to initial recognition. The cumulative income recognized in other comprehensive income amounted
to € 48 million.
Sale of shares in Calypso Biotech B.V., Netherlands
Divestments
48,535
9
48,526
9,514
1
9,513
7,016
7,016
Consolidated Financial Statements
Notes to the Consolidated Financial Statements General Disclosures
241
Overview of significant discretionary decisions and sources of estimation
uncertainty
The accounting matters with the most significant discretionary decisions as well as the most comprehensive
assumptions relating to the future and sources of estimation uncertainty are described below:
Accounting matter
Carrying
amount as
of Dec. 31,
2023 in €
million
Discretionary
scope/
estimation
uncertainty
No other events of particular importance that could have a material impact on the net assets, financial position,
or results of operations occurred subsequent to the balance sheet date.
IAS 16
IAS 36
Leases
medium
no
27, 28
Recognition and measurement of other provisions and
IAS 37
contingent liabilities
high
Revenue recognition
yes
9
Measurement of sales deductions and refund liabilities
877
IFRS 15
high
Income tax
no
15
Recognition and measurement of income tax liabilities
1,473
IAS 12
high
Recognition and measurement of deferred taxes from temporary
differences
IAS 12
medium
Recognition of deferred tax assets from tax loss carryforwards
67
IAS 12
high
(4) Subsequent events
IAS 19
medium
medium
4,787
852
33
500
yes
21
Recognition and measurement of lease arrangements
Inventories
IFRS 16
medium
4,637
no
24
Identification of impairments or reversal of impairments
Trade and other receivables
IAS 2
medium
4,031
no
Determination of loss allowance
IFRS 9
medium
Other financial assets
yes
36, 43
Determination of fair values of contingent consideration
125
Determination of fair values of equity instruments
643
IFRS 13
IFRS 9,
IFRS 13
high
medium
Provisions for employee benefits
yes
Determination of present value of defined-benefit obligations
Other provisions and contingent liabilities
Consolidated Financial Statements Notes to the Consolidated Financial Statements
Total equity and liabilities
Other current liabilities
-138
Property, plant and
25,724
2
57
629
20,152
20,163
1,768
1,568
4,930
intangible assets 2, 3
Goodwill and other
22,232
516
1,175
equipment³
4,302
1,911
1,059 2,368
-835
2,574
13,620
28,243
Number of employees
-1,081
3%
-2,051
costs
Research and development
8,204
57
211
423
1,266
2,363
2,818
7,297
6,302
6,596
Asia-
Pacific
North thereof:
America
USA
thereof: thereof:
Germany Switzerland
Europe
€ million
Information by country and region – 2022
2 Goodwill and other intangible assets are allocated by currency area.
1 Excluding intersegment sales.
62,908
1,169
3,458
4,433
15,259
-2,445
-11
thereof:
China
Latin
America
Middle
East and
Africa
Group
592
1,532
6,648
location¹
Net sales by company
22,232
695
-372
15,847 15,634
1,231
7,697
6,361 6,025
469
1,108
6,248
location¹
Net sales by customer
3,157
-371
-69
-26
11%
439
11%
3,659
100%
4,013
100%
The following tables present a more detailed breakdown of net sales from contracts with customers in the
individual business sectors by product type and region.
2023
€ million
Net sales by nature of the products
Life Science
Healthcare
Electronics
Group
411
Goods
22%
21%
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
Operating Activities
256
Semiconductor Solutions
Display Solutions
Surface Solutions
Total
2023
2022
2,479
68%
2,674
67%
770
900
8,074
87%
8,004
The following table presents the reconciliation of segment results of all operating businesses to the profit before
income tax of the Merck Group:
252
Consolidated Financial Statements Notes to the Consolidated Financial Statements Operating Activities
No single customer accounted for more than 10% of the Group's total net sales in fiscal 2023 or 2022.
3 Previous-year figures have been adjusted, see note (6) "Acquisitions and divestments".
2 Goodwill and other intangible assets are allocated by currency area.
1 Excluding intersegment sales.
111
-2,521
64,232
1,243
3,487
4,904
15,412
-12
-17
€ million
EBITDA pre of the operating businesses¹
Corporate and Other
1%
99%
2,952
81%
19,030
91%
Equipment
411
-18
5%
16%
1,004
5%
Services
778
8%
33
593
-25
-63
-348
14,496
Net sales by region
(customer location)
Europe
3,178
34%
2,541
31%
318
9%
6,037
29%
North America
3,372
36%
1,793
100%
22%
20,993
3,659
License income
Commission income
Income from co-
commercialization agreements
Total
17
3
19
1
15
17
9,281
100%
8,053
100%
100%
787
21%
5,952
116
Adjustments¹
546
7%
75
2%
737
4%
Total
9,281
100%
8,053
100%
3,659
100%
Middle East and Africa
6%
1,331
1%
28%
Asia-Pacific
2,263
25%
2,232
28%
2,440
4%
67%
33%
Latin America
352
4%
941
12%
39
6,936
€ million
922
Information by country and region 2023
2,215
4,878
equipment
Property, plant and
24,396
2
47
480
18,783
18,794
1,780
1,783
5,121
intangible assets²
Goodwill and other
1,097
20,993
2,576
1,315
14,718
2,648
13,531
28,304
Number of employees
-349
-827
-1,042
-2,004
costs
Research and development
9,056
62
225
444
2,571
535
1,267
2,477
Group
Middle
East and
Africa
China America
Pacific
USA
Latin
thereof:
Asia-
thereof:
North
America
thereof: thereof:
Germany Switzerland
Europe
€ million
251
Operating Activities
Net sales by customer
location¹
6,037
1,000
6,658
5,911
6,198
512
1,420
6,334
location¹
Consolidated Financial Statements Notes to the Consolidated Financial Statements
Net sales by company
737
1,331
2,708
6,936
5,632
5,952
369
20,993
Electronics
100%
7,839
1 Not defined by International Financial Reporting Standards (IFRS).
2 Without impairments on financial assets and inventories.
2022
€ million
Restructuring expenses
Integration expenses/IT expenses
Gains (+)/losses (-) on the divestment of
businesses
Acquisition-related adjustments
Other adjustments
Adjustments before impairment
51
51
-18
-18
-56
Adjustments in the operating result (total)¹
-56
Reversals of impairment losses
losses/reversals of impairment losses¹
-6
-21
-249
-1
-110
-1
-6
-118
€ million
Restructuring expenses
Integration expenses/IT expenses
Gains (+)/losses (-) on the divestment of
businesses
Acquisition-related adjustments
Other adjustments
Adjustments before impairment
Impairment losses²
-43
-44
-246
expenses
Total
-27
-32
-38
-74
-28
-198
2
-77
-1
-12
-88
38
38
expenses
income and
operating
thereof:
other
-50
-390
-88
-88
1
1
-43
-135
-44
-7
EBITDA pre of the Merck Group¹
-477
thereof:
cost of sales
thereof:
marketing and
selling
expenses
thereof:
administration
expenses
thereof:
research and
development
-246
-22
-44
Total
Financial result
Profit before income tax
1 Not defined by International Financial Reporting Standard (IFRS). Please refer to the following table for the components of the adjustments.
The adjustments comprised the following:
€ million
Restructuring expenses
Integration expenses/IT expenses
Gains (+)/losses (-) on the divestment of businesses
2023
2022
-249
-198
-118
-88
51
4,287
38
3,484
-125
Operating result (EBIT)¹
2023
2022
6,276
7,428
-397
-579
5,879
6,849
-1,880
-2,030
-390
-345
3,609
4,474
-187
Acquisition-related adjustments
-18
-29
Consolidated Financial Statements Notes to the Consolidated Financial Statements Operating Activities
253
The adjustments are reported in the consolidated income statement as part of the respective functional costs
and allocated to them as follows:
2023
thereof:
thereof:
marketing and
thereof:
thereof:
cost of sales
selling administration
expenses
expenses
thereof:
research and
development
other
operating
income and
expenses
expenses
Impairment losses were attributable in particular to intangible assets in the Electronics and Life Science
business sectors (see Note (14) “Other operating expenses" and Note (19) "Other intangible assets”).
Other adjustments include the losses on the net position of monetary assets and liabilities resulting from
hyperinflationary accounting in Argentina and Turkey, which are reported in other operating expenses (see Note
(2) "Reporting principles” and Note (14) “Other operating expenses”).
As in the previous year, integration and IT expenses in fiscal 2023 related to expenses for the enhancement of
ERP systems.
Restructuring expenses in the year under review primarily related to a program to further improve processes
and align the Group functions more closely with the businesses (€ 126 million; 2022: € 20 million; see Note
(27) "Other provisions").
Other adjustments
-56
-68
Adjustments before impairment losses/reversals of impairment losses¹
-390
-345
Impairment losses²
-42
-88
Reversals of impairment losses
1
Adjustments (total)¹
-477
-577
1 Not defined by International Financial Reporting Standard (IFRS).
2 Without impairments on financial assets and inventories.
-232
-29
-68
-68
1,743
22%
956
12%
856
11%
thereof: RebifⓇ
709
9%
887
11%
Fertility
1,547
19%
1,446
21%
18%
1,665
611
2022
1,819
22%
1,683
22%
thereof: ErbituxⓇ
thereof: BavencioⓇ
Neurology & Immunology
thereof: MavencladⓇ
1,025
13%
1,023
13%
713
9%
8%
thereof: Gonal-fⓇ
847
11%
553
7%
thereof: SaizenⓇ
Other
Total
332
4%
266
3%
235
3%
161
2%
8,053
100%
7%
565
thereof: Euthyrox®
8%
825
11%
Cardiovascular, Metabolism & Endocrinology
2,786
35%
2,805
36%
2023
thereof: GlucophageⓇ
11%
930
12%
thereof: ConcorⓇ
571
7%
590
882
Oncology
€ million
Healthcare
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
Operating Activities
254
Accounting and measurement policies
Nature and timing of revenue recognition
Net sales are recognized when (or as) the customer obtains control of the asset. For sales of goods, the
customer typically obtains control as soon as delivery is made, given that the customer is generally not able to
obtain any benefits from the asset before that point in time. In the case of equipment sales, the criteria for
revenue recognition are only met after installation has been successfully completed - to the extent that the
installation requires specialized knowledge, does not represent a clear ancillary service and the relevant
equipment can only be used by the customer once successfully set up.
For service contracts and customer-specific contract manufacturing of goods and equipment, Merck recognizes
revenue over time based on the progress toward complete satisfaction of the performance obligation, if there is
a contractual claim for payment against the customer for the services already performed and there is no
alternative use. Input- and output-oriented methods are used to appropriately determine progress on a
contract-specific basis. Although progress is ideally measured using input-oriented methods, output-oriented
methods are always applied when the input cannot be reliably determined, for example. Specifically, the
appropriate degree of progress is mainly calculated on the basis of milestones reached, time elapsed, units
delivered, or costs incurred in proportion to the anticipated total costs.
Licenses for intellectual property are granted to a limited extent in the Life Science and Healthcare business
sectors. Unlike in the Life Science business sector, these transactions do not usually form part of ordinary
activities in the Healthcare business sector, meaning that the corresponding income is reported in other
operating income (see Note (7) "Collaboration and licensing agreements" and Note (13) "Other
operating income").
Net sales from contracts comprising several separate performance obligations are recognized on a pro rata
basis when the respective performance obligation has been fulfilled. Multiple-element arrangements of this
nature only exist to a very limited extent in the Life Science business sector.
Determining the transaction price
Merck grants customers various kinds of rebates and discounts. These, as well as anticipated customer refund
claims, state compulsory charges, and rebates from health plans and programs, are deducted from sales. The
most significant portion of these deductions from sales is attributable to the Healthcare business sector and, in
particular, sales in the United States.
Sales deductions provided on the invoice as price-reducing items, which will likely be applied by customers
when making the respective payments, are recognized as reduction of trade accounts receivable. Expected
refunds, such as bonus payments, reimbursements for rights of return or rebates from health plans and
programs, are reported in the consolidated balance sheet under refund liabilities.
The measurement of sales deductions and refund liabilities arising from expected rebates and discounts takes
account of past experience, specific knowledge of expected sales volume growth rates, contractual conditions,
pricing information, and external information from distributors and industry services.
The measurement of sales deductions and refund liabilities resulting from rights of return takes into account
historical rates of return for individual product groups, information from distributors on inventory levels, and
publicly available information on product sales from sector-specific service providers (in the Healthcare business
sector).
(9) Net sales
1 Not defined by International Financial Reporting Standards (IFRS).
2 Without impairments on financial assets.
-577
-323
losses/reversals of impairment losses¹
-32
-32
-115
-75
-91
-345
Contractual payment terms
Impairment losses²
-232
Reversals of impairment losses
Adjustments in the operating result (total)¹
-32
-32
-115
-75
-232
20,993
Given that the Merck Group generates the large majority of its net sales through transactions with simple
structures, the company usually has an enforceable right to payment after the performance obligation has been
255
3,782
41%
4,540
44%
Life Science Services
792
8%
943
9%
Total
9,281
100%
10,380
100%
1 Prior-year figures have been adjusted owing to realignment in the Life Science business sector.
Process Solutions
47%
4,898
51%
fulfilled. The payment targets contractually agreed between Merck Group and its customers usually range
between 30 and 60 days.
Practical expedients
Merck uses the practical expedient of IFRS 15 in which the promised amount of consideration is not adjusted for
the effects of a significant financing component if the period between the fulfillment of a performance obligation
and the payment by the customer only amounts to up to one year.
Significant discretionary decisions and sources of estimation uncertainty
Sales deductions
The measurement of sales deductions and the corresponding refund liabilities requires extensive estimates.
Uncertainties exist in particular concerning the extent to which past experience serves as a reliable basis for
estimating the future development of expected refunds, such as bonus payments, reimbursements for rights of
return, or rebates from health plans and programs. External information from distributors and industry services
outside of Merck's control, which are also subject to uncertainty, are used to determine sales deductions.
Due to a lack of past experience, the estimation uncertainty referenced above is particularly relevant for
product launches in the Healthcare business sector.
Consolidated Financial Statements Notes to the Consolidated Financial Statements Operating Activities
Any changes in estimates of the parameters listed above have a cumulative impact on the net sales for the
respective adjustment period.
The following tables present a breakdown of net sales by key product lines/products:
Life Science¹
€ million
Science & Lab Solutions
2023
2022
4,706
If the carrying amount of refund liabilities had been 10% higher as of the reporting date, this would have
resulted in a € 88 million (2022: € 91 million) reduction in profit before tax.
100%
1%
€ million
2
Other
-28
-2
-2
-18
-26
Currency translation
obligations satisfied in prior periods
-109
10
9
-116
-118
thereof: attributable to performance
-113
10
8
-120
2
-121
Dec. 31, 2023
443
Marketing and selling expenses within logistics costs also include expenses for transportation services
performed on behalf of customers. The corresponding income from these services is reported under net sales.
Amortization of the intangible assets under marketing and selling expenses is mainly attributable to customer
relationships, licenses and similar rights, brands, and trademarks.
Marketing and selling expenses
Accounting and measurement policies
(11) Marketing and selling expenses
Impairment losses on inventories amounted to € 424 million (2022: € 279 million) in the reporting period, while
reversals of impairment losses amounted to € 237 million (2022: € 197 million).
The cost of sales included amortization of intangible assets (excluding amortization of internally generated or
separately acquired software) in the amount of € 173 million (2022: € 207 million). Material costs amounted to
€ 3,709 million in fiscal 2023 (2022: € 3,996 million) and were largely reported under cost of sales. For the first
time, the cost of sales also included royalties of € 55 million for BavencioⓇ as a result of the agreement
terminating the strategic alliance with Pfizer Inc., United States, which came into force on June 30, 2023 (see
Note (7) "Collaboration and licensing agreements”).
Cost comprises the following items: directly attributable costs, such as cost of materials; personnel and energy
costs; depreciation and amortization; overheads attributable to the production process; and inventory
impairment losses and their reversals.
The cost of sales primarily includes the cost of manufactured products sold and the merchandise sold.
Cost of sales
Accounting and measurement policies
(10) Cost of sales
258
Operating Activities
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
The development in contract assets and contract liabilities is shown in Note (26) "Contract assets" and in
Note (29) "Other non-financial liabilities".
877
44
60
816
Cumulative increase (-)/decrease (+) in net
sales
-2,545
-37
Jan. 1, 2023
€ million
2023
912
43
62
492
850
-3
-3
31
2
2
31
29
-118
0
-115
-118
Rebates/Bonus payments
Rights of return
Total
thereof: United
States
-60
-1,855
-2,485
Utilizations
Disposals due to divestments/Reclassification
to assets held for sale
2,648
31
52
1,945
Marketing and selling expenses comprised the following items:
2,596
Additions due to business combinations
912
43
62
492
850
Total
thereof: United
States
Total
Other additions
Dec. 31, 2022
€ million
Internal sales services
Income from fair value measurement of assets
37
Currency effects from operating activities
105
53
Income from upfront payments, milestone payments and royalties
6
71
Income from the revaluation of contingent considerations
54
137
Income from the disposal of assets
2022
2023
€ million
Other operating income was broken down as follows:
260
Operating Activities
Consolidated Financial Statements Notes to the Consolidated Financial Statements
27
The accounting treatment of contingent consideration agreed at the sale of a business as defined in IFRS 3 is
shown in Note (36) “Other financial assets.”
47
25
For information on income from the reversal of provisions for litigation, see Note (27) "Other provisions".
The reduction in upfront payments, milestone payments, and royalties was mainly due to the lower level of
royalties for interferon beta products (Biogen Inc., United States) of € 45 million (2022: € 55 million) and the
fact that no license income was recognized in the United States for the antidepressant Viibryd® (AbbVie Inc.,
United States) after income of € 27 million in the previous year.
The increase in income from contingent consideration was due in particular to a revaluation following the
achievement of milestones in connection with the biosimilars business that was sold to a subsidiary of
Fresenius SE & Co. KGaA, Bad Homburg vor der Höhe, in 2017.
Income from asset disposals included income from the disposal of a non-strategic brand in the Healthcare
business sector and a portfolio of licenses and patents in the Electronics business sector.
486
445
Other operating income
132
66
Remaining other operating income
6
Reversal of impairment losses on non-financial asset
7
13
Income from miscellaneous services
71
15
Realized gains from currency translation
24
Income from the reversal of provisions for litigation
Income from the revaluation of contingent considerations
Income from upfront payments, milestone payments, and royalties comprises consideration received by Merck
from contract partners that are not customers. This relates in particular to collaboration and out-licensing
agreements in the Healthcare business sector (see Note (7) “Collaboration and licensing agreements”).
2022
-616
-596
-1,193
-1,061
-476
-515
-972
-923
-971
-950
2022
2023
1 Excluding amortization of internally generated or separately acquired software.
Marketing and selling expenses
Other marketing and selling expenses
Royalty and license expenses
Amortization of intangible assets¹
Logistics
Sales promotion
-126
-137
-339
-348
Other operating income comprises all income that cannot be allocated to net sales or finance income on account
of its character.
Other operating income
Accounting and measurement policies
(13) Other operating income
Research and development costs include a high double-digit million-euro amount for the expected acceptance
and follow-on obligations in connection with the discontinuation of the development program for evobrutinib as
a result of not meeting their primary endpoints of the two Phase III clinical trials.
The net income from repayments of subsidies received and reimbursements recognized within research and
development costs amounted to € 21 million in fiscal 2023 (2022: € 23 million).
Cost reimbursements for research and development are offset against research and development costs.
For information on the capitalization of development costs and their separation from research and development
services agreed in conjunction with in-licensing, see Note (19) “Other intangible assets”.
The item comprises the costs of the Group's own research and development departments, the expenses
incurred as a result of research and development collaborations as well as the costs of clinical trials in the
Healthcare business sector (both before and after approval is granted).
Sales force
Research and development costs
(12) Research and development costs
259
Operating Activities
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
Of the royalty and license expenses, € 51 million (2022: € 53 million) related to the commercialization of ErbituxⓇ.
The reduction in logistics costs was due to lower freight rates in international goods transportation and the
lower sales volume in the Life Science and Electronics business sectors. Savings also resulted in lower expenses
for the internal and external sales force.
-4,714
-4,510
Accounting and measurement policies
Other
Income from upfront payments, milestone payments, and royalties
obligations satisfied in prior periods
100%
22,232
1
1
18
100%
4,013
100%
7,839
1
17
100%
10,380
Total
commercialization agreements
Net sales by region
(customer location)
Europe
North America
23%
1,781
38%
3,931
28%
6,248
9%
I
371
2,433
33%
3,445
Total
Middle East and Africa
Latin America
Asia-Pacific
31%
649
Income from co-
Commission income
92%
20,382
87%
3,481
100%
7,804
88%
9,097
Goods
Group
Electronics
Healthcare
Life Science
Net sales by nature of the products
Currency translation
Equipment
463
4%
1
20
4
16
License income
4%
930
3%
1
110
8%
804
Services
4%
881
10%
417
16
16%
Depreciation/amortization/impairment losses/reversals of impairment losses
Total
784
thereof: United
States
Rights of return
Rebates/Bonus payments
€ million
2022
The following table shows the change in refund liabilities:
Orders already received by the reporting date that will result in net sales in future periods amounted to around
€ 4 billion as of December 31, 2023 (December 31, 2022: around € 6 billion), of which around € 3 billion
related to the Life Science business sector (December 31, 2022: around € 4 billion). Based on past experience,
around 13% of orders received are not expected to result in net sales until fiscal 2025 or later
(December 31, 2022: around 10% in fiscal 2024 or later).
Semiconductor Solutions business unit in the Electronics business sector.
services in the Life Science business sector and net sales from the project business of the
445
257
Consolidated Financial Statements Notes to the Consolidated Financial Statements
Group net sales amounted to € 20,993 million in fiscal 2023 (2022: € 22,232 million). Around 5% of this figure
was recognized over time (2023: € 1,119 million; 2022: € 933 million). This mainly related to net sales from
100%
22,232
100%
4,013
100%
7,839
100%
3%
Operating Activities
Total
55
thereof: United
States
Total
-168
-6
-9
-147
-159
Cumulative increase (-)/decrease (+) in net
sales
-2,313
-29
-43
-1,739
-2,270
Utilizations
Disposals due to divestments/Reclassification
to assets held for sale
2,526
40
56
1,902
2,470
Other additions
Additions due to business combinations
Jan. 1, 2022
839
35
695
2%
thereof: attributable to performance
7%
53
6,361
29%
25%
2,261
29%
2,901
72%
7,697
35%
2,536
3%
353
1%
5%
1,231
116
10,380
40
10%
838
1%
527
8.2%
2022
2.00%
2.00%
2022
2023
Weighted cost of capital after
Life Science
Healthcare¹
in %
tax
Long-term
growth rate
The additional significant value-relevant assumptions underlying the goodwill impairment tests are quantified
below.
The calculation of the recoverable amount of the Electronics CGU included the expected average sales growth in
the period until the transition to the terminal value at a higher single-digit percentage (2022: higher single-digit
percentage). The sales expectation for the Electronics CGU is primarily based on the long-term growth trend in
the market for semiconductor materials and positive sales contributions from the Level Up growth program with
an initial investment volume exceeding € 3 billion by the end of 2025. Taking into account Group costs allocated
on a pro rata basis, the EBITDA pre margin applied in the period until the transition to the terminal value in the
impairment test for fiscal 2023 was around 29% (2022: around 30%).
7.5%
2023
Electronics
Significant discretionary decisions and sources of estimation uncertainty
0.00%
2.00%
Decrease in long-term growth rate
Decrease in net cash flows
In addition, sensitivity analyses of the key assumptions were performed as part of the scheduled impairment
tests. The following table presents the minimum amount by which individual key assumptions could have
changed when viewed in isolation before the impairment test triggered the recognition of an impairment loss.
As in the previous year, the recoverable amount in impairment testing in fiscal 2023 was well above the
carrying amount of the respective CGU more than 15% higher, in fact. Regardless of this, the results of the
valuation were checked for plausibility against externally available "sum of the parts" calculations and validated
using multiples based on peer group information.
-
The determination of the recoverable amount is subject to discretion and significant estimation uncertainty.
Assumptions regarding the amount of net cash flows, long-term growth rates, and discount factors are
considered a material source of estimation uncertainty due to their inherent uncertainty. Although Merck
assumes that the assumptions applied in calculating the recoverable amount are appropriate, changes to these
assumptions could result in goodwill impairment with an adverse impact on the net assets, financial position,
and results of operations. In the Electronics CGU in particular, there is a high degree of dependence on the
assumptions concerning the long-term growth trend in the market for semiconductor materials.
Goodwill
1.00%
2.00%
The expected average sales growth in the Healthcare CGU in connection with the calculation of fair value less
costs of disposal amounted to a mid-single-digit percentage rate in the detailed planning period (2022: mid-
single-digit percentage rate). The sales performance reflected the probability of regulatory approval of drug
candidates in the existing research and development programs. Taking into account Group costs allocated on a
pro rata basis, the EBITDA pre margin for fair value less costs of disposal applied in the period until the
transition to the terminal value in the impairment test for fiscal 2023 was around 30%.
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
Net cash flows were discounted using the cost of capital after taxes. For the calculation of the value in use,
which was applied in the Healthcare business sector in the previous year, the cost of capital before taxes as
shown below the table was derived iteratively.
1 The weighted cost of capital before taxes to determine the value in use of the CGU Healthcare for the previous year was 7.3%.
7.1%
8.1%
5.6%
6.3%
Operating Assets, Liabilities, and Contingent Liabilities 269
In the Life Science CGU, the expected average sales growth in the period until the transition to the terminal
value was a higher single-digit percentage (2022: higher single-digit percentage). The sales expectation for the
Life Science CGU is supported primarily by the anticipated long-term positive development in the
Process Solutions and Life Science Services business units, based on ongoing high market growth and the
continuing expansion of the portfolio and production capacities. Taking into account Group costs allocated on a
pro rata basis, the EBITDA pre margin applied in the period until the transition to the terminal value was
around 31% (2022: around 34%).
(17) Earnings per share
The long-term growth rate after the detailed planning period is determined taking into account expected long-
term growth and long-term inflation expectations.
In the course of business combinations, goodwill is recognized on the acquisition date. The option to measure
non-controlling interests at fair value on the date of their acquisition (full goodwill method) is not utilized.
The purpose of impairment testing in accordance with IAS 36 is to ensure that the carrying amount of assets in
the balance sheet is not higher than their recoverable amount. The recoverable amount is the higher of the fair
value less costs of disposal and the value in use.
Method for impairment testing
Impairment testing for goodwill takes place at the level of the Life Science, Healthcare, and Electronics business
sectors. These groups of cash-generating units (CGUS) are the lowest level at which goodwill at Merck is
monitored for internal management purposes.
Impairment testing is performed on a scheduled basis in the third quarter of every year and on an ad hoc basis
where there are indications of impairment. The existence of indications of impairment is monitored using
various factors such as changes in medium-term planning, analyst forecasts, validation multiples, and Merck's
average market capitalization compared to its balance sheet equity.
In the 2023 reporting year, the recoverable amount for all CGUS was primarily determined on the basis of the
fair value less costs of disposal (2022: Life Science and Electronics on the basis of the fair value less costs of
disposal; Healthcare on the basis of the value in use).
For both fair value less costs of disposal and value in use, the recoverable amount is calculated in accordance
with the discounted cash flow method (Level 3 in the IFRS 13 fair value hierarchy).
In calculating the fair value, the expected post-tax cash flows are derived from the medium-term plans
prepared by the business sectors. Due to extensive investments in the Life Science and Electronics CGUs, the
fourth planning year after the detailed planning period for both of these CGUS is extrapolated for an additional
four years in line with business-specific assumptions before being converted to the terminal value by applying a
long-term growth rate. In the Healthcare CGU, the transition to the terminal value takes place after four years
starting from the following year. Sales planning was based on internal past experience and largely non-
observable input factors in the market, such as future market shares, selling prices and volumes, and new
products from the development pipeline and expansion investments. Profit margins are based on past
experience adjusted for expected profitability developments.
In calculating the value in use in the previous year, the most recent medium-term plan approved by the
Executive Board, with a detailed planning period of four years starting from the following year, served as the
basis for planning. Sales planning was based on past experience and assumptions regarding future market
shares, selling prices, and volumes. Expected cash inflows and outflows from new products from the Healthcare
development pipeline and expansion investments were not included in the calculation of value in use. Profit
margins were based on past experience adjusted for expected profitability developments.
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
Operating Assets, Liabilities, and Contingent Liabilities 268
The discount factor after taxes is derived on the basis of the following input parameters:
Risk-free interest rate
Beta factor
%
Goodwill
Accounting and measurement policies
(18) Goodwill
Liabilities
Derived from the market data of the respective peer group companies
Based on a combination of different estimating methods, for example,
historical and implied stock yields
Derived from the respective sector-specific peer group
Derived from the returns of long-term government bonds based on
the Svensson method
Cost of debt and capital structure
Market risk premium
The changes in provisions included a mid-double-digit million-euro amount for the recognition of restructuring
provisions to align the Group functions more closely with the businesses, and a high double-digit million-euro
amount for the recognition of provisions for acceptance and follow-on obligations in connection with the results
of the two Phase III clinical trials to evaluate the efficacy and safety of evobrutinib (see Note (27) "Other
provisions").
Significant measurement assumptions
The item "Neutralization of gains/losses on disposal of fixed assets" included the effects recognized in income
of the disposal of a non-strategic brand in the Healthcare business sector and a portfolio of licenses and patents
in the Electronics business sector. The corresponding cash inflows are recognized in the cash flow from
investing activities.
Accounting and measurement policies
Earnings per share
Basic earnings per share is calculated by dividing the profit after taxes attributable to the shareholders of
Merck KGaA (net income) by the weighted average number of theoretical shares outstanding. The calculation of
the theoretical number of shares is based on the fact that the general partner's equity is not represented by
shares. Corresponding to the division of the subscribed capital of € 168 million into 129,242,252 shares (see
Note (34) "Equity"), the general partner's equity of € 397 million equates to 305,535,626 theoretical shares.
Overall, equity capital amounted to € 565 million or 434,777,878 theoretical shares outstanding.
As in the previous year, equity capital remained unchanged in fiscal 2023. The weighted average (basic)
number of shares was 434,777,878 and thus corresponded to the number of theoretical shares outstanding. In
fiscal 2023 and 2022, there were no shares with a potential diluting effect; as a result, the diluted earnings per
share were equivalent to basic earnings per share.
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
Operating Assets, Liabilities, and Contingent Liabilities 267
Operating Assets, Liabilities, and Contingent
The change in other non-cash income and expenses contained the neutralization of revaluations of contingent
consideration recognized in income (see Note (36) "Other financial assets"). The corresponding cash inflows
are also recognized in the cash flow from investing activities.
5
Impairment losses
Increase in cost of capital after tax
percentage points
17,004
557
4,420
42
1,525
11,059
515
Total
Electronics
Healthcare
Life Science
Goodwill
Currency translation difference
Impairment losses
Transfers
for sale
Disposals due to divestments/Reclassification to assets held
Additions
619
12,193
1,525
209
4,671
The additions in fiscal 2022 resulted in particular from the acquisition of Exelead Inc., United States (see Note
(6) "Acquisitions and divestments”).
Goodwill impairment testing did not give rise to the need to recognize any impairment losses in either fiscal
2022 or fiscal 2023.
The changes in goodwill caused by foreign exchange rates resulted almost exclusively from translating the
goodwill from the acquisitions of Versum Materials, Inc., United States; the Sigma-Aldrich Corporation, United
States; AZ Electronic Materials S.A., Luxembourg; and the Millipore Corporation, United States, which were
mostly denominated in U.S. dollars.
-544
17,845
2 Previous year has been adjusted, please refer to Note (6) "Acquisitions and Divestments”.
1 Net carrying amounts equal the gross amount.
4,532
Net carrying amounts, Jan. 1, 2023¹
1,525
-406
11,787
Net carrying amounts as of Dec. 31, 2023¹
18,389
4,671
1,525
12,193
828
18,389
-138
percentage points
Net carrying amounts as of Dec. 31, 20221,2
Interest paid totaled € 181 million (2022: € 185 million). Interest received amounted to € 77 million
(2022: € 25 million).
>10
>10
>2
>2
>2
>2
> 10
> 10
Life Science
Healthcare
2022
2023
2022
2023
2022
2023
> 2
> 2
> 2
> 2
Transfers
for sale
Disposals due to divestments/Reclassification to assets held
Other additions
Net carrying amounts, Jan. 1, 2022¹
€ million
The goodwill shown below mainly resulted from the following acquisitions: Exelead Inc., United States; Versum
Materials Inc., United States; Sigma-Aldrich Corporation, United States; AZ Electronic Materials S.A.,
Luxembourg; Millipore Corporation, United States; and Serono SA, Switzerland.
Currency translation difference
Operating Assets, Liabilities, and Contingent Liabilities 270
>2
> 2
> 2
> 2
> 10
> 10
Electronics
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
Tax payments made totaled € 1,053 million in fiscal 2023 (2022: € 1,344 million). Tax refunds received
amounted to € 38 million (2022: € 145 million).
124
The option to recognize interest received and interest payments made is exercised to the extent that such
transactions are recognized in cash flow from operating activities.
-5
-55
Tax refund claims/Other
67
67
-2
40
30
Tax loss carryforwards
liabilities
62
181
119
-6
9
3
-6
-57
174
385
Deferred taxes (consolidated
liabilities
-627
-627
Offset deferred tax assets and
23
offsetting)
1,757
2,142
385
-3
42
323
Deferred taxes (before
117
122
Current and non-current
provisions
42
823
Inventories
financial assets
38
2
-36
-17
13
-32
Current and non-current
222
103
-119
5
-44
821
835
15
122
633
510
-6
50
-10
475
1,514
Current and non-current
33
92
59
-1
9
51
Current and non-current
receivables/Other assets
Tax payments are reported in operating cash flow. Only significant transactions where the associated tax
payments can be practically calculated are recognized in the relevant item of the consolidated cash flow
statement.
1,130
Consolidated Financial Statements Notes to the Consolidated Financial Statements Operating Activities
135
106
29
Not recognized deferred tax assets on tax loss
carryforwards
carryforwards
30
30
67
18
49
Recognized deferred tax assets on tax loss
carryforwards
214
165
49
49
202
135
1 Prior year's figures for Germany were adjusted.
•
The operating cash flow is presented using the indirect method based on profit after taxes.
•
The operating cash flow is calculated and presented based on the following principles:
Operating cash flow
Accounting and measurement policies
(16) Operating cash flow
266
Operating Activities
Consolidated Financial Statements Notes to the Consolidated Financial Statements
456 million €) and mainly resulted from tax prepayments that exceeded the actual amount of tax payable for
the past fiscal year and earlier fiscal years from refund claims for previous years and from withholding tax
claims. As of December 31, 2023, income tax liabilities including liabilities for uncertain tax obligations totaled
1,473 million € (December 31, 2022: 1,522 million €).
Income tax receivables amounted to 482 million € as of December 31, 2023 (December 31, 2022:
Income tax receivables and income tax liabilities
Deferred tax assets resulting from tax loss carryforwards that exceed deferred tax liabilities relating to the
same taxation authority and the same taxable entity are not recognized if it is not considered probable that
taxable profit will be available against which they can be utilized.
The majority of the tax loss carryforwards either had no expiry date or can be utilized for up to 20 years. This
also applies to losses for which no deferred taxes were recognized.
184
-129
78
Potential deferred tax assets for tax loss
Total
Outside
Germany
Germany
Total
Outside
Germany
Germany
Tax loss carryforwards
€ million
Dec. 31, 2022¹
Dec. 31, 2023
Tax loss carryforwards were structured as follows:
Changes in tax loss carryforwards
Deferred tax liabilities from outside basis differences for planned dividend payouts were recognized in the amount
of € 157 million (December 31, 2022: € 79 million). Retained earnings of subsidiaries for which no deferred taxes
were recognized amounted to € 10,627 million as of December 31, 2023 (December 31, 2022: € 10,249 million).
The resulting temporary differences that will be taxable in future periods in the event of dividend payments would
amount to € 603 million as of December 31, 2023 (December 31, 2022: € 582 million).
As in the previous year, the item "Changes in scope of consolidation/Currency translation/Other changes" mainly
comprised exchange rate effects for items translated from U.S. dollars to the reporting currency (euro).
Furthermore, a non-recurring deferred tax income on intangible assets impacted in the amount of € 95 million.
Given the positive earnings forecasts, it was assumed that it will be possible to realize recognized deferred tax assets
of € 597 million (December 31, 2022: € 191 million), which exceeded deferred tax liabilities relating to the same
taxation authority and the same taxable entity, even though there was a loss in the current or previous period.
No deferred tax assets were recognized in the balance sheet for deductible temporary differences and other
interest carryforwards in the amount of € 13,220 million (December 31, 2022: € 71 million). The increase in
deductible temporary differences for which no deferred tax assets were recognized in the balance sheet is due to
the change in the exercise of different tax-related options abroad compared with the previous year. The majority
of these differences can only be utilized until 2029. Their utilization for tax purposes is not expected during this
period.
265
257
536
793
161
tax asset is recognized
702
541
161
542
441
101
balance sheet)
Tax loss carryforwards for which no deferred
136
251
95
156
Tax loss carryforwards for which a deferred
tax asset is recognized
838
677
136
23
111
40
Significant discretionary decisions and sources of estimation uncertainty
Deferred tax liabilities for planned dividend payments within the next twelve months of profits already
generated are recognized.
existing tax planning of the respective Group company.
•
results planning, and
results history,
temporary differences relating to the same taxation authority and the same taxable entity that will be
subject to taxation in the future,
•
The recognition of deferred tax assets requires an estimate of the probability of future use. The influencing
factors considered as part of this assessment include the following:
Deferred tax assets resulting from deductible temporary differences that exceed deferred tax liabilities relating
to the same taxation authority and the same taxable entity are recognized if it is considered probable that
taxable profit will be available against which they can be utilized. This corresponds to the recognition of
deferred tax assets on unused tax credits and tax loss and interest carryforwards.
Income taxes
Deferred taxes
Uncertain income tax assets and liabilities
Current income taxes for the reporting period and, where applicable, for prior periods, are calculated in the
amounts that the tax authorities are expected to demand or reimburse. The calculation is based on the
company-specific tax rate applicable in the relevant tax year.
Current income taxes
Accounting and measurement policies
(15) Income tax
262
Operating Activities
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
Currency effects from operating activities in the previous year primarily resulted from cash flow hedges in U.S.
dollars.
Factual assessments are made to calculate uncertain income tax assets and liabilities. Uncertain income tax
matters are recognized depending on the likelihood that the responsible tax authorities will accept the
respective income tax treatment. If recognition by the tax authorities is considered unlikely, the respective
uncertain tax asset or uncertain tax liability is measured at the most likely amount. Uncertain income tax
liabilities are reported within income tax liabilities. Expected income tax-related penalties and interest that do
not fall within the scope of IAS 12 are treated as provisions in line with IAS 37.
The calculation of the reported assets and liabilities from current and deferred income taxes requires extensive
discretionary judgments, assumptions, and estimates.
When assessing income tax assets and liabilities, the interpretation of tax provisions may be subject to
particular uncertainty. The possibility that the relevant tax authorities will take a differing view concerning the
application and interpretation of tax standards cannot be ruled out. Changes to the assumptions underlying the
interpretation of tax standards, for example as a result of changes in legislation, are recognized in the balance
sheet when the change comes into force.
With regard to deferred tax items, there is uncertainty as to when an asset will be realized or a liability settled.
This applies in particular to deferred taxes recognized in the course of company acquisitions. Assessing the
recoverability, particularly of tax credits and tax loss and interest carryforwards, requires assumptions and
estimates concerning the future taxable income of the respective Group company. Furthermore, the extent to
which a subsidiary's planned dividend distribution is probable within the next twelve months is discretionary.
-948
-650
19
11
12
-7
338
290
369
323
28
167
-1,344
-1,140
2022
2023
thereof: from temporary differences
thereof: from changes in tax rates
thereof: from tax loss carryforwards
Income taxes
Current income taxes in the period
Income taxes for previous periods
Deferred taxes in the period
€ million
Income taxes in the consolidated income statement were broken down as follows:
263
Operating Activities
Consolidated Financial Statements Notes to the Consolidated Financial Statements
Impairments of non-financial assets were attributable to intangible assets (see Note (19) “Other intangible
assets") in the amount of € 81 million (2022: € 211 million) and to property, plant, and equipment
(see Note (20) “Property, plant, and equipment”) in the amount of € 23 million (2022: € 21 million).
The reduction in profit transfer expenses was due in particular to the termination of the strategic alliance with
Pfizer Inc., United States, for BavencioⓇ in the field of immuno-oncology with effect from June 30, 2023
(see Note (7) "Collaboration and licensing agreements").
-1,170
-830
-16
-26
-45
-39
-67
-46
-45
-47
-67
-56
-68
-102
-232
-104
-275
-171
2022
2023
Infrastructure expenses
Non-allocable personnel expenses
Project expenses (including integration and IT projects)
Premiums, fees and contributions
Loss from hyperinflation accounting
-26
Tax reconciliation
-30
Expenses from a donation to the World Health Organization
Other operating expenses
-114
-120
Remaining other operating expenses
-154
Currency effects from operating activities
-11
-4
Expenses for miscellaneous services
-9
-5
Expenses from disposal of businesses and assets
-8
-19
Expenses from fair value measurement of assets and liabilities at fair value
Restructuring expenses
-12
-20
-9
-23
Expenses from claims
-7
-23
Expenses from Litigation
The following table presents the reconciliation from the theoretical income tax expense to the income tax
expense according to the consolidated income statement. The theoretical income tax expense is determined by
applying the statutory tax rate of a corporation headquartered in Darmstadt of 31.7% (2022: 31.7%).
€ million
Profit before income tax
823
2
84
737
Inventories
financial assets
32
-32
-22
-4
-6
Current and non-current
1,374
168
39
-129
-3
-59
-68
Property, plant and equipment
112
Assets Liabilities¹
(net)
-1,261
-135
846
302
23
81
49
170
122
-2
13
93
17
Current and non-current
provisions
51
526
475
6
-296
-37
803
Current and non-current
receivables/Other assets
15
66
51
-3
-27
Current and non-current
Non-income related taxes and expenses from tax audits
-1,428
Deferred tax
assets/liabilities
-103
28
167
-71
-7
568
495
-1,360
-1,105
31.7%
31.7%
4,287
3,484
2022
2023
Tax ratio according to consolidated income statement
Tax effect of non-deductible expenses/Tax-free income/Other tax effects
Income tax expense according to consolidated income statement
Tax effect on tax loss carryforwards
Tax credits
Tax effect of companies with a negative contribution to consolidated profit
Income tax for previous periods
Tax rate differences
Theoretical income tax expense
Tax rate
-79
Other changes¹
32
-129
Currency
translation/
Deferred taxes
credited/debited
to equity
scope of
consolidation/
Changes in
income
statement)
Deferred taxes
(consolidated
(net)
Intangible assets
€ million
Deferred tax
assets/liabilities
Dec. 31, 2022
Jan 1, 2022
The allocation of deferred tax assets and liabilities to the balance sheet items and the reconciliation of deferred
taxes in the consolidated income statement and the consolidated balance sheet are presented in the following
table:
Deferred taxes
264
Operating Activities
Consolidated Financial Statements Notes to the Consolidated Financial Statements
Income taxes consisted of corporation and trade taxes for the German companies and comparable income taxes
for non-German companies. Income taxes relating to previous periods recognized in fiscal 2023 resulted in
particular from completed tax audits, changes in income tax liabilities for risks from tax audits, and tax
assessments for previous years.
22.1%
18.7%
-948
-650
-48
14
liabilities
Impairment losses on non-financial assets
€ million
Deferred taxes (consolidated
91
23
1,310
1,287
47
235
(net) Assets Liabilities
Deferred tax
assets/liabilities
Other changes
Currency
translation/
scope of
consolidation/
Changes in
equity
debited to
income
statement)
(net)
-1,261
Intangible assets
€ million
Deferred taxes
credited/
Deferred taxes
(consolidated
Deferred tax
assets/liabilities
Dec. 31, 2023
Jan. 1, 2023
1 Previous-year figures have been adjusted, please refer to Note (6) "Acquisitions and Divestments".
balance sheet)
1,090
Profit share agreements
-979
-520
-520
Tax loss carryforwards
1,807
offsetting)
Deferred taxes (before
96
41
-55
3
1
-57
Tax refund claims/Other
91
30
19
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
Operating Activities
261
(14) Other operating expenses
Accounting and measurement policies
Other operating expenses
Other operating expenses comprise all expenses that cannot be reasonably allocated to a functional cost type or
finance costs.
30
Property, plant and equipment
-2
-132
-305
Offset deferred tax assets and
liabilities
369
The breakdown of other operating expenses was as follows:
1,829
23
The expenses and income and the payments under the leases in accordance with IFRS 16 were reported in the
consolidated income statement and the consolidated statement of cash flows as follows:
427
-14
-1
-13
10
-147
-37
-2
-108
-25
-1
-23
1
64
The additions to land, land rights, and buildings primarily related to newly agreed right-of-use assets for
laboratories, office buildings, and warehouses as well as agreed lease renewals.
The net carrying amounts of other facilities, operating and office equipment mainly included the right-of-use
assets for vehicles.
€ million
Right-of-use assets
Depreciation
Impairment losses
Reversals of impairment losses
Expenses for leasing low-value assets
206
Expenses for leases with variable lease payments
Income from subleasing right-of-use assets
Income from sale-and-lease-back transactions
Interest expenses for lease liabilities
Total
€ million
Operating cash flow
Financing cash flow
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Operating Assets, Liabilities, and Contingent Liabilities 280
500
45
8
157
-112
-19
-3
-1
-16
203
43
160
7
7
447
56
9
382
Total
-3
-37
-152
-6
481
58
8
415
Total
Other facilities,
operating and
office equipment
Plant and
machinery
4
Land, land rights,
and buildings
481
58
Total
415
-5
-1
2
Right-of-use assets
At the reporting date, the future lease payments were distributed over the following periods:
-11
€ million
264
123
-35
-9
-17
-9
524
111
Total
5 years
1-5 years
281
132
Within 1 year
After more than
513
101
137
488
Loss allowances
-10,619
-908
16
-770
265
-17,493
Net carrying amounts as of Dec. 31, 2023
4,847
580
729
395
6,551
1 Previous year has been adjusted, please refer to Note (6) "Acquisitions and Divestments".
Additions and disposals
The additions from business combinations in the previous year resulted in particular from the acquisition of
Exelead Inc., United States (see Note (6) "Acquisitions and divestments").
Additions for intangible assets not yet available for use essentially related to the Healthcare business sector and
mainly concerned the in-licensing from Jiangsu Hengrui Pharmaceuticals Co. Ltd., China, and Abbisko
Therapeutics Co. Ltd., China; see Note (7) “Collaboration and licensing agreements”. In the previous year,
this item included an upfront payment in a mid-double-digit million-euro amount in connection with the
acquisition of Chord Therapeutics SA, Switzerland, in the Healthcare business sector.
Software additions primarily related to the internal development of IT applications. The gross carrying amounts and
accumulated amortization for the capitalized software primarily related to purchased software as well as internally
generated applications and enhancements of purchased ERP programs that were already available for use.
Impairment losses amounting to € 81 million (2022: € 211 million) were recognized on an ad hoc basis for
other intangible assets in fiscal 2023. These were mainly attributable to the Life Science and Electronics
business sectors. In the previous year, a high-double-digit million-euro amount related to the Healthcare
business sector for the rights to the drug candidate berzosertib.
256
120
-47
-13
-14
-173
-14
-152
-147
2022
2023
Present value of future lease payments
Interest portion of future payments
Future lease payments
€ million
December 31, 2022
Present value of future lease payments
Interest portion of future payments
Future lease payments
-179
2023
2022
-25
-15
-22
-11
560
152
278
130
December 31, 2023
5 years
Within 1 year
After more than
-176
-174
-150
-149
-26
1-5 years
Total
-4,319
-5,196
Finite useful
life1
Not yet
available for
use
9,825
97
11,305
97
1,235
1,058
23,423
194
55
166
93
314
-17
-236
-11
-83
-347
0
23
-23
4
Total
2
software in
development
Marketing authorizations,
patents, licenses, similar rights,
and other items
Operating Assets, Liabilities, and Contingent Liabilities 272
Significant discretionary decisions and sources of estimation uncertainty
Purchased intangible assets
The identification and measurement of intangible assets acquired in the course of business combinations are
subject to significant discretion and estimation uncertainty.
In connection with in-licensing agreements in the Healthcare business sector, a discretionary estimate is made
of the extent to which upfront payments and milestone payments are remuneration for development services
yet to be performed or whether such payments are acquisition costs of an intangible asset to be capitalized.
Determination of amortization
Significant assumptions and estimates are required to determine the appropriate amount of amortization of
other intangible assets. This relates in particular to the determination of the underlying useful life.
If the amortization of intangible assets from customer relationships, brands, trademarks, marketing
authorizations, patents, licenses and similar rights, and other had been 10% higher, for example, due to
shortened useful lives, profit before income tax would have been € 78 million lower in fiscal 2023
(2022: € 83 million).
Identification of a need to recognize impairment loss and reverse impairment loss
Discretionary decisions are required in assessing substantial evidence of impairment as well as in identifying the
need to reverse the impairment of other intangible assets. Significant valuation-related assumptions and
estimates are also required to calculate the appropriate write-down amount in impairment testing.
€ million
Cost as of Jan. 1, 2022
Additions due to business combinations
Other additions
Disposals due to divestments/Reclassification to assets
held for sale
Other disposals
Transfers
Currency translation
Dec. 31, 2022
Customer
relationships,
brands, and
trademarks
Software and
487
59
13
-18
-9
Impairment losses
-932
-102
-229
-602
Depreciation, amortization, and write-downs
-15,810
-659
-720
-10,443
-3,989
Accumulated amortization and impairment losses as of
Jan. 1, 2022
24,169
1,096
1,379
11,302
10,391
582
24
-180
-3
-211
Reversals of impairment losses
-695
-887
-10,509
-4,743
Dec. 31, 2022
-211
-13
-1
-36
-160
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
Currency translation
15
-14
Transfers
331
83
231
17
Other disposals
held for sale
Disposals due to divestments/Reclassification to assets
-1
Intangible assets with indefinite useful lives and purchased, as well as internally generated intangible assets not
yet available for use, are not amortized, but rather tested for impairment when a triggering event arises or at
least once a year.
The identification of indications of impairment takes place with the involvement of the responsible departments,
taking external and internal information sources into consideration. Merck examines the existence of indications
of impairment using various factors, particularly deviations from sales forecasts and the analysis of changes in
medium-term planning. An impairment test is performed if there are indications of impairment. In the event of
impairment, an impairment loss is recognized under other operating expenses. Impairment losses are reversed
up to amortized cost and reported in other operating income if the original reasons for impairment no longer
apply.
Purchased and internally generated intangible assets with finite useful lives are amortized using the straight-
line method over their useful lives. The useful lives of customer relationships, brand names, and trademarks, as
well as marketing authorizations, acquired patents, licenses and similar rights, and software, are usually
between three and 24 years. In determining these useful lives, Merck considers factors including the typical
product life cycles for each asset and publicly available information about the estimated useful lives of similar
assets. The amortization expense is allocated to the respective functional costs or, if this is not possible,
recognized under other operating expenses.
-202
-581
Depreciation, amortization, and write-downs
-16,833
-695
-887
-10,509
-4,743
Accumulated depreciation and impairment losses as of
Jan. 1, 2023
24,045
1,165
1,637
-482
-16
-3
-112
11,200
10,043
Dec. 31, 2023
-351
Currency translation
6
-104
-887
Impairment losses
-26
Dec. 31, 2023
2
91
156
-
-
Currency translation
Transfers
37
12
5
3
-3
Other disposals
held for sale
Disposals due to divestments/Reclassification to assets
5
5
Reversals of impairment losses
-81
-31
-24
25
Other facilities,
operating and
office equipment
-14
Transfers
Cost as of Jan. 1, 2023
Operating Assets, Liabilities, and Contingent Liabilities 273
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
7,336
401
493
793
5,648
Net carrying amounts as of Dec. 31, 2022
-16,833
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Operating Assets, Liabilities, and Contingent Liabilities
271
(19) Other intangible assets
Accounting and measurement policies
Recognition and initial measurement of purchased intangible assets
In in-licensing, the portion of the consideration paid by Merck to acquire intellectual property is recognized as
an intangible asset. If research and development services to be performed by the seller are also agreed in
conjunction with the transaction, the related share of consideration is separated and recognized in research and
development expenses in line with the service performance.
Contingent consideration linked to milestone payments in connection with the purchase of intangible assets
arising outside a business combination is recognized as an intangible asset and as a financial liability once the
milestone is reached. Contingent consideration in the form of sales-based royalties is expensed when incurred.
Intangible assets acquired in business combinations are recognized at fair value on the acquisition date.
Recognition and initial measurement of internally generated intangible assets
Owing to the high level of uncertainty until pharmaceutical products are approved, the criteria for the
capitalization of development costs in accordance with IAS 38 are not met in the Healthcare business sector for
the development of drug candidates. Costs incurred after regulatory approval are insignificant and are therefore
not recognized as intangible assets. In the Life Science and Electronics business sectors, development expenses
are capitalized as soon as all the recognition criteria are met and can be verified accordingly. This also includes
expenses that are required for REACH registration. Furthermore, development expenses for internal software
projects and the enhancement of purchased ERP programs are capitalized providing that the relevant criteria
have been fulfilled.
Subsequent measurement
Subsequent measurement is at amortized cost.
Additions due to business combinations
Other additions
Disposals due to divestments/Reclassification to assets
Customer
relationships,
-44
-13
-9
-25
3
Other disposals
held for sale
396
92
284
16
20
1,096
1,379
11,302
10,391
Total
software in
development
patents, licenses, similar rights,
and other items
brands, and
trademarks
Software and
Marketing authorizations,
24,169
Plant and
machinery
17,943
Land, land rights,
13
Not yet available for use
135
134
8
124
2
Others
164
107
107
0.8-2.8
Versum Materials, Inc.
170
87
87
0.3-9.3
AZ Electronic Materials S.A.
thereof from the following acquisitions:
583
133
729
493
Operating and office equipment, other facilities
Plant and machinery
Administration buildings
Production buildings
Property, plant, and equipment is depreciated using the straight-line method over the useful life of the asset
concerned, and the corresponding expenses are allocated to the respective functional costs. Depreciation of
property, plant, and equipment is based on the following useful lives:
Subsequent measurement is based on amortized cost.
Subsequent measurement
Advance payments are disclosed together with the assets under construction.
In the course of determining cost, government grants received within the scope of IAS 20 are deducted. Grants
receivable for financial support that are no longer linked to future costs are recognized in profit or loss.
657
Recognition and initial measurement
(20) Property, plant, and equipment
Operating Assets, Liabilities, and Contingent Liabilities 275
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
1 Previous year has been adjusted, please refer to Note (6) "Acquisitions and Divestments".
115
102
102
Versum Materials, Inc.
thereof from the following acquisition:
Accounting and measurement policies
Useful life
447
212
170
2.5-3.5
Millipore Corporation
1,798
1,545
1,545
2.8-14.8
Versum Materials, Inc.
3,048
2,726
118
2,608
12.8-13.8
Sigma-Aldrich Corporation
thereof from the following acquisitions:
5,216
4,542
1,663
2,879
170
239
Brands and trademarks
thereof from the following acquisition:
0.3-9.3
793
580
243
124
213
Patents, licenses, and similar rights
Finite useful life¹
similar rights, and other
235
366
281
3.9
Marketing authorizations, patents, licenses and
Sigma-Aldrich Corporation
432
305
9
296
0.5-3.9
281
2.5-14.8
No more than 33 years
No more than 40 years
6 to 25 years
The useful lives of the assets are reviewed regularly and adjusted if necessary.
Impairment losses
-866
-173
-374
-319
Depreciation
-7,593
-15
-1,287
-3,987
-2,304
Accumulated depreciation and impairment losses as
of Jan. 1, 2022
16,513
2,429
1,879
6,228
5,976
Dec. 31, 2022
175
-19
-3
-21
Reversals of impairment losses
-2,588
Dec. 31, 2022
-70
-10
-35
-26
Currency translation difference
-1
-5
20
-1
-6
Transfers
244
1
91
84
67
Disposals
Disposals due to divestments/Reclassification to
assets held for sale
11
3 to 10 years
12
80
14,810
1,905
1,754
5,687
5,464
Total¹
progress
operating and Construction in
office equipment
Plant and
machinery1
Land, land rights,
and buildings¹
Cost as of Jan. 1, 2022
€ million
Other facilities,
Operating Assets, Liabilities, and Contingent Liabilities 276
Consolidated Financial Statements Notes to the Consolidated Financial Statements
Assumptions and estimates are required in determining the appropriate useful life and the expected residual
value in order to calculate the amount of depreciation on property, plant, and equipment. This applies in
particular to the determination of the underlying remaining useful life. In making these estimates, Merck
considers the useful lives of the property, plant, and equipment derived from past experience.
Identification of a need to recognize impairment loss and reverse impairment loss
Discretionary decisions are required in the identification of objective evidence of impairment as well as in
identifying the need to reverse impairment of property, plant, and equipment.
Determination of depreciation
Significant discretionary decisions and sources of estimation uncertainty
An impairment test is performed if there are indications of impairment. External and internal information is
used in this context. In the event of impairment, an impairment loss is recognized under other operating
expenses. Impairment losses are reversed up to amortized cost and reported in other operating income if the
original reasons for impairment no longer apply.
Additions due to business combinations
48
19
4
Currency translation difference
-1
-930
127
512
290
Transfers
-282
-6
63
-95
-88
Other Disposals
Disposals due to divestments/Reclassification to
assets held for sale
82
1,730
11
1,429
77
42
182
Other Additions
-94
Customer relationships
5,648
Total
Dec. 31, 2022
Filling and logistics center
Capacity expansion for drug safety testing
Membrane factory
USA
Ireland
Research center
Germany
Germany
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Operating Assets, Liabilities, and Contingent Liabilities
277
(21) Leasing
Accounting and measurement policies
Leasing
Scope of IFRS 16
Merck exercises the option provided by IFRS 16 to not recognize leases of intangible and low-value assets as
leases. Right-of-use assets under leases are reported in the balance sheet item "Property, plant, and
equipment" (see Note (20) "Property, plant, and equipment”).
Where the provision of company cars to employees qualifies as an employee benefit within the meaning of
IAS 19, IFRS 16 is not applied. In this case, its balance-sheet treatment is governed solely by IAS 19.
Separation of lease and non-lease components
Leases for land, land rights, and buildings are separated into lease and non-lease components. Merck otherwise
elects to exercise the option not to separate non-lease components from lease components.
Depreciation of the right-of-use assets arising from leases
Basically, right-of-use assets are depreciated over the lease term. If it is considered sufficiently probable that
an existing purchase option will be exercised or ownership will be automatically transferred at the end of the
lease term, however, depreciation takes place over the period that applies for corresponding assets under
property, plant, and equipment (see Note (20) "Property, plant, and equipment”).
Life Science
Healthcare
Life Science
Life Science
1
106
Dec. 31, 2023
Net carrying amounts as of Dec. 31, 2023
-2,820
3,506
-4,584
2,042
-1,454
-29
-8,887
Determining the incremental borrowing rate
492
9,056
1 Previous year's figures have been adjusted, see Note (6) "Acquisitions and divestments".
The individual additions to construction in progress in fiscal 2023 with an investment volume of more than
€ 50 million each are presented below:
Business sector
Life Science
Investment project
Country
Filtration plant
Ireland
3,016
19
If the interest rate for the lease cannot be reliably determined, the incremental borrowing rate is applied in
measuring the lease liability. At Merck, the incremental borrowing rate is determined on the basis of the risk-
free interest rate of the respective Group company over a similar term and in the same currency. This interest
rate is adjusted using a risk surcharge specific to Merck. Merck applies the repayment model to determine the
current portion of the lease. The current portion of the lease corresponds to the repayment share of the next 12
months.
Where renewal or termination options are available, their exercise is assessed on a case-by-case basis,
considering factors such as location strategies, leasehold improvements, and the degree of specificity.
Changes in the scope of consolidation
Additions
Disposals
Depreciation
Impairment losses
Reversal of impairment losses
Other
Dec. 31, 2022
€ million
Net carrying amounts as of Jan. 1, 2023
Changes in the scope of consolidation
Additions
Disposals
Depreciation
Impairment losses
Reversal of impairment losses
Other
Dec. 31, 2023
Right-of-use assets
Net carrying amounts as of Jan. 1, 2022
€ million
The reconciliation of net carrying amounts of right-of-use assets from leases was as follows:
Operating Assets, Liabilities, and Contingent Liabilities 279
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
Operating Assets, Liabilities, and Contingent Liabilities 278
Significant discretionary decisions and sources of estimation uncertainty
Leasing
Identification of a lease
Discretionary decisions can arise during the identification of leases in answering the question of whether a
lessor's right of substitution is substantive. Merck classifies rights of substitution as not substantive if the facts
and circumstances of the case do not support a different assessment.
Measurement of lease and non-lease components
In the case of leases for land, land rights, and buildings, separating the lease into lease and non-lease
components is subject to discretion and estimation uncertainty if observable prices are not available from the
contract partner or other potential lessors.
Determining the lease term
Determining the lease term
When determining the lease term, existing renewal and termination options must be evaluated to determine the
probability that such options will be exercised. The assessment of the probability of exercise may be
discretionary even though it relies on existing and material information on the general economic context, such
as location strategies, leasehold improvements, or the degree of specificity. If the available information does
not allow a reliable assessment, Merck uses historical experience for comparable situations.
Where individual contracts include termination options, it was considered unlikely that these would be exercised
so that additional lease payments were already considered in the corresponding lease liability.
Determining the incremental borrowing rate
Determining the risk-free interest rate and determining the risk surcharge are both discretionary.
Initial measurement of the lease liability and the right-of-use asset
In measuring the lease liability, there is discretionary scope and significant estimation uncertainty regarding
measuring any payments in the course of promised residual value guarantees, and
assessing the probability that existing purchase, termination, and renewal options will be exercised.
In measuring right-of-use assets under leases, Merck is subject to estimation uncertainty regarding any
demolition obligations and their resulting payments.
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
The largest 30 leases accounted for around 50% of total lease liabilities in fiscal 2023 and 2022. They are
essentially for right-of-use assets for office, warehouse, and laboratory buildings. If options to renew these
leases were exercised in future, which is not yet considered likely, this would result in additional potential
undiscounted cash outflows of up to € 235 million (2022: € 219 million).
43
43
Currency translation difference
6,228
1,879
2,429
16,513
Changes in the scope of consolidation
Additions
169
32
56
1,723
1,981
Reclassification to assets held for sale
Disposals
-85
-93
-82
-18
-278
Transfers
5,976
Cost as of Jan. 1, 2023
8,204
2,408
Electronics Dec. 31, 2023
1,672
years Life Science Healthcare
3,175
Customer relationships, brands, and trademarks
€ million
Total
Remaining
useful life in
The carrying amounts of customer relationships, brands, and trademarks, as well as marketing authorizations,
patents, licenses, similar rights, and other items, were attributable to the business sectors as follows:
Overview of material other intangible assets
Marketing authorizations, patents, licenses, similar rights, and other items not yet available for use involved
ongoing development projects that were not yet in the commercialization phase and thus did not yet have a
defined useful life. These primarily related to the Healthcare business sector.
385
As in the previous year, the currency translation effects essentially resulted from the translation of other
intangible assets denominated in U.S. dollars.
274
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Operating Assets, Liabilities, and Contingent Liabilities
-1,380
-21
-8,308
Net carrying amounts as of Dec. 31, 2022
3,389
1,909
499
Other significant information
542
120
-1,053
-1
-8
-2
-12
-23
Reversals of impairment losses
1
1
Disposals due to divestments/Reclassification to
assets held for sale
Impairment losses
Disposals
88
77
233
Transfers
-9
1
5
3
1
67
and buildings
-895
-389
-6
Currency translation difference
-119
-84
-27
-37
-266
Dec. 31, 2023
6,326
-173
6,625
3,045
Accumulated depreciation and impairment losses as
of Jan. 1, 2023
-2,588
-4,319
-1,380
-21
-8,308
Depreciation
-332
1,946
4,847
844
365
€ million
Trade and other receivables were measured as follows:
Information on the significant discretion and estimation uncertainty concerning trade and other receivables can
be found in Note (42) "Management of financial risks".
Trade and other receivables
Significant discretion and sources of estimation uncertainty
Further information on the accounting and measurement policies governing financial assets can be found in
Note (36) "Other financial assets”.
Loss allowances and reversals of loss allowances are reported under "Impairment losses and reversals of
impairment losses on financial assets (net)" in the consolidated income statement if the asset is used in
ordinary activities and hence has an operative nature. If the asset is not used in ordinary activities and hence
can be characterized as financial, it is recognized in financial income or financial expenses.
The measurement policies applied in determining loss allowances for trade and other receivables are shown in
Note (42) "Management of financial risks” in the "Credit risks” section.
Trade accounts receivable that are potentially designated to be sold on account of a factoring agreement are
measured at fair value through other comprehensive income.
Trade accounts receivable without significant financing components that are not the subject of a factoring
agreement are measured at the amount of the unconditional claim for consideration on initial recognition. For
additions to trade accounts receivable, loss allowances are recognized to allow for expected credit losses.
At initial recognition, other receivables are measured at fair value plus the direct transaction costs incurred
upon acquisition of the asset.
Trade and other receivables
Accounting and measurement policies
(25) Trade and other receivables
Operating Assets, Liabilities, and Contingent Liabilities 283
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
Measures to optimize inventory levels contributed to the reduction in inventories in the Life Science business
sector. This was offset by an increase in the Healthcare business sector and in the Electronics business sector.
Impairment losses included in the cost of sales are shown in Note (10) "Cost of sales".
4,632
4,637
2,139
2,045
1,418
1,428
1,076
1,164
Dec. 31, 2022
Dec. 31, 2023
Inventories
Finished goods/goods for resale
Work in progress
Gross trade accounts receivable
Gross other receivables
Raw materials and supplies
Subsequently
measured at
amortized cost
Subsequently
measured at fair
value through
other
-97
-97
Loss allowances on trade accounts
receivable
4,204
22
4,182
136
136
160
4,130
25
4,105
Gross trade and other receivables
160
4,069
22
4,046
3,969
25
3,945
Total
income
comprehensive
Subsequently
measured at fair
value through
other
Dec. 31, 2022
measured at
amortized cost
income
Subsequently
Total
comprehensive
Dec. 31, 2023
€ million
Inventories consisted of the following:
Discretionary decisions are required in the identification of impairment as well as in identifying the need to
reverse impairment of inventories. There are estimation uncertainties with respect to the calculation of the net
realizable value. In particular, changes in selling prices and expected costs of completion are considered in
calculating this value.
46
33
33
Assets from defined benefit plans
239
29
210
219
37
182
Prepaid expenses
349
3
346
325
2
323
Receivables from non-income-related taxes
Total
Non-current
Current
Total
Non-current
Current
€ million
Dec. 31, 2022
Dec. 31, 2023
Other non-financial assets are broken down as follows:
Other non-financial assets are carried at amortized cost. Impairments are recognized for any credit risks.
46
Remaining other assets
95
76
Identification of impairments or reversal of impairments
Significant discretionary decisions and sources of estimation uncertainty
Inventory prepayments are reported under other non-financial assets.
Since inventories are, for the most part, not manufactured within the scope of long-term production processes,
borrowing costs are not included.
Impairments may be due to factors relating to the sales market, qualitative reasons, a lack of usability of the
items, or their limited remaining shelf life. If the reason for impairment no longer applies, the carrying amount
is adjusted to the lower of cost or the new net realizable value.
Inventories are tested for impairment using a business-sector-specific method. Under this method, cost is
compared to the net realizable values. If the net realizable value is lower than the amortized cost, the asset is
written down by a corresponding amount, which is recognized as an expense in the cost of sales.
In addition to directly attributable unit costs, the cost of sales also includes overheads attributable to the
production process, which are determined on the basis of normal capacity utilization of the production facilities.
Goods for resale are recognized at cost. The “first-in, first-out" (FIFO) method is used to determine the
amortized cost of manufactured, finished, and unfinished materials, raw materials, and merchandise. The
weighted average cost formula is applied for items such as supplies.
Inventories
Accounting and measurement policies
(24) Inventories
Operating Assets, Liabilities, and Contingent Liabilities 282
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
The payments made for and received from the acquisition and the disposal of non-financial assets resulted from
the short-term investment of available funds in marketable greenhouse gas emissions certificates.
Net cash inflows from the disposal of other financial assets primarily resulted from repayments of short-term
investments in securities and term deposits as well as from contingent consideration (see Note (36) "Other
financial assets").
-63
Net cash outflows for investments in financial assets mainly resulted from short-term investments in securities
and term deposits that did not meet the requirements for classification as cash and cash equivalents.
Payments from the disposal of intangible assets in fiscal 2023 primarily resulted from the disposal of the rights
to a non-strategic brand in the Healthcare business sector and a portfolio of licenses and patents in the
Electronics business sector.
In the previous year, payments for investments in intangible assets included an upfront payment in a mid-
double-digit million-euro amount in connection with the acquisition of Chord Therapeutics SA, Switzerland.
(23) Cash flow from investing activities
804
99
705
748
115
633
Other non-financial assets
170
67
103
171
Payments for acquisitions less acquired cash and cash equivalents in the previous year were primarily
attributable to the acquisition of Exelead Inc., United States; M Chemicals Inc., Korea; and Erbi Biosystems
Inc., United States (see Note (6) "Acquisitions and divestments”).
Other non-financial assets
-63
-1
-39
-59
-3
-51
-25
-95
-22
-1
-12
-4
-45
-10
479
89
80
124
3
173
10
672
91
88
127
148
134
85
Total
Other
penalties
related to
income taxes
-29
Acceptance
and follow-on
obligations
-205
6
Changes in scope of consolidation/Other
Dec. 31, 2023
59
210
149
181
127
127
852
thereof: current
42
139
19
166
127
82
575
thereof: non-current
17
71
130
15
45
277
Accounting and measurement policies
Provisions for litigation
To assess a recognition obligation in relation to provisions for litigation and to quantify future outflows of
resources, Merck draws on the knowledge of the legal department as well as outside counsel.
-1
-1
5
Environmental
protection
Restructuring
Litigation
Contract assets represent contractual claims to receive payment from customers for whom the contractual
performance obligation has already been fulfilled, although an unconditional claim to payment has yet to arise.
Contract assets
Accounting and measurement policies
(26) Contract assets
Operating Assets, Liabilities, and Contingent Liabilities 284
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
In 2023, trade accounts receivable in Italy with a nominal value of € 69 million (2022: € 68 million) were sold for
€ 69 million (2022: € 68 million). These receivables did not involve any further rights of recourse against Merck.
The reduction in trade and other receivables is mainly attributable to foreign exchange effects and general
operational performance.
27
4,114
22
4,141
22
22
4,091
27
4,004
28
28
thereof: non-current
4,119
4,031
22
25
3,979
thereof: current
25
4,007
-1
-1
-1
The following table shows the change in contract assets:
€ million
Jan. 1
2023
Currency translation
Interest effect
Release
Utilizations
Additions
Jan. 1, 2023
€ million
Interest and
Other provisions developed as follows:
(27) Other provisions
Contract assets resulted in particular from rendering services and manufacturing of products in the Life Science
and Electronics business sectors.
128
104
1
Loss allowances on other receivables
Net trade and other receivables
1
-361
-3
Dec. 31
Other
Currency differences
2
thereof: attributable to performance obligations satisfied in prior periods
Disposals due to divestments/Reclassification to assets held for sale
Reclassification to trade accounts receivable
360
339
Other additions
10
Additions due to business combinations
207
128
2022
-451
-4
Accounting and measurement policies
Operating Assets, Liabilities, and Contingent Liabilities 281
1 Previous year's figures have been adjusted, see Note (2) "Reporting principles“.
The reduction in accruals for personnel expenses is due in particular to lower accruals for annual bonus
payments for the past fiscal year and for the tranche of the Merck Long-Term Incentive Plan that is payable in
the months following the reporting date.
The following table shows the development of contract liabilities in the period under review:
€ million
Jan. 1
Additions due to business combinations
Other additions
1,290
2023
2022
Current
Non-current
Total
Current
Non-current
Total
282
3
285
1,290
198
1
1,276
3
202
1
1,277
Disposals due to divestments/Reclassification to
assets held for sale
Recognition of income/reversal
-1,313
-1,313
1,805
-1,194
19
1,496
4
126
121
5
127
Liabilities from non-income-related taxes
163
1
164
200
1
202
Contract liabilities
249
3
252
282
3
285
Other accruals
29
8
38
26
10
36
Other non-financial liabilities¹
1,479
17
1,786
-1,195
Cumulative catch-up adjustments to revenue
Reclassification from non-current to current
Pension expenses
Compulsory social security contributions and other costs
Personnel expenses
290
2023
2022
24,105
22,086
11,938
11,886
6,516
7,334
4,971
4,850
14,436
15,087
1,676
1,309
63,642
62,552
2023
2022
5,299
5,340
853
Personnel expenses comprised expenses of € 212 million (2022: € 200 million) for defined contribution plans,
which are funded exclusively using external funds and therefore do not represent any obligation for Merck other
than making contribution payments. In addition, employer contributions amounting to € 93 million
(2022: € 92 million) were transferred to the German statutory pension insurance system, and contributions
amounting to € 122 million (2022: € 105 million) were transferred to statutory pension insurance systems
abroad.
6,644
6,517
460
Wages and salaries
€ million
Personnel expenses comprised the following:
(32) Personnel expenses
Currency translation
-11
1
-11
Other
Dec. 31
249
3
252
282
3
285
As of January 1, 2023, contract liabilities amounted to € 285 million (January 1, 2022: € 202 million), of which
a total of € 253 million (2022: € 181 million) was recognized through profit or loss in fiscal 2023.
122
(30) Trade and other payables
Trade and other payables
Trade and other payables are subsequently measured at amortized cost.
Trade and other payables as of December 31, 2023, included accrued amounts of € 775 million
(December 31, 2022: € 903 million) from outstanding invoices.
Consolidated Financial Statements Notes to the Consolidated Financial Statements Employees
Employees
(31) Number of employees
The number of employees was 62,908 as of December 31, 2023 (December 31, 2022: 64,232 employees).
The following table shows the average number of employees broken down by function.
Production
Administration
Research and development
Supply chain
Marketing and sales
Other
Average number of employees
Accounting and measurement policies
(22) Other non-financial assets
Payroll-related liabilities¹
1,156
Provisions for acceptance and follow-on obligations
The assessment of the recognition obligation for provisions for acceptance and follow-on obligations and the
quantification of future outflows of resources is based on internal project plans as well as on the assessment of
the respective matters by in-house and external specialists.
The main parameters in determining the amount of the provision are:
the ability to use or potential for modification of secured manufacturing capacities at third-party providers,
particularly for pharmaceutical compounds,
the number of affected patients and the expected duration of their continued treatment in clinical
development programs,
•
the expected date or period of the outflow of resources, and
•
the expectations concerning future events influencing the obligations.
Provisions for interest and penalties related to income taxes
Objective assessments are performed to determine the need to recognize provisions for interest and penalties
related to income taxes not covered by IAS 12.
the discount factor.
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
Significant discretion and sources of estimation uncertainty
Provisions for litigation
1,156
Provisions for restructuring
Estimation uncertainty about the provisions for restructuring primarily relates to determining the amount of the
expected outflow of resources. This is largely influenced by the assumptions made concerning the change in or
termination of the employment relationships of the affected employees and the planned implementation date of
the restructuring plan.
Provisions for environmental protection
The assessment of a recognition obligation and the measurement of the provisions for environmental protection
are subject to discretionary decisions and estimation uncertainties to a particular degree.
The estimation uncertainties relate in particular to the assessment of the timing and likelihood of a future
outflow of resources and the extent of necessary remediation measures as well as the related calculation of the
amount of the liability.
Provisions for acceptance and follow-on obligations
Estimation uncertainty regarding the provisions for acceptance and follow-on obligations primarily relates to
determining the amount of the expected outflow of resources.
Provisions for interest and penalties related to income taxes
Operating Assets, Liabilities, and Contingent Liabilities 286
Estimation uncertainty concerning the provisions for interest and penalties related to income taxes mainly
relates to the interpretation of tax codes and the effects of amended case law.
the associated future costs, and
the applicable remediation methods,
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
Assessing the need for recognizing provisions for litigation is based on the likelihood of possible outcomes for
proceedings. In particular, the factors influencing this likelihood are:
•
the validity of the arguments brought forward by the opposing party, and
•
the legal situation and current court rulings in comparable proceedings in the jurisdiction(s) in question.
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Operating Assets, Liabilities, and Contingent Liabilities 285
The following factors are also relevant in measuring provisions for litigation:
•
the duration of proceedings in pending legal disputes,
•
•
the applicable license rate plus an expected infringement surcharge,
the usual damages and fines for comparable legal disputes, and
•
the discount factor to be used.
Provisions for restructuring
Merck uses formal restructuring plans and the expectations of the affected employees concerning the
performance of the restructuring measures to assess the recognition obligation for provisions for restructuring
projects and the amount of the expected outflow of resources.
Provisions for environmental protection
To assess a recognition obligation in relation to provisions for environmental protection and to quantify future
outflows of resources, Merck draws on appraisals by independent external experts and the knowledge of in-
house specialists.
The following are key parameters in calculating the present value of the future settlement amount of the
provisions for environmental protection:
the future settlement date,
the extent of environmental damage,
•
•
Antitrust and other proceedings
Like the measurement of provisions, the assessment of a recognition obligation for provisions for litigation is to
a particular extent subject to a degree of estimation uncertainty. The uncertainties relate, in particular, to the
assessment of the likelihood and the amount of the outflow of resources.
December 31, 2023, and is now recognized in a high-single-digit million-euro amount. A cash outflow within the
next 12 months is considered possible.
The identification and the measurement of contingent liabilities are both subject to considerable uncertainty.
This applies with regard to assessing the likelihood of an outflow of resources as well as determining its amount.
Contingent liabilities in the amount of € 204 million (December 31, 2022 (adjusted): € 231 million) related
almost exclusively to litigation and tax matters.
Contingent liabilities from litigation mainly related to obligations under labor law and tort law. The contingent
liabilities from tax matters primarily related to the determination of earnings under tax law, customs
regulations, and excise tax matters.
In addition, there were contingent liabilities from various legal disputes with Merck & Co., Inc., Rahway, NJ,
United States (outside the United States and Canada: MSD), among other things due to breach of the
coexistence agreement entered into between the two companies and/or trademark/name right infringement
regarding the use of the designation "Merck". In this context, Merck has sued MSD in various countries and has
been sued by MSD in the United States. An outflow of resources - except costs for legal defense - was not
deemed sufficiently probable as of the balance sheet date to justify the recognition of a provision. Since the
contingent liability from these legal disputes could not be reliably quantified as of the balance sheet date, this
matter was not included in the total figure for contingent liabilities.
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
Operating Assets, Liabilities, and Contingent Liabilities 289
(29) Other non-financial liabilities
Accounting and measurement policies
In connection with the generics business that was divested in 2007, Merck was accused of breaching EU
antitrust law through agreements entered into by its former subsidiary Generics (UK) Ltd., United Kingdom,
relating to the antidepressant Citalopram patented by Lundbeck A/S, Denmark. The European Commission
imposed a fine in June 2013. Appeals against the decision were unsuccessful. Following the payment of the fine
of around € 18 million, British health authorities brought legal claims for damages against Merck and other
companies in a mid-triple-digit million-euro amount in fiscal 2023 due to alleged infringements of competition
law. In addition, there were further claimants from various other jurisdictions who have not yet quantified their
claims. In response to the latest developments in the proceedings, the provision was adjusted as of
Accruals for personnel expenses reported in other non-financial liabilities include, in particular, liabilities
resulting from vacation entitlements, variable and performance-related compensation components, and social
security contributions.
Contract liabilities include payments received by Merck prior to completion of contractual performance.
Contingent liabilities
Other non-financial liabilities comprises the following:
Dec. 31, 2022
€ million
Current
Non-current
Total
Current
Non-current
Total
Accruals for personnel expenses¹
916
916
Dec. 31, 2023
Significant discretionary decisions and sources of estimation uncertainty
Other non-financial liabilities
the legal situation and current court rulings in comparable proceedings in the jurisdiction in question.
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
The amount of the contingent liability is based on the best-possible estimate, which in turn is based on the
likelihood of possible outcomes of proceedings and on the applicable license rate in patent disputes.
Restructuring
The restructuring provisions recognized as of December 31, 2023, primarily relate to obligations for workforce
reduction measures in connection with communicated restructuring plans.
A program to continuously improve processes and align the Group functions more closely with the businesses was
launched in 2023. The implementation of this program will take until at least the end of fiscal 2024. Provisions in a
mid-double-digit million-euro amount were recognized for the program in the current fiscal year. Furthermore,
additional programs to improve efficiency and increase customer focus in the Electronics and Healthcare business
sectors were initiated during the current fiscal year. This resulted in the recognition of provisions in a mid-double-
digit million-euro amount that are largely expected to be utilized within the next two years.
Environmental protection
Provisions for environmental protection resulted in particular from obligations for soil remediation and
groundwater protection in connection with the crop protection business in Germany and Latin America that was
discontinued in 1987.
Acceptance and follow-on obligations
Provisions for acceptance and follow-on obligations primarily related to costs in connection with discontinued
development projects in the Healthcare business sector as well as obligation surpluses from onerous contracts.
A significant proportion of the provisions for acceptance and follow-on obligations are attributable to the results
of the two Phase III clinical trials to evaluate the efficacy and safety of evobrutinib. This resulted in the
recognition of a provision for follow-on obligations in a high-double-digit million-euro amount in 2023. The
outflow of resources is predominantly expected within the next 12 months.
Part of the provision is also attributable to the discontinuation of development projects under the strategic
alliance with GlaxoSmithKline, United Kingdom (GSK), and relates to the winding up of clinical trials. On
February 5, 2019, Merck entered into a global agreement in the field of immuno-oncology with a subsidiary of
GSK to co-develop and co-commercialize the drug candidate bintrafusp alfa. In the third quarter of 2021, it was
amicably decided with GSK that the agreement on bintrafusp alfa would end effective September 30, 2021. The
provisions recognized in a mid-double-digit million-euro amount included expected expenses for follow-on
obligations. The outflow of resources is mainly expected within the next 12 months.
Interest and penalties related to income taxes
Operating Assets, Liabilities, and Contingent Liabilities 287
Miscellaneous other provisions
the validity of the arguments brought forward by the opposing party or the tax authority, and
Provisions for interest and penalties related to income taxes mainly included penalties arising from tax audits as
well as interest payables associated with or resulting from tax payables.
•
The key factors in the identification of contingent liabilities are:
To identify contingent liabilities from litigation and tax matters, Merck draws on the knowledge of the legal
department and the tax department as well as the opinions of external consultants and attorneys.
-2
Accounting and measurement policies
(28) Contingent liabilities
Operating Assets, Liabilities, and Contingent Liabilities 288
Miscellaneous other provisions included provisions for asset retirement obligations, other tax risks not
constituting income tax in accordance with IAS 12, risks in connection with employee participation programs
and warranty obligations.
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
Contingent liabilities
-
We are curious minds dedicated to human progress. We believe that scientific exploration and responsible
entrepreneurship are key to technological advances that benefit us all. Our values courage, achievement,
Strategy fundamentals and ambition
Strategy*
22
22
Strategy
Fundamental Information about the Group_
Combined Management Report
In our Surface Solutions business, we provide our customers with solutions that help them to create functional
and decorative surfaces of all kinds. We focus on markets for automotive coatings, cosmetics, and, to a smaller
extent, industrial applications. With our portfolio of active ingredients, we enable cosmetics manufacturers to
enrich their skin care products with moisturizing, protecting and anti-aging effects. Moreover, our functional
solutions serve many innovative applications, from dirt-repellent and easy-care surfaces to laser markings of
plastic parts and cables.
Surface Solutions
Real estate investors use our product eyrise® s350 solar shading (sun protection at the touch of a button) to
deliver on ESG (environment, social, governance) objectives. For example, a large real estate investor in
Switzerland has already installed eyrise® on all facades of its flagship project in the center of Zurich. More
commercial projects are currently in installation.
With our OLED materials, we are also supporting our customers in making sustainable OLED structures, which
are important for new OLED applications such as IT screens. In 2023, we developed deuterated materials for
next-generation OLED displays. They have the potential to more than double the lifetime of OLED stacks
without compromising on efficiency and voltage, enabling displays with higher brightness.
While lockdowns and working from home pulled forward demand for TVs and IT devices during the Covid-19
pandemic, this trend has meanwhile reversed. The industry saw a significant reduction in demand during 2023,
resulting in a decline in customer factory utilization.
Our Display Solutions business unit includes the businesses with liquid crystals (LC), display patterning
materials (materials for surface treatment), organic light-emitting diodes (OLED), photoresists, reactive
mesogens, smart antenna (LC-based antennas), and liquid crystal glazing (LC-based windows). We support our
customers in developing novel display technologies for TV, IT, mobile devices, automotive, gaming, and other
applications. Together with our customers we are working in the field of AR/VR to expand the application
scenarios of LC & OLED materials and enhance the user experience in small and micro-sized displays. We are
working very closely with leading panel makers to develop next-generation products with LCD (liquid crystal
display) technology for the electronics market.
In April 2023, we announced our plans to expand manufacturing capacities at our site in Hometown,
Pennsylvania, USA, thus increasing domestic production capacity for electronics components. The roughly
€ 300 million investment in the Hometown site is intended to further develop our largest integrated specialty
gases facility. In June 2023, we commissioned a new production facility for DS&S in Chandler, Arizona, USA.
Display Solutions
In fiscal 2023, we integrated the chemical business of Mecaro Co. Ltd., which we acquired in 2022, into our
Semiconductor Solutions business. We also strengthened our business in thin films technology and our footprint
in Korea. In February 2023, we broke ground for a new integrated facility in Kaohsiung, Taiwan. Here we will
produce a comprehensive portfolio of semiconductor materials in one single site.
21
Fundamental Information about the Group Merck
Despite the current challenging economic environment, Surface Solutions is continuing to implement its
strategic transformation. We continued to invest in digitalizing and modernizing our production plants around
the globe while adjusting our capacities to the changing demands in our different markets.
The Covid-19 pandemic has accelerated the shift of the liquid crystals industry towards China and increased
competition. In 2023, we maintained our position as manufacturer of innovative LC materials with our
XtraBright™ products, winning new projects for large-area displays as well as high-resolution mobile devices.
Our OLED and photoresist materials are used in multiple free-form display products. In addition, we are actively
working with customers on both LC-on-silicon (LCOS) and OLED-on-silicon solutions for AR/VR displays.
eNPV1 = Expected net present value.
POS¹
-
44
-4,466
-4,714
32
-4,681
-4.6%
Administration expenses
-1,392
246
-1,146
-1,306
115
-1,191
-4,510
-3.8%
-2,445
7
-2,438
-2,521
75
-2,446
-0.3%
-51
-51
-6
0
-6
> 100.0%
Research and development costs
Impairment losses and reversal of
Marketing and selling expenses
-9.5%
13,737
Change
€ million
Net sales
IFRS
Elimination
of
adjustments
pre¹
IFRS
Elimination
of
adjustments
pre¹
pre¹
20,993
20,993
22,232
22,232
-5.6%
Cost of sales
-8,600
43
-8,558
-8,527
32
-8,496
0.7%
Gross profit
12,392
43
12,435
13,705
32
impairment losses on financial
assets (net)
Other operating income and
-385
Gains (-)/losses (+) on the
-51
51
-38
38
divestment of businesses
Acquisition-related adjustments
18
-18
29
-29
Other adjustments
56
-56
68
-68
EBITDA pre¹
5,879
5,879
6,849
6,849
thereof: organic growth¹
-14.2%
-9.0%
thereof: exchange rate effects
-4.9%
thereof: acquisitions/divestments
-0.3%
1 Not defined by International Financial Reporting Standard (IFRS).
2 Not defined by International Financial Reporting Standards (IFRS); EBITDA corresponds to operating result (EBIT) adjusted by depreciation,
amortization, impairment losses, and reversals of impairment losses.
-88
20222
88
118
138
-247
-685
323
-361
-31.6%
expenses
Operating result (EBIT)¹
3,609
4,474
Depreciation/amortization/
impairment losses/reversals of
1,880
-87
1,792
2,030
-232
1,798
-0.3%
impairment losses
EBITDA²
5,489
6,504
Restructuring expenses
249
-249
198
-198
Integration expenses/IT expenses
-118
responsibility, respect, integrity, and transparency - guide us in every step we take and in every decision we
make. Our company has a firm foundation with convictions and principles that the Merck family has lived by for
generations. We always take them into consideration when discussing and deciding on our enterprise strategy.
Compared to last year, we face greater challenges as the increasingly complex global situation has also
impacted some of our end markets. This poses challenges for the global economy and society. With a history of
more than 355 years and a truly global footprint today, we have established a solid, resilient foundation that
continues to bolster our confidence in our ambition for the future to become the global 21st century science
and technology pioneer. To achieve this, we continue to focus on our key growth drivers: Process Solutions,
Life Science Services, Science & Lab Solutions, and Semiconductor Solutions as well as developing specialty
drugs in our Healthcare business. Our must-win battles include building an organization with comprehensive
data expertise and strengthening our ability to innovate. For instance, in our "Data & Digital" initiatives, we
focus on identifying, prioritizing, and implementing technical capabilities across our businesses to promote
future growth.
2023
Merck Group
After substantial investments in improving our processes and expanding our production capacities in Surface
Solutions, we remain confident of successfully implementing our strategic transformation within that business.
Data & Digital strategy
Going forward, we will further identify transformative technologies to serve as pivotal enablers for our growth
and innovation ambition. Therefore, we will look into novel technologies beyond our core products and markets
while maintaining strategic proximity to our business sectors so as to leverage our existing assets and core
competencies. Our Group Science & Technology Office and the newly established Merck Data & AI Organization
are leading the implementation of our combined strategy for innovation and "data & digital". They promote
innovation within and between business areas by bringing transformative technology trends into the company
and exploiting the potential of high-quality data and state-of-the-art digital capabilities. In addition, we are
investing in building smart manufacturing capabilities, across our business sectors thus leveraging synergies
across business sectors while also exploring digital business models as a separate growth opportunity.
Furthermore, we are deploying a company-wide harmonized data and analytics operating model and ecosystem. This
enables us to derive actionable insights from data, support informed decision-making and scale related activities
across the company to solve real business challenges with machine learning and AI.
Data culture is fundamental for our digital transformation. Through targeted measures to improve data literacy
activities, we are strengthening the ability of our employees to identify, understand, create, model, analyze, interpret
data as well as, communicate and argue with data. We foster generative AI literacy by giving employees the
possibility to test AI in a secure environment. With myGPT@Merck, our employees have access to an AI assistant to
use when working with confidential and internal information.
Combined Management Report
Fundamental Information about the Group_
Strategy
26
26
Sustainability strategy
Leveraging science and technology
In our view, sustainable entrepreneurship and profitable growth go hand in hand; we can remain competitive
only by creating added value for society. Through our innovative and high-quality products, we want to help
meet global challenges. At the same time, these types of products secure our financial performance capability.
Responsible action is an integral part of our company culture. This also includes respecting the interests of our
employees, customers, investors, and society.
Safety and ethics matter just as much to us as business success. We mitigate ethical, economic, environmental,
and social risks as far as possible. From the early stages of development through to disposal, we keep an eye
on the entire life cycle of a product. We apply strict sustainability standards to our procurement activities.
During product manufacture, it is important to us to keep the environmental impact as low as possible, which is
why safe production, high environmental standards and strict quality management are of course so important
to us. By supplying products that meet extensive sustainability criteria, we also help other companies to
achieve their sustainability goals.
Sustainability is an essential element of our enterprise strategy. We have set ourselves three strategic
sustainability goals: In 2030, we will achieve progress for more than one billion people through sustainable
science and technology. By 2030, we will fully integrate sustainability into our value chains. By 2040, we will be
climate neutral and reduce our resource consumption. With these goals, we are helping to achieve the UN
Sustainable Development Goals (SDGs). Overall, our sustainability strategy is centered on seven focus areas
within which we are realizing numerous initiatives and projects today and tomorrow, measuring our progress as
we go.
Refining the sustainability strategy
In 2023, we revised our sustainability strategy, which we had communicated in 2020. In particular, we
sharpened the second goal: Under the new heading "Partnering for sustainable business impact", we want to
strengthen our focus on the social aspects in our value chains and embed sustainability more comprehensively
into our decision-making processes. Therefore, in addition to the existing focus area "Sustainable and
transparent supply chain", we are now also working on the new focus areas "Sustainability in our ways of
working and decision-making" and "Our people and communities; providing a diverse and inclusive
environment". For the third goal, "Reducing our ecological footprint", we modified two of our key indicators for
waste and water. The two new indicators, which are valid as of 2024, use more common metrics and also
include circular economy criteria.
We use 14 key indicators to record and assess our progress towards achieving our sustainability goals. Our
annual Long-Term Incentive Plan (LTIP) for Executive Board members and senior executives contains a
sustainability factor. We use it to measure performance over a period of three years based on selected key
indicators for each of our three sustainability goals. Details on how this sustainability factor is calculated can be
found in the "Compensation Report". In 2023, the company tied 15% of variable employee compensation to
sustainability parameters for the first time.
We are in the process of transforming the company and are integrating sustainability into the innovation
process and all parts of the value chain. It is our aim to decouple the growth of our businesses from negative
environmental impacts. More information on sustainability topics can be found in the "Non-Financial
Statement", which is also part of the management report.
27
Combined Management Report Fundamental Information about the Group_
Strategy
Strategic finance and dividend policy
We pursue a conservative financial policy characterized by the following aspects:
Financial flexibility and a conservative funding strategy
We ensure that we meet our obligations at all times and adhere to a conservative and proactive funding
strategy that involves the use of various financial instruments. Our diversified and profitable business activities
form the basis for our strong and sustainable cash flow generation capacity. Moreover, we have several funding
resources in place. A € 2.5 billion syndicated loan facility is in place until 2028 to cover unexpected cash needs.
This credit line is a backup facility that is intended to be used in exceptional circumstances only.
We also agreed upon several bilateral loan facilities. In addition, we have a commercial paper program with a
volume of € 2.5 billion at our disposal. Within the scope of this program, we can issue short-term commercial
paper with a maturity of up to one year.
The bond market also represents an important source of financing. The most recent bond issue took place in
June 2022 (€ 1.0 billion bond issue). The use of various instruments provides a broad financing basis and
addresses different investor groups.
Maintaining long-term and reliable business relations with a core group of banks
We work mainly with a well-diversified, financially stable, and reliable group of banks. Due to our long-term
business approach, bank relationships typically last for many years and are characterized by professionalism
and trust. The banking group consists of banks with strong capabilities and expertise in various products and
geographical regions. We regard these banks as strategic partners and involve them in important financing
transactions accordingly.
Strong investment-grade rating
To benefit from the strong electronics industry growth, we are continuously expanding our capacities and our
capabilities. We are continuing to invest significantly more than € 3 billion in innovation and capacities, which are
aligned with the customers and regions we serve. These investments are an essential part of our ongoing Level Up
growth program, which we kicked off at the end of 2021. The investments are made in lockstep with the capacity
expansions of our customers in order to support their growth and new fabs with a reliable supply of innovative
materials and systems. We will continue to invest in our geographic proximity to our customers while boosting
R&D and innovation. Electronics also seeks to exploit attractive external growth opportunities through acquisitions.
Our ability to systematically use data and digital methods across the entire value chain differentiates in the
market, enabling us to meet and exceed the increasing requirements regarding quality, speed and reliability.
Furthermore, we are accelerating important initiatives to transform the industry towards sustainability and
investing even further in safety.
The rating of our creditworthiness by external rating agencies is an important indicator of financial stability.
A strong investment-grade rating is an important cornerstone of our financial policy as it safeguards access to
attractive financial conditions on the capital markets.
In the short term, AI alone cannot offset the current market decline in the electronics industry, which results
from weak demand after the Covid-19 pandemic and associated excess inventory along the value chain.
However, in the medium and long term, the fundamental growth drivers, such as AI, are expected to accelerate
the market development through the next decade. To produce ever more powerful and energy-efficient chips,
innovation in novel materials will be even more essential.
Electronics
Through our multi-industry business model, we serve attractive global markets with secular growth trends as a
trusted partner to advance human progress. Our diversified portfolio benefits from key megatrends. In
Life Science, this includes a growing market for complex and novel modalities. In Healthcare, we develop and
commercialize specialty pharmaceuticals in the Oncology and Neurology & Immunology franchises. These
include the medicines Erbitux® (cancer), Bavencio® (cancer) and MavencladⓇ (multiple sclerosis). In addition,
we are conducting clinical trials with late-stage xevinapant (head and neck cancer) and further drug candidates
in oncology, neurology and immunology in earlier stages of clinical development. With our comprehensive
portfolio of semiconductor materials, we expect to benefit in the medium and long term from continuously
increasing demand for chips due to the exponential growth of data volumes as well as the further
implementation of artificial intelligence (AI) and the Internet of Things (IoT).
We strive to make a positive impact in our communities and on the planet while assessing and considering the
ESG (environmental, social, governance) impact of our growth ambition. Since the launch of our sustainability
strategy, we have achieved essential milestones in integrating sustainability as a foundational element of our
overall governance and decision-making frameworks. We are diligently striving to achieve human progress for
more than one billion people through sustainable science and technology by 2030. Fully integrating
sustainability into our value chains by 2030 is at the forefront of our priorities. In addition, we are committed to
achieving climate neutrality and minimizing resource consumption by 2040.
Active portfolio management is an integral part of our strategy. This has enabled us to transform over the last
decades and our evolution into a global science and technology pioneer. In this sense, inorganic growth is a
relevant element to accelerate strategic plans and to leverage business opportunities in our attractive end
markets. Strengthening our key growth businesses remains the highest priority for which mergers and
acquisitions (M&A) could serve as appropriate tools.
* The contents of this chapter or section are voluntary and therefore not audited. However, our auditor has read the text critically.
23
Combined Management Report
Fundamental Information about the Group_
Strategy
Business strategies
Life Science
Our Life Science business sector is a global leader in the approximately € 230 billion life sciences industry. We
continue to consistently deliver long-term profitable growth despite near-term headwinds, including a decline in
Covid-19-pandemic-related demand, destocking by key customers and softening of funding for early-stage
biotech companies. Our long-term market growth outlook remains unchanged at approximately 5% to 7%
C AGR, fueled by increasing demand for commercial medicines and the essential nature of R&D across customer
segments. We are well-positioned to weather challenging market conditions and emerge as an even more
integral partner to our customers.
Our strategy builds on the transformation we began last year, with a sharpened focus on differentiating both
our core and high-growth portfolios and capitalizing on the unique capabilities of our company. We are doing
this by leveraging our distinctive breadth of offerings to customers in academia, the biopharmaceutical industry
and the industrial sector, including food & beverage, to advance leading edge science. We aspire to
comprehensively address customers' scientific needs and serve as a partner across products and services with a
focus on enabling novel modalities. We amplify customer value by proactively addressing future customer
needs to create lasting differentiation beyond the breadth and performance of our offerings. Our multichannel
commercial approach, e-commerce platform and focus on sustainability set us apart. We enhance
competitiveness by pursuing operational and commercial excellence and building future-oriented capabilities
and ways of working.
This course we have set directs our focus and resources to pursuing opportunities that financially and
technologically "move the needle" while deprioritizing those that may distract from our focused ambition to
continue to be a global science & technology leader. For example, our Process Solutions business unit is
optimizing its go-to-market approaches to address shifting customer behaviors, including expanding access to
Process Solutions products via sigmaaldrich.com, our e-commerce platform. Our growing Life Science Services
Contract Testing and Development Manufacturing Organization (CTDMO) business is building an end-to-end
offering for novel modalities with a focus on anti-drug conjugates (ADCs), mRNA and viral vectors, where
customers are seeking greater technical expertise and collaboration.
The diverse customer and portfolio base of our Science and Lab Solutions business provides a stable foundation
while continuing to build positions in higher-growth segments. Our Integrated Supply Chain Organization's
evolution to become more agile, resilient, and customer-centric is an essential foundation for continued
profitable growth. To this end, we have implemented new processes to more closely connect our sales and
production plans, using digital tools to align with customers on lead times and other supply expectations,
standardizing operations across sites and regionalizing our network - especially in Asia-Pacific (APAC) - to meet
local needs and balance risk. We have also embedded sustainability criteria in R&D and operations, providing
customers with an expanded range of greener alternatives and data, such as product carbon footprints, to help
reach their sustainability goals.
-
Our strategy reflects our purpose - to impact life and health with science and allows us to deliver customer
and shareholder value now and into the future. We are prepared to address short-term challenges and emerge
from the post-Covid-19-pandemic era with deeper customer relationships, high-value innovations and a more
resilient and cost-effective operating network.
24
Combined Management Report Fundamental Information about the Group_
Strategy
Healthcare
Despite external volatility in recent years, the pharmaceutical industry has proven its resilience and remains
attractive with solid growth expectations. Global megatrends such as growing and aging populations as well as
better access to healthcare continue to drive the need for our products. At the same time, the macroeconomic
and geopolitical environment has become more uncertain. Our mixed portfolio and our diverse geographic
footprint build a resilient foundation to meet these demands and respond appropriately to the dynamics of our
markets, paving the way for the future success of our Healthcare business.
Following our successes over the past years, we continue to drive pipeline projects with the aim of bringing
groundbreaking medicines to patients, maximizing our existing portfolio and continuing our expansion in growth
markets. We are resolute in our ambition to become a global specialty innovator with a high-growth future in
oncology as well as neurology and immunology. This ambition is built on a firm foundation and continues to
foster sustainable and profitable growth in the Cardiovascular, Metabolism & Endocrinology franchise while
further strengthening our leadership position in fertility. We pursue this ambition with a focused leadership
approach, concentrating investments on decorrelated opportunities in our pipeline and across therapeutic areas,
regions and payer types.
The first pillar of our strategy is to reinforce and expand our global footprint, bringing the innovation of our
pipeline to patients and growing our presence in the United States and in China, for example. Driven by well-
known demographic trends, the expected absolute global pharma market growth contribution will remain
highest in established markets, while the emerging markets are expected to grow faster than developed
markets in relative terms as a result of rapidly developing pharma infrastructure. With our diversified portfolio
of specialty and mature product businesses, we are benefiting from these trends. While our solid base within
established markets (France, Germany, Italy, Japan, Spain, the United Kingdom, and the United States)
enables us to achieve growth with our specialty portfolio, the emerging markets will be a large growth driver for
many of our established products in the future. Managing the balance between delivering innovative new
medicines with first-in-class and/or best-in class potential while leveraging our strengths in other markets and
ensuring the profitable growth of the existing business will be one of the strategic imperatives.
The second pillar of our strategy is the focus on specialty medicine franchises. Here, we expect the oncology,
neurology and immunology markets to remain highly attractive in terms of size, growth prospects and
profitability. Within each specialty franchise, our approach is to develop deep internal expertise and insight,
from internal research to commercialization, through external talent searches and strategic partnerships.
In order to optimize the holistic value and focus of our pipeline, we continuously monitor and assess the
potential of our pipeline candidates, based on clinical data, strategic fit and financial criteria, to determine the
best way forward.
The third strategic pillar is innovation. We aim to develop potential first-in-class and best-in-class therapies.
We have streamlined our pipeline and expanded our innovation capabilities with strong investigational drug
candidates and technologies. In order to maximize the output of our R&D investments and to ensure long-term
sustainability, we are focusing our expertise on specific franchises. Further, we increase our intake of external
innovation, in line with industry practice, to meet our ambition of launching a new product every 18 months.
We are investing in assets with the most promising value generation outlook as well as digital technologies and
novel modalities such as antibody-drug conjugates to drive pipeline growth.
Combined Management Report
Fundamental Information about the Group_
Strategy
25
We are an innovation leader within the electronics industry, targeting the most critical materials segments of the
semiconductor wafer processing as well as OLED and LC display panels. Our diversified portfolio proves to be resilient
in a dynamic market environment. We partner with leading experts around the world to enable the next generation
of electronic devices, innovating with leading-edge customers and being a local partner for their global presence.
The long-term growth prospects of the industry remain very attractive, despite the current downcycle. We believe
in the long-term growth drivers of digitalization and its visualization, fueled by an exponential increase in data
volumes. Semiconductors will thus continue to be a critical component in many industries. The main accelerator in
the industry is and will remain AI. Although the number of AI chips is still small, the high growth rates and the
high value of these chips as well as the required materials will fuel the growth of the semiconductor industry. This
trend will be supported by technologies such as 5G networks, autonomous driving, electric vehicles, and IoT.
Merck will benefit from the high material requirements of these AI chips in terms of value and volume.
Reconciliation EBITDA pre¹
In November 2023, our ratings were confirmed by Moody's (A3, stable outlook) and Standard & Poor's (A,
stable outlook). We discontinued our Scope rating (previously: A, stable outlook) in December 2023.
We are pursuing a sustainable dividend policy. Provided the economic environment develops in a stable
manner, the current dividend represents the minimum level for future dividend proposals. Our dividend policy
will follow business development and earnings increases over the coming years. However, dividend growth
could deviate, for example, within the scope of restructuring or in the event of significant global economic
developments. We aim for a target corridor of 20% to 25% of earnings per share pre.
NPV1 = Net present value.
IRR¹ Internal rate of return.
Combined Management Report
Probability of success.
M&A Mergers and acquisitions.
1 Not defined by International Financial Reporting Standards (IFRS).
29
Combined Management Report_ Fundamental Information about the Group Internal Management System
Key performance indicators of the Group and its businesses
The three key performance indicators of net sales, EBITDA pre, and operating cash flow (OCF) are the most
important financial factors for assessing operational performance. Accordingly, we refer to these KPIs in the
"Report on Economic Position", the "Report on Risks and Opportunities", and the "Report on Expected
Developments". As the most important indicators of financial business performance, the KPIs are key
elements of our performance management system.
Net sales
Net sales are defined as the revenues from the sale of goods, services rendered to external customers, and
commission income and profit sharing from collaborations, net of value-added-tax, and after sales deductions
such as rebates or discounts. Net sales are the main indicator of our business growth and therefore an
important parameter of external as well as internal performance measurement. In addition, organic sales
growth compared with the target is used for internal performance management. Organic sales growth shows
the percentage change in net sales versus a comparative period, adjusted for exchange rate and portfolio
effects. Exchange rate effects may arise as a result of foreign exchange fluctuation between the functional non-
euro currency of a consolidated company and the reporting currency (euro). By contrast, portfolio effects reflect
sales changes due to acquisitions and divestments of consolidated companies or businesses.
Merck Group
ROCE¹ Return on capital employed.
Net sales
Net sales
Change
2023
2022
20,993
22,232
€ million
-1,239
%
-5.6%
Combined Management Report_ Fundamental Information about the Group. Internal Management System
30
EBITDA pre
EBITDA pre is the main performance indicator measuring ongoing operational profitability and is used internally
and externally. To permit a better understanding of the underlying operational performance, the operating
result is adjusted to exclude depreciation and amortization, impairment losses and reversals of impairment
losses, as well as adjustments. These adjustments are restricted to the following categories: integration
expenses, IT expenses for certain projects, restructuring expenses, gains/losses on the divestment of
businesses, acquisition expenses, and other adjustments. The classification of specific income and expenses as
adjustments follows clear rules and is subject to strict governance at the Group level. Within the scope of
internal performance management, EBITDA pre permits process efficiency increases without influencing the
performance of the operating business through exceptional items or restructuring expenses. The following table
shows the composition of EBITDA pre in fiscal 2023 compared with the previous year. The IFRS figures have
been modified to reflect the elimination of adjustments included in the respective functional costs.
€ million
Sustainable dividend policy
OCF1 = Operating cash flow.
EPS pre¹ = Earnings per share before adjustments.
28
Combined Management Report_ Fundamental Information about the Group.
Internal Management System
Internal Management System
As a global company with a diverse portfolio of products and services, we use a comprehensive framework of
indicators to manage performance. The most important key performance indicator (KPI) for measuring
performance is EBITDA pre¹.
The Value Creation and Financial KPI Pyramid, which summarizes our important financial performance
measures, reflects the comprehensive framework of financial KPIs to steer the businesses and prioritize the
allocation of cash resources. It consists of three managerial dimensions: Merck Group, Business, and Projects,
each of which requires the use of different indicators.
Business
Merck Group
Projects
M&A
NPV, IRR,
EBITDA pre margin,
EPS, EPS pre,
ROCE, MEVA
Net Sales,
EBITDA pre,
OCF, Net income,
EPS, EPS pre,
Dividend ratio,
Net financial debt,
Credit rating, ROCE, MEVA
Net sales,
EBITDA pre,
OCF
EBITDA pre-margin¹ = Earnings before interest, income tax, depreciation and amortization as well as adjustments in percent of the net sales.
EPS = Earnings per share.
EBITDA pre¹ = Earnings before interest, income tax, depreciation and amortization as well as adjustments.
Abbreviations
Payback period,
EBITDA pre margin, ROCE
NPV, IRR,
MEVA¹ = Merck value added.
Capex
EBITDA pre margin,
eNPV, IRR,
Licensing
ROCE, MEVA
Net sales growth,
EBITDA pre margin
POS, ROCE
291
(33) Provisions for employee benefits
Provisions for employee benefits are composed as follows:
Employees
651,200
The value of the provisions as of December 31, 2023, was € 7 million (December 31, 2022: € 97 million). Net
income of € 35 million was generated in fiscal 2023 (2022: net expenses of € 70 million). The three-year
tranche issued in fiscal 2020 ended at the end of fiscal 2022; an amount of € 160 million was paid out in fiscal
2023. The three-year tranche issued in fiscal 2021 ended at the end of 2023 and was reclassified from current
provisions for employee benefits to other current non-financial liabilities as of December 31, 2023. The tranche
is expected to result in a payout of € 54 million in fiscal 2024. At the reporting date, the average closing price
of Merck shares in Xetra® trading over the last 60 trading days was € 149.40.
€ million
Consolidated Financial Statements Notes to the Consolidated Financial Statements
Provisions for pensions and other post-employment benefits
Other changes
Non-current provisions for employee benefits
41
33
1,496
62
879
2
130
130
2,586
5
72
1
Total
Other countries
Dec. 31, 2022
United Kingdom
Switzerland
Germany
5
4
555
327
2
5
22
€ million
2022
The development of the net defined benefit liability was as follows:
Pension obligations in the United Kingdom resulted primarily from benefit plans which are based on years of
service and final salary and were closed to newly hired employees from 2006 onward. The agreed benefits
comprised retirement, disability, and surviving-dependent benefits. The employer and the employees made
contributions to the plans. Statutory minimum funding obligations existed.
295
Consolidated Financial Statements Notes to the Consolidated Financial Statements Employees
Pension obligations in Switzerland mainly comprised retirement, disability, and surviving-dependent benefits
regulated by law. The employer and the employees made contributions to the plans. Statutory minimum
funding obligations existed.
The vast majority of defined benefit obligations of German entities were attributable to plans that encompass
old-age, disability, and surviving-dependent pensions. These obligations were based on benefit rules comprising
benefit commitments dependent on years of service and final salary, as well as two different direct
commitments for employees newly hired since January 1, 2005, that are not based on final salary. The benefit
entitlement for new members from January 1, 2005, to December 31, 2020, resulted from the cumulative total
of annually determined pension components calculated on the basis of a defined benefit expense and an age-
based annuity table. The benefit entitlement for new members from January 1, 2021, resulted from the
performance of salary-based employer contributions and voluntary employee contributions, topped up by the
employer, to an external fund. A minimum return on contributions has been guaranteed by Merck. There were
no statutory minimum funding obligations in Germany.
2,634
5
152
909
1,202
Fair value of the plan assets
4,287
323
332
881
2,752
22
372
January 1, 2022
obligations
Other
18
Medical plan
4
4
Other
4
4
Installments
43
18
29
Lump sum
1,732
59
1,060
613
Annuity
Benefit not based on final salary
1
2,856
127
10
Medical plan
Present value of defined benefit
obligations
1,061
Installments
Annuity
Lump sum
E
2,186
Benefit not based on final salary
Installments
Lump sum
Annuity
Benefit based on final salary
3,058
€ million
2,848
160
384
1,022
1,281
Fair value of the plan assets
4,787
310
358
Present value of defined benefit
Current service cost
Interest expense
Interest income
-20
42
42
88
-52
140
1,440
-32
-429
19
1,901
-32
Payment transactions
Employee contributions
Employer contributions
Pension payments
Actuarial gains (+)/losses (-)
Actuarial gains (+)/losses (-)
Changes in the effects of the asset ceilings
arising from experience adjustments
-32
-429
-1
9
-33
2,634
-4,287
December 31, 2022
-11
-1
-4
-6
Other
120
-1
-2
-10
-6
-3
Currency translation recognized in equity
1
-1
Changes in the scope of consolidation
129
1
-429
Actuarial gains (+)/losses (-)
Remeasurements of plan assets
Past service cost
-1
-1
-3
-3
34
34
-73
-73
Gains (+) or losses (-) on settlement
-203
-2,996
2,999
-5,995
Net defined
benefit liability
Effects of
asset ceilings
Non-current other employee benefit provisions
the defined
benefit
obligations
Present value of
Plan administration costs recognized in income
-203
Currency effects recognized in income
Other effects recognized in income
Items recognized in income
arising from experience adjustments
-205
2,099
-205
Actuarial gains (+)/losses (-)
arising from changes in financial assumptions
2,099
Actuarial gains (+)/losses (-)
arising from changes in demographic assumptions
7
7
Actuarial gains (+)/losses (-)
Remeasurements of defined benefit obligations
-1
-247
59
-306
-2
1
30
-30
127
-1,685
72
Installments
9
18
82
the expected rate of future salary increase
-98
-9
-17
-73
the expected rate of future salary increase
were 50 basis points lower
109
-373
-21
-80
-256
426
18
23
91
295
the discount rate were 50 basis points lower
the discount rate were 50 basis points higher
-16
Total
were 50 basis points higher
-141
10
27
109
the life expectancy were 1 year higher
-10
-28
-110
the life expectancy were 1 year lower
were 50 basis points higher
the expected rate of future pension increase
212
9
44
155
the expected rate of future pension increase
were 50 basis points lower
-157
-5
-8
-3
5
December 31, 2022
Other countries
Switzerland
3.76%
3.81%
4.49%
4.52%
4.95%
4.80%
2.15%
2.70%
1.34%
3.84%
2.76%
Future pension increases
Duration
2.75%
3.74%
3.32%
Discount rate
2022
2023
2022
2023
2022
2023
Future salary increases
United Kingdom
2.14%
0.02%
Germany
Increase (+)/decrease (-) in present value of
all defined benefit obligations if
€ million
December 31, 2023
The following overview shows how the present value of all defined benefit obligations would have been
impacted by changes to relevant actuarial assumptions:
The determination of the present value of the obligation from defined benefit pension plans primarily requires
discretionary judgment regarding the selection of methods to determine the discount rate, the selection of
suitable mortality tables, and estimates of future salary and pension increases.
Provisions for pensions and other post-employment benefits
Significant discretionary decisions and sources of estimation uncertainty
These were average values weighted by the present value of the respective defined benefit obligation.
2.14%
The lower interest rate level in the euro area and Switzerland resulted in an increase in the present value of the
defined benefit obligations as well as in the duration of the obligations.
12
2.20%
1.75%
2.89%
15
2.90%
13
0.03%
15
16
17
19
11
Consolidated Financial Statements
Notes to the Consolidated Financial Statements Employees
293
1,943
4
1,652
1,939
Net defined benefit liability
Effects of the asset ceilings
Funded status
-2,634
-2,848
33
1,685
4,287
Dec. 31, 2022
Dec. 31, 2023
Fair value of the plan assets
Present value of all defined benefit obligations
€ million
The value recognized in the consolidated balance sheet for pensions and other post-employment benefits was
derived as follows:
Depending on the legal, economic, and fiscal circumstances prevailing in each country, different retirement
benefit systems are provided for employees. Newly hired employees are only offered plans whose benefits are
based on contributions and the return on their investments. Some of these plans require the employer to
guarantee a minimum return on investment. Other plans are generally based on the employee's years of
service and salary. Pension obligations comprise both obligations from current pensions and accrued benefits
for pensions payable in the future.
In order to minimize fluctuations of the net defined benefit liability, Merck, in managing its plan assets, also
pays attention to potential fluctuations in liabilities. The portfolio is structured in such a way that, in the ideal
scenario, the impact of exogenous factors on the plan assets and the defined benefit obligations offset each
other.
Both the benefit obligations and the plan assets are subject to fluctuations over time. The reasons for such
fluctuations could include changes in market interest rates and thus the discount rate, as well as adjustments
to other actuarial assumptions (such as life expectancy or expected future increases in pension). This could lead
to - or cause an increase in - underfunding. Depending on statutory regulations, it may become necessary in
some countries to reduce underfunding and provide additional funding.
4,787
Sensitivities are determined on the basis of the respective parameters in question, with all other measurement
assumptions remaining unchanged.
Assets from defined benefit plans
Provisions for pensions and other post-employment benefits
Lump sum
354
1
2,429
Annuity
Benefit based on final salary
Total
Other countries
United Kingdom
33
Switzerland
€ million
Dec. 31, 2023
The defined benefit obligations were based on the following types of benefits provided by the respective plan:
The increase in provisions was mainly due to the reduction in the discount rates in the euro area and
Switzerland.
Employees
Consolidated Financial Statements Notes to the Consolidated Financial Statements
294
46
1,731
1,975
Germany
9
21
95
-5
-66
-325
-17
-24
-61
-224
370
18
-9
26
256
the discount rate were 50 basis points lower
the discount rate were 50 basis points higher
the expected rate of future salary increase
were 50 basis points lower
Total
Other countries
United Kingdom
Switzerland
Germany
Increase (+)/decrease (-) in present value of
all defined benefit obligations if
€ million
69
-80
the expected rate of future salary increase
were 50 basis points higher
74
-9
-22
-96
the life expectancy were 1 year lower
the life expectancy were 1 year higher
197
5
16
35
140
the expected rate of future pension increase
were 50 basis points higher
-148
-5
-12
-2
-128
the expected rate of future pension increase
were 50 basis points lower
89
10
I
5
☑
1
2022
2023
January 1, 2023
Reclassification from non-current to current/liabilities¹
Currency translation
Interest effect
Release
Utilizations
Additions
Jan. 1, 2023
€ million
Other employee benefit provisions developed as follows:
Non-current other
employee benefit
provisions
Obligations for partial retirement programs and other severance payments not recognized in connection with
restructuring programs, as well as obligations in connection with long-term working hour accounts and
anniversary bonuses, are also included in other employee benefit provisions.
Other employee benefit provisions
Accounting and measurement policies
Other employee benefit provisions
298
Consolidated Financial Statements Notes to the Consolidated Financial Statements Employees
The weighted duration of defined benefit obligations amounted to 17 years (2022: 16 years).
940
168
164
Other employee benefit provisions include obligations from share-based compensation programs. However,
they do not contain the tranche of the Merck Long-Term Incentive Plan (LTIP) that is payable in the months
following the reporting date, as this is no longer subject to value fluctuations following the reporting date. More
information on these compensation programs can be found below.
163
Current other
employee benefit
provisions¹
299
Changes in scope of consolidation/Other
-57
32
-90
-9
-3
-5
2
2
Total
-130
-41
-125
-99
-26
239
161
78
380
81
-89
Dec. 31, 2023
26
22223
Germany
Expected payments of undiscounted benefits
994
133
103
151
607
175
21
Switzerland
19
108
170
21
19
27
103
171
29
18
27
155
United Kingdom Other countries
85
130
116
112
583
21
22
103
20
22
Total
99
22
95
19
22
91
165
38
19
23
20
217
83
299
Paid out
41,813
685,700
Forfeited
Potential number offered for the first time in 2021
Potential number of MSU
13,722.30
173.46
3 Years
Dec. 31, 2021
2023 tranche
Jan. 1, 2023 -
Dec. 31, 2025
12,995.23
DAX® value (60-day average of the DAX® prior to the start of the
performance cycle)
212.16
3 Years
132.43
3 Years
Reference price of Merck shares in € (60-day average Merck share
price prior to the start of the performance cycle)
Term
2022 tranche
Jan. 1, 2022 -
Dec. 31, 2024
15,684.57
2021 tranche
Jan. 1, 2021 -
Dec. 31, 2023
643,887
509,033
1,266
1,673
464,022
573,459
Dec. 31, 2023
19,901
22,829
26,455
2,016
Paid out
Forfeited
Potential number offered for the first time in 2022
672,367
488,524
601,930
Dec. 31, 2022
227
1,253
Paid out
20,282
40,704
Forfeited
Potential number offered for the first time in 2023
Performance cycle
The following table presents the key parameters as well as the development of the potential number of Merck
share units (MSUs) for the individual tranches:
A cash payment is made based on the MSUs granted after the three-year performance cycle has ended. The
value of a granted MSU, which is relevant for payment, corresponds to the average closing price of Merck
shares in XetraⓇ trading during the last 60 trading days prior to the end of the performance cycle. The payout
amounts of the respective tranches are limited to two and a half times the individual grant.
-10%
10%
-10%
10%
Change in the DAX®
Variation of Merck share price
€ million
The measurement of long-term share-based compensation programs implies extensive estimation uncertainty.
The following overview shows the amounts by which the non-current provisions from share-based
compensation programs (carrying amount as of December 31, 2023: € 7 million/carrying amount as of
December 31, 2022: € 97 million) would have been impacted by changes in the DAX® or the closing price of the
Merck share on the balance sheet date. The amounts stated would have led to a corresponding reduction or
increase in profit before income tax.
Share-based payments
Increase (+)/decrease (-) of the provision
Significant discretionary decisions and sources of estimation uncertainty
Consolidated Financial Statements Notes to the Consolidated Financial Statements Employees
Changes to the intrinsic value of share-based compensation programs are allocated to the respective functional
costs according to the causation principle. Time value changes are recognized in financial income or finance
costs.
The expected volatilities are based on the implicit volatility of Merck shares and the DAX® in accordance with
the remaining term of the respective tranche. The dividend payments incorporated into the valuation model are
based on medium-term dividend expectations.
The fair value of the obligations is calculated by an external expert using a Monte Carlo simulation as of the
balance sheet date. The main parameters in the measurement of the share-based compensation programs with
cash settlement are long-term indicators of company performance and the price movement of Merck shares in
relation to the DAX®. A sustainability factor is also included in the valuation parameters for tranches issued
from fiscal 2022 onward.
Provisions are recognized for the share-based compensation program with cash settlement at Merck ("Merck
Long-Term Incentive Plan”) and reported in other employee benefit provisions.
Share-based payments
Accounting and measurement policies
Share-based payments
1 Previous year's figures have been adjusted, see Note (2) "Reporting principles".
299
Dec. 31, 2023
Dec. 31, 2022
1
The sustainability factor can range from 0.8 to 1.2. This means that, depending on the result of the financial
KPIs (0% to -150%) and the sustainability factor, the eligible participants are granted between 0% and 180%
of the MSUS they could be eligible to receive at the end of the respective performance cycle.
300
Consolidated Financial Statements Notes to the Consolidated Financial Statements Employees
40%
"Reducing our ecological footprint"
•
30%
"Partnering for sustainable business impact"
•
30%
"Dedicated to human progress"
•
The weighting of the three sustainability criteria for the 2023 LTIP tranche is as follows:
For tranches issued from fiscal 2022 onward, the MSUs measured on the basis of financial targets are multiplied
by a sustainability factor composed of the three sustainability criteria: "Dedicated to human progress",
"Partnering for sustainable business impact", and "Reducing our ecological footprint".
These share-based compensation programs with cash settlement in place at Merck are aligned with target
achievement based on key performance indicators as well as the long-term performance of Merck shares.
Certain employees are eligible to receive a certain number of virtual shares - Merck share units (MSUS) - at the
end of a three-year performance cycle. The number of MSUs that could be received depends on the individual
grant defined for the respective person and the average closing price of Merck shares in Xetra® trading during
the last 60 trading days prior to January 1 of the respective performance cycle (reference price). When the
three-year performance cycle ends, the number of MSUs to then be granted is determined based on the
development of defined financial key performance indicators (KPIs). In addition to the financial KPIs, a
sustainability factor is included in performance measurement for tranches issued from fiscal 2022 onward.
The calculation is based on the performance of the Merck share price compared to the performance of the DAX®
with a weighting of 50%, the development of the EBITDA pre margin during the performance cycle as a
proportion of a defined target value with a weighting of 25%, and the development of organic sales growth as a
proportion of a defined target value, also with a weighting of 25%. Depending on the development of these
financial KPIs, at the end of the respective performance cycle the eligible participants are granted between 0%
and 150% of the MSUs they could be eligible to receive.
Sensitivities were determined on the basis of the respective parameters in question, with all other
measurement assumptions remaining unchanged. The 2021 tranche will not be subject to any value
fluctuations between December 31, 2023, and the payout date, and was therefore excluded from the sensitivity
analysis (December 31, 2022: exclusion of 2020 tranche).
8
-10
-18
-1
20
25
€ million
99
24
57
-61
147
Payment transactions
Employee contributions
Employer contributions
Pension payments
-236
29
-22
58
29
29
Actuarial gains (+)/losses (-)
Actuarial gains (+)/losses (-)
58
10
-350
17
58
-323
Changes in the effects of the asset ceilings
21
17
2,848
-4,787
December 31, 2023
5
16
-11
Other
1
-4
125
5
4
20
-16
Currency translation recognized in equity
Changes in the scope of consolidation
142
-1
57
86
Other changes
-1,943
arising from experience adjustments
Remeasurements of plan assets
-150
-109
-1,685
Net defined
benefit liability
Effects of
asset ceilings
-33
37
-37
-3
89
89
-150
-109
-4,287
Fair value of the
plan assets
Present value of
the defined
benefit
obligations
296
Employees
Consolidated Financial Statements Notes to the Consolidated Financial Statements
Interest expense
Current service cost
2,634
Actuarial gains (+)/losses (-)
-3
-291
arising from experience adjustments
10
Actuarial gains (+)/losses (-)
arising from changes in financial assumptions
-350
Actuarial gains (+)/losses (-)
arising from changes in demographic assumptions
17
Actuarial gains (+)/losses (-)
5
Remeasurements of defined benefit obligations
Other effects recognized in income
Currency effects recognized in income
on settlement
Plan administration costs recognized in income
Interest income
Gains (+) or losses
Past service cost
-168
123
Items recognized in income
The actual income from plan assets amounted to € 147 million in the year under review (2022: loss of
€ 395 million).
Covering the benefit obligations with financial assets represents a means of providing for future cash outflows,
which are required by law in some countries (for example, Switzerland and the United Kingdom) and voluntarily
in other countries (for example, Germany).
Consolidated Financial Statements Notes to the Consolidated Financial Statements
2026
2025
2024
€ million
December 31, 2023
The expected payments of undiscounted benefits under the plans were as follows:
Employer contributions to plan assets and direct payments to plan beneficiaries for the next year are expected
to amount to € 48 million (2022: € 42 million) and € 96 million (2022: € 95 million) respectively.
Plan assets did not directly include financial instruments issued by Group companies or assets used by Group
companies.
2,634
2027
594
2,848
646
2,202
Fair value of the plan
assets
64
5
59
62
62
2,040
Other
2028
December 31, 2022
17
24
95
153
22
17
26
88
Total
2029-2033
Other countries
Expected payments of undiscounted benefits
Switzerland
Germany
2028-2032
2027
2026
2025
2024
2023
€ million
United Kingdom
64
64
61
58
58
74
74
Total
No quoted market
price in an active
market
market
Total
Quoted market
price in an active
620
No quoted market
price in an active
market
Equity instruments
Cash and cash equivalents
€ million
Quoted market
price in an active
Dec. 31, 2022
Dec. 31, 2023
The fair value of the plan assets was allocated to the following categories:
297
Employees
market
620
636
636
61
Insurance contracts
344
204
140
439
392
48
Investment funds
500
321
179
373
193
180
Real estate
968
968
1,219
1,219
Debt instruments
160
2023
Fair value of the
plan assets
Provisions for pensions and other post-employment benefits
1 Previous year's figures have been adjusted, see Note (2) "Reporting principles".
Dec. 31, 2023
1,975
Dec. 31, 2022
1,731
299
2,030
83
81
2,275
2,111
Provisions for other employee benefits included provisions for share-based payments, which are discussed in
greater detail in the section on share-based payments in this note.
Other countries
Accounting and measurement policies
Provisions for employee benefits
Provisions for pensions and other post-employment benefits
The present value of the defined benefit obligation is determined by expert third parties according to the
actuarial projected unit credit method.
The discount rates for defined benefit pension plans are generally determined by reference to discount rates for
similar durations and currencies calculated by external actuaries. This was based on bonds with ratings of at
least "AA" or a comparable rating from at least one of the leading rating agencies as of the reporting date.
The other actuarial assumptions used as the basis for calculating the defined benefit obligation, such as rates of
salary increases and pension trends, were determined on a country-by-country basis in line with the economic
conditions prevailing in each country. The latest country-specific mortality tables are also applied (Germany:
Heubeck 2018G; Switzerland: BVG 2020G; United Kingdom: S3PA).
Apart from the net balance of interest expense for the defined benefit obligations and interest income from the
plan assets, which is reported in financial income and financial expenses, the expenses for defined benefit plans
are allocated to the individual functional areas in the consolidated income statement.
Consolidated Financial Statements Notes to the Consolidated Financial Statements Employees
292
217
2,192
The calculation of the defined benefit obligations was based on the following actuarial parameters and
durations:
Germany
Switzerland
United Kingdom
In addition to retirement benefit obligations, provisions for pensions and other post-employment benefits
include obligations for other post-employment benefits, such as medical care.
Current provisions for employee benefits¹
At the reporting date, other financial assets were composed as follows:
current
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Capital Structure, Investments, and Financing Activities 307
Dec. 31, 2023
current
€ million
198
Subsequent measurement at fair value through
other comprehensive income
122
122
200
200
Other
4
4
4
4
Dec. 31, 2022
1
126
4
122
204
4
201
Subsequent measurement at amortized cost
Total
non-current
Total
non-current
Loans against third parties
Financial income
Financial income and expenses
Other operating
income or other
operating expenses
Financial income
and expenses
income or other
operating expenses
Other operating
Financial income
and expenses
Other operating
income or other
operating expenses
Foreign currency
gains or losses
Group equity (upon
derecognition:
reclassification to
financial income
and expenses)
Other operating
income or other
operating expenses
Financial income
and expenses
operating
expenses)
derecognition:
reclassification to
other operating
income or other
Financial income
and expenses
Group equity (upon
Other operating
income or other
operating expenses
Net gain and net
loss on
disposal/value
adjustments
Financial
loss
fair value through profit or
Operational
Subsequent measurement at
Financial income
and expenses
Financial
and reversals of
impairment losses
of financial assets
(net)
Financial income
and expenses
Impairment losses,
losses/reversals of
impairment losses
Impairment losses,
and reversals of
impairment losses
of financial assets
(net)
Impairment
Operational
Financial income
and expenses
Other operating
income or other
operating expenses
Financial income
and expenses
Interest income or
expenses
Financial income
and expenses
(applying the
effective interest
method)
644
Financial
Other operating income or other operating
expenses
Operational
Subsequent measurement
at fair value through profit
or loss
Financial income
Foreign currency
gains and losses
recognized directly
in equity
Results recognized directly in equity
(value adjustments)
Reclassification of the cumulative results
previously recognized directly in equity in
the retained earnings when asset is
disposed
Financial
income
Other operating
Other operating
income
Foreign currency
gains and losses
recognized directly
in equity
gains or losses
Value adjustments
Results recognized directly in equity
(value adjustments)
Reclassification of the cumulative results
previously recognized directly in equity in
the retained earnings when asset is
disposed
Operational
Asset type
Foreign currency
Subsequent measurement
at fair value through other
comprehensive income
Category
The following table provides details on the measurement effects of equity instruments on the consolidated
balance sheet and the consolidated income statement:
The recognition of income from the unwinding of discounts and income and expenses from interest rate-induced
changes in contingent considerations measured at fair value through profit or loss subsequent to initial
recognition are reported in financial income and expenses.
Financial income
and expenses
Financial income
and expenses
Dividend income
842
80
517
Merck KGaA
Total
Profit transfer to E. Merck KG
-52
-692
-743
-90
-684
-774
Profit/loss transfer to Merck KGaA
-4
Merck & Cie
KMG
-4
Change in profit carried forward of E. Merck KG
1
1
-100
7
-100
Profit transfer to E. Merck KG including
-694
-746
-90
981
499
7
Total
Merck KGaA
KMG
Withdrawal from revenue reserves
Transfer to revenue reserves
Retained earnings limited liability shareholders
Withdrawal by E. Merck KG
-682
Profit carried forward E. Merck KG
81
Dividend proposal
Profit carried forward of limited liability shareholders
(preliminary)
319
-801
80
-284
34
318
-284
34
A dividend of € 2.20 per share was distributed for fiscal 2022. The dividend proposal for fiscal 2023 is
unchanged at € 2.20 per share. With the proposed dividend payment to shareholders amounting to
€ 284 million (2022: € 284 million), the profit carried forward of the shareholders after the dividend payment
would amount to € 34 million (2022: € 34 million). Based on the proposed dividend payment to the
shareholders, E. Merck KG would be entitled to withdraw € 682 million (2022: € 801 million), meaning that
E. Merck KG would be entitled to a profit brought forward of € 81 million (2022: € 80 million).
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Capital Structure, Investments, and Financing Activities 304
Appropriation of profits and changes in reserves
2023
2022
Merck & Cie
€ million
53
Financial
53
37
125
125
Contingent consideration
502
436
66
396
333
63
63
Subsequent measurement at fair value through
profit and loss
14
81
80
199
1
198
Debt instruments
516
516
643
643
Equity instruments
597
1
235
-778
250
Financial assets
(operational)
Derivatives with a hedging relationship
(operational)
53
46
7
50
47
3
Derivatives without a hedging relationship
16
16
16
27
27
182
154
28
194
161
33
32
Derivatives without a hedging relationship
(financial transactions)
Other debt instruments
37
fair value through other
comprehensive income
Equity instruments not subject to mandatory subsequent measurement at fair value through profit or loss are
measured at fair value through other comprehensive income in subsequent periods and if they are intended to
be held for the longer term. Further details on the measurement of equity instruments at fair value are
presented in Note (43) "Information on fair value measurement”.
Subsequent measurement at
amortized cost
<15
Level 3
<15
Asceneuron SA, Switzerland
Level 3
<15
Level 3
<15
Storm Therapeutics Limited, UK
Level 3
<50
Level 3
<25
Mosa Meat B.V., Netherlands
Level 3
<15
Level 3
<25
Celestial AI Inc., United States
Level 3
<25
Level 3
Level 3
ElectronInks Inc., United States
Level 3
Other (no notation in an active market)
Level 1
4
Level 1
1
Other (notation in an active market)
Level 3
<15
Level 3
<15
Level 3
<15
Level 3
<15
Level 3
<15
Plexium Inc., United States
Nouscom AG, Switzerland
Formo Bio GmbH, Germany
Level 3
<15
<15
<25
Level 3
<50
€ million
Fair value as of
Equity interests with subsequent measurement at fair value through other comprehensive income mainly
related to shares in the following companies in particular:
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Capital Structure, Investments, and Financing Activities 308
As in the previous year, contingent consideration primarily included claims arising from the sale of the
biosimilars business to Fresenius SE & Co. KGaA, Bad Homburg vor der Höhe, in 2017. The reduction in
contingent consideration was mainly attributable to payments received.
The increase in other current financial assets with subsequent measurement at amortized cost related to
deposits with banks. Debt instruments with subsequent measurement at fair value through other
comprehensive income increased in the year under review due to the purchase of commercial papers.
1,278
957
321
1,480
-801
-90
-682
-52
Profit transfer to E. Merck KG/
transfer adjusted for trade tax
23
-12
Result of E. Merck KG before reciprocal profit
changes in reserves
-868
M Ventures portfolio
DNA Script S.A.S., France
Vera Therapeutics, Inc., United States
Precigen, Inc., United States
Level 3
<25
Level 1
<50
Level 1
<50
Level 1
<50
Level 1
<50
200
Level 3
Level 3
<50
422
436
Fair Value:
hierarchy level
IFRS 13
Dec. 31, 2022
Fair value as of
Fair Value:
hierarchy level
IFRS 13
Dec. 31, 2023
Artios Pharma Limited, UK
Wiliot Ltd., Israel
<50
Level 3
181
Level 3
(36) Other financial assets
Capital Structure, Investments, and Financing Activities 305
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
€ 456 million). This mainly related to cash and cash equivalents at subsidiaries that are subject to capital controls.
The maximum default risk was equivalent to the carrying amount of cash and cash equivalents.
Cash and cash equivalents included restricted cash amounting to € 404 million (December 31, 2022:
Changes in cash and cash equivalents as defined by IAS 7 are presented in the consolidated cash flow statement.
1,854
1,982
610
1,244
1,481
501
Dec. 31, 2022
Dec. 31, 2023
Cash and cash equivalents
Short-term cash investments (up to 3 months)
Cash, bank balances and cheques
€ million
Cash and cash equivalents comprised the following items:
Cash and cash equivalents comprise short-term investments with a maximum maturity of up to three months,
which can be readily converted to a determined amount of cash.
Cash and cash equivalents
Accounting and measurement policies
Accounting and measurement policies
Other financial assets
This section does not cover the accounting and measurement policies for derivative financial instruments. They
are presented separately in Note (39) "Derivative financial instruments”.
Recognition and initial measurement
Operational
Asset type
Category
Measurement effects of debt instruments are reported in the consolidated balance sheet and the consolidated
income statement as follows:
Recognition
Financial assets are derecognized if the claim for compensation is fulfilled by the other counterparty, if there is no
longer a reasonable expectation that the counterparty will fulfill its contractual obligations, or if Merck transfers
the contractual rights including all material risks and rewards of the financial asset to another counterparty.
Derecognition
Capital Structure, Investments, and Financing Activities 306
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
Financial assets are only reclassified in the rare event of Merck changing its business model with regard to the
management of financial assets.
(35) Cash and cash equivalents
Profit carried forward previous year
This classification is based on the business model and the structure of contractual payment flows. Financial
assets subsequently measured at amortized cost are accounted for using the effective interest method and
considering any impairment losses. The procedure for calculating impairment losses is described in Note
(42) "Management of financial risks”. Financial assets of this class are held in order to collect their
contractual cash flows, which are exclusively principal repayments and interest payments on the outstanding
capital amount.
subsequent measurement at fair value through profit or loss.
subsequent measurement at fair value through other comprehensive income, or
subsequent measurement at amortized cost,
•
•
On initial recognition, financial assets are assigned to one of the following measurement categories which also
correspond to the financial instrument classes as defined in IFRS 9:
Classification and subsequent measurement
Detailed information on the measurement methods for financial assets measured at fair value are presented in
Note (43) "Information on fair value measurement”.
Financial assets are initially measured at fair value and recognized as of the settlement date. For financial
assets not subsequently measured at fair value through profit or loss in subsequent periods, initial
measurement also includes directly attributable transaction costs. Any difference between the fair value of a
financial instrument on initial recognition (Level 2 and 3) and the transaction price is recognized in income
using the straight-line method over the duration.
Except for derivative financial instruments with positive market value, Merck only applies subsequent
measurement at fair value through profit or loss for debt instruments with contractual properties resulting in
cash flows that do not exclusively represent principal repayments and interest payments on the outstanding
capital amount. In particular, this includes contingent consideration that was contractually agreed with the
acquirer within the context of the disposal of businesses within the meaning of IFRS 3 (see Note
(43) "Information on fair value measurement”). Merck does not utilize the option of the subsequent
measurement of debt instruments at fair value through profit or loss.
Subsequent measurement at
The non-controlling interests in consolidated equity and profit or loss essentially related to the non-controlling
interests in Versum Materials Taiwan Co., Ltd., Taiwan; Merck Ltd., Thailand; and in the listed company
PT Merck Tbk., Indonesia.
Non-controlling interests
10
Level 3
17
Total
Other (no notation in an active market)
Other (notation in an active market)
Telios Pharma, Inc., United States
IDRX, Inc., United States
Level 1
34
Level 1
0
MoonLake Immunotherapeutics AG, Switzerland
Level 1
0
Level 1
152
MoonLake Immunotherapeutics Ltd., Cayman Islands
94
207
Other minority interests
Level 3
InfraServ GmbH & Co. Wiesbaden KG, Germany
13
Level 3
(€ -90 million) and was paid to E. Merck KG in fiscal 2023. Merck & Cie KmG is a partnership under Swiss law that
is controlled by Merck KGaA but distributes its operating result directly to E. Merck KG. This distribution is a
payment to shareholders and is therefore also presented under changes in equity.
Based on the proposed appropriation of profits, the profit transfer to E. Merck KG for fiscal 2023, including changes
in reserves, amounted to € -746 million. This consisted of the profit/loss transfer to E. Merck KG (€ -692 million),
the profit transfer to Merck KGaA (€ -4 million), the change in profit carried forward by E. Merck KG (€ 1 million)
and the profit transfer from Merck & Cie KmG, Switzerland, to E. Merck KG (€ -52 million). In the previous year, the
profit transfer to E. Merck KG including changes in reserves amounted to -868 million. This consisted of the profit
transfer to E. Merck KG (€ -684 million), the profit transfer to Merck KGaA (€ 7 million), the change in profit carried
forward by E. Merck KG (€ -100 million) and the profit transfer from Merck & Cie KmG to E. Merck KG
withdrawal by E. Merck KG
Financial debt/capital management
Accounting and measurement policies
(37) Financial debt/Capital management
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Capital Structure, Investments, and Financing Activities 309
516
643
Level 3
The calculation of non-controlling interests was based on the reported equity of the subsidiaries concerned.
18
14
Level 1
Level 1
2
Level 3
10
Level 3
9
Level 3
22
Level 3
76
-52
34
598
Eurobond 2019/2027
€
500
1.875
July 2026
498
499
Eurobond 2022/2026
€
598
750
July 2025
747
748
Eurobond 2020/2025
USD
1,600
3.250
March 2025
1,498
1,444
0.125
July 2027
0.375
600
Hybrid bond 2014/2074
€
800
0.875
July 2031
797
797
Eurobond 2019/2031
€
500
2,375
July 2030
497
497
Eurobond 2022/2030
€
750
0.500
July 2028
747
748
Eurobond 2020/2028
€
USD bond 2015/2025
1,228
702
Current financial debt
Maturity
€ million
€ million
Interest rate
Dec. 31, 2022
Dec. 31, 2023
Nominal value
The composition of financial debt as well as a reconciliation to net financial debt are presented in the following
table:
The accounting and measurement policies for lease liabilities and derivatives are presented in Notes
(21) "Leasing" and (39) "Derivative financial instruments".
Except for lease liabilities and derivatives with negative market values, financial debt is initially recognized at
fair value and subsequently measured at amortized cost using the effective interest method.
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Capital Structure, Investments, and Financing Activities 301
Capital Structure, Investments, and Financing
Activities
(34) Equity
Accounting and measurement policies
Accounting treatment of the general partner's equity
As a partnership limited by shares, Merck KGaA has two different shareholder groups who have contributed to
the company: the general partner E. Merck KG, as the personally liable partner; and the shareholders.
From an accounting perspective, the contributions of both shareholder groups are treated as equity, regardless
of the general partner's option to terminate its capital share. This treatment is based on the provision in the
Articles of Association of Merck KGaA stating that the limited liability shareholders may decide on the
conversion of the company into a stock corporation and thus limit the general partner's settlement claim to
fulfillment in equity instruments.
Equity capital/Capital reserves
The equity capital of the company consisted of the subscribed capital composed of shares and the equity
interest held by the general partner E. Merck KG (general partner's equity). As of the balance sheet date, the
company's subscribed capital amounting to € 168 million was divided into 129,242,251 no-par value bearer
shares plus one registered share. Each share therefore corresponded to € 1.30 of the subscribed capital. The
amount resulting from the issue of shares by Merck KGaA exceeding the nominal amount was recognized in the
capital reserves. The equity interest held by the general partner amounted to € 397 million. As in the previous
year, there were no changes in subscribed capital in fiscal 2023.
Retained earnings
Retained earnings developed as follows:
€ million
Jan. 1, 2022
%
499
million
Eurobond 2019/2023
180
122
Lease liabilities (IFRS 16)
transactions)
30
77
Liabilities from derivatives (financial
11
20
Loans from third parties and other financial debt
259
206
Liabilities to related parties
203
277
Bank loans
600
Bonds (current)
€
600
0.005
Dec. 2023
600
Currency
499
Dec. 2074¹
3,375
Financing
commitments
from banks
Utilization
commitments
from banks
Bilateral credit agreement
Syndicated loan
€ million
Financing
Maturity of
Dec. 31, 2022
Dec. 31, 2023
Loan agreements represent another major source of financing for Merck. On the balance sheet date, the
financing commitments from banks in respect of Merck were as follows:
Traditionally, the capital market represents a major source of financing for Merck, for instance via bond issues.
As of December 31, 2023, there were liabilities of € 3.9 billion from a debt issuance program most recently
renewed in fiscal 2023 (December 31, 2022: € 4.5 billion). In addition, Merck had access to a commercial paper
program to meet short-term capital requirements with a volume of € 2.5 billion (December 31, 2022:
€ 2 billion), none of which was utilized as of December 31, 2023, or the prior-year reporting date.
The objective of capital management is to ensure the necessary financial flexibility in order to maintain long-
term business operations and realize strategic options. Maintaining a stable investment grade rating, ensuring
liquidity, limiting financial risks, as well as optimizing the cost of capital are the objectives of our financial policy
and set important framework conditions for capital management. In this context, net financial debt as well as
gearing, calculated as the ratio of EBITDA pre to net financial debt, are important capital management
indicators at Merck.
Capital management
Information on liabilities to related parties can be found in Note (45) "Related party disclosures”.
Non-current liabilities to related parties in the amount of € 990 million (December 31, 2022: € 660 million)
consisted of liabilities to E. Merck Beteiligungen KG.
The financial debt was not secured by liens or similar forms of collateral. The loan agreements do not contain
any financial covenants. The average borrowing cost on December 31, 2023, was 2.1% (December 31, 2022:
1.9%).
A partial buyback of the nominal volume of € 275 million of hybrid bonds issued in 2019 and 2020 took place
on November 20, 2023.
A partial buyback of the nominal volume of € 250 million of a hybrid bond issued in 2019 took place on
September 9, 2022.
The hybrid bonds issued by Merck KGaA are bonds for which the leading rating agencies have given equity
credit treatment to half of the issuances, thus making the issuances more favorable to Merck's credit rating
than traditional bond issues. The bonds are recognized in full as financial liabilities in the balance sheet.
Although Merck intends to repay them at the earliest possible date, these bonds are principally reported as non-
current financial debt for accounting purposes.
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Capital Structure, Investments, and Financing Activities 310
5 Excluding current derivatives (operational) and contingent considerations, which are recognized in the context of business combinations according to IFRS 3.
6 Not defined by International Financial Reporting Standard (IFRS).
4 Merck has the right to prematurely repay this hybrid bond issued in September 2020 for the first time in September 2026.
Utilization
3 Merck has the right to prematurely repay this tranche of the hybrid bond issued in June 2019 for the first time in June 2029.
Interest
2,500
375
There were no indications that the availability of extended credit lines was restricted.
203
3,078
284
3,158
2027
fix
7
7
< 1 year
variable
203
203
277
277
Various bank credit lines
Project financing
with banks
<3 Jahre
variable
375
2027
variable
2,500
financing
commitments
Profit after tax
2 Merck has the right to prematurely repay this tranche of the hybrid bond issued in June 2019 for the first time in December 2024.
247
8,328
€
1,000
1.625
Sep. 20804
998
840
Hybrid bond 2020/2080
€
750
2.875
June 20793
749
632
Hybrid bond 2019/2079
€
500
1.625
June 20792
498
499
Hybrid bond 2019/2079
€
500
Bonds (non-current)
1 Merck has the right to prematurely repay this tranche of the hybrid bond issued in December 2014 for the first time in December 2024.
7,802
Bank loans
1,854
1,982
459
7,500
Net financial debt6
Current financial assets5
Cash and cash equivalents
10,428
9,941
366
9,200
9,239
393
less:
Financial debt
Non-current financial debt
Lease liabilities (IFRS 16)
transactions)
Liabilities from derivatives (financial
48
47
Loans from third parties and other financial debt
660
990
Liabilities to related parties
7
8,126
Gains/losses recognized in equity
125
Dividend payments
Tax effect
Dec. 31, 2023
E. Merck KG's share of net profit
-5
-5
-56
-7
2,136
2,073
E. Merck KG and Merck KGaA engage in reciprocal net profit transfers. This makes it possible for E. Merck KG,
the general partner of Merck KGaA, and the shareholders to participate in the net profit/loss of Merck KGaA in
accordance with the ratio of the general partner's equity interest and the subscribed capital (70.274% or
29.726% of the equity capital).
Reclassification to assets
The allocation of net profit/loss is based on the net income of both E. Merck KG and Merck KGaA, determined in
accordance with the provisions of the German Commercial Code. These figures are adjusted for trade tax
and/or corporation tax and create the basis for the allocation of net profit/loss. The adjustment for corporation
tax is made to compensate for the difference in the tax treatment between the general partner and the limited
liability shareholders. Corporation tax is only calculated on the income received by the limited liability
shareholders. Its equivalent is the income tax applicable to the partners of E. Merck KG which must be paid by
them directly. The adjustment thus ensures that the share in net profit corresponds to the respective interests
held by the two shareholder groups.
€ million
Result of E. Merck KG before reciprocal profit
transfer, adjusted for trade tax
2023
2022
E. Merck KG
Merck KGaA
E. Merck KG
Merck KGaA
-12
23
The reciprocal net profit/loss transfer between E. Merck KG and Merck KGaA as stipulated by the Articles of
Association was as follows:
-88
-920
-1,001
-15
-5
10
5
Dec. 31, 2022
-54
-12
3,151
3,086
-54
-12
Jan. 1, 2023
Gains/losses recognized in equity
-2
Fair value adjustment
98
-17
Reclassification to profit or loss
-95
2522
3,151
3,086
-1,016
-1,013
Comprehensive income
980
919
Corporation tax
700
242
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Capital Structure, Investments, and Financing Activities 303
The result of E. Merck KG adjusted for trade tax, on which the appropriation of profits is based, amounted to
€ -12 million (2022: € 23 million). This resulted in a profit/loss transfer to Merck KGaA of € -4 million
(2022: € 7 million). Merck KGaA's net income adjusted for corporation tax, on which the appropriation of its
profit is based, amounted to € 985 million (2022: € 974 million). Merck KGaA transferred a profit of
€ 692 million to E. Merck KG (2022: € 684 million). In addition, an expense from corporation tax charges was
reported in the amount of € 4 million (2022: expense of € 54 million).
Appropriation of profits
The profit distribution to be resolved by shareholders also defines the amount of that portion of net profit/loss
freely available to E. Merck KG. If the shareholders resolve to carry forward or to allocate to retained earnings a
portion of Merck KGaA's net retained profit to which they are entitled, E. Merck KG shall be obliged to allocate
to the profit carried forward/retained earnings of Merck KGaA a comparable sum determined according to the
ratio of subscribed capital to general partner's equity. This ensures that the retained earnings and the profit
carried forward by Merck KGaA correspond to the ownership ratios of the shareholders on the one hand and
E. Merck KG on the other hand. Consequently, for distributions to E. Merck KG, the available amount is the
amount that results from netting the profit transfer of Merck KGaA with the amount either allocated or
withdrawn by E. Merck KG from retained earnings/profit carried forward. This amount corresponds to the sum
paid as a dividend to the shareholders and reflects their pro rata shareholding in the company.
Based on the profit transfer, the appropriation of profits by Merck KGaA was as follows:
€ million
Net income
2023
2022
Portion limited
Portion
E. Merck KG
liability
shareholders
Portion
E. Merck KG
Portion limited
liability
shareholders
683
285
700
242
80
285
139
683
-54
4
54
Basis for appropriation of profits
(100%)
-12
985
23
974
Profit transfer to E. Merck KG (ratio of general
(70.274%)
692
-692
684
-684
partner's equity to equity capital)
Profit/loss transfer to Merck KGaA (ratio of
subscribed capital to equity capital)
(29.726%)
4
-4
-7
7
Corporation tax
-4
Net income
-71
Net income of Merck KGaA before reciprocal
profit transfer
194
Dec. 31, 2022
Jan. 1, 2023
Profit after tax
Gains/losses recognized in equity
Comprehensive income
Dividend payments
-19
-2
21
18,811
Change in scope of consolidation/Other
-401
18,463
18,811
-401
53
18,463
2,824
2,824
-187
160
-28
53
Transactions with no change of control
-868
-239
16
Profit transfer to/from E. Merck KG including changes in reserves
-868
Retained
earnings/net
retained profit
Remeasurement Fair value reserve
of defined benefit
plans
for equity
instruments
Retained
earnings
16,610
-1,539
63
15,134
3,326
3,326
1,140
-31
1,109
3,326
1,140
-31
4,435
-239
2,824
-187
Capital increases
2,796
Reclassification to profit or loss
Reclassification to assets
Tax effect
Cash flow hedge
reserve
Cost of cash flow
hedge reserve
Currency
translation
Gains/losses
recognized in
difference
equity
-145
-23
1,992
1,824
91
11
1,159
1,261
-98
-15
1,117
160
Fair value adjustment
Gains/losses recognized in equity
1,230
Jan. 1, 2022
Profit after tax
-284
Capital increases
Profit transfer to/from E. Merck KG including changes in reserves
-746
Transactions with no change of control
-1
-1
Change in scope of consolidation/Other
31
Dec. 31, 2023
-746
-4
-592
-27
186
20,228
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
Capital Structure, Investments, and Financing Activities 302
-284
Gains/losses recognized in equity
€ million
20,635
Gains/losses recognized in equity developed as follows (see also Note (39) “Derivative financial
instruments"):
Positive market
values
Other financial
assets
Derivatives with a cash flow
Currency
hedging relationship
operating
business
Financial
transactions
Transactions in
Currency
Fair value
Capital Structure, Investments, and Financing Activities 312
Presentation on
the balance
sheet
Market value
item
Type of Type of hedged
collateral
Hedging relationship
Changes in fair value in the
consolidated income statement
and the consolidated statement of
comprehensive income
Derivative financial instruments are recognized in the consolidated balance sheet, the consolidated income
statement, and the consolidated statement of comprehensive income - with the exception of the balance sheet
treatment of amounts included directly from the reserve in the initial cost or in the other carrying amount of a
non-financial asset or liability - as follows:
Merck has concluded virtual power purchase agreements. As these agreements are designed as contracts for
difference, they fulfill the definition of contracts to buy non-financial items that can be settled net in cash with
the characteristics of derivative financial instruments and are measured at fair value through profit or loss in
accordance with IFRS 9. As no physical electricity is purchased, the own use exemption that allows certain
derivative financial instruments to be treated as executory contracts does not apply.
Derivatives without a
hedging relationship
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
Hedging ineffectiveness may occur in the timing of forecast cash flows or if hedged items are dissolved.
Derivatives that do not or no longer meet the documentation or effectiveness requirements for hedge
accounting, whose hedged item no longer exists, or for which hedge accounting rules are not applied are
classified as financial assets or liabilities at fair value through profit or loss depending on their balance.
Where options are used as hedging instruments, only their intrinsic value is designated as the hedging
instrument. Changes in the fair value of the time value component of options that are used for hedge
accounting are recognized in other comprehensive income and in the reserve for the cost of cash flow hedging
within equity. The subsequent accounting of these amounts depends on the type of hedged transaction.
Where forward contracts are used as hedging instruments, only the spot element is designated as the hedging
instrument. Changes in the fair value of the forward element in forward contracts are recognized in other
comprehensive income in the reserve for the cost of cash flow hedging within equity. The subsequent
accounting of these amounts depends on the type of hedged transaction.
during the term
Virtual power
purchase
agreements
The nominal amounts of the derivatives held by Merck at the respective reporting dates were as follows:
Negative
market values
Positive market
values
Negative
market values
Positive market
values
Negative
market values
4,760
2,075
Merck only uses derivatives as hedging instruments. Merck uses the dollar offset method as well as regression
analyses to measure hedge effectiveness.
2,075
current
non-current
current
Virtual power purchase agreements¹
No hedge accounting
Cash flow hedge
€ million
Currency
Currency
Dec. 31, 2022
Dec. 31, 2023
Other operating income
Other operating expenses
Other financial
assets
Other financial
liabilities
Financial income and expenses
Other
operating
expenses
at maturity
Other
operating
income
adjustments
(in equity)
Fair value
adjustments
(in equity)
Other financial
liabilities
Other financial
assets
Financial debt
Transactions in
operating
business
The IFRS 9 provisions are applied for hedge accounting. Hedging transactions are entered into for highly
probable forecast transactions in foreign currencies and for hedging fair values of assets on the balance sheet.
Cash flow hedge accounting for forecast transactions in foreign currency means the hedged item is recognized
at a fixed exchange rate on a net basis instead of being recognized at the spot exchange rate at the transaction
date. As a result of hedging fair values of assets on the balance sheet, the compensating changes in value of
the corresponding hedged item and hedging instrument offset each other.
861
Accounting and measurement policies
1,127
129
998
732
Total
Non-current
Current
Total
Non-current
Current
thereof: liabilities to related parties
Miscellaneous other financial liabilities¹
in Mio. €
Dec. 31, 2022
Dec. 31, 2023
Other financial liabilities comprised the following:
With the exception of liabilities from derivatives and contingent considerations, which are recognized in the
context of business combinations according to IFRS 3, other financial liabilities are initially measured at fair
value and in subsequent periods at amortized cost, applying the effective interest method. The accounting and
measurement policies of derivatives are presented in Note (39) "Derivative financial instruments".
Other financial liabilities
Accounting and measurement policies
(38) Other financial liabilities
Capital Structure, Investments, and Financing Activities 311
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
39
4,760
1,119
Derivative financial instruments
122
732
(39) Derivative financial instruments
The liabilities to related parties primarily consist of liabilities to E. Merck KG.
1 Previous year has been adjusted, please refer to Note (2) "Reporting principles".
1,294
141
1,153
1,152
147
1,005
Other financial liabilities¹
53
19
34
25
18
7
Liabilities from derivatives (operational)
50
50
47
47
thereof: interest accruals
861
1,241
7,412
-50
7,412
TWD
KRW
JPY
CNY
CHF
Net exposure
€ million
December 31, 2022
52
5
7
9
77
-2
-42
-12
-29
-3
-47
59
Consolidated income statement
Equity (other comprehensive income)
USD
-58
-591
163
-100
42
59
Consolidated income statement
Equity (other comprehensive income)
(depreciation vs. €)
Exchange rate +10%
-182
-15
-17
-9
-61
87
15
22
16
100
-59
Consolidated income statement
Equity (other comprehensive income)
Exchange rate -10%
(appreciation vs. €)
867
151
216
997
-6
-9
-10
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Capital Structure, Investments, and Financing Activities 318
firm purchase commitments over the next 12 months in non-functional currency.
forecast transactions in non-functional currency, the expected probability of which is very high for the next
12 months, and
Foreign exchange risks from the following transactions are hedged using foreign exchange contracts and
currency options applying hedge accounting:
receivables from and liabilities to third parties in non-functional currency.
•
intragroup financing in non-functional currency, and
.
Foreign exchange risks from the following transactions are economically hedged through the use of foreign
exchange contracts and currency options:
The entire foreign exchange exposure is divided into several defined subsets with different risk profiles and
systematically hedged using suitable hedging instruments. Hedging is performed based on a regularly reviewed
basket of currencies. The maximum time horizon for hedging is 12 months.
Owing to the international nature of its business, Merck is exposed to transactional foreign exchange risks
within the scope of both its business activities and financing activities. Foreign exchange risks are continuously
analyzed, and different hedging strategies used to limit or eliminate these risks.
Foreign exchange risks
The Report on Risks and Opportunities included in the combined management report provides further
information on the management of financial risks.
Merck uses marketable forward exchange contracts, options and interest swaps as hedging instruments. The
strategy to hedge interest rate and foreign exchange rate fluctuations arising from forecast transactions and
transactions already recognized in the balance sheet is set by a risk committee, which meets on a regular basis.
The use of derivatives is regulated by extensive guidelines and subject to ongoing risk controls by Group
Treasury. Speculation is prohibited. The strict separation of functions between trading, settlement and control
functions is ensured. Derivatives are only entered into with banks that have a good credit rating. Related
default risks are continuously monitored.
Market fluctuations with respect to foreign exchange and interest rates represent significant profit and cash flow
risks for the Group. Merck aggregates these Group-wide risks and steers them centrally, partly by using
derivative financial instruments. To estimate existing risks of foreign exchange and interest rate fluctuations,
Merck uses scenario analyses. Merck is not subject to any material risk concentration from financial
transactions.
(42) Management of financial risks
The amount of unused credit lines that could be employed for future operating activities and to meet obligations
and information on changes in financial debt can be found in Note (37) "Financial debt/Capital
management".
Fair value adjustments of other current and non-current financial liabilities were entirely attributable to
liabilities from derivatives. In the consolidated cash flow statement, cash changes of assets from derivatives of
€ 609 million (2022: € 711 million) were reported together with repayments of other current and non-current
financial debt of € 1,973 million (2022: € 2,604 million) in the item “Repayments of other current and non-
current financial debt" with a net amount of € 1,364 million (2022: € 1,893 million). In the above reconciliation,
changes of assets from derivatives were reported separately, as they did not form part of financial liabilities.
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Capital Structure, Investments, and Financing Activities 317
Interest payments for leases were recognized in operating cash flow but served as a reconciliation item in the
above table as the underlying lease liabilities were a component of financial debt. Changes in lease liabilities
included additions and retirements of right-of-use from leases and the effects from unwinding of the discount
on lease liabilities.
1 The previous year's figures have been adjusted, see consolidated cash flow statement.
The following table shows the net exposure and the effects of transactional exchange rate movements of the key
currencies against the euro in relation to the net income and equity of the Group on the balance sheet date:
December 31, 2023
€ million
Net exposure
Exchange rate -10%
(appreciation vs. €)
-93
2
42
12
29
3
47
-59
Consolidated income statement
Equity (other comprehensive income)
420
-16
117
31
474
-593
USD
TWD
KRW
JPY
CNY
CHF
Exchange rate +10%
(depreciation vs. €)
294
-16
-22
-87
1 The hedging instruments and the corresponding hedged items were denominated in the same currency, therefore the hedge ratio was 1:1.
1.10
33.26
1,415.00
146.50
7.63
Weighted average hedging rate
January 1, 2023
-6
0
-1
-5
-22
Change in value of hedged item used to
determine hedge effectiveness since
6
1
5
22
Change in value of outstanding hedging
instruments since January 1, 2023
January 2024 -
December 2024
1:1
January 2024 -
December 2024
1:1
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Capital Structure, Investments, and Financing Activities 319
1:1
December 31, 2022
Notional amount
2
8
3,408
134
158
92
933
3,408
134
158
92
933
USD
TWD
KRW
JPY
CNY
thereof: positive market values
Fair value of the hedging instrument
thereof: non-current
thereof: current
€ million
January 2024 -
December 2024
January 2024 -
December 2024
1:1
1:1
52
78
114
922
USD
TWD
KRW
JPY
CNY
Notional amount
€ million
December 31, 2023
The impact of cash flow hedge accounting for forecast transactions in foreign currency was as follows for the
major currencies:
The planned cash flows in the next 12 months are analyzed and divided into subsets in accordance with the risk
management strategy. In the first subset, 25% of a regularly reviewed basket of currencies is hedged. The
second subset hedges a more flexible basket of currencies selected on the basis of hedging costs and
correlation with the euro. The hedging strategy achieves an economic hedge ratio of at least 40% across all
hedging subsets. Depending on scenario analyses, this can be increased to up to 90% using a rule-based
approach. As in the previous year, balance sheet items in the above currencies were economically hedged by
derivatives in full if they did not correspond to the functional currency of the respective Group company.
Accordingly, they do not affect the net exposure presented above.
the nominal values of hedging instruments of these planned cash flows.
planned cash flows in the next 12 months in the respective currency, less
In this presentation, effects of cash flow hedges are taken into consideration in the equity of the Group. The net
exposure of each of the above currencies consisted of the following components:
141
12
14
7
839
922
114
78
Hedge ratio¹
December 2024
Maturity profile
January 2024 -
-2
-2
thereof: negative market values
8
1
1
-15
5
thereof: positive market values
6
1
5
22
Fair Value of the hedging instrument
thereof: non-current
thereof: current
839
52
23
-3
-691
5,255
30
2022
value through profit or loss
95
95
2023
Subsequent measurement at fair
2
2
2022
Debt Instruments
2023
2022
thereof: investments held
2023
2022
derecognized
2023
thereof: investments
2022
Equity Instruments
30
2023
(without derivatives)
Subsequent measurement at
-18
-18
30
30
1
1
2022
Total
2023
2022
relationship (net)
2023
Derivatives without a hedging
(without derivatives)
2022
value through profit or loss
2023
Subsequent measurement at fair
2022
amortized cost
2023
Financial debt
income
value through other comprehensive
Subsequent measurement at fair
153
Interest income/expenses and similar income and expenses
6
4
Other intangible assets
10
18
Property, plant and equipment
17
22
Capitalized borrowing costs for
-30
25
-9
24
Other interest income/expenses and similar income and
expenses
-2
-5
Other non-current provisions
-7
12
-319
69
-235
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Capital Structure, Investments, and Financing Activities 315
-5
1
-50
1
-6
-51
-4
2022
amortized cost
-3
-27
2023
Financial assets
Total
Disposal
gains/losses
Fair value
adjustments
Net gains and losses
Impairment
losses/reversal of
impairment losses
(net)
Dividends
Currency
differences
€ million
The following table shows the development of net gains and losses, currency differences as well as dividend
income from financial instruments (excluding items recognized in other comprehensive income) by
measurement category:
Subsequent measurement at
711
-27
79
effects
Ex-
change
rate
in lease
liabilities
Lease
interest
Repay-
ments
Cash
inflows
Jan. 1,
2022
Change
Changes
Non-cash
Cash
€ million
2022
-27
-620
609
-16
Derivative assets (current and non-
current)
9,941
-15
603
Fair
value
adjust-
ment
-83
Other
Dec. 31,
2022
-37
Derivative assets (current and non-
current)
7 10,428
7 9,510
-13
-13
663
663
97
187
-12
97
187
-12
9,906 1,281 -2,604
10,801 2,917 -4,217
Financial debt
financial liabilities¹
Other current and non-current
918
1,637 -1,613
894
E. Merck Beteiligungen KG
Financial liabilities to E. Merck KG and
in scope
of
consoli-
dation
201
-14
8,746
Jan. 1,
2023
€ million
Non-cash
Cash
2023
The change in financial debt was as follows:
Furthermore, the net reporting option has been exercised to report cash receipts and payments for items in
which the turnover is quick, the amounts large, and the maturities short. This primarily relates to rolling
financing by way of commercial paper and short-term bank loans reported under "Payments from new
borrowings of other current and non-current financial debt" and "Repayment of other current and non-current
financial debt".
The option to recognize dividend payments and profit withdrawals in the cash flows from financing activities is
exercised in determining the cash flows from financing activities.
Financing cash flow
Accounting and measurement policies
(41) Financing cash flow
Capital Structure, Investments, and Financing Activities 316
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
The currency result from equity instruments with subsequent measurement at fair value through other
comprehensive income was recognized in other comprehensive income.
In the table above, interest income or expenses relating to derivatives without a hedging relationship, with the
exception of the virtual power purchase agreements, are reported as a component of fair value adjustments.
31
3
34
-5
29
1
Cash Repay-
inflows
ments
Lease
interest
Change
in lease
liabilities
Ex-
change
rate
-15
603
-83
201
-14
519 -1,973
1,216 -2,394
10,428
Financial debt
9,510
financial liabilities
-51
Other current and non-current
-420
697
918
E. Merck Beteiligungen KG
Financial liabilities to E. Merck KG and
2023
Changes
in scope
of
consoli- Dec. 31,
dation
Other
Fair
value
adjust-
ment
effects
1,195
5
January 2023 -
December
2023
10
30
53
30
53
non-current
current
non-current
current
current non-current
non-current
current
No hedge accounting
Currency
Cash flow hedge
€ million
business
Financial transactions
business
Financial transactions
Transactions in operating
Transactions in operating
16
Negative market values
7
30
Derivative assets
€ million
December 31, 2023
The following table presents the potential netting volume of the reported derivative assets and liabilities:
As in the previous year, all hedging relationships were transaction related. Netting of derivatives from an
economic perspective was possible due to the existing framework agreements on derivatives trading that Merck
had entered into with commercial banks. Actual netting only takes place in the case of insolvency of the
contract partner. Derivatives were not offset on the face of the balance sheet.
19
34
30
46
60
16
19
4
46
7
Virtual power purchase
agreements
30
16
Currency
19
4
46
Positive market values
December 31, 2022
Capital Structure, Investments, and Financing Activities 313
37
current non-current
current non-current
current non-current
non-current
current
Currency
Cash flow hedge
€ million
Transactions in operating
business
Financial transactions
Transactions in operating
business
Financial transactions
Negative market values
Positive market values
non-current
December 31, 2023
The fair values of the derivatives were as follows:
1 The virtual power purchase agreements do not have fixed nominal amounts.
10,014
9,487
5
37
5
No hedge accounting
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
18
7
77
47
40
27
agreements
18
2
Derivative liabilities
47
Virtual power purchase
77
27
Currency
18
2
77
47
3
27
3
5,255
December 31, 2022
Derivative assets
2
10
11
Jan. 1, 2023
Dec. 31, 2022
Tax effect
Reclassification to assets
194
13
74
106
16
16
Reclassification to profit or loss
-98
-26
-73
-15
-26
11
Fair value adjustment (directly
recognized in equity)
-5
-145
-11
-4
10
22
98
67
31
-17
22
Reclassification to profit or loss
-12
-5
recognized in equity)
Fair value adjustment (directly
-54
-54
-5
-50
-4
-12
-11
-1
-50
-12
-11
-93
-40
Potential netting volume
74
-62
40
-40
Potential net
amount
due to financial
collateral
due to master
netting
agreements
Potential netting volume
123
-83
123
-83
Net presentation
Netting
presentation
Gross
22
-102
-102
114
114
presentation
Gross
Derivative liabilities
due to master
netting
agreements
due to financial
collateral
Potential net
amount
-23
-12
-11
Jan. 1, 2022
Total
swaps
of currency Interest rate
forwards
value of
options
Total
of currency
forwards
€ million
options
€ million
Spot
component
Intrinsic
Cash flow hedge reserve
Forward
component
Cost of cash flow hedge reserve
The reserves for cash flow hedges and the cost of cash flow hedging of the Group related to the following
hedging instruments (see also Note (34) "Equity"):
-23
63
60
-60
Time value of
-36
Netting Net presentation
-95
volume
Change in expected future electricity Change in expected annual production
prices
December 31, 2023
A change in the material valuation parameters would have had the following impact on the fair value of the
agreements excluding the hedging instrument:
In total, the agreements including the hedging instrument resulted in a net gain on fair value measurement of
€ 3 million (2022: € 16 million) that was recognized in other operating income.
In financial terms, the most important agreement is the one concluded between Merck and a wind energy
project developer in the United States for an installed capacity attributable to Merck of 68 megawatts. The wind
farm was commissioned in fiscal 2022. The fair value of the agreement was € 44 million as of the end of the
reporting period (2022: € 50 million). The electricity price of around 40% of the expected production volume
under this virtual power purchase agreement is hedged by a separate hedging instrument. Consequently, the
net effect of the fixed price for the virtual power purchase agreement is zero for this quantity. The accounting
provisions on hedge accounting were not applicable.
As part of the implementation of its sustainability strategy, Merck has concluded so-called virtual power purchase
agreements in order to cover the purchased electricity volumes in Europe and the United States with energy
certificates from renewable sources. At the reporting date, agreements were in place with wind and solar farm
operators in the United States and Spain. With the exception of a wind farm in the United States, the other wind
and solar farms in Spain and the United States were still under construction. The fundamental structure of all of
the agreements was identical, involving a fixed exercise price for Merck and the assumption of the exposure from
variable spot energy prices in the respective market regions. Merck receives green electricity certificates for the
volumes of electricity produced and attributed to Merck. Merck uses the certificates it receives solely for itself. The
agreements have remaining terms of between 10 and 17 years as of the reporting date.
Electricity price risks
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Capital Structure, Investments, and Financing Activities 320
-100 basis
points
-17
+100 basis
points
17
-100 basis
points
-21
21
points
+100 basis
2022
2023
Effects on equity (other comprehensive income)
Effects on consolidated income statement
Change in market interest rate
€ million
Change in cost of capital after tax
The effects of a parallel shift in the yield curve by +100 or -100 basis points on the consolidated income
statement, as well as on equity relative to all short-term or variable monetary deposits and monetary
borrowings within the scope of IAS 32, except contingent considerations, are presented in the following table.
In the event of a downward shift, the interest rate for instruments subject to a contractual interest rate floor of
zero percent was limited accordingly:
percentage points
percentage points
percentage points
volume
Change in expected future electricity Change in expected annual production
prices
Liquidity risks
Change in the fair value of
the virtual power purchase
agreements
€ million
December 31, 2022
3
-3
-6
6
-19
19
Change in the fair value of
the virtual power purchase
agreements
-1
+1
-10
+10
-10
+10
€ million
percentage points
855
1,778
-625
1:1
1:1
1:1
1:1
Hedge ratio¹
January 2023 -
December
2023
January 2023 –
December
2023
2023
December
January 2023 -
January 2023 -
December
2023
Tax items
Maturity profile
-34
-3
-2
thereof: negative market values
45
5
-59
2
1:1
Change in value of outstanding hedging
instruments since January 1, 2022
Change in value of hedged item used to
determine hedge effectiveness since
January 1, 2022
8
2
Dec. 31, 2022
Dec. 31, 2023
2,403
Short-term or variable interest rate monetary deposits
Short-term or variable interest rate monetary borrowings
Net interest rate exposure
€ million
The Merck Group's net exposure to interest rate changes comprised the following:
Interest rate risks
In addition to the transactional foreign exchange risks described previously, currency translation risks resulted
from the fact that many of Merck's subsidiaries are located outside the euro area and have functional currencies
other than the reporting currency. Exchange differences resulting from translation of the assets and liabilities of
these companies into euro, the reporting currency, are recognized in equity.
1 The hedging instruments and the corresponding hedged items were denominated in the same currency, therefore the hedge ratio was 1:1.
1.07
31.16
percentage points
1,373.00
7.32
Weighted average hedging rate
-10
-5
3
-2
-8
10
5
-3
136.00
+10
2,083
-1,228
+10
19
2
197
90
Finance income
Interest expense and similar expenses
-319
-235
Capital loss from disposal of debt instruments with subsequent measurement at amortized cost
Expenses from fair value changes from debt instruments with subsequent measurement at fair
value through profit or loss
2
-15
Expenses from fair value changes of share-based compensation programs
Currency differences from financing activities
-2
-1
-26
Other interest expenses
Finance costs
Financial result
-2
-322
-277
Income from the change of the fair value of share-based compensation programs
Other interest income
10
25
1
Tax effect
-10
Reclassification to assets
Dec. 31, 2023
-6
-4
-5
-7
-10
-46
-125
-56
(40) Finance income and expenses/Net gains and losses from financial
instruments
Finance income and expenses were as follows:
€ million
Interest income and similar income
2023
2022
153
69
Capital gain from disposal of debt instruments with subsequent measurement at amortized cost
Income from fair value changes from debt instruments with subsequent measurement at fair
value through profit or loss
1
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Capital Structure, Investments, and Financing Activities 314
-187
7
percentage points
-155
Subsequent measurement at fair value through profit or loss
-1
Leases
-14
-13
Pension provisions
-61
Liquidity risks are monitored and reported to management on a regular basis.
The risk that Merck cannot meet its payment obligations resulting from financial liabilities is limited by
establishing the required financial flexibility and by Group-wide cash management. Information on issued bonds
and other sources of financing can be found in Note (37) “Financial debt/Capital management”.
2
-2
-5
5
-9
9
-1
+1
Interest and similar income and expenses arose as follows:
Change in cost of capital after tax
-10
-202
Subsequent measurement at fair value at amortized cost
-39
Interest
expenses
thereof: Financial assets
-2
€ million
Subsequent measurement at fair value at amortized cost
2023
2022
Interest income
Interest income
Interest
expenses
Financial instruments
-203
90
-161
76
22
-3
Subsequent measurement at fair value through other
comprehensive income
1
Subsequent measurement at fair value through profit or loss
thereof: Financial debt
14
11
33
Quoted prices in an active
market
Quoted prices in an active
market
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
Capital Structure, Investments, and Financing Activities 328
Other debt instruments
Financial assets
Subsequent measurement at fair
value through profit or loss
Derived from active market
Financial instruments concerned
Fair value determined using input factors observable in the market (Level 2)
Bonds
Subsequent measurement at fair
Publicly-traded funds
Other short-term cash
investments
Financial debt
amortized cost
Subsequent measurement at
Financial liabilities
Other debt instruments
value through profit or loss
Other short-term cash
investments
Quoted prices in an active
market
Description of the measurement
technique
Derived from active market
Forward exchange contracts
observable on the market as
well as exchange rate
volatilities
relationship)
Derived from active market
Use of recognized actuarial
methods
Spot and forward rates
Interest rate curves available
on the market
Spot and forward rates
observable on the market as
well as exchange rate
volatilities
Use of recognized actuarial
methods
Use of recognized actuarial
methods
Main input factors used to
determine fair values
Liabilities to banks and other
loan liabilities
Financial liabilities
Subsequent measurement at
amortized cost
Forward exchange contracts
and currency options
Derivatives (with a hedging
relationship)
Interest rate swaps
relationship)
Derivatives (without a hedging and currency options
Forward exchange contracts
value through profit or loss
Subsequent measurement at fair
Financial liabilities
Forward exchange contracts
and currency options
Derivatives (with a hedging
relationship)
Interest rate swaps
Derivatives (without a hedging and currency options
Bonds
-59
Main input factors used to
determine fair values
Contract Assets
thereof: POCI¹
-31
-1
4
-1
-34
thereof: Level 3
-31
-1
-7
-23
thereof: Level 1/2
(including current leasing receivables)
-63
-2
4
-7
Dec. 31
Changes in
scope of
consolidation
Effects of
currency
translation
Use of recognized actuarial
methods
Reclassifica-
tion within
levels
-2
Shares
-1
thereof: Level 3
Description of the measurement
technique
Financial instruments concerned
Equity instruments
value through other comprehensive
income
Subsequent measurement at fair
Financial assets
Fair value determined by official prices and quoted market values (Level 1)
The measurement techniques and main input factors used to determine the fair value of financial instruments
are as follows:
Information on fair value measurement
Accounting and measurement policies
(43) Information on fair value measurement
Capital Structure, Investments, and Financing Activities 327
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
-64
Changes in the expected credit loss rates used in the simplified impairment model did not result in any
significant changes in the additions to and reversals of impairment losses in Level 2.
1 Purchased or originated credit-impaired receivables.
-1
-61
Loss allowances for financial assets
thereof: Level 3
thereof: Level 2
thereof: Level 1
(including non-current leasing receivables)
Other Receivables
thereof: Level 1/2
Spot and forward rates
observable on the market as
well as exchange rate
volatilities
Change of discount rate
Spot and forward rates
observable on the market as
well as exchange rate
volatilities
3
-3
6.1%
10%
unchanged
-10%
Change in probability of regulatory approval
December 31, 2022
Change of discount rate
€ million
December 31, 2023
If, in the context of determining the fair value of this contingent consideration at the balance sheet date, the
probability of approval as well as the discount factor of the most important development programs had been
estimated to be lower or higher, this would have led to the following changes in the measurement and the
corresponding effects on the profit before income tax:
The most significant contingent consideration was the future purchase price claim from the sale of the biosimilars
business to a subsidiary of Fresenius SE & Co. KGaA, Bad Homburg vor der Höhe, Germany, on August 31, 2017.
It was calculated by an external valuation expert on initial recognition in 2017 and continued on this basis. As of
December 31, 2023, the carrying amount was € 118 million (December 31, 2022: € 219 million).
The calculation of the fair value of assets from contingent considerations is subject to significant discretionary
judgment.
Assets from contingent consideration
Determining the parameters that are to be included in discounted cash-flow-methods and deriving the fair value
from observable prices within the scope of equity refinancing are both subject to discretionary decisions and
estimation uncertainty.
Equity investments in unlisted companies
Significant discretionary decisions and sources of estimation uncertainty
Income and expenses from the discounting of probability-weighted future milestone payments and license fees
and from changes in discount rates are reported in the financial result.
When determining the probability of occurrence of the individual milestone events in connection with the
development of drug candidates, the focus is on empirically available probabilities of success of development
programs in comparable phases of clinical development in the relevant therapeutic areas. To determine the
sales plan, internal sales plans and sales plans of external industry services are used. The discount rate (after
tax) of 6.6% as of December 31, 2023 (December 31, 2022: 6.3% to 7.3%) was calculated using the weighted
average cost of capital.
the discount factor used.
.
the underlying sales planning used to derive royalties, and
9
the estimated probability of reaching the individual milestone events,
6.6%
6
Utilizations
17
-3
-24
6.8%
(unchanged)
20
-21
6.3%
24
3
-18
5.8%
10%
unchanged
-10%
€ million
Change in probability of regulatory approval
3
-3
-8
7.1%
(unchanged)
-6
•
The fair values of assets from contingent considerations are calculated by weighting the expected future cash
flows from milestone payments and royalties using their probability of occurrence and discounting them. The
main parameters when determining contingent considerations are:
Assets from contingent considerations (Level 3)
Trade accounts receivable
that are intended for sale
due to a factoring agreement
Other debt instruments
Contingent consideration
Derivatives (without a hedging
relationship)
Subsequent measurement at fair
value through profit or loss
Trade and other receivables
Observable prices derived
from equity refinancing
Cost-based determination
Derived from observable
prices within the scope of
equity refinancing sufficiently
close to the balance sheet
date, considered risk
allowances
Expected cash flows from
recent business planning,
average cost of capital,
expected long-term growth
rate
Main input factors used to
determine fair values
Discounting of expected
future cash flows
Equity investments in
unlisted companies
Equity instruments
Description of the measurement
technique
Financial instruments concerned
Subsequent measurement at fair
value through other comprehensive
income
Financial assets
Fair value determined using input factors unobservable in the market (Level 3)
Capital Structure, Investments, and Financing Activities 329
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
Interest rates observable on
the market
Discounting of future cash
flows
Virtual power purchase
agreements
Contingent considerations
from the sale of businesses
or shares in corporations
Loans with variable
repayments
Interests in unlisted funds
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Capital Structure, Investments, and Financing Activities 330
Counterparty credit risk is taken into consideration for measurements of financial instruments at fair value. In
the case of non-derivative financial instruments, such as other liabilities or interest-bearing securities, this is
reflected using risk premiums on the discount rate, while discounts on market value (credit valuation
adjustments and debit valuation adjustments) are used for derivatives. Transfers between the individual
hierarchy levels at fair value are made at the end of the month in which the triggering event - for example an
initial public offering - took place.
Sales planning, milestone
payments, probabilities of
regulatory and commercial
events, discount rates
Electricity future price
curves, expected electricity
production volumes, discount
factors
Discounting of probability-
weighted future milestone
payments and license fees
Use of recognized actuarial
methods
Contingent considerations
from the purchase of
businesses
Contingent consideration
Hedging instrument for
virtual power purchase
agreements
Derivatives (without a hedging
relationship)
Subsequent measurement at fair
value through profit or loss
Interest rate curves available
on the market
Financial liabilities
Net asset values of the fund
interests
Sales planning, milestone
payments, probabilities of
regulatory and commercial
events, discount rates
Expected cash flows from
recent business planning,
discount rates
Electricity future price
curves, expected electricity
production volumes, discount
factors
Nominal value of potentially
sold trade accounts
receivable, average fees for
sales of trade accounts
receivable
Acquisition cost
Consideration of the fair
value of companies in which
the funds are invested
Use of recognized actuarial
methods
Discounting of expected
future cash flows
Discounting of probability-
weighted future milestone
payments and license fees
Discounting of expected
future cash flows
Nominal value less factoring
fees
Bonds with embedded
settlement option for equity
in an unlisted company
Interest rates observable on
the market
Jan. 1 Additions
-4
€ million
-48
Subsequent measurement at fair
value through profit or loss
Contingent considerations
Derivatives without a hedging
4
53
-34
-4
-7
-12
relationship
Derivatives with a hedging
relationship
Refund liabilities
Finance lease liabilities
30
-30
912
-912
491
-9
-10
-10
-5
59
-111
-2,801
Bank loans
203
-5
-203
2,499
-2,499
Liabilities to related parties
1,780
-123
-25
-81
-110
-53
-550
Other financial liabilities²
376
-258
-118
Loans from third parties and other
financial debt
59
-1,121
15,134
-191
-5,790
When recognizing impairment losses, the general three-stage impairment model is used for financial
instruments included in other receivables, and the simplified approach is used for non-current leasing
receivables. The individual credit rating of the contract partner is used to determine the impairment loss of
other receivables. If there is considered to be a substantially increased risk of default, the expected credit loss
is calculated over the entire lifetime.
Individual cases are also analyzed to ascertain whether objective findings suggest that the value of other
receivables is impaired. Such suggestions may include, for example, economic difficulties of the debtor,
contractual breaches, or the renegotiation of contractual payment obligations.
Impairment of other financial assets
Investments in debt instruments subsequently measured either at amortized cost or at fair value through other
comprehensive income are fundamentally considered to be investments with low risk, meaning that the
expected credit loss in the upcoming 12 months is used to determine the impairment loss.
For financial assets with only a minimal default risk, the rules concerning the mandatory recognition of a risk
provision for the lifetime expected credit loss are not applied at initial recognition or during subsequent
measurement. Therefore, no assessment of whether there has been a significant increase in the credit risk is
carried out for such assets. Merck does not presume an increased credit risk as of the balance sheet date if the
contract partner has an investment grade rating.
If there are indications that the debtor's creditworthiness has worsened but that this is not yet reflected in its
existing credit rating, the credit risk assessment is adjusted and the impairment allowances recognized for
expected credit losses are increased. In all other cases, there are no new risk assessments as of the balance
sheet date and the risk profile initially assumed is maintained.
Wherever a considerable increase in the default risk is assumed, the lifetime expected credit loss of the
financial asset is considered.
On the balance sheet date, the theoretical maximum default risk for all items referenced above corresponds to
the net carrying amounts less any compensation from credit insurance.
Significant discretionary decisions and sources of estimation uncertainty
Credit risks
Impairment of other receivables
Impairment of trade accounts receivable and contract assets
the identification of customer groups with identical default risks,
the identification of impaired creditworthiness, and
•
the calculation of the expected credit losses.
Impairment of other financial assets
Discretionary judgment is applied in determining individual impairment allowances.
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Capital Structure, Investments, and Financing Activities 324
The following table shows impairments for financial assets from operative transactions and contract assets as
well as gains from their reversals recognized in the consolidated income statement:
€ million
Impairment losses
In terms of the impairment of trade accounts receivable and of contract assets, there is significant discretion
and estimation uncertainty regarding:
-5,352
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Capital Structure, Investments, and Financing Activities 323
A default generally exists when the debtor cannot fully meet its liabilities.
-17
-471
-264
-5,904
-9
-173
-101
-3,463
1 For the hybrid bonds, repayment is assumed at the earliest possible date.
2 Previous year has been adjusted, please refer to Note (2) "Reporting Principles".
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
Capital Structure, Investments, and Financing Activities 322
A debtor's creditworthiness is assumed to be impaired if there are objective indications that the debtor is in
financial difficulties, such as the disappearance of an active market for its products or impending insolvency.
The nominal amounts of trade accounts receivable considered as originated credit-impaired financial assets are
recognized using the risk-adjusted effective interest rate, which reflects the expected credit losses over the
original lifetime.
Credit risks
Credit risks are monitored on an ongoing basis. The risks arising from extending credit to customers and in the
course of other business relationships are also managed.
Merck analyzes all trade accounts receivable that are more than 90 days past due in order to establish whether
default exists. In addition, all other financial instruments that are more than 30 days past due are examined in
order to establish whether there has been a significant increase in the credit risk. Both methods are used to
examine whether there is objective evidence of an impairment requiring the recognition of additional loss
allowances.
Accounting and measurement policies
Credit risks
Impairment of trade accounts receivable and contract assets
Merck uses the simplified impairment model for trade accounts receivable and contract assets, pursuant to
which any credit losses expected to occur over the entire lifetime of an asset are taken into account. In order to
measure expected credit losses, the assets are grouped based on the existing credit risk structure and the
respective maturity structure.
The customer groups with comparable default risks to be considered are determined according to the specific
business sector and the place of business of the respective customers.
The expected credit loss rates used in the simplified impairment model are derived on the basis of past default
rates and current macroeconomic expectations. In doing so, country-specific ratings are taken into
consideration since many of Merck's customers depend directly or indirectly on the economic trends in the
country where their place of business is located (public and private healthcare systems, universities, and
research companies from within the pharmaceutical industry, as well as industries subsidized under
development plans, particularly in Asia). These country ratings are aggregated into three separate rating
groups. Under the impairment model, past default rates and country ratings are used as an approximation of
the defaults to be expected in the future.
When a country's rating changes, the historical default rates of the rating group to which the respective country
has been reallocated have to be applied accordingly, rather than the historical default rates of the previous
rating group.
If there is objective evidence that certain trade accounts receivable or contract assets are fully or partially
impaired, additional loss allowances are recognized to account for expected credit losses.
Credit risk for Merck means the risk of a financial loss if a customer or other contract partner is not able to
meet its contractual payment obligations. Merck is exposed to credit risks mainly due to existing trade accounts
receivable, other receivables, other debt instruments, derivatives and contract assets.
-363
-600
-147
-1
-4,888
-7
-63
-1,934
Trade accounts payable
2,545
-2,545
Liabilities to related parties
1,928
-37
-277
-938
-550
-35
-440
Other financial liabilities
393
-266
-127
Loans from third parties and other
financial debt
68
-5
-97
-20
-241
-164
-8
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
Capital Structure, Investments, and Financing Activities 321
The following liquidity risk analysis presents the undiscounted, contractually fixed cash flows such as
repayments and interest on financial liabilities and the net cash flows of derivatives with a negative fair value:
December 31, 2023
€ million
Subsequent measurement at
Cash flows
< 1 year
Cash flows
1-5 years
Cash flows
> 5 years
Carrying
-1,000
amount
Repayment
Interest
Repayment
Interest
Repayment
amortized cost
Bonds and commercial paper¹
7,802
Bank loans
283
Interest
of trade accounts receivable
-9
Subsequent measurement at fair
-256
-5,885
-15
-113
-137
-2,521
1 For the hybrid bonds, repayment is assumed at the earliest possible date.
December 31, 2022
Cash flows
<1 year
Cash flows
1-5 years
Cash flows
-370
>5 years
€ million
amount
Interest Repayment
Interest Repayment
Interest
Repayment
Subsequent measurement at
amortized cost
Bonds and commercial paper¹
8,726
Carrying
-47
-6,127
14,515
value through profit or loss
Contingent considerations
2
-2
Derivatives without a hedging
96
-79
-8
-10
relationship
-225
Derivatives with a hedging
Refund liabilities
Lease liabilities
5
-5
877
-877
515
-11
-120
-22
relationship
Trade and other receivables
of contract assets
2023
5
1
3
27
36
-9
-4
-2
-12
-35
-63
-3
-3
-26
-32
Credit risks from other receivables
Gross other receivables amounted to € 160 million as of December 31, 2023 (December 31, 2022:
€ 136 million). Other receivables of € 157 million were allocated to Level 1 of the three-level impairment model
(December 31, 2022: € 126 million), meaning that the credit loss expected in the next 12 months was used to
determine the amount of impairment when examining the individual credit risk of the respective contract
partner. In addition, non-current leasing liabilities amounting to € 3 million (December 31, 2022: € 2 million)
were allocated to Level 2 of the simplified impairment model. The next table shows the impairment losses
recognized for other receivables.
Credit risks from other financial assets
Merck limits credit risks from other financial assets by entering into contracts almost exclusively with contract
partners whose creditworthiness is good. The credit risk from financial contracts is monitored daily on the basis
of market information on credit default swap rates and regularly on the basis of rating information.
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Capital Structure, Investments, and Financing Activities 326
4,069
64
64
75
-18
-46
-78
Loss allowances based on expected credit losses for trade accounts receivable as of December 31, 2022, were
as follows:
December 31, 2022
€ million
Expected loss rate
Trade accounts receivable before loss
allowances
thereof: credit impaired
Impairment losses on financial assets developed as follows:
Loss allowances
accounts receivable
Not yet due
0.3%
0.8%
Up to 90 days Up to 180 days
past due
past due
3.2%
Up to 360 days
past due
19.6%
More than 360
days past due
54.6%
Total
3,394
472
thereof credit impaired trade
2023
€ million
Trade and other receivables
11
4
-97
-31
2
7
1
-20
-31
-50
-50
11
2
-74
-2
-3
-64
-51
11
-1
-99
Net
-7
-1
-63
scope of
consolidation
(including current leasing receivables)
thereof: Level 1/2
thereof: Level 3
thereof: POCI¹
Contract Assets
thereof: Level 1/2
thereof: Level 3
Other Receivables
(including non-current leasing receivables)
thereof: Level 1
Dec. 31
thereof: Level 2
Loss allowances for financial assets
1 Purchased or originated credit-impaired receivables.
2022
Net
Reclassifica-
tion within
Effects of
Changes in
Jan. 1 Additions
Utilizations
currency
levels translation
thereof: Level 3
-9
-97
-53
1,003
565
10
2,838
280
15
454
66
609
2
1,260
158
676
1,892
582
10
3,969
Life Science
Healthcare
Electronics
Other
Group
1,363
153
1,484
994
Group
Electronics
2022
-51
-6
-50
-7
-1
1
of debt instruments subsequently measured at fair value through other comprehensive income
The loss allowances and reversals recognized for trade accounts receivable as shown above applied entirely to
receivables resulting from contracts with customers. The increase in loss allowances for trade accounts
receivable was mainly attributable to a distribution partner in the Healthcare business sector in a mid-double-
digit million-euro amount.
Credit risks from trade accounts receivable
Other
The credit risk from trade accounts receivable is largely impacted by the specific circumstances of individual
customers. Merck also considers additional factors such as the general default risk in the respective industry
and country in which the customer operates.
Merck continuously reviews and monitors the open positions of all its customers in the corresponding countries
and takes steps to mitigate credit risks if necessary.
The tables below contain an overview of the credit risk by business sector and country rating as established by
leading rating agencies:
December 31, 2023
€ million
External rating of at least A- or comparable
External rating of at least BBB- or comparable
External rating lower than BBB- or comparable
Trade accounts receivable before loss
allowances
December 31, 2022
€ million
External rating of at least A- or comparable
External rating of at least BBB- or comparable
External rating lower than BBB- or comparable
Trade accounts receivable before loss
allowances
Life Science
Healthcare
The credit risk of customers is assessed using established credit management processes. This is done in
particular by analyzing the aging structure of trade accounts receivable.
of debt instruments subsequently measured at amortized cost
648
3,012
0.8%
Up to 90 days Up to 180 days Up to 360 days
past due
past due
past due
39.0%
More than 360
7.4%
days past due
72.4%
Total
3,342
432
67
55
0.4%
73
10
1
4
18
46
80
-15
-3
-5
-22
3,969
7
Not yet due
thereof credit impaired trade
302
17
471
60
521
4
585
1,575
1,817
669
accounts receivable
7
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Capital Structure, Investments, and Financing Activities 325
Goods were generally sold under retention of title so that a reimbursement claim existed in the event of default.
Other guarantees generally were not demanded. The scope of credit-insured receivables was immaterial for
Merck.
Loss allowances based on expected credit losses for trade accounts receivable as of December 31, 2023, were
as follows:
December 31, 2023
€ million
Expected loss rate
Trade accounts receivable before loss
allowances
thereof: credit impaired
Loss allowances
4,069
Trade accounts payable²
100.00
3.0
0.4
3.9
10.6
Germany
Group
thereof: Deloitte
GmbH
Wirtschafts-
prüfungs-
gesellschaft,
0.3
2023
Other services
Audits of financial statements
Other audit-related services
Tax consultancy services
€ million
The auditor of the consolidated financial statements changed to Deloitte GmbH Wirtschaftsprüfungsgesellschaft,
Germany, in fiscal 2023. The costs for the auditor of the consolidated financial statements were composed as
follows:
(47) Auditor's fees
338
Total
Consolidated Financial Statements Notes to the Consolidated Financial Statements Other Disclosures
11.0
The expenses for other audit-related services to Deloitte GmbH Wirtschaftsprüfungsgesellschaft primarily arose
for the audit of the non-financial statement and the sustainability report.
Germany
thereof:
Merck KGaA (%)
(%)
Registered office
Equity interest
I. Fully consolidated companies
4.2
Company
The shareholdings of Merck KGaA as of December 31, 2023, are presented below:
(48) List of shareholdings
Scope of Consolidation
339
Notes to the Consolidated Financial Statements Other Disclosures
Consolidated Financial Statements
Country
As in the previous year, no compensation was paid to former members of the Supervisory Board in fiscal 2023.
As in the previous year, the members of the Executive Board and the Supervisory Board did not receive any
advances or loans in fiscal 2023 from companies included in the consolidated financial statements. As in the
previous year, no contingent liabilities were entered into for the benefit of these persons in fiscal 2023.
Further individualized information and disclosures, as well as a presentation of the compensation system for the
members of the Executive Board and the Supervisory Board, can be found in the compensation report.
968
961
0.0
0.0
0.0
0.7
2.4
2.6
3.8
24.6
0.2
0.2
0.4
0.6
17.7
18.5
25.6
5.8
32.7
32.7
105
95
48
58
815
808
2022
2023
Total compensation granted in the fiscal year
Committee membership compensation
Meeting attendance fees
Fixed portion
€ thousand
Payments to former members of the Executive Board and their surviving dependents in accordance with
section 314 (1) no. 6 b) HGB were made as pension payments, as profit sharing, under the long-term incentive
plan and waiting allowance for a post-contractual non-competition clause. These payments amounted to
€ 14.4 million in fiscal 2023 (2022: € 21.7 million). Provisions for defined benefit pension commitments carried
by E. Merck KG amounted to € 123.8 million as of December 31, 2023 (December 31, 2022: € 123.1 million).
The compensation of the Supervisory Board in accordance with section 314 (1) no. 6 a) HGB and IAS 24.17 was
composed as follows:
The total compensation granted to members of the Executive Board as referred to by section 314 (1) no. 6 a)
HGB amounted to € 30.1 million in fiscal 2023 (2022: € 30.4 million). In addition to the short-term benefits
shown in the table above, this also includes compensation under the standalone long-term incentive plan for
the Executive Board, the structure of which is essentially as described in Note (33) "Provisions for employee
benefits", and other long-term benefits. On the basis of the long-term incentive plan, 57,164 virtual shares,
also referred to as Merck Share Units (MSU), were made potentially available in fiscal 2023 (2022: 43,436
MSU).
Parent
Germany
Germany
Merck KGaA
Merck Consumer Health Holding Germany GmbH
Germany
100.00
Darmstadt
100.00
100.00
Darmstadt
Darmstadt
Darmstadt
100.00
Darmstadt
100.00
Darmstadt
100.00
100.00
100.00
100.00
Germany
Darmstadt
Merck Financial Services GmbH
Germany
100.00
100.00
Darmstadt
Merck Export GmbH A)
Germany
100.00
Darmstadt
Merck Electronics KGaA A)
Germany
100.00
Darmstadt
Merck Display Trading GmbH A)
Darmstadt
6.3
100.00
100.00
Germany
100.00
Berlin
Biochrom GmbH A)
Germany
100.00
Chemitra GmbH A)
Darmstadt
Germany
100.00
Hamburg
company
Darmstadt
AmpTec GmbH A)
AZ Electronic Materials GmbH A)
Darmstadt
100.00
100.00
100.00
Darmstadt
Merck 12. Allgemeine Beteiligungs-GmbH A)
Merck 13. Allgemeine Beteiligungs-GmbH
Merck 15. Allgemeine Beteiligungs-GmbH
Merck 16. Allgemeine Beteiligungs-GmbH A)
Merck 20. Allgemeine Beteiligungs-GmbH A)
Merck 21. Allgemeine Beteiligungs-GmbH
Merck 24. Allgemeine Beteiligungs-GmbH A)
Merck Chemicals GmbH A)
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
100.00
Gernsheim
Emedia Export Company mbH
Germany
Darmstadt
6.3
2022
2023
Transactions were conducted with related parties as follows:
Related parties in respect of the Merck Group are E. Merck KG, Emanuel-Merck-Vermögens-KG and E. Merck
Beteiligungen KG. Furthermore, direct or indirect subsidiaries of Merck KGaA, associates of the Merck Group,
joint ventures of the Merck Group, as well as pension funds that are classified as defined benefit plans in
accordance with IAS 19 are also related parties within the meaning of IAS 24. Members of the Executive Board
and the Supervisory Board of Merck KGaA, the Executive Board and the Board of Partners of E. Merck KG as
well as close members of their families are also related parties, as are companies controlled or jointly controlled
by this group of persons.
Related party disclosures
Accounting and measurement policies
(45) Related party disclosures
Other Disclosures
Income
Consolidated Financial Statements Notes to the Consolidated Financial Statements Other Disclosures
1,050
1,431
676
604
326
548
336
Expenses
Receivables
Liabilities
1,118.8
826.5
0.0
0.1
4.0
11.3
1.9
2.3
E. Merck KG
Dec. 31, 2022 Dec. 31, 2023 Dec. 31, 2022
2022 Dec. 31, 2023
2023
2022
2023
€ million
48
E. Merck Beteiligungen KG
278
Dec. 31, 2023
1 Disposals due to liquidations are not included.
-19
-19
4
adjustment/restructuring
and full acquisition by
third parties
M Ventures Portfoliogesellschaften
M Ventures portfolio companies mainly include minority interests in listed and unlisted companies. The mandate
of M Ventures is to invest in innovative technologies and products.
Portfolio
10
10
11
Partial sale
third parties
17
10
(44) Other financial obligations
Other financial obligations comprised the following:
€ million
Other financial obligations were recognized at nominal value.
Obligations to acquire intangible assets
After more than 5 years
In 1-5 years
Within 1 year
€ million
The expected maturities of the obligations to acquire intangible assets were as follows:
Obligations to acquire intangible assets existed in particular owing to contingent considerations within the scope
of in-licensing and research and development collaborations. In these agreements, Merck has entered into an
obligation to make milestone payments once specific targets have been reached. In the unlikely event that all
of the milestones are achieved, Merck would be obligated to pay up to € 1,431 million (December 31, 2022:
€ 1,050 million) for the acquisition of intangible assets. The table above does not contain any other financial
obligations from possible future sales-based license fees and milestone payments.
1,330
1,050
280
483
1,914
Dec. 31, 2022
Dec. 31, 2023
1,431
Acquisition of property, plant, and equipment
Other financial obligations
Acquisition of intangible assets
Dec. 31, 2022
100.00
0.4
32.4
1 The owner of Engel-Apotheke, Darmstadt, is a member of the Supervisory Board of Merck KGaA.
0.4
0.2
1.8
2.9
0.6
As in the previous year, the liabilities of Group companies in respect of E. Merck KG primarily resulted from
mutual profit transfers between Merck KGaA and E. Merck KG as well as the profit transfer by Merck & Cie
KMG, Switzerland, to E. Merck KG. They included financial debt of € 94.7 million (December 31, 2022:
€ 258.0 million), subject to standard market interest rates. The financial debt in respect of E. Merck
Beteiligungen KG in the amount of € 1,100.0 million (December 31, 2022: € 660.0 million) were also subject to
standard market interest rates. There was no collateral or guarantees either in favor of or at the expense of
Merck.
0.6
0.2
Non-consolidated subsidiaries
companies
1.2
0.9
6.7
0.1
Loss allowances on receivables from non-consolidated subsidiaries recognized in the reporting period and
previous periods amounted to € 19.0 million in total as of December 31, 2023 (December 31, 2022:
€ 12.0 million). The expense from impairment losses recognized in 2023 amounted to € 7.0 million
(2022: € 0.0 million).
Information on pension funds that are classified as defined benefit plans in accordance with IAS 19 can be
found in Note (33) "Provisions for employee benefits".
Information on Executive Board and Supervisory Board compensation can be found in Note (46) "Executive
Board and Supervisory Board compensation". Above and beyond this, no material activities between
companies of the Merck Group and members of the Executive Board or the Supervisory Board of Merck KGaA,
the Executive Board or the Board of Partners of E. Merck KG, or members of their immediate families took place
in either fiscal 2023 or the previous year.
Total compensation pursuant to IAS 24.17
Share-based payments
Termination benefits
Other long-term benefits
Post-employment benefits
Short-term benefits
Additional benefits
Other compensation
Variable compensation
Fixed compensation
€ million
The compensation of the Executive Board of Merck KGaA is recognized by the general partner, E. Merck KG,
which is not included in these consolidated financial statements. It was composed as follows:
(46) Executive Board and Supervisory Board compensation
Consolidated Financial Statements Notes to the Consolidated Financial Statements Other Disclosures
337
0.0
0.5
0.0
0.4
0.0
0.0
0.0
0.0
0.2
0.0
Joint ventures
0.1
Engel-Apotheke, Darmstadt¹
660.1
1,100.1
0.0
0.0
0.6
0.1
2.3
3.2
0.0
0.3
Majority interest in non-controlled
0.0
0.0
19.5
0.0
0.0
0.1
0.9
Associated companies
0.0
0.0
0.5
0.6
0.0
0.0
100.00
Germany
Merck Financial Trading GmbH
France
100.00
Fontenay s/Bois
Merck Chimie S.A.S.
France
100.00
Merck Performance Materials S.A.S.
Lyon
France
100.00
Lyon
Gonnon S.A.S.
France
100.00
Merck Biodevelopment S.A.S.
Trosly Breuil
100.00
France
100.00
Molsheim
Millipore S.A.S.
France
100.00
Lyon
Merck Serono S.A.S.
France
100.00
Lyon
Merck Santé S.A.S.
France
99.86
Lyon
Merck S.A.
Espoo
France
Merck OY
100.00
100.00
Prague
Merck Life Science spol. s r.o.
Czech Republic
100.00
Zagreb
Czech Republic
Merck d.o.o.
100.00
Sofia
Merck Bulgaria EAD
Bulgaria
100.00
Hoeilaart
Croatia
Merck spol. s r.o.
Prague
100.00
Espoo
Merck Life Science OY
Finland
100.00
Tallinn
Merck Serono OÜ
Estonia
100.00
Soborg
Merck Life Science A/S
Denmark
100.00
Soborg
Merck A/S
Denmark
Finland
Merck NV/SA
Sigma-Aldrich Chimie S.a.r.l.
100.00
100.00
Dublin
Versum Materials Ireland Limited
Ireland
100.00
Arklow
Italy
Sigma-Aldrich Ireland Ltd.
100.00
Carrigtwohill
Millipore Cork Unlimited Company
Ireland
100.00
Dublin
Ireland
Istituto di Ricerche Biomediche Antoine Marxer RBM
S.p.A.
Footnotes follow at the end of the table.
100.00
Italy
Merck Life Science S.r.l.
Milan
100.00
Italy
Merck S.r.l.
Milan
100.00
Italy
Merck Serono S.p.A.
Rome
99.74
Italy
Versum Materials Italia S.r.l.
Milan
Merck Serono (Ireland) Ltd.
Saint Quentin
Ireland
Carrigtwohill
Maroussi
Merck Commercial Industrial Pharmaceutical Chemical
Single Member S.A.
Greece
Fallavier
100.00
Sigma-Aldrich Holding S.a.r.l.
100.00
France
Fallavier
100.00
Saint Quentin
Sigma-Aldrich Chimie SNC
France
Fallavier
Saint Quentin
Hungary
Merck Kft.
Budapest
Merck Millipore Ltd.
Ireland
100.00
Arklow
Merck Life Science Limited
Ireland
100.00
Carrigtwohill
Merck Finance Limited
Ireland
100.00
Budapest
Merck Life Science Kft.
Hungary
100.00
100.00
29
Belgium
Hoeilaart
Darmstadt
Merck Patent GmbH A)
Germany
100.00
100.00
Darmstadt
100.00
Merck LS RTU GmbH A)
100.00
Darmstadt
Merck Life Science KGaA A)
Germany
100.00
100.00
Germany
Germany
Merck Performance Materials GmbH
Wiesbaden
100.00
Hohenbrunn
Merck Schuchardt OHG
Germany
100.00
100.00
Darmstadt
Merck Real Estate GmbH A)
Germany
100.00
100.00
Darmstadt
Merck Performance Materials Holding GmbH
Germany
100.00
Darmstadt
Germany
Merck Life Science Holding GmbH
100.00
Darmstadt
Merck Healthcare Holding GmbH
Germany
100.00
100.00
Weiterstadt
100.00
Merck Healthcare Germany GmbH A)
100.00
Darmstadt
Merck Gernsheim Holding GmbH A)
Germany
100.00
Gernsheim
Germany
100.00
Germany
Merck Healthcare KGaA A)
Darmstadt
Merck Internationale Beteiligungen GmbH
Germany
100.00
100.00
Darmstadt
Merck International GmbH
Germany
100.00
100.00
Gernsheim
Merck Holding GmbH
Germany
100.00
Darmstadt
Germany
100.00
Merck Site Management GmbH A)
100.00
Other European
100.00
Darmstadt
Versum Materials Germany GmbH
Germany
100.00
countries
100.00
Sigma-Aldrich Verwaltungs GmbH
Germany
100.00
Steinheim
Sigma-Aldrich Logistik GmbH
Germany
Steinheim
Austria
Merck Chemicals and Life Science GesmbH
Vienna
Merck Life Science BV
Belgium
100.00
Hoeilaart
Merck Chemicals NV/SA
Belgium
100.00
Vienna
Sigma-Aldrich Handels GmbH
Austria
100.00
Vienna
Merck Gesellschaft mbH
Austria
100.00
100.00
Gernsheim
Steinheim
Germany
Footnotes follow at the end of the table.
Grundstücksverwaltungsgesellschaft mbH A)
100.00
100.00
Darmstadt
Germany
Consolidated Financial Statements. Notes to the Consolidated Financial Statements Other Disclosures
100.00
Germany
100.00
Gernsheim
Merck Surface Solutions GmbH A)
Germany
100.00
Merck Vierte Allgemeine Beteiligungsgesellschaft mbH Gernsheim
Merck Wohnungs- und
340
Equity interest
Country
100.00
Taufkirchen
Sigma-Aldrich Chemie Holding GmbH
Germany
100.00
Steinheim
Sigma-Aldrich Chemie GmbH
Germany
100.00
thereof:
Merck KGaA (%)
(%)
Registered office
Steinheim
Sigma-Aldrich Biochemie GmbH
Company
Germany
Sigma-Aldrich Grundstücks GmbH & Co. KG
group equity to
retained earnings
18
income
Non-
current
Current
notes
market
Consoli-
dated
quoted
values
Total
in the
market
Fair value
determined
using input
factors not
observable
in the
market
(Level 2)
factors
observable
Fair value
determined
using input
Fair value
determined
by official
prices and
(Level 3)
Fair value¹
Total
Cash and cash equivalents
4
122
36
Other debt instruments
receivables)
4,112
(Level 1)
25
25
receivable (excluding leasing
Trade accounts receivable and other
1,854
1,854
35
4,087
Carrying amount
cost
Subsequent measurement at amortized
37
Lease liabilities (measured in accordance
with IFRS 16)²
877
877
9
Refund liabilities
122
5
20
2
2
5
5
5
96
393
515
Total
Financial assets
€ million
December 31, 2022
The following table presents the carrying amounts and the fair values of the individual financial assets and
liabilities as of December 31, 2022, for each individual financial instrument class pursuant to IFRS 9:
Capital Structure, Investments, and Financing Activities 332
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
2 Measurements within the scope of IFRS 16 are exempted from the requirements of IFRS 13 (IFRS 13.6(b)).
1 The simplification option under IFRS 7.29(a) was used for disclosures of certain fair values. IFRS 7.29(d) explicitly does not require disclosure of the
fair value of lease liabilities.
10,136
22
2,747
7,367
14,515
9,387
5,129
126
Subsequent measurement at fair value
through other comprehensive income
Equity instruments
53
53
36,39
Derivatives with a hedging relationship
relationship
69
53
53
69
46
23
36, 39
Derivatives without a hedging
182
17
53
Finance lease receivables (to be
25
Trade accounts payable³
Subsequent measurement at amortized
cost
Financial liabilities
1,174
833
70
271
7,273
984
6,289
Total
measured in accordance with IFRS 16)²
7
2
5
93
38, 39
89
154
Debt instruments
receivable
22
22
22
22
36
25
516
415
102
516
516
36
Trade accounts receivable and other
80
1
81
28
Colleretto Giacosa
36
Other debt instruments
250
250
250
235
14
36
Contingent consideration
through profit or loss
Subsequent measurement at fair value
81
81
182
Derivatives with a hedging relationship
20
39
643
643
36
323
Other debt instruments
Trade and other receivables
207
Equity instruments
Subsequent measurement at fair value
204
4
201
36
Other debt instruments
through other comprehensive income
436
643
25
125
36
Contingent considerations
through profit or loss
Subsequent measurement at fair value
199
199
199
1
198
36
25
25
25
25
leasing receivables)
125
3,998
3,973
Fair value
determined
using input
market
quoted
Fair value
determined
by official
prices and
Fair value¹
Carrying amount
factors
observable
cost
Financial assets
€ million
December 31, 2023
The following table presents the carrying amounts and the fair values of the individual financial assets and
liabilities as of December 31, 2023, for each individual financial instrument class pursuant to IFRS 9:
Capital Structure, Investments, and Financing Activities 331
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
Subsequent measurement at amortized
in the
market
(Level 2)
Fair value
determined
using input
factors not
observable
in the
market
25
Trade and other receivables (excluding
1,982
1,982
35
Cash and cash equivalents
(Level 1)
Total
values
Non-
current
Current
notes
Consoli-
dated
Total
(Level 3)
25
Transfer of the
cumulative gains (+)
or losses (-) within
125
Other debt instruments
2,665
7,367
9,349
8,846
503
37
10,032
Financial debt
2,545
30
Trade payables and other liabilities
cost
Subsequent measurement at amortized
Financial liabilities
2,545
Other financial liabilities
38
998
relationship
77
96
18
79
37, 38,
Derivatives without a hedging
2
2
38
Contingent considerations
through profit or loss
Subsequent measurement at fair value
1,125
127
1,300
125
731
505
Derivatives with a hedging relationship
relationship
77
47
30
36, 39
36, 39
Derivatives without a hedging
95
98
194
161
33
36
194
37
37
WN
7,493
1,008
6,485
Total
accordance with IFRS 16)²
9
3
6
25
Lease receivables (measured in
37
37
77
50
27
65
2,499
30
Financial debt
-23
-4
22
415
53
250
806
93
Derivatives
without a
hedging
relationship
other Contingent
receivables consideration
Trade and
Equity
instruments
Derivatives
without a
hedging
relationship
Contingent
consideration
Total
21
59
72
thereof: attributable to
operating result)
statement (other
69
1
2
56
10
consolidated income
recognized in the
Gains (+)/losses (-)
Fair value changes
Level 1/Level 2
Transfers into Level 3 from
152
instruments
assets/liabilities held as
Additions
Net carrying amounts as
Net carrying amounts as
7
-7
Other
into Level 1/Level 2
-11
93
I
I
Transfers out of Level 3
-131
10
-68
2,499
-11
250
53
415
€ million
Other debt
Subsequent measurement
at fair value through profit
or loss
Subsequent measurement
at fair value through other
comprehensive income
Subsequent measurement at fair value
through profit or loss
Financial liabilities
Financial assets
2023
The changes in financial assets and liabilities for each of the individual classes of financial instruments allocated
to Level 3 and measured at fair value were as follows in fiscal 2023:
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Capital Structure, Investments, and Financing Activities 334
of Dec. 31, 2022
806
-23
-4
22
of Jan. 1, 2023
-4
10
1
-307
-5
25
436
50
125
-3
95
-51
-11
Other
into Level 1/Level 2
I
-3
Net carrying amounts as
-62
-20
710
The cumulative gain
(+) or loss (-) on
disposal recognized in
other comprehensive
adjustment/restructuring
and full acquisition by
Portfolio
2022¹
Moon Lake Immunotherapeutics Ltd.,
Cayman Islands
M Ventures Portfoliogesellschaften
of derecognition
Reasons for the disposal
Fair value on the date
20231
€ million
The following equity instruments measured at fair value through other comprehensive income were disposed of
in 2023 and 2022:
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Capital Structure, Investments, and Financing Activities 335
Disposals during the reporting period related in particular to payments received in connection with the
contingent consideration arising from the sale of the biosimilars business to Fresenius SE & Co. KGaA, Bad
Homburg vor der Höhe, as well as trade accounts receivable under factoring agreements. The reclassification of
the fair value of Calypso Biotech B.V., Netherlands, to assets held for sale is included in the "Other" line item.
The gains and losses from Level 3 assets recognized in other comprehensive income were reported in the
consolidated statement of comprehensive income under the item "Fair value adjustments".
of Dec. 31, 2023
Transfers out of Level 3
16
3
-69
5
assets/liabilities held as
of the balance sheet
date
thereof: attributable to
income and expenses)
statement (financial
14
10
10
consolidated income
recognized in the
Gains (+)/losses (-)
date
of the balance sheet
16
5
I
14
Gains (+)/losses (-)
-29
-2
-190
-21
Disposals
difference
I
-1
-3
-2
Currency translation
comprehensive income
47
47
recognized in other
2
-46
-1
Disposals
1,248
7,989
9,342 15,134
5,792
Total
in accordance with IFRS 16)²
27
491
125
37
Finance lease liabilities (to be measured
912
912
9
366
Refund liabilities
9,265
2 Measurements within the scope of IFRS 16 are exempted from the requirements of IFRS 13 (IFRS 13.6(b)).
-21
instruments
€ million
Other debt
Subsequent measurement
at fair value through profit
or loss
Subsequent measurement
at fair value through other
comprehensive income
1 The simplification option under IFRS 7.29(a) was used for disclosures of certain fair values. IFRS 7.29(d) explicitly does not require disclosure of the
fair value of lease liabilities.
Subsequent measurement at fair value
through profit or loss
Financial assets
2022
The changes in financial assets and liabilities for each of the individual classes of financial instruments allocated
to Level 3 and measured at fair value were as follows in the previous year:
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Capital Structure, Investments, and Financing Activities 333
4 Previous year's figures have been adjusted, see Note (2) "Reporting Principles".
3 Previous year's figures have been adjusted, see Note (6) "Acquisitions and Divestments".
Financial liabilities
30
30
30
through profit or loss
Subsequent measurement at fair value
1,237
118
1,119
38
Contingent consideration
Other financial liabilities4
1,188
7,989
9,907
8,834
1,073
37
9,177
38
4
4
30
38, 39
Derivatives with a hedging relationship
39
relationship
53
23
30
53
19
34
37, 38,
Derivatives without a hedging
4
4
Derivatives
without a
hedging
relationship
Trade and
Contingent
consideration
other Contingent
receivables consideration
income and expenses)
statement (financial
16
-1
1
10
thereof: attributable to
-4
recognized in the
Gains (+)/losses (-)
date
of the balance sheet
44
-13
consolidated income
assets/liabilities held as
-4
9
difference
-3
I
-1
2
2
Currency translation
comprehensive income
-11
-11
recognized in other
Gains (+)/losses (-)
of the balance sheet
date
6
1
Equity
instruments
30
4
17
7
27
Additions
of Jan. 1, 2022
689
-10
-39
20
345
24
271
78
Net carrying amounts as
Total
Derivatives
without a
hedging
relationship
70
184
87
Level 1/Level 2
assets/liabilities held as
thereof: attributable to
operating result)
statement (other
Transfers into Level 3 from
-13
30
79
15
17
consolidated income
recognized in the
Gains (+)/losses (-)
Fair value changes
30
Syntropy Technologies LLC
In our opinion, on the basis of the knowledge obtained in the audit,
Pursuant to section 322 (3) sentence 1 HGB, we declare that our audit has not led to any reservations relating
to the legal compliance of the consolidated financial statements and of the combined management report.
the accompanying combined management report as a whole provides an appropriate view of the Group's
position. In all material respects, this combined management report is consistent with the consolidated
financial statements, complies with German legal requirements and appropriately presents the
opportunities and risks of future development. Our audit opinion on the combined management report does
not cover the content of the above-mentioned statements and disclosures extraneous to the combined
management report.
the accompanying consolidated financial statements comply, in all material respects, with the IFRS as
adopted by the EU and the additional requirements of German commercial law pursuant to section 315e (1)
HGB and, in compliance with these requirements, give a true and fair view of the assets, liabilities and
financial position of the Group as at December 31, 2023, and of its financial performance for the financial
year from January 1 to December 31, 2023, and
We have audited the consolidated financial statements of Merck Kommanditgesellschaft auf Aktien,
Darmstadt, Germany, and its subsidiaries (the Group) which comprise the consolidated balance sheet as at
December 31, 2023, the consolidated income statement, the consolidated statement of comprehensive
income, the consolidated statement of changes in net equity and the consolidated cash flow statement for
the financial year from January 1 to December 31, 2023, and the notes to the consolidated financial
statements, including a summary of significant accounting policies. In addition, we have audited the
combined management report for the parent and the Group of Merck Kommanditgesellschaft auf Aktien,
Darmstadt, Germany, for the financial year from January 1 to December 31, 2023. In accordance with the
German legal requirements, we have not audited the content of the combined non-financial statement
pursuant to sections 289b and 315b German Commercial Code (HGB) included in the section "Non-financial
statement" of the combined management report, nor the corporate governance statement pursuant to
sections 289f and 315d HGB referred to in the combined management report. Moreover, we have not audited
the content of the disclosures described as extraneous to the combined management report.
Wilmington
Report on the Audit of the Consolidated
Financial Statements and of the Combined
Management Report
United States
Aldrich-APL, LLC
Urbana
100.00
Riga
BioControl Systems, Inc.
100.00
Wilmington
United States
BioReliance Corporation
Rockville
100.00
United States
Cell Marque Corporation
100.00
St. Louis
Aldrich Chemical Foreign Holding LLC
United States
Canada
Canada
EMD Crop BioScience Canada Inc.
EMD Inc.
Toronto
100.00
Mississauga
100.00
Canada
MilliporeSigma Canada Ltd.
Oakville
100.00
United States
Aldrich Chemical Co. LLC
Milwaukee
100.00
Rocklin
North America
100.00
Cerilliant Corporation
EMD Group Holding, Inc.
Wilmington
100.00
United States
United States
EMD Holding Corp.
United States
EMD Invest LLC
100.00
Wilmington
100.00
United States
EMD Millipore Corporation
Burlington
Rockland
100.00
Wilmington
EMD Finance LLC
Round Rock
100.00
United States
Electron Transfer Technologies, Inc.
West Trenton
100.00
United States
EMD Accounting Solutions & Services America, Inc.
Rockland
100.00
United States
EMD Digital Inc.
Burlington
100.00
United States
United States
100.00
100.00
Versum Materials UK Limited
(%)
Merck KGaA (%)
100.00
100.00
Istanbul
100.00
Registered office
Buchs
Aberdeen
Gillingham
100.00
United Kingdom
Merck Holding Ltd.
Feltham
100.00
100.00
Buchs
Epichem Group Limited
BioReliance Limited
Footnotes follow at the end of the table.
Consolidated Financial Statements. Notes to the Consolidated Financial Statements Other Disclosures
342
Equity interest
thereof:
Country
Switzerland
Türkiye
United Kingdom
United Kingdom
Switzerland
Company
Sigma-Aldrich International GmbH
Sigma-Aldrich Production GmbH
Merck Ilac, Ecza Ve Kimya Ticaret Anonim Sirketi
United Kingdom
Feltham
Merck Investments Ltd.
100.00
100.00
United Kingdom
SAFC Biosciences Limited
Gillingham
100.00
United Kingdom
Feltham
SAFC Hitech Limited
100.00
United Kingdom
Sigma-Aldrich Company Limited
Gillingham
100.00
United Kingdom
Gillingham
100.00
Feltham
Millipore (U.K.) Limited
United Kingdom
Merck Life Science UK Limited
Gillingham
100.00
United Kingdom
Merck Performance Materials Limited
Feltham
100.00
United Kingdom
Merck Serono Europe Limited
Feltham
100.00
United Kingdom
United Kingdom
Merck Serono Ltd.
Feltham
100.00
United States
Wilmington
Registered office
(%)
Merck KGaA (%)
St. Louis
100.00
St. Louis
Wilmington
100.00
100.00
Laramie
100.00
Madison
100.00
The Woodlands
100.00
St. Louis
Sigma-Genosys of Texas LLC
Sigma-Aldrich, Inc.
Equity interest
thereof:
Country
United States
United States
United States
United States
United States
United States
United States
Company
Sigma-Aldrich Corporation
Sigma-Aldrich Manufacturing LLC
Sigma-Aldrich Missouri Insurance Company
Sigma-Aldrich Research Biochemicals, Inc.
Sigma-Aldrich RTC, Inc.
100.00
343
United States
Bellefonte
100.00
Australia
Australia
Australia
Australia
China
Wilmington
China
China
China
China
Asia-Pacific (APAC)
Versum Materials, Inc.
Merck Healthcare Pty. Ltd.
China
United States
100.00
Wilmington
100.00
United States
Versum Materials Manufacturing Company, LLC
Wilmington
100.00
United States
Versum Materials Technology LLC
Wilmington
100.00
United States
Versum Materials US International, Inc.
Wilmington
100.00
United States
Versum Materials US, LLC
Supelco, Inc.
EMD Performance Materials Corp.
Consolidated Financial Statements. Notes to the Consolidated Financial Statements Other Disclosures
100.00
United States
J.C. Schumacher Company
United States
United States
United States
Ormet Circuits, Inc.
United States
United States
FloDesign Sonics, Inc.
Millipore Asia Ltd.
MilliporeSigma Distribution LLC
Research Organics, LLC
Wilmington
100.00
Wilmington
Intermolecular, Inc.
United States
100.00
Wilmington
100.00
United States
EMD Serono Holding, Inc.
Rockland
100.00
United States
EMD Serono Research & Development Institute, Inc.
Billerica
100.00
United States
EMD Serono, Inc.
Rockland
100.00
United States
Exelead Inc.
100.00
Footnotes follow at the end of the table.
Glendale
Wilmington
Serono Laboratories, Inc.
Rockland
100.00
United States
Sigma Chemical Foreign Holding LLC
St. Louis
United States
100.00
Sigma Redevelopment Corporation
St. Louis
100.00
United States
Sigma-Aldrich Co. LLC
St. Louis
United States
100.00
Madison
100.00
100.00
Wilmington
100.00
San Diego
100.00
Cleveland
100.00
United States
SAFC Biosciences, Inc.
Lenexa
100.00
United States
United States
SAFC Carlsbad, Inc.
SAFC, Inc.
Carlsbad
100.00
Buchs
Sigma-Aldrich Chemie GmbH
Switzerland
100.00
Netherlands
Versum Materials International B.V.
Amsterdam
100.00
Netherlands
Amsterdam
Versum Materials Netherlands B.V.
100.00
Netherlands
Netherlands
Versum Materials Netherlands International B.V.
Versum Materials Pacific B.V.
Amsterdam
100.00
Amsterdam
Versum Materials Holdings Nederland B.V.
Netherlands
100.00
Netherlands
Merck Ventures B.V.
Amsterdam
100.00
Netherlands
Serono Tri Holdings B.V.
Schiphol-Rijk
100.00
Netherlands
Sigma-Aldrich B.V.
Amsterdam
100.00
Netherlands
Versum Materials Asia B.V.
Amsterdam
Amsterdam
100.00
100.00
Merck Life Science AS
Merck Romania S.R.L.
Bucharest
100.00
Russia
Russia
Merck Life Science LLC
Romania
Merck LLC
100.00
Moscow
100.00
Serbia
Merck d.o.o. Beograd
Belgrade
Moscow
100.00
Algés
Merck, S.A.
Oslo
100.00
Poland
Merck Business Solutions Europe Sp. z o.o.
Wroclaw
100.00
Poland
Merck Life Science Sp. z o.o.
Poznan
100.00
Poland
Merck Sp. z o.o.
Warsaw
100.00
Portugal
Norway
100.00
Amsterdam
Netherlands
Luxembourg
Merck Invest SCS
Luxembourg
100.00
Luxembourg
Merck Re S.A.
100.00
Luxembourg
100.00
Luxembourg
Millipore International Holdings S.à r.l.
Luxembourg
100.00
Luxembourg
100.00
Luxembourg
Merck Holding S.à r.l.
Luxembourg
100.00
Vilnius
100.00
Luxembourg
Merck Chemicals Holding S.à r.l.
Luxembourg
100.00
Luxembourg
Merck Finance S.à r.l.
Luxembourg
100.00
Luxembourg
Merck Finanz S.à.r.l.
Luxembourg
100.00
Sigma-Aldrich Global S.a.r.l.
Merck Life Science N.V.
Luxembourg
Luxembourg
Schiphol-Rijk
100.00
Netherlands
Merck Chemicals B.V.
Amsterdam
100.00
Merck B.V.
Netherlands
Amsterdam
100.00
Netherlands
Merck Holding Netherlands B.V.
Schiphol-Rijk
100.00
Merck Europe B.V.
Netherlands
100.00
100.00
Sigma-Aldrich S.a.r.l.
Luxembourg
100.00
Malta
Merck Capital Holding Limited
Pietà
100.00
50.29
Malta
Netherlands
Merck Capital Limited
eyrise B.V.
Pietà
100.00
Veldhoven
100.00
Slovakia
Merck Life Science spol. s r.o.
Bratislava
III. Companies measured at fair value through other comprehensive income in accordance with IFRS 9 due to immateriality and
other equity investments
thereof:
Merck KGaA
(%)
Equity
interest (%)
Registered office
Company
Country
Germany
346
Footnotes follow at the end of the table.
50.00
Audit Opinions
Merck AB
Solna
100.00
Consolidated Financial Statements Notes to the Consolidated Financial Statements Other Disclosures
Germany
BEEoled GmbH
Dresden
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
21.76
Sweden
Germany
Merck Life Science AB
100.00
Eysins
100.00
Switzerland
Merck Serono SA
Aubonne
100.00
Merck Performance Materials (Suisse) SA
Switzerland
Eysins
100.00
Switzerland
Sigma-Aldrich (Switzerland) Holding AG
Buchs
100.00
SeroMer Holding SA
Switzerland
100.00
Zug
Switzerland
Ares Trading SA
Aubonne
100.00
Switzerland
Chord Therapeutics SA
Eysins
100.00
Switzerland
Merck & Cie KmG
Altdorf
51.63
51.63
Switzerland
Merck (Schweiz) AG
Solna
Germany
Germany
Germany
Madrid
(%)
Registered office
Merck Serono, UAB
Merck Serono SIA
Company
Merck, S.L.U.
Lithuania
Country
Equity interest
341
Consolidated Financial Statements. Notes to the Consolidated Financial Statements Other Disclosures
100.00
Darmstadt
Latvia
Spain
100.00
Madrid
100.00
Slovakia
Merck spol. s r.o.
Bratislava
100.00
Slovenia
Merck d.o.o.
Ljubljana
100.00
Spain
Merck Chemicals and Life Science S.A.U.
Madrid
100.00
Spain
Merck Life Science S.L.U.
100.00
100.00
Darmstadt
100.00
100.00
Darmstadt
100.00
100.00
Darmstadt
100.00
100.00
Darmstadt
20.00
100.00
Sweden
20.00
Gernsheim
GreenTech Accelerator Gernsheim GmbH
Merck 25. Allgemeine Beteiligungs-GmbH
Merck 26. Allgemeine Beteiligungs-GmbH
Merck 27. Allgemeine Beteiligungs-GmbH
Merck 28. Allgemeine Beteiligungs-GmbH
Merck 29. Allgemeine Beteiligungs-GmbH
Merck 37. Allgemeine Beteiligungs-GmbH
Merck 38. Allgemeine Beteiligungs-GmbH
Merck 39. Allgemeine Beteiligungs-GmbH
Merck 40. Allgemeine Beteiligungs-GmbH
Merck 41. Allgemeine Beteiligungs-GmbH
Merck 42. Allgemeine Beteiligungs-GmbH
Merck 43. Allgemeine Beteiligungs-GmbH
Merck 44. Allgemeine Beteiligungs-GmbH
Merck 45. Allgemeine Beteiligungs-GmbH
Merck 46. Allgemeine Beteiligungs-GmbH
Merck 47. Allgemeine Beteiligungs-GmbH
Merck 48. Allgemeine Beteiligungs-GmbH
Merck 49. Allgemeine Beteiligungs-GmbH
Germany
100.00
Merck Pty. Ltd.
Darmstadt
100.00
100.00
Darmstadt
100.00
100.00
Darmstadt
100.00
100.00
Darmstadt
100.00
Darmstadt
100.00
Darmstadt
100.00
100.00
Darmstadt
100.00
Sigma-Aldrich Oceania Pty. Ltd.
United States
Merck Chemicals (Shanghai) Co., Ltd.
100.00
Darmstadt
100.00
100.00
Darmstadt
100.00
100.00
100.00
100.00
100.00
Darmstadt
100.00
100.00
Darmstadt
Darmstadt
Darmstadt
100.00
United States
100.00
United Arab
Merck Serono Middle East FZ-Ltd.
Dubai
100.00
Emirates
II. Companies accounted for using the equity method
Other European
countries
United Kingdom
MM Domain Holdco Limited
London
50.00
50.00
North America
100.00
Tunis
100.00
Belgium
32.41
Netherlands
Russia
Switzerland
Switzerland
United Kingdom
Kivu BioScience B.V.
Amsterdam
Naarden
Chemical Trade Limited LLC
Moscow
100.00
Asceneuron SA
Lausanne
21.54
21.66
27.49
Amsterdam
21.69
ReWind Therapeutics NV
Leuven-Heverlee
25.72
France
France
France
Netherlands
Netherlands
MERCK 8ème S.A.S.
MERCK Holding S.A.S.
Scipio Bioscience S.A.S.
Calypso Biotech B.V.
iOnctura B.V.
Lyon
Lyon
100.00
100.00
Montrouge
Other European countries
CAM AG Chemie-Erzeugnisse und
Merck SARL
100.00
Merck Ltd.
Cairo
100.00
Israel
Inter-Lab Ltd.
Yavne
Egypt
100.00
InterPharm Laboratories Ltd.
Yavne
100.00
Israel
Merck Serono Ltd.
Herzliya Pituach
Israel
Africa (MEA)
Merck KGaA (%)
(%)
Lima
100.00
Uruguay
Ares Trading Uruguay S.A.
Montevideo
100.00
Footnotes follow at the end of the table.
Consolidated Financial Statements. Notes to the Consolidated Financial Statements Other Disclosures
345
Country
Middle East and
Company
Equity interest
thereof:
Registered office
100.00
Tunisia
Israel
Yavne
MERCK Limited
Riyadh
100.00
South Africa
Merck (Pty) Ltd.
Modderfontein
Saudi Arabia
100.00
Merck Life Science (Pty) Ltd.
Modderfontein
100.00
Tunisia
Merck Promotion SARL
Tunis
South Africa
100.00
Nairobi
Merck Healthcare and Life Science Limited
90.91
Israel
QLight Nanotech Ltd.
Sigma-Aldrich Pty. Ltd.
Jerusalem
100.00
Israel
Sigma-Aldrich Israel Ltd.
Rehovot
100.00
Israel
Versum Materials Israel Ltd.
Tel Aviv
100.00
Kenya
PMatX Ltd.
Muttenz
39.11
Adsorptionstechnik AG
Santo Domingo
100.00
Wilaya de Tipiza
20.00
Lachish Darom
26.92
Representaciones MEPRO S.A.
Yavne
Lagos
100.00
thereof:
Merck KGaA
(%)
Darmstadt
100.00
100.00
98.37
Merck S.A.
Venezuela
Venezuela
Dominican Republic
Middle East and Africa (MEA)
Algeria
Israel
Israel
Nigeria
Merck Dominicana, S.R.L.
Novapharm Production SARL
PxE Computational Imaging Ltd.
Sentaur Bio Ltd.
Merck Pharmaceutical and Life Sciences
Ltd.
IV. Majority interest in non-controlled companies
Germany
Germany
Merck Foundation gGmbH
Latin America
Caracas
Caracas
Latin America
A) Companies opting for exemption as provided for by section 264 (3) and section 264b of the German Commercial Code.
B) Fully-consolidated due to majority of voting rights.
D) This is an affiliate within the meaning of IFRS 11 (joint activity).
To the best of our knowledge, and in accordance with the applicable reporting principles, the consolidated
financial statements of the Merck Group give a true and fair view of the assets, liabilities, financial position, and
profit or loss of the Group. The combined management report includes a fair review of the development and
performance of the business and the position of the Group, together with a description of the material
opportunities and risks associated with the expected development of the Group.
Darmstadt, February 14, 2024
Belén Garijo
Bohum
Kai Beckmann
Peter Guenter
Responsibility statement
M. Henizel
Mikado
Helene von Roeder
350
Other Information Reproduction of the Independent Auditor's Report
Reproduction of the
Independent Auditor's
Report
To Merck Kommanditgesellschaft auf Aktien, Darmstadt, Germany
Matthias Heinzel
349
Other Information Responsibility Statement
363 Financial Calendar
Darmstadt, February 14, 2024
Belén Garijo
1Bchmmmm
Kai Beckmann
Peter Guenter
M. Heinzel
Matthias Heinzel
Indaco
Helene von Roeder
100.00
100.00
other information
349 Responsibility Statement
350 Independent Auditor's Report
362 Business Development 2019-2023
C) Closed-end funds classified as debt instruments in accordance with IFRS 9.
100.00
Singapore
35.00
Gillingham
100.00
Oxford
23.80
United States
United States
35.40
North America
Canada
United States
United States
Future Fertility Inc.
Actithera Inc.
EMD Biotech LLC
ImmuneBridge Inc.
Indi Molecular, Inc.
MemryX Inc.
Toronto
21.65
Dover
50.00
United States
Dundee
100.00
Feltham
Macrophage Pharma Limited
London
22.21
United Kingdom
Merck Cross Border Trustees Ltd.
Feltham
100.00
United Kingdom
Merck Ltd.
Feltham
100.00
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Merck Pension Trustees Ltd.
Outrun Therapeutics Limited
Sigma Chemical Co. Ltd.
Theolytics Ltd.
Wilmington
100.00
Wilmington
25.43
Asia-Pacific (APAC)
China
Japan
Singapore
Company
Prolog Healthy Living Fund II, L.P. C)
Prolog Healthy Living Fund, L.P. C)
Surface Solutions, LLC
Registered office
St. Louis
St. Louis
Wilmington
Equity
interest (%)
44.50
35.61
100.00
Merck Testing (Shanghai) Co., Ltd.
Resonac Versum Materials Co. LTD D)
Merck Life Science Testing Services Pte.
Ltd.
Shanghai
100.00
Kawasaki
United States
Merck Peruana S.A.
United States
Country
Wilmington
32.16
Ann Arbor
20.67
United States
Pictor Labs, Inc.
Los Angeles
23.55
United States
Polaris Electro-Optics, Inc
Wilmington
24.99
Footnotes follow at the end of the table.
Consolidated Financial Statements. Notes to the Consolidated Financial Statements Other Disclosures
347
United States
Peru
thereof:
Merck KGaA (%)
Panama City
Merck Ltd.
Philippines
Philippines
New Zealand
New Zealand
100.00
Kuala Lumpur
Auckland
100.00
100.00
Brazil
100.00
Petaling Jaya
100.00
Tokyo
Versum Materials Malaysia Sdn Bhd
100.00
Sigma-Aldrich New Zealand Co.
Auckland
100.00
Seoul
Merck Electronic Materials Ltd.
Merck Ltd.
Republic of Korea
Republic of Korea
Republic of Korea
Republic of Korea
Republic of Korea
Republic of Korea
Republic of Korea
Republic of Korea
Republic of Korea
100.00
Eumseong
M Chemicals Inc.
Republic of Korea
100.00
Taguig
Merck Inc.
99.99
Taguig
Merck Business Solutions Asia Inc.
100.00
thereof:
Merck KGaA (%)
Seoul
(%)
Sigma-Aldrich (M) Sdn Bhd
Japan
100.00
Tokyo
Merck Ltd.
Japan
100.00
Merck Performance Materials G.K.
Tokyo
Japan
100.00
Tokyo
Merck Electronics Ltd.
Japan
100.00
Merck Holdings G.K.
Tokyo
100.00
Japan
Versum Materials Japan Inc.
Company
Malaysia
Malaysia
Merck Sdn Bhd
Malaysia
Country
Japan
Equity interest
344
Notes to the Consolidated Financial Statements Other Disclosures
Consolidated Financial Statements.
Footnotes follow at the end of the table.
100.00
Tokyo
Sigma-Aldrich Japan G.K.
Registered office
Tokyo
99.99
Versum Materials ADM Korea Inc.
Versum Materials HYT Inc.
Versum Materials Korea Inc.
Versum Materials PM Korea Inc.
Merck Healthcare Vietnam Limited
Merck Vietnam Company Limited
Merck S.A.
Versum Materials Taiwan Co., Ltd.
Merck Ltd. B)
Taipei
74.00
Bangkok
Argentina
45.11
100.00
Ho Chi Minh City
100.00
Buenos Aires
100.00
Argentina
Ho Chi Minh City
Latin America
Vietnam
Vietnam
100.00
Versum Materials Singapore Pte. Ltd.
Singapore
100.00
Merck Ltd.
Taipei
100.00
Taiwan
Taiwan
Merck Performance Materials Ltd.
SAFC Hitech Taiwan Co., Ltd.
Taipei
100.00
Kaohsiung
100.00
Taiwan
Thailand
Brazil
Merck Performance Materials Ltd.
Sigma-Aldrich Korea Ltd.
Sigma-Aldrich de Argentina S.R.L.
Merck S.A.
100.00
Pyeongtaek-shi
Versum Materials SPC Korea Ltd.
100.00
Siheung-Si
100.00
Siheung-si
100.00
100.00
100.00
Ansan-si
100.00
Seoul
100.00
Pyeongtaek-shi
Ansan-si
Singapore
Merck Performance Materials Pte. Ltd.
Singapore
Rio de Janeiro
Singapore
Taiwan
100.00
Singapore
Versum Materials Singapore International Pte. Ltd.
Singapore
100.00
Singapore
Sigma-Aldrich Pte. Ltd.
Singapore
100.00
Singapore
Merck Pte. Ltd.
Singapore
100.00
Buenos Aires
Merck Biopharma Co., Ltd.
Petaling Jaya
86.65
Macquarie Park
100.00
Macquarie Park
100.00
Bayswater
100.00
100.00
Macquarie Park
Suzhou
Merck Innovation Hub (Guangdong) Co., Ltd.
Merck Display Materials (Shanghai) Co., Ltd.
Merck Electronic Materials (Suzhou) Ltd.
Merck Electronics (Zhangjiagang) Co., Ltd.
Merck Holding (China) Co., Ltd.
Sigma-Aldrich Brasil Ltda.
Japan
Barueri
Suzhou
Shanghai
Shanghai
100.00
100.00
Nantong
Merck Life Science Technologies (Nantong) Co., Ltd.
Merck Ltd.
China
China
100.00
Hong Kong
Merck Life Science Ltd.
China
100.00
Guangzhou
100.00
Shanghai
100.00
100.00
100.00
Hong Kong
Chile
Santiago de Chile
Panama
Merck, S.A.
Panama
Merck Biopharma Distribution S.A. de C.V.
Merck, S.A. de C.V.
Sigma-Aldrich Quimica, S. de R.L. de C.V.
Mesofarma Corporation
Mexico
Mexico City
Mexico City
100.00
Toluca
100.00
Panama City
100.00
100.00
Mexico
Mexico
100.00
100.00
Chile
Sigma-Aldrich Quimica Ltda.
Santiago de Chile
100.00
Colombia
Merck S.A.
Bogota
100.00
Ecuador
Guatemala
Merck C.A.
Quito
100.00
Merck, S.A.
Guatemala City
Merck S.A.
100.00
100.00
China
Merck Life Science Pvt. Ltd.
India
100.00
Shanghai
Versum Materials (Shanghai) Co., Ltd.
China
100.00
Mumbai
Dalian
China
Ltd.
100.00
Wuxi
China
Sigma-Aldrich (Wuxi) Life Science & Technology Co.,
China
Versum Materials (Dalian) Co., Ltd.
100.00
India
Merck Performance Materials Pvt. Ltd.
Jakarta
P.T. Merck Tbk.
Indonesia
100.00
Jakarta
P.T. Merck Chemicals and Life Sciences
Indonesia
100.00
Bangalore
Sigma-Aldrich Chemicals Private Limited
India
100.00
Mumbai
Merck Specialities Pvt. Ltd.
India
100.00
Mumbai
Shanghai
Sigma-Aldrich (Shanghai) Trading Co., Ltd.
100.00
100.00
China
China
100.00
Beijing
100.00
Beijing
Merck Serono (Beijing) Pharmaceutical R&D Co., Ltd.
Merck Serono Co., Ltd.
China
China
Hong Kong
Beijing
Merck Serono (Beijing) Pharmaceutical Distribution
Co., Ltd.
China
100.00
Nantong
100.00
Nantong
Merck Pharmaceutical Distribution (Jiangsu) Co., Ltd.
Merck Pharmaceutical Manufacturing (Jiangsu) Co.,
Ltd.
China
China
100.00
Merck Testing and Certification (Shanghai) Co., Ltd.
SAFC Hitech (Shanghai) Co., Ltd.
Hong Kong
Shanghai
Shanghai
Merck Performance Materials Hong Kong Ltd.
Merck Pharmaceutical (HK) Ltd.
100.00
100.00
100.00
China
Management Report
the remuneration report pursuant to section 162 German Stock Corporation Act (AktG),
the combined consolidated non-financial statement pursuant to sections 289b and 315b HGB included in
the section "Non-financial statement" of the combined management report,
the corporate governance statement pursuant to sections 289f and 315d HGB referred to in the combined
management report,
the other content of the combined management report described as extraneous to the combined
management report,
The executive directors are responsible for the preparation of the consolidated financial statements that comply,
in all material respects, with IFRS as adopted by the EU and the additional requirements of German commercial
law pursuant to section 315e (1) HGB, and that the consolidated financial statements, in compliance with these
requirements, give a true and fair view of the assets, liabilities, financial position and financial performance of
the Group. In addition, the executive directors are responsible for such internal control as they have
determined necessary to enable the preparation of consolidated financial statements that are free from material
misstatement, whether due to fraud (i.e. fraudulent financial reporting and misappropriation of assets) or error.
In preparing the consolidated financial statements, the executive directors are responsible for assessing the
Group's ability to continue as a going concern. They also have the responsibility for disclosing, as applicable,
matters related to going concern. In addition, they are responsible for financial reporting based on the going
concern basis of accounting unless there is an intention to liquidate the Group or to cease operations, or there
is no realistic alternative but to do so.
the executive directors' confirmation regarding the consolidated financial statements and the combined
management report pursuant to section 297 (2) sentence 4 and section 315 (1) sentence 5 HGB, and
all other parts of the annual report,
but not the consolidated financial statements, not the audited content of the combined management report
and not our auditor's report thereon.
The supervisory board is responsible for the report of the supervisory board. The executive directors and the
supervisory board are responsible for the statement according to section 161 AktG concerning the German
Corporate Governance Code, which is part of the corporate governance statement, and for the remuneration
report pursuant to section 162 AktG. Otherwise, the executive directors are responsible for the other
information.
•
is materially inconsistent with the consolidated financial statements, with the audited content of the group
management report or our knowledge obtained in the audit, or
otherwise appears to be materially misstated.
Furthermore, the executive directors are responsible for the preparation of the combined management report
that as a whole provides an appropriate view of the Group's position and is, in all material respects, consistent
with the consolidated financial statements, complies with German legal requirements, and appropriately
presents the opportunities and risks of future development. In addition, the executive directors are responsible
for such arrangements and measures (systems) as they have considered necessary to enable the preparation of
a combined management report that is in accordance with the applicable German legal requirements, and to be
able to provide sufficient appropriate evidence for the assertions in the combined management report.
354
Other Information Reproduction of the Independent Auditor's Report
Responsibilities of the Executive Directors and the Supervisory Board
for the Consolidated Financial Statements and the Combined
Our audit opinions on the consolidated financial statements and on the combined management report do not
cover the other information, and consequently we do not express an audit opinion or any other form of
assurance conclusion thereon.
In connection with our audit, our responsibility is to read the other information identified above and, in doing
so, to consider whether the other information:
evaluate the consistency of the combined management report with the consolidated financial statements,
its conformity with German law, and the view of the Group's position it provides.
•
We communicate with those charged with governance regarding, among other matters, the planned scope and
timing of the audit and significant audit findings, including any significant deficiencies in internal control that we
identify during our audit.
evaluate the overall presentation, structure and content of the consolidated financial statements, including
the disclosures, and whether the consolidated financial statements present the underlying transactions and
events in a manner that the consolidated financial statements give a true and fair view of the assets,
liabilities, financial position and financial performance of the Group in compliance with IFRS as adopted by
the EU and with the additional requirements of German commercial law pursuant to section 315e (1) HGB.
obtain sufficient appropriate audit evidence regarding the financial information of the entities or business
activities within the Group to express audit opinions on the consolidated financial statements and on the
combined management report. We are responsible for the direction, supervision and performance of the
group audit. We remain solely responsible for our audit opinions.
conclude on the appropriateness of the executive directors' use of the going concern basis of accounting
and, based on the audit evidence obtained, whether a material uncertainty exists related to events or
conditions that may cast significant doubt on the Group's ability to continue as a going concern. If we
conclude that a material uncertainty exists, we are required to draw attention in the auditor's report to the
related disclosures in the consolidated financial statements and in the combined management report or, if
such disclosures are inadequate, to modify our respective audit opinions. Our conclusions are based on the
audit evidence obtained up to the date of our auditor's report. However, future events or conditions may
cause the Group to cease to be able to continue as a going concern.
evaluate the appropriateness of accounting policies used by the executive directors and the reasonableness
of estimates made by the executive directors and related disclosures.
obtain an understanding of internal control relevant to the audit of the consolidated financial statements
and of arrangements and measures relevant to the audit of the combined management report in order to
design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an
audit opinion on the effectiveness of these systems.
identify and assess the risks of material misstatement of the consolidated financial statements and of the
combined management report, whether due to fraud or error, design and perform audit procedures
responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for
our audit opinions. The risk of not detecting a material misstatement resulting from fraud is higher than the
risk of not detecting a material misstatement resulting from error, as fraud may involve collusion, forgery,
intentional omissions, misrepresentations, or the override of internal controls.
We exercise professional judgment and maintain professional skepticism throughout the audit. We also:
355
Other Information Reproduction of the Independent Auditor's Report
Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance
with section 317 HGB and the EU Audit Regulation and in compliance with German Generally Accepted
Standards for Financial Statement Audits promulgated by the Institut der Wirtschaftsprüfer (IDW) will always
detect a material misstatement. Misstatements can arise from fraud or error and are considered material if,
individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users
taken on the basis of these consolidated financial statements and this group management report.
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a
whole are free from material misstatement, whether due to fraud or error, and whether the combined
management report as a whole provides an appropriate view of the Group's position and, in all material
respects, is consistent with the consolidated financial statements and the knowledge obtained in the audit,
complies with the German legal requirements and appropriately presents the opportunities and risks of future
development, as well as to issue an auditor's report that includes our audit opinions on the consolidated
financial statements and on the combined management report.
Auditor's Responsibilities for the Audit of the Consolidated Financial
Statements and of the Combined Management Report
The supervisory board is responsible for overseeing the Group's financial reporting process for the preparation
of the consolidated financial statements and of the combined management report.
We provide those charged with governance with a statement that we have complied with the relevant
independence requirements, and communicate with them all relationships and other matters that may
reasonably be thought to bear on our independence, and where applicable, the actions taken or safeguards
applied to eliminate independence threats.
From the matters communicated with those charged with governance, we determine those matters that were of
most significance in the audit of the consolidated financial statements for the current period and are therefore
the key audit matters. We describe these matters in the auditor's report unless law or regulation precludes
public disclosure about the matter.
Other Information Reproduction of the Independent Auditor's Report
356
Other Legal and Regulatory Requirements
Report on the Audit of the Electronic Reproductions of the
Consolidated Financial Statements and of the Combined Management
report Prepared for Publication Pursuant to section 317 (3a) HGB
perform audit procedures on the prospective information presented by the executive directors in the combined
management report. On the basis of sufficient appropriate audit evidence we evaluate, in particular, the
significant assumptions used by the executive directors as a basis for the prospective information, and
evaluate the proper derivation of the prospective information from these assumptions. We do not express a
separate audit opinion on the prospective information and on the assumptions used as a basis. There is a
substantial unavoidable risk that future events will differ materially from the prospective information.
•
2.
•
In the consolidated financial statements as of December 31, 2023, of Merck Kommanditgesellschaft auf
Aktien, Darmstadt, Germany, the amount stated under the balance sheet item "Goodwill" is mEUR 17,845
(36.8% of the Group's total assets), with mEUR 4,532 attributable to the Electronics business sector. The
Electronics business sector represents a cash-generating unit.
Recoverability of goodwill in the Electronics business sector
description (including reference to corresponding information in the consolidated financial statements)
auditor's response
a)
1.
b)
a)
Our presentation of these key audit matters has been structured as follows:
Completeness and measurement of income tax liabilities
Recoverability of goodwill in the Electronics business sector
1.
In the following we present the key audit matters we have determined in the course of our audit:
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit
of the consolidated financial statements for the financial year from January 1 to December 31, 2023. These
matters were addressed in the context of our audit of the consolidated financial statements as a whole and in
forming our audit opinion thereon; we do not provide a separate audit opinion on these matters.
Key Audit Matters in the Audit of the Consolidated Financial
Statements
We conducted our audit of the consolidated financial statements and of the combined management report in
accordance with section 317 HGB and the EU Audit Regulation (No. 537/2014; referred to subsequently as "EU
Audit Regulation”) and in compliance with German Generally Accepted Standards for Financial Statement Audits
promulgated by the Institut der Wirtschaftsprüfer (IDW). Our responsibilities under those requirements and
principles are further described in the "Auditor's Responsibilities for the Audit of the Consolidated
Financial Statements and of the Combined Management Report" section of our auditor's report. We are
independent of the group entities in accordance with the requirements of European law and German commercial
and professional law, and we have fulfilled our other German professional responsibilities in accordance with
these requirements. In addition, in accordance with Article 10 (2) point (f) of the EU Audit Regulation, we
declare that we have not provided non-audit services prohibited under Article 5 (1) of the EU Audit Regulation.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
audit opinions on the consolidated financial statements and on the combined management report.
Basis for the Audit Opinions
Other Information Reproduction of the Independent Auditor's Report
351
Audit Opinion
Recoverability of goodwill of the cash-generating unit Electronics was a key matter in our audit because we
identified an increased impairment risk for this business sector as part of our risk assessment. The impairment
test for the preparation of the consolidated financial statements is based on a valuation of the Electronics
business sector that involves discounting the planned future cash flows for this business sector at weighted
average cost of capital using a discounted cash flow model. The planned cash flows are derived from the
medium-term planning for the business sector approved by the executive directors, which is extrapolated based
on assumed long-term growth rates.
•
The result of this valuation highly depends on the executive directors' judgmental determination of future cash
flows and the discount rate for the business sector and is therefore subject to considerable uncertainties.
Therefore, and as a result of our risk assessment, this matter was of particular significance in our audit.
352
the report of the supervisory board,
•
The executive directors and/or the supervisory board are responsible for the other information. The other
information comprises:
Other Information
353
Other Information Reproduction of the Independent Auditor's Report
Furthermore, we analyzed correspondence with the competent tax authorities and assessed the assumptions
underlying the determination of income tax liabilities based on our knowledge and experience of how the
relevant legal requirements are currently applied by the tax authorities and courts. We used a risk-based audit
approach to audit the accuracy of the calculation of the income tax liabilities.
We obtained an understanding of existing tax risks through inquiry of employees in the tax department. We
assessed the competence, capabilities and objectivity of the external experts and evaluated their expert
opinions.
Among other things, as part of our audit we obtained an understanding of the process and of the
accounting-relevant controls included in the process and involved our own tax experts in respect of national and
international tax law into the audit team in order to evaluate the executive directors' judgments and estimates
as well as the assessment of the engaged external experts, if any. Where identified controls were relevant for
our audit, we had their design and implementation tested.
b)
The disclosures of the executive directors on recognition and measurement of income tax liabilities can be
found in note 15 in the notes to the consolidated financial statements.
The Group operates in different jurisdictions with different legal systems. The application of local tax regulations
and tax incentives as well as transfer pricing rules is complex. The recognition and measurement of income tax
liabilities require the executive directors to exercise judgment in assessing tax matters and to make estimates
regarding uncertain tax positions. In order to reinforce and validate their own risk assessment, the executive
directors engaged external experts as deemed necessary. There is a risk for the consolidated financial
statements that income tax liabilities are not fully recognized or not appropriately measured. For these reasons,
this matter was of particular significance in our audit.
As at December 31, 2023, the amount recognized for income tax liabilities including liabilities for
uncertain tax obligations is mEUR 1,473.
Completeness and measurement of income tax liabilities
a)
2.
Among others, in our audit we obtained an understanding of the accounting-relevant controls included in
the process and reproduced the methodological approach to performing the impairment tests. Where identified
controls were relevant for our audit, we had their design and implementation tested. Where estimates were
made by the executive directors, we assessed whether the methods applied, assumptions made and data used
were acceptable. Regarding the projection of future cash flows, we firstly evaluated the planning reliability by
reviewing the past adherence to planning, walked through the underlying planning process and conducted a
critical assessment. Subsequently, we evaluated the appropriateness of the future cash flows used in the
valuation, especially by comparing these figures with the medium-term planning approved by the executive
directors and by reconciling selected planning assumptions with general, company and industry-specific market
expectations. We obtained a deep understanding of the parameters applied in determining the discount rate
used, evaluated the completeness and accuracy of the calculation scheme and had them compared with general
and industry-specific market expectations. Furthermore, due to the material significance of goodwill, we
performed an additional own sensitivity analysis for the cash-generating unit (comparison of carrying amount
with recoverable amount). As part of our audit, we were supported by internal valuation experts. Using their
help, we reproduced the methodological approach to impairment testing, the arithmetical correctness of the
valuation model as well as the determination of the used discount rate.
b)
The disclosures of the executive directors on goodwill can be found in note 18 in the notes to the consolidated
financial statements.
Other Information Reproduction of the Independent Auditor's Report
We have performed an audit in accordance with section 317 (3a) HGB to obtain reasonable assurance whether
the electronic reproductions of the consolidated financial statements and of the combined management report
(hereinafter referred to as "ESEF documents") prepared for publication, contained in the file, which has the SHA
256 value c114c083dc2ea03436431c301daa4137a7a71bd1b9fb0c7c074e316f288ebc8f, meet, in all material
respects, the requirements for the electronic reporting format pursuant to section 328 (1) HGB ("ESEF
format"). In accordance with the German legal requirements, this audit only covers the conversion of the
information contained in the consolidated financial statements and the combined management report into the
ESEF format, and therefore covers neither the information contained in these electronic reproductions, nor any
other information contained in the file identified above.
(German Public Auditor)
Basis for the Audit Opinion
Wirtschaftsprüfer
Other Information Reproduction of the Independent Auditor's Report
359
Limited assurance report of the independent
practitioner regarding the non-financial
statement
To Merck Kommanditgesellschaft auf Aktien, Darmstadt/Germany
Our Engagement
We have performed a limited assurance engagement on the consolidated non-financial statement of Merck
Kommanditgesellschaft auf Aktien, Darmstadt/Germany, ("the Company"), which was combined with the non-
financial statement of the Company, for the financial year from January 1 to December 31, 2023 ("non-financial
reporting") included in the combined management report on the Company and the Group.
Our assurance engagement did not cover the remuneration report and sustainability report, which are referred
to in the non-financial reporting, nor any references to external sources of documentation and websites
contained in the non-financial reporting, including the contents of such sources of documentation and websites.
Moreover, our assurance engagement did not consider any disclosures relating to prior periods.
Responsibility of the Executive Directors
The executive directors of the Company are responsible for the preparation of the non-financial reporting in
accordance with section 289c to section 289e German Commercial Code (HGB), section 315c in conjunction
with section 289c to section 289e HGB and Article 8 of Regulation (EU) 2020/852 of the Parliament and the
Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and
amending Regulation (EU) 2019/2088 ("EU Taxonomy Regulation") and the delegated acts adopted thereunder,
as well as for making their own interpretation of the wording and terms contained in the EU Taxonomy
Regulation and the delegated acts adopted thereunder, as set out in the section "Reporting in accordance
with the EU Taxonomy Regulation" of the non-financial reporting.
This responsibility includes the selection and application of appropriate non-financial reporting methods and
making assumptions and estimates about individual non-financial information of the Group that are reasonable
in the circumstances. Furthermore, the executive directors are responsible for such internal control as the
executive directors consider necessary to enable the preparation of a non-financial reporting that is free from
material misstatement, whether due to fraud (i.e. fraudulent non-financial reporting) or error.
The EU Taxonomy Regulation and the delegated acts adopted thereunder contain wording and terms that are
still subject to considerable interpretation uncertainties and for which clarifications have not yet been published
in every case. Therefore, the executive directors have disclosed their interpretation of the EU Taxonomy
Regulation and the delegated acts adopted thereunder in the section "Reporting in accordance with the EU
Taxonomy Regulation” of the non-financial reporting. They are responsible for the defensibility of this
interpretation. Due to the immanent risk that indeterminate legal terms may be interpreted differently, the
legal conformity of the interpretation is subject to uncertainties.
The preciseness and completeness of the environmental data in the non-financial reporting is subject to
inherent restrictions resulting from the manner in which the data was collected and calculated as well as from
assumptions made.
Daniel Weise
Other Information Reproduction of the Independent Auditor's Report
Independence and Quality Assurance of the Audit Firm
We have complied with the German professional requirements on independence as well as other professional
conduct requirements.
Our audit firm applies the national legal requirements and professional pronouncements - in particular the
Professional Charter for German Public Auditors and German Sworn Auditors (BS WP/vBP) and the quality
management standards issued by the Institute of Public Auditors in Germany (IDW) - and accordingly
maintains a comprehensive quality management system that includes documented policies and procedures with
regard to compliance with professional ethical requirements, professional standards as well as relevant
statutory and other legal requirements.
Responsibility of the Independent Practitioner
Our responsibility is to express a conclusion with limited assurance on the non-financial reporting based on our
assurance engagement.
We conducted our assurance engagement in accordance with the International Standard on Assurance
Engagements (ISAE) 3000 (Revised): "Assurance Engagements other than Audits or Reviews of Historical
Financial Information" issued by the IAASB. This standard requires that we plan and perform the assurance
engagement to obtain limited assurance about whether any matters have come to our attention that cause us
to believe that the Company's non-financial reporting - with the exception of the referenced remuneration
report and sustainability report and of references to external sources of documentation and websites including
their contents as well as of disclosures relating to prior periods - is not prepared, in all material respects, in
accordance with section 289c to section 289e HGB, section 315c in conjunction with section 289c to
section 289e HGB and the EU Taxonomy Regulation and the delegated acts adopted thereunder as well as the
interpretation by the executive directors disclosed in the section "Reporting in accordance with the EU
Taxonomy Regulation” of the non-financial reporting.
The procedures performed in a limited assurance engagement are less in extent than for a reasonable
assurance engagement; consequently, the level of assurance obtained in a limited assurance engagement is
substantially lower than the assurance that would have been obtained had a reasonable assurance engagement
been performed. The choice of assurance work is subject to the practitioner's professional judgment.
Within the scope of our assurance engagement, which we performed in the months from October 2023 to
February 2024, we have, among other things, performed the following assurance procedures and other
activities:
Gaining an understanding of the structure of the Group's sustainability organization and stakeholder
engagement,
Inquiries of the executive directors and relevant employees involved in the preparation of the non-financial
reporting about the preparation process, about the internal control related to this process and about
disclosures in the non-financial reporting,
Analytical procedures on selected information in the non-financial reporting,
Reconciliation of selected disclosures with the corresponding data in the consolidated financial statements
and the annual financial statements and combined management report,
Evaluation of the presentation of the non-financial reporting, and
Evaluation of the process to identify taxonomy-eligible and taxonomy-aligned economic activities and the
corresponding disclosures in the non-financial reporting.
In our opinion, the electronic reproductions of the consolidated financial statements and of the combined
management report prepared for publication contained in the file identified above meet, in all material respects,
the requirements for the electronic reporting format pursuant to section 328 (1) HGB. Beyond this audit opinion
and our audit opinions on the accompanying consolidated financial statements and on the accompanying
combined management report for the financial year from January 1 to December 31, 2023 contained in the
"Report on the Audit of the Consolidated Financial Statements and of the Combined Management Report"
above, we do not express any assurance opinion on the information contained within these electronic
reproductions or on any other information contained in the file identified above.
360
Signed:
Identification of likely risks of material misstatement in the non-financial reporting,
Wirtschaftsprüfer
We conducted our audit of the electronic reproductions of the consolidated financial statements and of the
combined management report contained in the file identified above in accordance with section 317 (3a) HGB
and on the basis of the IDW Auditing Standard: Audit of the Electronic Reproductions of Financial Statements
and Management Reports Prepared for Publication Purposes Pursuant to section 317 (3a) HGB (IDW AUS 410
(06.2022)). Our responsibilities in this context are further described in the "Group Auditor's Responsibilities
for the Audit of the ESEF Documents" section. Our audit firm has applied the requirements set forth in the
IDW Quality Management Standards.
(German Public Auditor)
Responsibilities of the Executive Directors and the Supervisory Board for the
ESEF Documents
The executive directors of the parent are responsible for the preparation of the ESEF documents based on the
electronic files of the consolidated financial statements and of the group management report according to
section 328 (1) sentence 4 no. 1 HGB and for the tagging of the consolidated financial statements according to
section 328 (1) sentence 4 no. 2 HGB.
The supervisory board is responsible for overseeing the process for preparing the ESEF documents as part of
the financial reporting process.
Other Information Reproduction of the Independent Auditor's Report
357
Group Auditor's Responsibilities for the Audit of the ESEF Documents
Our objective is to obtain reasonable assurance about whether the ESEF documents are free from material
intentional or unintentional non-compliance with the requirements of section 328 (1) HGB. We exercise
professional judgment and maintain professional skepticism throughout the audit. We also:
identify and assess the risks of material intentional or unintentional non-compliance with the requirements
of section 328 (1) HGB, design and perform audit procedures responsive to those risks, and obtain audit
evidence that is sufficient and appropriate to provide a basis for our audit opinion.
obtain an understanding of internal control relevant to the audit on the ESEF documents in order to design
audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an
assurance opinion on the effectiveness of these controls.
evaluate the technical validity of the ESEF documents, i.e. whether the file containing the ESEF documents
meets the requirements of the Delegated Regulation (EU) 2019/815, in the version in force at the balance
sheet date, on the technical specification for this electronic file.
evaluate whether the ESEF documents enable a XHTML reproduction with content equivalent to the audited
consolidated financial statements and to the audited combined management report.
evaluate whether the tagging of the ESEF documents with Inline XBRL technology (iXBRL) in accordance
with the requirements of Articles 4 and 6 of the Delegated Regulation (EU) 2019/815, in the version in
force at the balance sheet date, enables an appropriate and complete machine-readable XBRL copy of the
XHTML reproduction.
Further Information pursuant to Article 10 of the EU Audit Regulation
In addition, the executive directors of the parent are responsible for such internal controls that they have
considered necessary to enable the preparation of ESEF documents that are free from material intentional or
unintentional non-compliance with the requirements for the electronic reporting format pursuant to section 328
(1) HGB.
We declare that the audit opinions expressed in this auditor's report are consistent with the additional report to
the audit committee pursuant to Article 11 of the EU Audit Regulation (long-form audit report).
We were elected as Group auditor by the general meeting on April 22, 2022. We were engaged by the
supervisory board on April 28, 2023. We have been the auditor of Merck Kommanditgesellschaft auf Aktien,
Darmstadt/Germany, since the financial year 2023.
Wirtschaftsprüfungsgesellschaft
Frankfurt am Main, Germany, February 16, 2024
Christoph Schenk
The German Public Auditor responsible for the engagement is Daniel Weise.
German Public Auditor Responsible for the
Engagement
Deloitte GmbH
358
Other Matter
Other Information Reproduction of the Independent Auditor's Report
-
Signed:
Use of the Auditor's Report
Our auditor's report must always be read together with the audited consolidated financial statements and the
audited combined management report as well as with the audited ESEF documents. The consolidated financial
statements and the combined management report converted into the ESEF format - including the versions to
be submitted for inclusion in the Company Register are merely electronic reproductions of the audited
consolidated financial statements and the audited combined management report and do not take their place. In
particular, the ESEF report and our audit opinion contained therein are to be used solely together with the
audited ESEF documents made available in electronic form.
-
Goodwill
7,612
7,653
Other intangible assets
-3.0%
17,845
18,389
17,004
15,959
17,114
7,335
9,221
32,516
-0.6%
36,102
36,334
34,380
34,805
Non-current assets
-0.1%
48,495
48,535
45,362
6,551
41,796
thereof:
-10.7%
thereof:
6,192
43,808
3,488
4,004
4,114
receivables
Trade receivables and other current
0.1%
4,637
4,632
3,900
3,294
3,342
Property, plant, and equipment
Inventories
1.6%
12,393
12,201
10,982
9,280
9,003
Current assets
10.4%
9,056
8,204
7,217
6,421
17.0%
Total assets
5,201
-15.2%
3,221
4,385
EBITDA pre¹
13.1%
390
345
157
279
318
Adjustments¹
26.1%
29.3%
6,103
30.2%
25.2%
Margin (% of net sales) 1
-15.6%
5,489
6,504
5,946
4,923
4,066
EBITDA²
17.2%
20.1%
21.2%
28.1%
Assets and liabilities
6,849
-14.2%
6.49
7.65
7.03
4.57
3.04
Earnings per share (in €)
-15.1%
2,834
3,339
3,065
1,994
1,324
5,879
Profit after tax
3,484
4,287
3,924
2,630
1,735
Profit before income tax
28.0%
30.8%
31.0%
29.7%
27.1%
Margin (% of net sales) 1
-18.7%
3,646
1,228
Cash and cash equivalents
60,334
58,096
57,036
Employees (number as of December 31)
0.0%
2.204
2.20
1.85
1.40
-3.0%
2,445
2,521
64,232
2,426
2,268
1.30
Dividend per share (in €)
Research and development costs
55.2%
53.6%
47.2%
40.7%
40.9%
Equity ratio (in %)¹
Other key data
-9.9%
7,500
2,288
8,328
62,908
1 Not defined by International Financial Reporting Standards (IFRS).
www.nexxar.com
nexxar GmbH, Vienna
DESIGN
Frankfurter Strasse 250,
64293 Darmstadt, Germany
Telephone: +49 6151 72-0
www.merckgroup.com
Published on March 7, 2024
by Merck KGaA
M
2024
14 Quarterly Statement Q3
November
Half-yearly
Financial Report
2024
1
-2.1%
August
15 Quarterly Statement Q1
May
2024
26 Annual General Meeting
April
2024
7 Annual Press Conference
March
Financial calendar
4 Proposal on the appropriation of profits for 2023.
3 According to the consolidated cash flow statement.
2 Not defined by International Financial Reporting Standards (IFRS); EBITDA corresponds to operating result (EBIT) adjusted by depreciation,
amortization, impairment losses, and reversals of impairment losses.
2024
-2.7%
8,753
12,363
9,239
9,200
8,270
9,785
8,644
Non-current
-4.7%
9,941
10,428
10,801
12,142
13,194
0.4%
Financial liabilities
26,754
26,005
21,416
17,017
17,914
Equity
6.9%
1,982
1,854
1,899
1,355
781
2.9%
10,758
Current
2,357
Net financial debt¹
-11.2%
3,784
4,259
4,616
3,477
2,856
Operating cash flow³
18.0%
1,066
1,413
813
4,550
and equipment³
1,531
Payments for investments in property, plant,
-21.5%
216
275
355
150
208
Liquidity
-42.9%
702
2,531
1,807
Payments for investments in intangible assets³
Margin (% of net sales) 1
20,993
3,609
Wirtschaftsprüfer
Jan Joos
Signed:
(German Public Auditor)
Wirtschaftsprüfer
Daniel Oehlmann
Signed:
Wirtschaftsprüfungsgesellschaft
Deloitte GmbH
(German Public Auditor)
Frankfurt am Main, Germany, February 16, 2024
We issue this report as stipulated in the engagement letter agreed with the Company (including the "General
Engagement Terms for Wirtschaftsprüfer and Wirtschaftsprüfungsgesellschaften (German Public Auditors and
Public Audit Firms)" as of January 1, 2017, promulgated by the Institut der Wirtschaftsprüfer (IDW)). We draw
attention to the fact that the assurance engagement was conducted for the Company's purposes and that the
report is intended solely to inform the Company about the result of the assurance engagement. Consequently,
it may not be suitable for any other purpose than the aforementioned. Accordingly, the report is not intended to
be used by third parties for making (financial) decisions based on it.
Restriction of Use
Our assurance engagement did not cover any external sources of documentation, expert opinions or references
to external websites listed in the combined non-financial statement.
Based on the assurance procedures performed and the evidence obtained, nothing has come to our attention
that causes us to believe that the combined non-financial statement of the Company for the financial year from
January 1, 2023 to December 31, 2023 is not prepared, in all material respects, in accordance with
section 289c to section 289e HGB, section 315c in conjunction with section 289c to section 289e HGB and the
EU Taxonomy Regulation and the delegated acts adopted thereunder as well as the interpretation by the
executive directors as disclosed in the section "Reporting in accordance with the EU Taxonomy
Regulation" of the combined non-financial statement.
Practitioner's Conclusion
In determining the information in accordance with Article 8 of the EU Taxonomy Regulation, the executive
directors are required to interpret indeterminate legal terms. Due to the immanent risk that indeterminate legal
terms may be interpreted differently, the legal conformity of their interpretation and, accordingly, our
assurance engagement thereon are subject to uncertainties.
Other Information Reproduction of the Independent Auditor's Report
361
13.1%
Our responsibility is to the Company alone. We do not accept any responsibility to third parties. Our conclusion
is not modified in this respect.
Other Information Business Development 2019 - 2023
-5.6%
-19.3%
Business
362
4,474
4,179
2,985
2,120
22,232
19,687
17,534
16,152
Net sales
Operating result (EBIT)¹
2023 Change in %
2022
2021
2020
2019
€ million
This overview may include historically adjusted values in order to ensure comparability with the reporting
period.
2019-2023
Results of operations
BUSINESS DEVelopment
-31.4%
783
830
-47
-99
Adjustments¹
477
577
-17.2%
-298
-5.6%
948
2,824
Income tax
-25.6%
-3
14
10
-15.1%
-502
3,326
Income tax on the basis of the underlying tax rate¹
in %
€ million
650
-1,044
4,371
266
=4
34
Combined Management Report_ Fundamental Information about the Group Internal Management System
The rating of our creditworthiness by external agencies is an important indicator of our ability to raise debt
capital at attractive market conditions. The capital market makes use of the assessments published by
independent rating agencies in order to assist debt providers in estimating the risks associated with a financial
instrument. We are currently assessed by Moody's and Standard & Poor's. The most important factor for the
credit rating is the ability to repay debt, which is determined in particular by the ratio of operating cash flow to
net- or gross financial debt.
Credit rating
We pursue a reliable dividend policy with a target payout ratio based on EPS pre (see definition above) with the
aim of ensuring an attractive return for our shareholders.
Dividend ratio
1 Not defined by International Financial Reporting Standards (IFRS).
-15.5%
-1.56
10.05
-1,310
8.49
-15.6%
-680
2022
3,691
Net income pre¹
-25.6%
3
-14
-10
Non-controlling interests to be adjusted
-20.3%
Earnings per share pre¹ in €
2023
Combined Management Report_ Fundamental Information about the Group. Internal Management System
Net income
4,259
3,784
Operating cash flow
> 100.0%
-93
21
-72
Other non-cash income and expenses³
> 100.0%
-102
-48
-475
-150
-32.5%
69.6%
-310
-445
-755
Changes in other assets and liabilities³
-91
279
188
Changes in provisions³
> 100.0%
-144
Neutralization of gains/losses on disposal of fixed assets and
other disposals³
-11.2%
1 Not defined by International Financial Reporting Standard (IFRS). Adjustments according to definition above.
2 According to Consolidated Income Statement.
€ million
Change
Reconciliation net income to net income pre¹
Earnings per share are calculated by dividing profit after tax attributable to the shareholders of Merck KGaA
(net income) by the weighted average number of theoretical shares outstanding. The use of a theoretical
number of shares takes into account the fact that the general partner's capital is not represented by shares. As
an alternative comparison, we also report earnings per share pre, which are adjusted for the effects of
integration expenses, IT expenses for selected projects, restructuring expenses, profits/losses from the
divestment of businesses, acquisition expenses, and other adjustments. Amortization of acquired intangible
assets is also adjusted for. The adjustment excludes impairment losses on intangible assets for acquired
research and development (R&D) projects below a threshold value of € 50 million. Income tax is calculated on
the basis of the Group's underlying tax rate. The following table presents the reconciliation of net income to net
income pre for the calculation of EPS pre.
Net income, earnings per share (EPS) and earnings per share pre (EPS pre)
Capital market-related parameters
33
Relevant non-financial performance measures
Merck value added gives information about the financial value created over a period of time. Added value is
created when the return on capital employed (ROCE) of the company or the business is higher than the
weighted average cost of capital (WACC). MEVA metrics provide us with a powerful tool to weigh investment
and spending decisions against capital requirements and investors' expectations.
Merck value added (MEVA)
An additional parameter for assessing investments in property, plant & equipment, and intangible assets is the
payback period, which indicates the time in years after which an investment will generate positive net cash
flow.
Payback period
In addition to NPV and IRR, return on capital employed is an important metric for the assessment of investment
projects when looking at individual accounting periods. It is calculated as the adjusted operating result pre
(EBIT pre) divided by the sum of property, plant and equipment, intangible assets, trade accounts receivable,
trade accounts payable, and inventories.
Return on capital employed (ROCE)
The internal rate of return is a further important criterion for the assessment of acquisition projects and
investments in property, plant and equipment, as well as intangible assets. It is the discount rate that makes
the present value of all future free cash flows equal to the initial investment or the purchase price of an
acquisition. A project adds value if the internal rate of return is higher than the weighted cost of capital
including markups.
Internal rate of return (IRR)
The main criterion for prioritizing investment opportunities is net present value. It is based on the discounted
cash flow method and is calculated as the sum of the discounted free cash flows over the duration of a project.
The weighted average cost of capital (WACC), representing the weighted average of the cost of equity and cost
of debt, is used as the discount rate. Different markups are applied to the WACC depending on the nature and
location of the respective project.
Net present value (NPV)
Sustainable value creation is essential to secure the long-term success of the company. To optimize the
allocation of financial resources, we use a defined set of parameters as criteria for prioritizing investment
opportunities and portfolio decisions.
Investments and value management
32
Fundamental Information about the Group. Internal Management System
Combined Management Report_
4 As of January 1, 2023, the tranche of the Merck Long-Term Incentive Plan to be paid out in the months following the balance sheet date is disclosed
under other current non-financial liabilities and no longer under current provisions for employee benefits. For better comparability, the previous year's
figures have been adjusted.
3 According to the Consolidated Cash Flow Statement.
Non-controlling interest
Along with the indicators of the financial performance of the businesses, non-financial measures also play an
important role in furthering the success of the company.
Around 6,500 employees (2022: approximately 7,300) worked in R&D and related support functions in 2023. They
dealt with innovations to address long-term health and technology trends in both established and growth markets.
Expenditure for R&D amounted to € 2.4 billion in 2023 (2022: € 2.5 billion).
Our culture should embody what unites us as well as the way in which we collaborate, lead and work as a team
to achieve human progress and drive the company forward. We live our high-impact culture and through this,
we measure our ability to attract, develop and retain the right people.
* The contents of this chapter or section are voluntary and therefore not audited. However, our auditor has read the text critically.
The launch of 3dGRO™ Patient-Derived Organoids (PDOS) is also opening up new possibilities for researchers.
During 2023, we launched 20 pancreatic and 20 colorectal organoids, along with 3dGROTM Wnt3a conditioned
media supplement used for organoids. These complex, multicellular 3-dimensional in vitro cell models used in
biomedical research that closely mimic in vivo organs are a powerful way to study drug responses, disease
progression, and more. An important tool in cancer research, organoids provide a more relevant, phenotypic
model of cancer than traditional 2D cell culture models.
The next frontier in cell culture
In December, we launched the Milli-Q® SQ-2 series systems. With eight patents for its innovative features, this
ultrapure lab water equipment offers greater flexibility, autonomy and sustainability - with less energy and
water consumption. The system does not require a direct connection to a water pipe, so researchers can draw
ultrapure water via the equipment at the point of use without any intermediate installations.
We continued to offer incremental and sustainable technologies that improve productivity challenges to address
customers' key challenges. In June, we launched mPAGE® Lux electrophoresis gel, a product that decreases,
from 90 to three minutes, the time-consuming and key step of gel casting for western blotting, a method for
protein separation.
Efficiency and productivity-enhancing tools
In February, we launched M-TRACE® All-in-One Computer solution, another example of how we are digitalizing
the lab. M-TRACE® offers a cleanroom-friendly way to create test records used during sterility testing and other
quality control workflows. Compliant with the QC sterility testing environment, it enables full data traceability.
In November, we launched ChemisTwin™, an online digital reference materials platform. It is a digital reference
materials platform that can perform automatic analysis of samples' purity, identity, and degradation of
compounds through over 1,500 calibrated algorithm-based digital references. Reference materials ensure the
quality and safety of medicines and other products (such as water, food and beverage) from the earliest stages
of research and development through quality control and quality assurance testing.
In December, we launched AIDDISON™ drug discovery software, the first AI-powered software-as-a-service
platform that bridges the gap between virtual molecule design and real-world manufacturability through
Synthia™ retrosynthesis software Application Programming Interface (API) integration. It combines generative
AI, machine learning, and computer-aided drug design to speed up drug screening. Trained on more than two
decades of experimentally validated datasets from pharmaceutical R&D, AIDDISON™ identifies compounds from
more than 60 billion possibilities that have key properties of a promising active ingredient, such as non-toxicity,
solubility, and stability in the body. The platform then proposes ways to best synthesize these drugs.
One important driver for the Science &Lab Solutions business innovation is digitalizing the lab of future, with
workflows through AI, machine learning, automation, and other solutions. It supports scientists at all stages
with tools that can increase efficiency, safety and success rates of delivering new, safer therapies for patients.
By combining expertise in small molecules, biologics and new modalities with AI and other digital tools, we are
helping to redefine how drugs are discovered, developed and produced.
The lab of the future
From nanomaterials enhancing battery performance to optimal media culture for producing lab-cultivated meat,
the breadth, and depth of our Science & Lab Solutions portfolio highlights how life science innovation improves
important aspects of our daily lives.
Combined Management Report
Science & Lab Solutions*
38
* The contents of this chapter or section are voluntary and therefore not audited. However, our auditor has read the text critically.
Life Science Services received three awards in 2023. In March, it was recognized at Life Science Leader's 2023
CDMO Leadership Awards in five categories: capabilities, compatibility, expertise, quality, and service. In
September, it received the API Development Award for ChetoSensarTM at the 2023 CPHI Pharma Awards as well
as the Best Biologics CMO Award at the 2023 Asia Pacific Biologics CMO Excellence Awards 2023.
One key R&D investment for Life Science Services was the expansion of Contract Testing Development and
Manufacturing Organization (CTDMO) Services with two new GMP-grade mRNA drug substance manufacturing
sites in Darmstadt and Hamburg, Germany. Consequently, our offering is the first to encompass all key stages
of mRNA technologies, lipids, lipid nanoparticles (LNP), and fill & finish, including key products and biosafety
testing.
Life Science Services*
In March, Medicine Maker recognized the Process Solutions business unit with its Best Biopharma Equipment
Company award.
In July, the MobiusⓇ iFlex Bioreactor was launched as the latest addition to the BioContinuum TM Production and
Harvest Platform, our integrated solution for perfusion process development and manufacturing. Alongside our
portfolio of EX-CELL® Advanced HD Perfusion, Mobius® Breez Microbioreactor and Cellicon® Cell Retention
Solution, the MobiusⓇ iFlex Bioreactor enables customers to realize the efficiency gains and cost savings of
production intensification and continuous monoclonal antibody (mAb) manufacturing.
In April, we launched UltimusⓇ single-use process container film, designed to provide extreme durability and
leak resistance for single-use assemblies used for bioprocessing liquid applications. Ultimus® film is designed
with a proprietary woven nylon structure and provides enhanced bag strength and resilience. This technology is
now available in Mobius® 3D process containers.
In January, we introduced the PelliconⓇ Capsule with Ultracel® membrane, which meets the single-use
tangential flow filtration (TFF) device requirements for the antibody-drug conjugate (ADC) manufacturing
process. Engineered with operator safety in mind, the PelliconⓇ Capsule features for easy connection to a
single-use TFF system. The capsules are resistant to organic solvents commonly used in the ADC manufacturing
process.
To this end, a large number of engineers, chemists and biologists across five global hubs are focused on six
strategic innovation vectors: building our core portfolio, factories and labs of the future, novel modalities, next
generation biology, AI and digital, and sustainability. In 2023, we launched more than 8,500 products including
products under our “faucet program" for antibodies, reference materials, chemicals, and nanomaterials.
Process Solutions*
As the fields of preventive and personalized medicine evolve, it will be essential to set the standard with robust,
scalable, efficient processes for viral vector production, next-generation sequencing and autologous cell
therapies. This in turn will support the expansion of disruptive cell and gene therapies to treat the most
challenging and chronic conditions, including cancer, heart disease, diabetes, and muscular dystrophy.
Combined Management Report Fundamental Information about the Group. Research and Development
Across our three business units Process Solutions, Life Science Services, and Science & Lab Solutions, our R&D
teams continue to bring expertise and a diversified and relevant portfolio of products and services to our
customers around the world.
Fundamental Information about the Group. Research and Development
Healthcare
In December, we announced a license agreement with Abbisko Therapeutics Co. Ltd, Shanghai, China, for
pimicotinib (ABSK021), which is currently being evaluated in a Phase III study for the treatment of tenosynovial
giant cell tumor (TGCT). TGCT is a benign tumor of the joints that can cause swelling, pain, stiffness, and
limited mobility of the affected joints. The agreement grants Merck a license to commercialize pimicotinib in
mainland China, Hong Kong, Macau and Taiwan, with an option for rest of world.
To diversify our robust internal pipeline in our focus areas of DNA damage response inhibition and antibody-drug
conjugates, in October 2023 we announced a strategic collaboration with Jiangsu Hengrui Pharmaceuticals Co.
Ltd. (Hengrui). The partnership includes an exclusive global license (excluding mainland China) to develop,
manufacture and commercialize Hengrui's next-generation potent and selective PARP1 (poly (ADP-ribose)
polymerase 1) trapping inhibitor HRS-1167. The agreement also includes an option for exclusive global
development, manufacturing and commercialization (excluding mainland China) of Hengrui's Claudin-18.2
antibody-drug conjugate (ADC) SHR-A1904.
In July 2023, our collaboration partner Telix Pharmaceuticals announced the administration of the first dose in
the Phase Ib STARSTRUCK trial. This open-label, single-arm, multicenter dose-escalation and dose-expansion
study will evaluate the safety profile, dosing and activity of our DNA-dependent protein kinase (DNA-PK)
inhibitor candidate, peposertib (M3814), in combination with Telix's investigational targeted radiation therapy,
TLX250, in patients with solid tumors expressing carbonic-anhydrase IX (CAIX).
We also continued to advance our pipeline of DNA damage response inhibition (DDR) assets, exploring multiple
hypotheses to determine which regimens may provide the most value to patients. In 2023, we initiated the Phase
Ib/IIa DDRiver NSCLC 322 study of tuvusertib (M1774), our potentially best-in-class, potent and selective inhibitor
of ataxia telangiectasia and Rad3-related (ATR), in combination with Regeneron Pharmaceutical's PD-1 inhibitor
cemiplimab in patients with non-squamous NSCLC that has progressed on prior anti-PD-(L)1 and platinum-based
therapies. The first dose was administered in October to a person requiring treatment.
Additional progress in our pipeline in 2023 includes completion of Phase Ia for our anti-CEACAM5 antibody-drug
conjugate (ADC), M9140, with the identification of two doses for evaluation in Phase Ib. M9140 is the first ADC
based on our proprietary technology to enter clinical development.
Our Phase III development program for xevinapant, the potentially first-in-class IAP (inhibitor of apoptosis protein)
inhibitor, in the treatment of squamous cell carcinoma of the head and neck (SCCHN) continues to progress. Patient
enrollment for the TrilynX study (NCT04459715) was completed in 2023. This international, randomized, double-
blind, placebo-controlled Phase III study evaluates the efficacy and safety of xevinapant compared to placebo when
administered in addition to definitive chemoradiotherapy in patients with unresected, locally advanced SCCHN.
Patient recruitment continues in the international, randomized, double-blind, placebo-controlled Phase III XRay
Vision (NCT05386550) study, which is evaluating the efficacy and safety of xevinapant versus placebo in
combination with adjuvant, post-operative radiotherapy in patients with resected LA SCCHN who are at high risk for
relapse and are ineligible for cisplatin treatment.
As we work towards our vision of creating a world where more cancer patients can become cancer survivors, we
continue to pioneer novel medicines, advancing promising molecules in our pipeline that build on our expertise
and leadership in core mechanisms and tumor types.
Novel medicines
We also shared results of the primary analysis of the Phase II INSIGHT 2 study at the WCLC. These findings
suggest the potential of tepotinib plus osimertinib as a chemotherapy-sparing oral targeted therapy option for
patients with EGFR-mutant NSCLC with MET amplification who have developed resistance to prior EGFR tyrosine
kinase inhibitor therapy.
tissue biopsy. An additional subgroup analysis presented at the 2023 World Congress on Lung Cancer (WCLC)
in September demonstrated the robust and durable clinical activity of TepmetkoⓇ, particularly as a first-line
treatment, with stability in health-related quality of life and a manageable safety profile in Asian patients with
advanced NSCLC with METex14 skipping. Tepmetko® is now available for the treatment of METex14-skipping
NSCLC in 23 markets globally.
40
39
Combined Management Report Fundamental Information about the Group. Research and Development
In 2023, we shared multiple analyses of studies of the oral MET inhibitor TepmetkoⓇ (tepotinib) in advanced
non-small cell lung cancer (NSCLC). In a long-term follow-up analysis of the Phase II VISION study published in
JAMA Oncology, TepmetkoⓇ showed robust and durable clinical activity across therapy lines in patients with
METex14-skipping NSCLC, particularly in previously untreated patients with METex14 skipping confirmed by
TepmetkoⓇ
Additionally, Bavencio® is approved for the treatment of advanced renal cell carcinoma (RCC) in combination
with axitinib in 60 countries.
BavencioⓇ is also approved as a monotherapy for the treatment of metastatic Merkel cell carcinoma (MCC) in
63 countries. In September 2023, we received U.S. Food and Drug Administration approval of a supplemental
Biologics Licensing Application for BavencioⓇ, converting the MCC indication from accelerated approval into full
approval. This makes it the first MCC treatment to receive full approval in the U.S. market.
We continue to evaluate whether optimization of first-line maintenance treatment by adding a novel therapy to
avelumab could improve outcomes for patients with advanced UC whose disease did not progress with first-line
platinum-based chemotherapy in the Phase II JAVELIN Bladder Medley study. Initiated in 2022, this randomized
umbrella study is assessing avelumab monotherapy versus the combination of avelumab with our
investigational anti-TIGIT antibody M6223, avelumab in combination with Nektar Therapeutics' interleukin-15
(IL-15) receptor agonist, NKTR-255, and avelumab in combination with Gilead Sciences' TrodelvyⓇ
(sacituzumab govitecan-hziy).
To date, BavencioⓇ (avelumab), an anti-PD-L1 antibody, has been approved in 66 countries as a first-line
maintenance treatment for locally advanced or metastatic urothelial carcinoma (UC) in adult patients whose
disease has not progressed following platinum-based chemotherapy. At the 2023 American Society of Clinical
Oncology (ASCO) Genitourinary Cancers Symposium, we presented long-term follow-up data from the Phase III
JAVELIN Bladder 100 trial. The data demonstrated median overall survival from start of chemotherapy of 29.7
months among patients receiving BavencioⓇ who did not progress on first-line platinum-based chemotherapy,
thus establishing a new benchmark for treatment outcomes in clinical studies.
BavencioⓇ
We are committed to bringing new standards of care for multiple tumor types to as many patients as possible
worldwide. Therefore, in 2023 we continued to explore the impact of our marketed therapies through continued
analysis of data from our pivotal studies and the generation of real-world evidence. We are assessing these
treatments in new settings as well.
In Oncology, our scientific curiosity and dedication to patients are at the heart of our efforts to improve the future
of people living with cancer. In this core focus area of our R&D portfolio, we aim to deliver transformative
treatments. Translational research is embedded into the whole R&D process, with several projects addressing
unmet needs in difficult-to-treat cancers through innovative treatment approaches and novel combinations.
Oncology*
With our Healthcare research, we aspire to make a positive difference for patients. Our business sector-wide
"Focused Leadership" approach to pipeline enrichment builds on our established expertise in the underlying
disease biology of our core therapeutic areas of oncology, neurology and immunology as well as technological
capabilities. By building on our existing strengths and maximizing synergies within our pipeline of compounds
discovered in-house and with external assets, we will secure sustainable R&D productivity in order to provide
innovative medicines to patients in need. In November 2022, we announced that we would aim to launch one
new product or indication every 1.5 years on average, bolstered by external innovation.
* The contents of this chapter or section are voluntary and therefore not audited. However, our auditor has read the text critically.
Life Science
37
Fundamental Information about the Group. Research and Development
€ million
Research and Development Costs
Athinia™ is targeting the semiconductor industry and is a collaborative data ecosystem where multiple
companies leverage AI to solve critical challenges by utilizing data to improve supply chain transparency,
quality and reliability of materials and to accelerate time to market. In July 2023, Athinia™ expanded its
partnerships to include Tokyo Electron for real-time collaborative analysis of the performance of semiconductor
manufacturing equipment. As a cloud solution, Athinia ™ is an independent platform that provides a secure and
specific data analytics tool for the industry. In the context of a sustainability application, data from various
sources can be integrated to facilitate seamless collaboration in modeling, exchanging, and calculating carbon
emissions data. As a founding member of the Semiconductor Climate Consortium, Athinia™ is leading the way
in establishing sustainability standards on a digital platform. Companies can use this platform to benchmark
their emissions performance against their industry peers, identify areas for improvement and participate in
collaborative initiatives aimed at reducing emissions.
Syntropy provides a data integration and analytics environment wherein healthcare organizations can
contextualize and analyze infinitely a wide variety of data types across their entire ecosystem in an unlimited
and secure manner. In 2023, Syntropy announced a partnership with Evidium to develop an AI operating
system for healthcare: This alliance will make it easier for clinicians to contextualize clinical data at the source
and for scientists to securely collaborate on that data. In the era of increasingly prevalent generative AI, it is
crucial for AI to be trustworthy and responsible, especially in healthcare.
101
In our R&D, AI and machine learning have demonstrated their ability to predict the properties of new materials.
However, our applications of AI and machine learning go beyond just internal use. One example of AI and
machine learning being commercialized is the progress made on AIDDISON™. This AI- powered drug discovery
software uses generative AI based on two decades of historic data. The software, which had been in
development since 2020, was launched by Life Science in 2023. In addition to external commercialization, we
also use it in our Healthcare business sector for internal early drug discovery.
Advanced microphysiological systems based on human cell culture models promise to deliver faster and
more accurate drug testing results compared with today's two-dimensional approaches and might reduce
animal testing. We are currently looking into this next generation of organoids based on chip technology,
bringing our Life Science, Healthcare and Electronics colleagues together to work on this area of innovation.
36
Fundamental Information about the Group. Research and Development
Combined Management Report
Developing digital twins in smart manufacturing. As virtual models designed to accurately replicate a
physical object or organism, they can help to improve the time, cost, quality, and sustainability of
manufacturing, process optimization and product development. Examples include making pharma supply
chains more traceable and trustworthy. We developed a model for primary packaging in the pharmaceutical
industry, and in cooperation with a partner provided proof-of-concept.
Life Science
Using our capabilities across the Group in messenger ribonucleic acid (mRNA) synthesis, lipid nanoparticle
(LNP) synthesis and formulation and targeted delivery as well as AI to enable the development of "smarter"
LNPs that can more effectively target different tissue types including hard-to-reach biological targets in
various disease areas.
Examples of opportunities we are developing at the intersection of our business sectors and converging
technologies include:
With our Healthcare business sector's R&D pipeline, we aspire to make a positive difference for patients. Our
main research areas include oncology and immunology, including multiple sclerosis. The main focus of our
Electronics business sector's research is on developing innovative materials and technologies required for the
manufacture of ever smaller, faster, more powerful, and more sustainable processors and memory chips.
Furthermore, Electronics develops novel materials for next-generation displays and functional and decorative
effect pigments for use in the automotive and cosmetics industries and other industrial applications.
We are firmly convinced that science should not be conducted in silos. We believe that a modern,
multidisciplinary approach to science will power the next wave of human progress. We call this approach
"bioconvergence" because it leverages synergies across digital and material science as well as biotechnology.
Success depends on the ability to combine a broad mix of competencies and technologies across several
disciplines to create novel market solutions. We are a diversified science and technology company with leading
positions across the life science, healthcare and electronics industries. Our goal is to harness synergies not only
within our business sectors, but across them.
The organizational setup of our R&D activities reflects our structure with three business sectors. In the
Life Science business sector, our research activities focus on developing innovative technologies for laboratory
and life science applications in government and academic labs, the biopharmaceutical industry, and the
industrial sector. Our Life Science Technology Office, established in 2022, continues to drive long-term
innovation and ensures that R&D investments are aligned with our growth strategy. Our goal is to accelerate
and impact scientific discovery across our Life Science business units and the Group as a whole. We focus on
digital and automated labware, the factory of the future and novel modalities as well as providing more
sustainable products for the lab. In addition, our teams remain dedicated to delivering advancements in our
core portfolios, such as filtration, pure water for use in laboratories and diagnostic solutions.
We conduct research and development (R&D) worldwide to develop new products and services to improve the quality
of life of patients and meet the needs of our customers. Further optimizing the relevance and efficiency of our
research and development activities - either on our own or in collaboration with third parties - is one of our top
priorities. In addition, we are continuously improving the fulfilment of our sustainability criteria and integrating them
into our R&D processes starting with our product development stage. In 2023, we evaluated almost all relevant R&D
projects, thereby increasing transparency regarding the sustainability performance of our global R&D portfolio.
Research and Development
Combined Management Report Fundamental Information about the Group. Research and Development
35
We know that diversity drives progress. It strengthens our ability to innovate and makes an essential
contribution to our success in science and technology. We actively promote and measure the diversity of our
leaders to create an inclusive culture that reflects our values and enables every employee to fulfill their
potential.
Diversity, equity and inclusion
According to our sustainability strategy, which was revised in 2023, we aim to achieve human progress through
sustainable science and technology, fully integrate sustainability into our value chains and reduce our ecological
footprint. We are pursuing these goals in seven focus areas, within which we are realizing numerous initiatives
and projects and measuring our progress.
Sustainability
Continuing to build our automated design-make-test-analyze platform powered by state-of-the-art artificial
intelligence (AI) and lab automation. This will accelerate the discovery of new and better drug candidates
and in turn expedite timelines for new therapies to reach patients.
Healthcare
Electronics
Corporate and Other
Combined Management Report
The ratio of research expenditure to Group sales was 11.6% (2022: 11.3%). The increase is due to the
negative sales development.
-3.0%
-75
2,521
-20.5%
-24
119
-3.5%
-11
308
-2.2%
-37
1,694
1,657
297
94
2,445
-0.7%
-3
399
396
%
€ million
2022
2023
Change
Total
High-Impact Culture
High-quality, interoperable data combined with analytics and AI offer unprecedented potential for new digital
business models adjacent to our current product offering and unlock additional growth opportunities. Examples
include Syntropy and Athinia™, which are partnerships with Palantir.
Amortization of acquired intangible assets
-84.7%
-187
62
-33.0%
-948
298
-31.4%
-141
-917
776
thereof: Changes in inventories³
-89
-604
516
-85.3%
thereof: Changes in trade accounts receivable³
-8
-413
405
-98.0%
thereof: Changes in trade accounts payable/refund liabilities³
-43
-125
13.1%
-650
-345
Combined Management Report_ Fundamental Information about the Group. Internal Management System
31
Operating cash flow (OCF)
Operating cash flow results from Merck's current business activities and describes the cash generated from
operating activities. It is influenced mainly by EBITDA pre, income tax, the financial result and changes in net
working capital.
Merck Group
Operating cash flow
Change
-45
EBITDA pre¹
Adjustments¹
Finance result²
Income tax²
€ million
Changes in working capital¹
-14.2%
-970
6,849
5,879
-390
€ million
2022
2023
%
Phase II
Solid tumors⁹
M9466 (HRS-1167; Selective PARPi)
Solid tumors8
Solid tumors
M9140 (anti-CEACAM5 Antibody drug conjugate)
Solid tumors?
Locally advanced squamous cell carcinoma of the
head and neck - Unresected, cisplatin-eligible³
Locally advanced squamous cell carcinoma of the
head and neck - Resected, cisplatin-ineligible4
Locally Advanced or Metastatic Urothelial Carcinoma 5
Solid tumors6
Phase II
Idiopathic inflammatory myopathies (DM and PM)²
Phase II
Systemic lupus erythematosus¹
Cutaneous lupus erythematosus¹
3.1
Indication
M6223 (anti-TIGIT mAb)
M4076 (ATM inhibitor)
Tuvusertib/M1774 (ATR inhibitor)
Avelumab (anti-PD-L1 mAb) + combinations
Xevinapant (IAP inhibitor)
Xevinapant (IAP inhibitor)
Oncology
Enpatoran (TLR7/8 antagonist)
Enpatoran (TLR7/8 antagonist)
Enpatoran (TLR7/8 antagonist)
Immunology
Global Health
Status
Arpraziquantel (anthelmintic)
10 On 14 December, 2023, the Committee for Medicinal Products for Human Use (CHMP) of the European Medicines Agency (EMA) adopted a positive scientific
opinion for arpraziquantel for the treatment of schistosomiasis in children aged 3 months to 6 years. The application was submitted by Merck, on behalf of the
Pediatric Praziquantel Consortium, under the EU-M4all procedure for high-priority medicines for human use intended for countries outside the European Union.
Pediatric schistosomiasis 10
Malaria
As of December 31, 2023
Therapeutic area
Compound
9 On October 30, 2023, Merck announced a collaboration with Jiangsu Hengrui Pharmaceuticals Co. Ltd., China, including an exclusive license worldwide
(excluding China) to develop, manufacture and commercialize the next-generation potent and selective PARP1 trapping inhibitor HRS-1167.
8 Administered in combination, including combinations other than avelumab.
7 Administered in combination with Tuvusertib/M1774 (ATRI).
6 Studies as monotherapy and in combination with cemiplimab, niraparib, avelumab or M4076 ATMi. Includes studies (phase I/II) in collaboration with/
sponsored by external partners, e.g. US National Cancer Institute (NCI).
5 Combinations include Sacituzumab Govitecan, NKTR-255 and M6223.
5 In combination with radiotherapy in resected LA SCCHN patients ineligible for the treatment with cisplatin.
3 In combination with cisplatin and radiotherapy in unresected LA SCCHN patients eligible for the treatment with cisplatin.
2 Dermatomyositis and Polymyositis.
1 Clinical trial passed futility analysis.
Unless noted otherwise, clinical programs conducted in collaboration with external partners are not shown unless Merck has co-ownership of data. More
information on the ongoing clinical trials can be found at www.clinicaltrials.gov. Pipeline products are under clinical investigation and have not been
proven to be safe and effective. There is no guarantee any product will be approved in the sought-after indication.
End of December 2023, Merck entered into a licensing agreement with Inspirna, Inc., United States, for ompenaclid (RGX-202), a first-in-class oral
inhibitor of the creatine transport channel SLC6A8, and SLC6A8-targeting follow-on compounds. Ompenaclid is currently being evaluated in a Phase II
study for the second-line treatment of RAS-mutated (RASmut) advanced or metastatic colorectal cancer (mCRC).
On December 04, 2023, Merck announced a license agreement with Abbisko Therapeutics Co. Ltd, China, for pimicotinib (ABSK021), which is currently
being evaluated in a Phase III study for the treatment of tenosynovial giant cell tumor (TGCT). The agreement grants Merck a license to commercialize
pimicotinib in mainland China, Hong Kong, Macau and Taiwan, with an option for rest of world.
Phase II
Registration
Phase I
Phase Ib
Phase Ia
Phase Ib
Phase Ib
Phase II
Phase III
Phase III
M5717 (PeEF2 inhibitor)
44
At ECTRIMS 2023, we presented 31 abstracts in total, including long-term efficacy and neurofilament light chain
data (from the M AGNIFY-MS study) for MavencladⓇ as well as new real-world evidence data highlighting naïve use
of the treatment. In addition, we shared updated five-year safety and efficacy data from the Phase II Open Label
Extension for investigational evobrutinib as well as baseline demographic data of our Phase III EVOLUTION trials.
Combined Management Report Fundamental Information about the Group.
Enpatoran, an investigational highly specific potential first-in-class immune modulator blocking the activation of
toll-like receptors (TLR7 and TLR8), is being developed as a new oral therapy for SLE and CLE. It aims to
overcome limitations of currently available lupus therapies by providing selective inhibition of lupus-relevant
disease drivers, which may increase efficacy while preserving immunity against infections. We anticipate data
from our Phase II clinical trials for enpatoran in the first half of 2024.
Beyond our portfolio in MS, we have a pipeline focusing on discovering new therapies that have potential in
other neuroinflammatory and immune-mediated diseases, including systemic lupus erythematosus (SLE),
cutaneous lupus erythematosus (CLE) and generalized myasthenia gravis (gMG).
With a commitment of more than 25 years to people living with multiple sclerosis (MS), our ongoing dedication
to science drives us to discover cutting-edge therapies through our research in neurological and immune-
mediated disease areas.
Neurology & Immunology*
42
Fundamental Information about the Group. Research and Development
Combined Management Report
Updated findings from the Phase II VISION trial, which is the largest study of a MET inhibitor in METex14-
skipping NSCLC and served as the basis for regulatory approvals, continue to show clinically meaningful
long-term efficacy in patients treated with TepmetkoⓇ regardless of line of therapy (2L, 2L+ and 3L+).
A new analysis of real-world survival outcomes and survival risk factors in elderly patients with locally
advanced SCCHN that highlights poor survival outcomes, especially in patients aged 70 years and older
with advanced disease stage and comorbidities, underscoring the need for innovative effective treatments
for this population.
Additional real-world analyses reinforcing the use of BavencioⓇ as a treatment for advanced/metastatic
MCC. After a median follow-up of approximately 29 months, data from the MCC TRIM study showed a
median OS of 52 months for patients with metastatic MCC treated with BavencioⓇ in a real-world setting in
Germany. Most patients (approximately 86%) received first-line BavencioⓇ.
New analyses and real-world evidence that reinforce the role of BavencioⓇ first-line maintenance in the
treatment of advanced UC in patients with varying characteristics. These include long-term efficacy and
safety outcomes from the Phase III JAVELIN Bladder 100 study that confirm the prolonged overall survival
(OS), progression-free survival (PFS) and tolerability of first-line maintenance with BavencioⓇ in patients
older than 65 years with advanced UC. Further evidence from France and the United States, including initial
data from the French AVENANCE study on patients with advanced UC whose tumors have histological
variants, support the findings of JAVELIN Bladder 100 in real-world settings.
•
Highlights included:
At the European Society for Medical Oncology (ESMO) Congress 2023, we presented 28 abstracts featuring the
latest research on our oncology portfolio addressing unmet treatment needs across bladder, head and neck,
lung, colorectal, and other cancers.
ErbituxⓇ data that add to the growing body of evidence supporting the role of cetuximab-based therapies
across the continuum of care in the treatment of RAS wild-type metastatic colorectal cancer and as a
backbone of treatment in SCCHN.
Additional presentations for TepmetkoⓇ that included analyses of the INSIGHT 2 study in NSCLC with
epidermal growth factor receptor (EGFRm) mutation and MET amplification during treatment with
TepmetkoⓇ plus osimertinib.
Clinical data for BavencioⓇ that reinforce its role as a standard of care in first-line maintenance for
advanced urothelial carcinoma in patients without disease progression following first-line platinum-based
chemotherapy. Poster discussions, including long-term safety analyses and an analysis of quality-adjusted
survival from the Phase III JAVELIN Bladder 100 study, confirm the acceptable long-term benefit-risk
profile as well as the net benefit estimate of BavencioⓇ in first-line maintenance and further support its use.
Long-term outcomes from the VISION study, the largest study of a MET inhibitor in patients with METex14-
skipping advanced NSCLC (N=313). Detection was carried out via liquid and/or tissue biopsy. The results
demonstrate the robust and sustained clinical activity of TepmetkoⓇ, particularly in the first-line setting:
with a median follow-up time of 32.6 months, the overall response rate in 164 people treated with first-line
therapy was 57.3% (95% CI: 49.4, 65.0) and the median duration of response 46.4 months (13.8, cannot
be estimated).
•
Highlights included:
In June, 43 abstracts featuring new data for the medicines Bavencio® (avelumab), Erbitux® (cetuximab) and
TepmetkoⓇ (tepotinib) and drug candidates from our pipeline including the first-in-class investigational IAP
inhibitor xevinapant were presented at the ASCO Annual Meeting.
We shared additional new data for our marketed and investigational oncology medicines at major oncology
congresses.
Highlights of congress publications in 2023
41
Combined Management Report Fundamental Information about the Group. Research and Development
We are also exploring the potential of oral cladribine beyond MS, developing it for the treatment of gMG, which
affects an estimated 700,000 people and where a high unmet need remains, particularly as regards oral
treatment options. Cladribine is believed to work by affecting the pathogenic pathways involved in the
development of autoimmunity (auto-antibody producing B cells and T cells). In June 2023, the FDA granted
Orphan Drug Designation for cladribine for the treatment of myasthenia gravis. We anticipate the initiation of a
global Phase III clinical trial program in the second quarter of 2024.
In February 2023, we entered a preclinical licensing and strategic research partnership with Aqilion, a biotech
company focused on developing innovative treatments for immune-mediated and neurological diseases.
New data for our existing therapy MavencladⓇ (cladribine tablets), as well as for our investigational drug
evobrutinib, were presented at key congresses in 2023, including the Americas Committee for Treatment and
Research in Multiple Sclerosis (ACTRIMS) Forum in February, the American Academy of Neurology (AAN)
Annual Meeting in April and the European Committee for Treatment and Research in Multiple Sclerosis
(ECTRIMS) Congress in October.
At ACTRIMS 2023, we presented data that included analyses of the CLARIFY-MS study, showing the potential of
MavencladⓇ to improve outcomes in an impactful way for people living with RMS. In addition, we showed
updated long-term efficacy and safety data from our Phase II program for the investigational drug evobrutinib.
In December we shared that the phase III pivotal study did not meet its primary endpoint of annualized relapse
rate for up to 156 weeks compared to oral teriflunomide.
Our pipeline
* The contents of this chapter or section are voluntary and therefore not audited. However, our auditor has read the text critically.
On September 20, we announced two strategic collaborations with Benevolent AI and Exscientia to drive
accelerated drug discovery with higher probability of success. Access to end-to-end AI platform capabilities is
expected to generate several novel development candidates in oncology, neurology and immunology. AI-
powered R&D is an integral part of delivering on our ambition to bring more medicines to more patients, faster.
Collaborations to strengthen AI-driven drug discovery*
In September, we celebrated the topping-out for our Launch and Technology Center at our site in
Darmstadt, Germany. This investment of approximately € 160 million is intended to ensure that our next
generations of innovative small-molecule medicines (including high-potency compounds) are available for
clinical trials, global launches and commercial supply on time and in the required quality and quantity, with
accelerated processes compared with the past. The Launch and Technology Center is anticipated to be fully
operational by the end of 2025 following validation by regulatory authorities.
In June, we inaugurated our Biotech Development Center at our site in Corsier-sur-Vevey, Switzerland. This
investment of over € 250 million aims to ensure that our next generations of innovative large-molecule
medicines (biotech therapies and potential other new therapeutic modalities) are available for clinical trials
on time and in the required quality and quantity with an accelerated process compared with the past. The
Biotech Development Center is expected to be fully operational in early 2024 following validation by
regulatory authorities.
•
Our declared aim is to bring more medicines to more patients faster. In 2023, we supported this aim by reaching
key milestones for two transformational investments focusing on complementary therapeutic modalities:
Investments to speed up the availability of new medicines*
ConcorⓇ/Concor Cor®, containing bisoprolol, is a beta-blocker for treating hypertension and cardiovascular diseases
such as coronary heart disease and chronic heart failure. In addition to ConcorⓇ/Concor CorⓇ, the ConcorⓇ
franchise includes fixed-dose combinations such as Concor Plus®/Lodoz® (bisoprolol with hydrochlorothiazide) and
ConcorⓇ AM (bisoprolol with amlodipine). ConcorⓇ AM has been registered in 71 countries.
GlucophageⓇ, containing the active ingredient metformin, is the most widely prescribed non-insulin diabetes
treatment worldwide for first-line treatment of type 2 diabetes for which we achieved a successful label
extension in Europe in 2022. The label update on the mechanism of action is evidence of the still growing body
of knowledge and opportunities for metformin in the diabetes continuum. Those label updates are currently
being rolled out in all other countries outside Europe where the GlucophageⓇ family of products is available.
Research and Development
The new formulation of Euthyrox® (levothyroxine) for the treatment of hypothyroidism obtained further
regulatory approvals in 2023, resulting in a total of 101 countries where this incremental innovation is
registered. With its characteristics of delivering precise, fine-tuned and stable T4 doses, EuthyroxⓇ may help
optimize disease management, making it a good choice for healthcare providers and patients.
Cardiovascular, Metabolism & Endocrinology*
According to updated data, more than five million babies have been born worldwide with the help of Gonal-fⓇ,
a leading therapeutic within our fertility portfolio. It contains the active ingredient follitropin alfa (r-hFSH alfa),
which is a recombinant form of the natural hormone FSH and is available in a convenient and ready-to-use pre-
filled injection pen. Treatment with Gonal-fⓇ can result in increased follicles, oocytes and embryos compared
with urinary gonadotropins, thereby improving the chances of pregnancy and live birth. Recent real-world
evidence studies based on key European registries (D.I.R., SNDS) showed increased likelihood of live birth with
Gonal-fⓇ compared with urinary gonadotropins and biosimilar preparations of follitropin alfa.
43
Fundamental Information about the Group. Research and Development
Combined Management Report
* The contents of this chapter or section are voluntary and therefore not audited. However, our auditor has read the text critically.
Infertility is an increasing challenge globally due to demographic changes and lifestyle adjustments such as
delayed childbearing. Based on the latest data from WHO, one in six people worldwide are affected by infertility.
As the global market leader in fertility drugs and treatments, our Fertility franchise plays a crucial role in our
Healthcare business.
Fertility*
ATM: ATM serine/threonine kinase
At AAN 2023, we presented data from the M AGNIFY-MS study, showing sustained reductions in the memory B-
cell numbers, with changes towards anti-inflammatory phenotypes in circulating B- and T-cell types for study
participants taking Mavenclad® and provided updated efficacy and safety data from our Phase II program for
the investigational drug evobrutinib.
In view of the significant and growing impact of chronic diseases such as diabetes, prediabetes, hypertension,
and cardiovascular disease, growth hormone disorders and thyroid disorders on health and society in the 21st
century, we are committed to helping patients with these conditions.
Japan
ATR: Ataxia telangiectasia and Rad3-related
CEACAM5: Carcinoembryonic antigen-related cell adhesion molecule 5
4.2%
10.9%
18.1%
19.1%
2.5%
-2.3%
7.8%
9.2%
7.7%
17.4%
35.8%
38.2%
14.5%
16.9%
4.2%
-0.1%
4.5%
Growth of wafer area for semiconductor chips
-14.1%
Combined Management Report _ Report on Economic Position
7 Growth of display area is a pure volume indicator.
6 Growth rates based on market data stated in US dollars. Market data from Evaluate Pharma on the growth of indications are based on published
company reports and are subject to exchange rate fluctuations.
5 Growth rates based on market data in local currency, translated at a constant euro exchange rate. The IQVIA market data on the growth of indications
are based on current figures, including the third quarter of 2023. Annual growth based on the values for the past 12 months. The type 2 diabetes
market excludes the United States since this market is insignificant to Merck.
3 Global pharmaceutical spending at a constant exchange rate. IQVIA market data based on the past 12 months as of the third quarter 2023.
4 Number of programs in Phase I or Phase II clinical trials, Cortellis.
1 Predicted development. Final development rates for 2023 were not available for all industries when this report was prepared.
2 Global Market for Laboratory Products, October 2023, Frost & Sullivan.
7.1%
-5.6%
10.1%
12.2%
4.2%
Global sales of cosmetics and care products
-3.9%
-1.5%
Growth of display surface area?
3.9%
Global number of produced light vehicles
Change 2022
Change 2023¹
49
India
4.5
5.4
Emerging Markets and Developing Economies Asia
4.1
4.1
Emerging Markets and Developing Economies
6.7
1.0
3.4
0.5
1.9
2.5
2.6
1.6
3.5
1.9
Macroeconomic and Sector-Specific Environment
7.2
5.2
Electronics
Market for the treatment of colorectal cancer6
Market for fertility treatment5
Market for type 2 diabetes therapies5
Market for multiple sclerosis therapies
Global pharmaceutical market
Healthcare
China
Early clinical monoclonal antibody (mAb) pipeline growth
Growth in global sales of biopharmaceutical drugs³
Growth in market for laboratory products²
Life Science
The development of selected sector specific environments was as follows:
Combined Management Report _ Report on Economic Position Macroeconomic and Sector-Specific Environment
1 Figures for fiscal 2023 estimated
Euro Area
Share of biopharmaceutical sales in the global pharmaceutical market³
BTK: Bruton's tyrosine kinase
50
Life Science
PFAS, a generic term that covers about 10,000 per- and polyfluoralkyl substances, is used for several critical
applications in the manufacture of microchips, e.g. photolithography, plasma etching and wafer cleaning. While
it is currently not possible to manufacture semiconductors without PFAS, we have already developed several
alternative products for some applications in Electronics. One area in which we are highly advanced is the
replacement of PFAS surfactants with non-PFAS alternatives in photoresists and related ancillary products such
as rinse solutions.
Scorecard
To embed sustainable design into R&D and steer our portfolio in a more sustainable direction in the long term,
we have developed a scorecard that focuses on sustainable criteria in the development of new products and
solutions. The scorecard is a tool for driving a sustainability culture in R&D and considers every step of the
value chain to identify opportunities and risks at an early stage and act accordingly.
* The contents of this chapter or section are voluntary and therefore not audited. However, our auditor has read the text critically.
46
Combined Management Report Fundamental Information about the Group.
Research and Development
Academic research program
With the objective of enabling more sustainable semiconductor manufacturing solutions, we have joined forces
with the Intel Corporation to jointly fund an academic research program over three years. The program will
specifically leverage AI and machine learning technologies to achieve innovative breakthroughs in sustainable
semiconductor manufacturing processes and technologies. Potential solutions include environmentally friendlier
materials, more efficient use of resources, AI-based solutions for modeling chemical processes, and opportunities
for reducing waste and emissions. The focus is on building open-source tools for the benefit of the entire scientific
and industrial community.
R&D activities in the business units*
Semiconductor Solutions
In our R&D we are addressing critical material needs through every step of the wafer manufacturing process.
Top R&D programs for our Semiconductor Solutions business units include:
Business field Thin Films
Our Thin Films business field is actively developing new dielectrics (organosilanes and spin-on dielectrics) and
metallics offerings. Many of these new products are qualified by multiple customers and we are developing new
materials for leading-edge nodes that will enable chips and chiplets used for generative AI. The integration of
the chemical business of Mecaro into our business enables us to develop new precursors for high performance
DRAM and provides us with unique capabilities to expand our development in Asia. In addition, we continued to
expand our metallics portfolio to support our customers' roadmaps, providing innovative solutions for ALD
(atomic layer deposition) and CVD (chemical vapor deposition). We achieved significant advancements in high-
performance, conformal dielectric ALD films which address key customer pain points. Our spin-on-dielectrics
platform focuses on developing new formulations for gap-fill applications in increasingly deep and narrow
insulating features with the improved performance needed to enable next-generation V-NAND (vertical flash
memory) and DRAM (dynamic random-access memory).
Business field Specialty Gases
PFAS
Nitrogen trifluoride (NF3) accounts for about 60% of our global emissions, mainly from our specialty gases
business. We developed and tested an abatement solution using a modified commercial thermal destruction
technology and demonstrated the ability to destroy NF3 with 99% efficiency.
NF3 abatement
We are continuing to drive sustainability in R&D to address the increasing push for lower emissions along the
value chains. Ongoing key programs focus on, e.g. NF3 abatement and more sustainable processes and
manufacturing technologies as well as green solvents, sustainable etch gases and PFAS replacement.
IAP: Inhibitor of apoptosis proteins
mAb: Monoclonal antibody
PARP1: poly (ADP-ribose) polymerase 1
Phase Ia: Dose finding
Phase Ib: Dose escalation/expansion and signal seeking
PD-L1: Programmed cell death ligand 1
PeEF2: Plasmodium eukaryotic elongation factor 2
Our etch gas technology program continues to develop new chemistries to enable more than 100-layer, single-
stack etching for advanced memory devices such as V-NAND (vertical flash memory). We are also seeing good
progress in our etch gas development work for new low-GWP (global warming potential) gases for etching
applications and in our cooperation with customers to develop low-GWP gas solutions used in the production of
semiconductors.
TIGIT: T cell immunoreceptor with Ig and ITIM domains
TLR7/8: Toll-like receptors 7 and 8
Fundamental Information about the Group. Research and Development
45
Electronics
As a science and technology company, we strive to offer leading-edge products, services, and solutions.
Our R&D strategy follows our overall Electronics technology strategy, which aims to enhance and expand our
capabilities, drive organic growth and enable new technology platforms. Our Chief Technology Office (CTO) is
identifying trends and vetting technologies that are beyond the time horizon or scope of our business units. As
a dedicated technology organization, the CTO is managing research partnerships, shaping our technology
roadmaps, and managing our long-term R&D portfolio. Our Technology Leadership Board reviews and optimizes
our technology investment across the business sector.
Our R&D is aligned to strengthen our existing position in the industry across many key material and innovation
areas, with the addition of artificial intelligence (AI), data services, analytics, and sustainability to enhance our
portfolio offering. As an essential part of our "Level Up" growth program, we are continuing to invest significantly
more than € 3 billion in innovation and capacity expansion. With our R&D investments within "Level Up", we are
also scaling up our research and development capabilities for next-generation semiconductor and display materials
to further strengthen our position as one of the leading suppliers to the electronics industry.
Our R&D is focused on finding solutions for the needs that drive our industry: increase energy efficiency of
devices, enhance performance of materials, reduce environmental impact on the planet. Consequently,
sustainability, and the use of AI and machine learning are key focus areas of our R&D.
Sustainable technologies and materials*
Combined Management Report
Business field Formulations (patterning and planarization)
The main driver of our R&D engagements in patterning is the manufacturing capability and costs associated
with extreme ultraviolet (EUV) lithography systems. We are increasing our efforts in the development of EUV
lithography materials to directly help our key customers address these challenges. Our Patterning Solutions
team achieved a breakthrough in PFAS-free EUV rinse development, paving the way for a sustainable solution
to prevent the collapse of structures in EUV lithography.
We are also investing in directed self-assembly (DSA) capabilities as we support customers' integration of DSA
into advanced nodes, and we are beginning to sample photoresists and rinse materials from our PFAS-free
portfolio development.
Overall, the IMF expects global inflation to decline more than expected in 2023 but remained above target
levels. The persistently high inflation rates prompted central banks to increase interest rates and high debt
levels led to tighter fiscal policies in some countries. China's property sector crisis still poses a risk as it could
deepen and cause global spillovers.
The development of gross domestic product (GDP) in selected countries and regions was as follows:
Annual change in %
20231
2022
World
Advanced Economics
In its latest World Economic Outlook published on January 30, 2024, the International Monetary Fund (IMF)
predicts that the global economic recovery will prove surprisingly resilient despite numerous crises, but the
speed of the recovery will vary depending on the economy. Global gross domestic product (GDP) growth slowed
from 3.5% in 2022 to a projection of 3.1% in 2023. Overall, economic activity remains below pre-pandemic
levels. Major impediments to economic recovery are long-term consequences of the pandemic and geopolitical
tensions as well as cyclical factors such as inflation and tightened monetary policy. The ongoing war in Ukraine
and the resurgent conflict in the Middle East are weighing on the economic development by accelerating the
geoeconomic fragmentation and hindering the flow of commodities, which could lead to food or energy price
peaks.
USA
Not only the growth of the pharmaceutical sector as a whole, but also the market development for
biotechnologically produced active ingredients is relevant to our business. According to IQVIA, these products
accounted for 38.2% of the global pharmaceutical market in 2023 (2022: 35.8%), thus continuing the increase
in market share of recent years. The most important market for biological pharmaceuticals remains the United
States, with a 64.2% share of global biopharmaceutical market volumes.
The developments at a regional level follow the described trend. EMEA (Europe, Middle East and Africa) grew by
9.2% in 2023 (2022: 8.2%) with the EU5 (Germany, France, UK, Italy, and Spain) growing by 7.8% (2022:
8.0%). North America grew by 10.2% (2022: 9.6%) with the United States growing at a rate of 10.3% (2022:
9.5%). In absolute terms, the pharmaceutical market in the United States remains the biggest and most
important market by far. Latin America achieved double-digit growth of 19.2% (2022: 12.5%) impacted by
high inflation. This is followed by the Asia-Pacific region (excluding China and Japan) with 8.2% growth (2022:
9.6%). Despite continued extension of price regulations (for example, volume-based procurement), China
returned to growth with 4.3% in 2023 (2022: -0.8%) due to the lifting of Covid-19 pandemic measures,
increased access to innovative products and growing healthcare infrastructure).
In its latest study from September, IQVIA forecasts growth of 9.2% in 2023 (2022: 7.8%) for the global overall
pharmaceutical market. After the recovery from the Covid-19 pandemic, the pharmaceutical market is expected
to see still high growth rates benefitting from accelerated approval pathways and increased access to innovative
medicines globally. This is balanced by further increasing cost containment measures and policies driving
biosimilar and generics uptake as well as stricter price reviews and prescription controls.
Healthcare
Once capital markets stabilize, spending on laboratory products is likely to increase again. In the pharma and
biotech production market, in which our Process Solutions and Life Science Services business units are active,
demand is driven by the development and manufacture of therapeutics and vaccines. According to the
pharmaceutical market research firm IQVIA, the end market for biopharmaceuticals grew by 16.9% in 2023
(2022: 14.5%) to € 496 billion (or 38.2% of the global pharmaceutical market). The number of monoclonal
antibodies (mAbs) in phase I or II development grew by 17.4% (2022: 7.7%). While the biopharmaceutical
market grew in 2023, laboratory consumables and materials used in manufacturing were pre-purchased to a
significant extent in 2022, resulting in high inventories among our customers.
Accordingly, the markets in which the Life Science business sector of Merck operates slowed down in 2023
compared with 2022. According to the market research firm Frost & Sullivan, the market for laboratory
products, which is relevant to our Science & Lab Solutions business unit, declined by -5.6% in 2023 (2022:
4.2%). This decline is due to a challenging macroeconomic outlook (declining GDP growth and persistent
inflation) and a sustained slowdown of investment in early stage biotech companies (according to Citi Research,
venture capital and IPOs remain below pandemic highs).
Our Life Science business sector is one of the leading global suppliers of products, tools and services for
research laboratories, pharma and biotech production, as well as industrial and testing laboratories. The
convergence of several adverse developments (macroeconomics, capital constraints, declining Covid-19
pandemic demand, and high customer inventory) has challenged growth of life science companies compared
with previous years.
The developments in the therapeutic areas of relevance to Merck saw differing trends in the reporting year. The
global market for type 2 diabetes, excluding the United States, followed the growth trend of previous years and
accelerated growth, achieving 19.1% in 2023 (2022: 18.1%). The therapeutic area of infertility grew 10.9% in
the reporting year (2022: 4.2%). Colorectal cancer declined by -0.1% in 2023 (2022: increase of 4.5%) due to
biosimilar penetration. The growth trend in the market for multiple sclerosis therapies declined slightly
compared with previous year level by -2.3% (2022: 2.5%), as new product launches are counteracted by the
effect of generic competition.
50
Macroeconomic and Sector-Specific Environment
Report on ECONOMIC
Our Planarization business is driving new product development across advanced oxide and metal segments. For
example, we are achieving technical progress using dielectric high-performance cerium dioxide particles for
advanced oxide CMP (chemical mechanical planarization).
* The contents of this chapter or section are voluntary and therefore not audited. However, our auditor has read the text critically.
Combined Management Report
Fundamental Information about the Group. Research and Development
47
Display Solutions
With the proliferation of multiple applications and display trends, the display industry's technological
requirements are significantly expanding. Our display materials are enabling the fast-growing market of
innovative displays for current and future applications such as foldable smartphones, flexible displays for
automotive or AR/VR (augmented reality/virtual reality) devices.
position
As our liquid crystals business remains a strong focus area, our R&D team is continuously working to develop new
liquid crystal mixtures for our customers who need differentiated performance such as high transmittance, high
contrast ratio, and high reliability to realize displays for new applications. We are working with our customers in
the field of AR/VR to expand the application scenarios of liquid crystals and continue to enhance the user
experience in small and micro-sized displays. We remain fully committed to advancing LCD technology and are
working very closely with leading panel makers to develop next-generation products for the electronics market.
In the display industry, OLED is regarded as state-of-the-art technology for its excellent visual experience. It is
also considered as the technology of the future of displays as it enables the production of flexible, foldable,
rollable, and even transparent displays. We introduced new barrier materials that offer superior flexibility,
higher reliability and a longer lifetime in flexible OLED devices compared with existing solutions. Devices with
fully flexible OLED displays are one of the fastest-growing trends in data-driven electronics. Our innovative ALD
material won the "Display Component of The Year 2023" award from Society for Information Display (SID), the
world's largest display association. In addition, our innovative deuterated material won the "Technology
Innovation Award" from LG Displays in September 2023.
In our Surface Solutions business, we offer our customers solutions for designing surfaces that meet their
specific requirements. Together with our customers, we are consistently developing new formulations that, in
combination with existing products and product innovations, provide customized solutions across various
industries.
In our automotive pigments business, we are continuously expanding our portfolio of Colorstream® multicolor-
effect pigments. A recent example is the development of Colorstream® F20-52 SW Mineral Red pigment, a new
silica-based pigment that extends the red color palette of Surface Solutions into a more blueish-red range.
In our cosmetics business, we are further developing our range of high-color intensity pigments with metallic
optical effects entirely without the use of metals. These Ronaflux® pigments are based on an entirely new
proprietary technology employing fluidized bed processes for depositing ultrathin and highly stable carbon
layers onto pearlescent pigments - a major precondition for spectacular shine effects. The carbon layers
intensify the colors of the effect pigments, thus enabling brilliant shades of blue and green without the addition
of chrome oxides, Prussian blue or other colorants. This new offering enables manufacturers of eye makeup and
lipsticks to meet the strict regulatory requirements while offering brilliant metallic blue and green shades that
do not contain any metal-based pigments.
To produce realistic color effects on electronic devices, we are focusing on methodologies to transfer coloristic
measuring data into 3D visible effects. As a first step, we have introduced the first digital tool for visualizing car
colors in various light conditions in a realistic way. Under controlled, calibrated conditions, color data, measured
state-of-the-art technology, can be used to produce a realistic display.
Combined Management Report _ Report on Economic Position
Macroeconomic and Sector-Specific Environment
48
Surface Solutions
3.0
Current provisions increased as a result of follow-on obligations in connection with the discontinuation of
the development program for evobrutinib and ongoing efficiency programs (further information can be
found in Note (27) "Other provisions” in the Notes to the Consolidated Financial Statements).
In fiscal 2023, the Merck Group recorded the following regional sales performance:
Share
2022
Total change
Acquisitions/
divestments
Exchange
rate effects
Organic
growth¹
Europe
Share
€ million
Net sales by region
Merck Group
Merck Group
Course of Business and Economic Position
Report on Economic Position
2023
Combined Management Report
6,037
-1.3%
Asia-Pacific (APAC)
29%
6,361
-6.4%
0.1%
-2.7%
29%
-3.8%
5,952
North America
28%
6,248
-3.4%
-2.1%
28%
6,936
1 Not defined by International Financial Reporting Standards (IFRS).
22,232
47%
10,380
Share
2022
Total change
-10.6%
2.7%
-5.8%
7,839
8.5%
8,053
Healthcare
0.1%
-2.7%
-7.9%
44%
38%
100%
35%
3,659
-5.6%
0.1%
-4.1%
-1.6%
100%
20,993
Electronics
Merck Group
4,013
-8.8%
0.3%
-4.1%
-5.1%
18%
18%
33%
-4.3%
-5.8%
12,392
Gross profit
-38.4%
-8,527
-41.0%
-8,600
59.0%
100.0%
2022
22,232
100.0%
20,993
%
2023
Cost of sales
%
Net sales
13,705
€ million
-1,239
-73
-1,313
-1,306
-6.6%
-1,392
Administration expenses
-4.3%
203
61.6%
-21.2%
-21.5%
-4,510
Marketing and selling expenses
0.9%
-9.6%
-5.6%
%
-4,714
€ million
Change
Consolidated Income Statement
Africa (MEA)
Middle East and
5%
1,231
8.1%
-10.5%
Merck Group
18.6%
1,331
Latin America
35%
7,697
-9.9%
0.2%
6%
737
20,993
4%
8.8%
Merck Group
The Consolidated Income Statement of the Merck Group is as follows:
Net sales in the Life Science business sector decreased by € 1,100 million or -10.6% year-on-year to
€ 9,281 million (2022: € 10,380 million). This development was mainly attributable to organic effects, which
amounted to € 821 million or -7.9%. Exchange rate effects of € 285 million or -2.7% also contributed to the
downturn in net sales. The Life Science business sector accounted for the largest share of Group net sales at
44% (2022: 47%), followed by Healthcare at 38% (2022: 35%). Net sales in the Healthcare business sector
increased by € 214 million or 2.7% year-on-year to € 8,053 million (2022: € 7,839 million). Negative exchange
rate effects of -5.8% were offset by organic growth of 8.5%. The € 354 million decline in net sales in the
Electronics business sector to € 3,659 million (2022: € 4,013 million) was driven by organic effects of -5.1% and
exchange rate effects of -4.1%. This was offset by a positive effect of 0.3% from the acquisition of M Chemicals
Inc., Korea. The percentage contribution of Electronics to Group net sales was unchanged year-on-year at 18%.
Orders already received by the reporting date that will result in net sales in future periods amounted to
around € 4 billion as of December 31, 2023 (December 31, 2022: around € 6 billion), of which around
€ 3 billion related to the Life Science business sector (December 31, 2022: around € 4 billion).
In fiscal 2023, the Merck Group generated net sales of € 20,993 million (2022: € 22,232 million),
representing a year-on-year decline of € 1,239 million or -5.6%. Negative exchange rate effects served to
reduce net sales by € 902 million or -4.1% in fiscal 2023. These effects largely resulted from the exchange
rate development of the Chinese renminbi, the US dollar, and the Argentinian peso. Net sales fell by
€ 357 million or -1.6% organically. Net sales in the Life Science and Electronics business sectors declined,
while the Healthcare business sector recorded organic growth. The portfolio-related net sales increase of
€ 19 million mainly resulted from the acquisition of M Chemicals Inc., Korea.
1 Not defined by International Financial Reporting Standards (IFRS).
100%
22,232
-5.6%
0.1%
-4.1%
-1.6%
100%
3%
6.1%
-2.7%
9,281
-5.9%
Acquisitions/
divestments
Organic
growth¹
Merck Group
Merck Group
Course of Business and Economic Position
55
Merck Group
Report on Economic Position Course of Business and Economic Position
Key figures
Combined Management Report
We originally anticipated a moderate decline to roughly stable development for the operating cash flow of the
Merck Group in 2023 (2022: € 4,259 million). We then specified the forecast range at between € 3,700 million
and € 4,300 million with the publication of the figures for the first quarter. As we expected the development of
operating cash flow to be largely in line with operating performance, we lowered our forecast to between
Operating cash flow
The expenses for Corporate and Other in EBITDA pre amounted to € -397 million in fiscal 2023. This meant that
EBITDA pre was slightly below the original forecast range of between € -370 million and € -330 million. However,
we specified our forecast with the presentation of the figures for the third quarter. Due to substantially lower
expected income from currency hedging transactions, we have forecast that EBITDA pre for corporate costs and
other is expected to be slightly below the forecast range of -330 to -370 million €. The original forecast for fiscal
2023 provided for a significant decline in the expenses in this area. Compared with the prior-year figure of € -
579 million, the expenses decreased significantly by -31.5%.
We originally anticipated a slight to strong organic decrease in EBITDA pre for our Electronics business sector in
fiscal 2023. We expected inflation-driven cost increases to have a particularly pronounced impact on material costs,
and that we would only be able to pass on cost increases to a limited extent in the coming quarters due to the price
pressure faced by our customers. With the presentation of the figures for the first quarter, we quantified our
forecast for the organic decline in EBITDA pre as ranging from -12% to -3%. Having lowered our forecast
considerably to between -18% and -10% with the report on the second quarter in response to inflation-related cost
increases and the underutilization of our production capacities, we reiterated this guidance at the end of the third
quarter. Along with the exchange rate effect that was most recently forecast at between -10% and -7% (originally:
significantly negative exchange rate effect), this resulted in a forecast range for EBITDA pre in the Electronics
business sector of between € 870 million and € 980 million. EBITDA pre of € 913 million in fiscal 2023 (2022:
€ 1,192 million) was in the lower half of the forecast range. This was consistent with the more specific forecast
issued along with the report on the third quarter (trending in the lower half of the range) and corresponded to a
decline of -23.4% compared with the previous year (-17.1% organic, -5.6% due to exchange rate effects).
Corporate and Other
Electronics
With our new products expected to continue to deliver a substantial earnings contribution, especially
MavencladⓇ and BavencioⓇ, we forecast slight to moderate organic growth in EBITDA pre for our Healthcare
business sector. Largely because of the sustained high level of prices due to inflation, this original forecast was
slightly below the expected organic growth in net sales (moderate to solid organic sales growth). With the
publication of the figures for the first quarter, we quantified our forecast for organic growth in EBITDA pre at
between +8% and +12% in fiscal 2023. We then raised this forecast to between +14% and +19% at the end
of the second quarter, especially as business performance was expected to be stronger. We confirmed this
forecast range at the end of the third quarter. Along with the exchange rate effect that was most recently
forecast at between -17% and -13% (originally: negative exchange rate effect in a high single-digit to low
double-digit percentage range), this resulted in a forecast range for EBITDA pre in the Healthcare business
sector of between € 2,450 million and € 2,600 million. With EBITDA pre of € 2,543 million in fiscal 2023 (2022:
€ 2,477 million), the business sector came in at the upper end of this range. This was also consistent with the
more specific forecast issued together with the report on the third quarter (trending at the upper end of the
range). This corresponded to an increase of +2.7% compared with the previous year (+17.1% organic, -14.4%
due to exchange rate effects, -0.7% from portfolio).
€ 3,500 million and € 4,100 million at the end of the second quarter and confirmed this forecast in our report
on the third quarter. The operating cash flow amounted to € 3,784 million in fiscal 2023, which was within the
most recent forecast range of between € 3,500 million and € 4,100 million. This corresponded to a decline of
-11.2% compared with the previous year (2022: € 4,259 million). The decisive factor for this was the
development of EBITDA pre.
Healthcare
Change
2023
Margin (% of net sales) 1
-19.3%
-865
4,474
3,609
Operating result (EBIT) 1
€ million
-5.6%
22,232
20,993
Net sales
%
€ million
2022
-1,239
17.2%
54
Report on Economic Position Review of Forecast against Actual Business Developments
The forecast of the Merck Group for fiscal 2023 published in the Annual Report for fiscal 2022 comprised the forecast
for the Group as well as the forecast for the three business sectors: Life Science, Healthcare, and Electronics.
Review of Forecast against Actual Business
Developments
52
Review of Forecast against Actual Business Developments
Report on Economic Position
Combined Management Report
Net sales
The markets for automotive coatings and cosmetics are crucial to our Surface Solutions business. According to
the December 2023 report from GlobalData (formerly LMC), a leading global provider of automotive forecasts,
global automobile production grew significantly by 10.1% in 2023 compared with growth of 7.1% in 2022.
Underlying drivers include an unmet global demand, with China continuing to be one of the most important
markets. According to Euromonitor's report from October 2023, the market for cosmetics and care products
grew more slowly in 2023 after a very strong development in 2022 with an overall growth of 4.2% in 2023
(2022: 12.2%).
Despite the current downturn, we foresee a positive outlook for the Electronics business sector. We anticipate
that the semiconductor market will regain momentum in 2024, driven by AI solutions, the Internet of Things,
and the increase in data volumes related to big data.
The semiconductor industry is the most important market for our business with materials, solutions and
services for the production of integrated circuits (Semiconductor Solutions). In particular, the growth in demand
for semiconductor materials depends mainly on the wafer area produced for semiconductors. The silicon wafers
required as raw materials are used as an indicator to estimate the demand for semiconductor materials overall.
According to the global industry association SEMI (forecast as of Q3 2023), the delivered silicon wafer area
experienced a -14.1% decline in 2023, following moderate growth in 2022 (3.9%). The current cyclical industry
downturn is amplified by macroeconomic challenges such as high interest rates and changing consumer buying
behaviors with a preference for services. Semiconductor manufacturers have responded by reducing utilization
rates to address excess inventory, resulting in declining demand for silicon wafers and related materials and
services.
Electronics
51
Combined Management Report _ Report on Economic Position Macroeconomic and Sector-Specific Environment
Current financial liabilities were reduced by the repayment of a bond in the amount of € 600 million and an
early partial repayment of hybrid bonds in the amount of € 275 million.
With our Display Solutions business, we are a significant producer of liquid crystal mixtures and OLED materials
for the display industry. After the Covid-19-pandemic-induced "stay at home boom," the display industry
underwent demand normalization in 2022. There are several indications that display market is slowly
recovering after supply inventory adjustments. Due to sluggish demand in the fourth quarter of 2023, however,
the market research company OMDIA (forecast as of Q3 2023) forecasted a slight decline in growth for 2023.
In the medium to long term, liquid crystals will continue to play a key role in the display industry in the future.
OLED technology, for which we have a strong position as material supplier, is becoming increasingly important
in high-end display applications.
54
We forecast slight to solid organic net sales growth for the Group in 2023. In particular, the macroeconomic,
geopolitical and industry-specific conditions changed over the course of the year. Furthermore, the Life Science
business sector saw sustained high inventory levels and a reluctance to invest on the part of customers, while the
Electronics business sector was affected by the ongoing weakness of the market for semiconductor materials.
Waning demand for products in connection with the Covid-19 pandemic meant that, as expected, net sales
declined sharply in fiscal 2023. All in all, we reported an organic decline in net sales of -1.6% in fiscal 2023,
which fell within the forecast range of between -2% and +2% that we revised in the second quarter and
confirmed in the third quarter. At the start of the year, we anticipated a negative exchange rate effect totaling
between -1% and -4%, especially as a result of the expected development of the U.S. dollar and the Chinese
renminbi. Several currencies, including the U.S. dollar and the Chinese renminbi as well as some currencies of
emerging economies, saw less favorable development than expected as the year progressed. The negative
exchange rate effect in 2023 as a whole was -4.1%, thus falling within the range of -3% to -6% which we most
recently revised in the second quarter and confirmed in the third quarter. The slightly positive portfolio effect
was negligible at +0.1%. All in all, net sales amounted to € 20,993 million, representing a year-on-year
decrease of -5.6%. This was below the mid-point of the forecast range of € 20,500 million to € 21,900 million
and thus was consistent with the more specific forecast issued together with the figures for the third quarter
(trending slightly below the mid-point).
-
Combined Management Report
In contrast to the expected net sales development, we originally expected EBITDA pre in Life Science to be in a
range from a moderate decline to organically about stable in fiscal 2023 due to inflation-driven price increases
weighing more heavily on earnings. At the end of the first quarter, we quantified our forecast for the organic
decline in EBITDA pre at between -8% and -4%. In response to the underutilization of our production
capacities, we then lowered this to between -21% and -12% with the publication of the figures for the second
quarter. Along with the exchange rate effect that was most recently forecast at between -6% and -2%
(originally: slightly negative exchange rate effect), this resulted in a forecast range for EBITDA pre in the
Life Science business sector of between € 2,750 million and € 3,200 million. The business sector achieved this
forecast with EBITDA pre of € 2,820 million in fiscal 2023 (2022: € 3,760 million). This corresponded to a
decline of -25.0% compared with the previous year (-21.4% organic, -3.3% due to exchange rate effects).
EBITDA pre therefore also fell within the more specific forecast range issued at the same time as the report on
the third quarter (trending in the lower half of the range of € 2,750 million to € 3,200 million).
Life Science
Our original forecast for the Merck Group's EBITDA pre for 2023 ranged from a moderate decline to roughly
stable organic development compared with the previous year. This assumption was based on the expectation of
a moderate decline to roughly stable organic development in the Life Science business sector, slight to
moderate organic growth in the Healthcare business sector, and a slight to strong organic decline in the
Electronics business sector. We originally expected negative exchange rate effects to impact EBITDA pre by
between -1% and -4% compared with the prior year. With the presentation of the figures for the first quarter,
we quantified our forecast at organic development of between -5% and 0%. In response to inflation-related
cost increases and the underutilization of our production capacities, especially in the Life Science and
Electronics business sector, we revised our forecast to between -9% and -3% at the end of the second quarter.
This forecast was confirmed with the publication of the figures for the third quarter. Due to negative exchange
rate effects, we revised our forecast for the impact of exchange rate effects twice in the course of fiscal 2023,
ultimately ending with a forecast of between -6% and -3%. EBITDA pre amounted to € 5,879 million in fiscal
2023, representing an overall decline of -14.2% compared with the previous year (-9.0% organic, -4.9% from
currency effects, -0.3% from portfolio effects). This is in the lower half of the forecast range of between
€ 5,800 million and € 6,400 million, and hence is consistent with the more specific forecast range (trending in
the lower half of the range).
EBITDA pre
Despite the economically and geopolitically difficult conditions in the market for semiconductor materials, we
forecast slight to solid organic net sales growth for our Electronics business sector at the start of the year based
on the assumption that the semiconductor market would recover in the second half of 2023. We quantified our
organic sales growth forecast at between -2% and +3% when we published the figures for the first quarter.
Compared with the previous forecast, we anticipated an even more pronounced weakening of the market
followed by a delayed but stronger recovery which should now only occur later in the second half of the year.
We adjusted this forecast with the publication of the figures for the second quarter, stating that we expected an
organic decline in net sales of between -6% and -1% in light of the further delay in the recovery of the
semiconductor market. We then confirmed this forecast at the end of the third quarter. The organic decline in
net sales for fiscal 2023 as a whole was -5.1%, which is in line with the lower end of the forecast range. Due to
negative exchange rate effects of -4.1% and taking into account a portfolio effect of +0.3%, net sales in the
Electronics business sector declined by -8.8% year-on-year to € 3,659 million, thereby falling within the
forecast range of between € 3,500 million and € 3,800 million. This was consistent with the more specific
forecast issued together with the report on the third quarter (trending around the mid-point).
Life Science
Electronics
Review of Forecast against Actual Business Developments
Report on Economic Position
Combined Management Report
We originally forecast moderate to solid organic sales growth for our Healthcare business sector compared with
the previous year. We then quantified this organic sales growth forecast at between +5% and +9% when we
published the figures for the first quarter. We raised this forecast range to between +6% and +9% with the
publication of the figures for the second quarter and confirmed this at the end of the third quarter. With full-year
organic growth of +8.5%, the business sector achieved the forecast for fiscal 2023. This development was driven
in particular by the significant growth of the oncology business and, above all, the strong performance of our
recently approved product BavencioⓇ. Neurology & Immunology made a substantial contribution to full-year
organic sales growth in fiscal 2023 thanks to our recently approved product MavencladⓇ in particular. Sales
growth was also driven by our established portfolio, especially fertility products. Taking into account the negative
exchange rate effect of -5.8%, net sales in the Healthcare business sector increased by +2.7% to € 8,053 million
in fiscal 2023, thereby falling within the upper half of the forecast range. This was consistent with the more
specific forecast issued together with the report on the third quarter (trending slightly above the mid-point).
Healthcare
Our Life Science business sector reported an organic decline in net sales of -7.9% in fiscal 2023. This was at
the lower end of the forecast range of between -8% and -2%, which we adjusted in the second quarter and
confirmed in the third quarter, meaning that Life Science fell below our original forecast of slight to moderate
organic growth. All of the business units Process Solutions, Life Science Services and Science & Lab Solutions
recorded a downturn in organic net sales. As expected, Process Solutions and Life Science Services saw the
most pronounced organic decline in net sales, whereas the downturn in the Science & Lab Solutions business
unit was only slight. All in all, net sales in the Life Science business sector fell by -10.6% to € 9,281 million
including a negative exchange rate effect of -2.7% and a positive portfolio effect of 0.1%. This was in the lower
half of the forecast range of € 9,100 million to € 9,950 million, which is consistent with the more specific
forecast issued at the end of the third quarter (trending in the lower half of the forecast range).
53
20.1%
EBITDA²
5,489
2022
5,225
5,173
5,302
5,293
2023
5,198
Q4
Q2
Q1
€ million/organic growth in %
Net sales and organic growth¹ by quarter²
Merck Group
The net sales in the individual quarters as well as the respective organic growth rates in 2023 are presented in
the following graph:
Q3
Development of sales and results of operations
5,568
5,660
Share
2023
Life Science
€ million
Net sales by business sector
Merck Group
5,806
In fiscal 2023, the net sales by business sector developed as follows:
1 Not defined by International Financial Reporting Standards (IFRS).
-1.7%
-4.1%
-1.1%
0.8%
%
2 Quarterly breakdown unaudited.
2 Not defined by International Financial Reporting Standards (IFRS); EBITDA corresponds to operating result (EBIT) adjusted by depreciation,
amortization, impairment losses, and reversals of impairment losses.
1 Not defined by International Financial Reporting Standards (IFRS).
-11.2%
30.8%
28.0%
Margin (% of net sales) 1
-14.2%
-970
6,849
Profit after tax
5,879
29.3%
26.1%
Margin (% of net sales)¹
-15.6%
-1,015
6,504
EBITDA pre¹
2,834
3,339
-505
-475
4,259
3,784
Operating cash flow
-15.5%
-1.56
10.05
8.49
Earnings per share pre (€)¹
-15.2%
-1.16
7.65
6.49
Earnings per share (€)
-15.1%
Exchange
rate effects
-86
695
Research and development costs
1,854
1,280
6.6%
1,982
Cash and cash equivalents
1,271
178
Other current assets
499
Other current financial
receivables
-110
5
4,114
assets
4,004
-9
Total assets¹
26.9%
13,042
2.9%
749
53.6%
26,005
128
55.2%
-0.1%
-40
100.0%
48,535
100.0%
48,495
26,754
Trade and other current
4,632
4,637
Property, plant and
7,335
6,551
Other intangible assets¹
18,389
17,845
9,056
Goodwill1
-0.6%
-232
74.9%
36,334
74.4%
36,102
thereof:
8,204
equipment¹
Other non-current assets
Inventories
thereof:
1.6%
192
25.1%
12,201
25.6%
12,393
Current assets
244
852
-784
-544
2,406
2,650
13,015
Non-current assets¹
26.8%
0.2%
-526
205
100.0%
48,535
4,422
3,411
11
1,228
100.0%
48,495
-8.6%
-815
19.6%
9,514
453
17.9%
-504
-0.1%
The increase in non-current provisions for employee benefits essentially resulted from actuarial losses in
connection with the discount rate.
€ 26,005 million). Profit after tax (€ 2,834 million) contributed to this development. By contrast, a negative
currency translation difference (€ 1,003 million) and the dividend payments and profit distribution in the
reporting year served to reduce equity (see “Consolidated Statement of Changes in Net Equity” in the
Consolidated Financial Statements). Partially as a result of the ongoing reduction in net financial debt, the
equity ratio improved by more than one percentage point to 55.2% (December 31, 2022: 53.6%).
In fiscal 2023, the equity of the Merck Group rose by 2.9% to € 26,754 million (December 31, 2022:
Trade and other current receivables mainly developed in line with the business volume. At the same time,
this item was reduced by exchange rate effects.
Of the additions to property, plant and equipment in 2023, € 391 million (2022: € 279 million) related to
strategic investments in Germany, including € 329 million for the expansion of the Darmstadt site. At the
Darmstadt site, the Healthcare business sector invested € 51 million in a new research center and the
Life Science business sector invested € 31 million in a new membrane production facility. Furthermore, the
Life Science business sector invested € 50 million in a new filling and logistics center in Schnelldorf. Outside
Germany, there were high levels of investment in strategic projects in the United States (€ 330 million),
Ireland (€ 157 million) and China (€ 90 million) in particular. In the United States, the Life Science business
sector invested € 69 million in expanding its capacities for biosafety testing and analytical development
services in Rockville, while the Electronics business sector invested € 30 million in a new production facility
for specialty gases for the semiconductor industry in Hometown. In Ireland, the Life Science business
sector invested € 149 million in the expansion of membrane production capacities and the construction of a
new filtration plant in Cork. In China, the Electronics business sector invested € 34 million in the
establishment of a site for advanced semiconductor solutions in Zhangjiagang.
The year-on-year increase in property, plant and equipment was attributable to additions of € 1,981 million
(2022: € 1,730 million), which significantly exceeded depreciation and disposals in the reporting period.
-40
Other intangible assets were reduced by amortization and currency effects, in particular stemming from the
U.S. dollar. Slightly higher investment than in the previous year, in particular from in-licensing in the
Healthcare business sector (further information can be found under "Other intangible assets" in the
Notes to the Consolidated Financial Statements), was not enough to offset this development.
The total assets of the Merck Group were essentially unchanged at € 48,495 million as of December 31,
2023 (December 31, 2022: € 48,535 million).
60
60
Course of Business and Economic Position Merck Group
Combined Management Report Report on Economic Position
1 Previous year's figures have been adjusted, see Note (6) "Acquisitions and Divestments" in the Notes to the Consolidated Financial Statements.
2 Previous year's figures have been adjusted, see Note (2) "Reporting principles" in the Notes to the Consolidated Financial Statements.
Goodwill was down as against the previous year as a result of the depreciation of the U.S. dollar against the
euro in particular.
8,699
-153
39
liabilities¹, 2
1,333
Other non-current
9,239
Non-current financial debt
provisions
Current liabilities1
277
employee benefits
2,192
Non-current provisions for
thereof:
Non-current liabilities¹
Equity
Other non-current
thereof:
Current provisions²
658
-22
162
1,486
9,200
299
2,030
Total equity and liabilities¹
3,918
Other current liabilities²
refund liabilities¹
3,422
payables/
Trade and other current
702
Current financial debt
26
%
321
%
3
-0.1%
15.0%
-14
3,326
13.5%
2,824
Net income
-25.6%
-10
-15.1%
-505
-31.4%
298
-4.3%
15.0%
-948
3,339
Non-controlling interests
-3.1%
13.5%
-502
1 Not defined by International Financial Reporting Standards (IFRS).
Life Science
17%
297
Electronics
13%
€ million/%
-15.1%
Research and development costs by business sector¹ - 2023
Merck Group
Course of Business and Economic Position_
Report on Economic Position
Combined Management Report
56
56
Merck Group
396
-650
2,834
Income tax
Other operating income and expenses
losses on financial assets (net)
> 100%
-45
-6
-0.2%
-385
-51
-3.0%
75
-11.3%
-2,521
-11.6%
-2,445
Impairment losses and reversals of impairment
Profit after tax
-1.8%
3,609
-18.7%
-33.0%
62
-803
-0.8%
19.3%
-187
4,287
-0.6%
16.6%
Operating result (EBIT)¹
-125
3,484
Financial result
-43.8%
-19.3%
300
-865
€ million
-685
4,474
17.2%
Profit before income tax
557
-3.1%
20.1%
70%
-20.6%
-20.2%
2,820
45%
Life Science
913
Electronics
1 Not defined by International Financial Reporting Standards (IFRS).
15%
EBITDA pre¹ by business sector² - 2023
Merck Group
2 Quarterly breakdown unaudited.
1 Not defined by International Financial Reporting Standards (IFRS).
-12.8%
-2.6%
€ million/%
2 Not presented: Decline in Group EBITDA pre by € -397 million due to Corporate and Other.
41%
Healthcare
€ million
57
%
€ million
Change
Dec. 31, 2022
Dec. 31, 2023
Balance sheet structure
Merck Group
Net assets and financial position
59
Course of Business and Economic Position_
Report on Economic Position
Combined Management Report
2,543
%
1,628
Merck Group
1,782
Course of Business and Economic Position Merck Group
Report on Economic Position
Combined Management Report
The net income attributable to Merck KGaA shareholders declined by 15.1% to € 2,824 million (2022:
€ 3,326 million) and resulted in a reduction in earnings per share to € 6.49 (2022: € 7.65).
Income tax expense amounted to € 650 million (2022: € 948 million) and resulted in a tax rate of 18.7%
(2022: 22.1%). The downturn in earnings was accompanied by a corresponding reduction in taxes.
Furthermore, a non-recurring deferred tax income had a reducing effect on the tax rate.
The financial result improved by 33.0% to € -125 million (2022: € -187 million). This was due in particular
to the positive development of net interest income. Details about financial income and expenses can be
found in Note (40) "Finance income and expenses/Net gains and losses from financial
instruments" in the Notes to the Consolidated Financial Statements.
58
Compared to the previous year, EBITDA pre, the key financial indicator used to steer operating business,
fell by € 970 million or -14.2% to € 5,879 million (2022: € 6,849 million).
Administration expenses increased as a result of a program to continuously improve processes and align
the Group Functions more closely with the businesses in particular.
Marketing and selling expenses declined on the back of lower logistics costs in particular.
There was a year-on-year decline in the operating result (EBIT) in fiscal 2023. This was largely due to the lower
level of gross profit, which was only partially offset by a reduction in operating expenses. In particular, the
year-on-year decline in the gross margin was due to lower sales of high-margin products in the Life Science
business sector that had experienced strong demand in conjunction with the Covid-19 pandemic. In addition, as
a result of the agreement terminating the strategic alliance with Pfizer Inc., United States, the cost of sales
included royalties for the Bavencio® product for the first time from July 1, 2023, which in turn reduced the
gross margin.
1,810
1 Not presented: research and development costs of € 94 million allocated to Corporate and Other.
Healthcare
1,657
Accounting for a 70% (2022: 70%) share of Group R&D spending (excluding research and development
cost allocated to Corporate and Other), Healthcare was the most research-intensive business sector of the
Merck Group. Further information can be found in the "Research and Development" chapter.
The development of EBITDA pre in the individual quarters in comparison with 2022 as well as the respective
growth rates are presented in the following overview:
Other operating income and expenses fell compared with the previous year, mainly as a result of lower profit
transfer expenses in the Healthcare business sector. Impairment losses on non-financial assets also declined.
Overall, the aforementioned developments led to a reduction in the EBIT margin by around three
percentage points, from 20.1% in the previous year to 17.2%.
EBITDA pre¹ and change by quarter²
Merck Group
1,293
1,446
2022
1,587
2023
Q4
1,553
Q2
1,629
22
Q1
€ million/change in %
Q3
thereof: Rebif®
709
11%
856
-6.8%
11.7%
-4.3%
15.9%
12%
956
-0.9%
22%
1,743
-4.5%
-3.5%
21%
1,665
Neurology & Immunology
8%
9%
611
16.6%
thereof: MavencladⓇ
-17.2%
11%
-20.1%
35%
4.0%
23.4%
2,786
Endocrinology
Cardiovascular, Metabolism &
11%
825
2.7%
-7.8%
10.5%
847
thereof: Gonal-fⓇ
18%
1,446
7.0%
-7.8%
14.9%
19%
1,547
Fertility
11%
887
-2.9%
9%
%
thereof: BavencioⓇ
1 Not defined by International Financial Reporting Standards (IFRS).
7.4%
11.9%
5.3%
2,030
2,089
1,924
1,795
2022
2,032
2 Quarterly breakdown unaudited.
2,066
1,905
2023
Q4
Q3
Q2
Q1
€ million/organic growth in %
Net sales and organic growth¹ by quarter²
Healthcare
-4.6%
2,049
Net sales of the key product lines and products developed as follows in 2023:
Healthcare
Net sales by major product lines/products
13%
1,023
0.3%
-10.6%
10.9%
13%
1,025
thereof: Erbitux®
22%
1,683
8.1%
-9.2%
Share
2022
rate effects Total change
Exchange
Organic
growth¹
17.3%
22%
1,819
Oncology
Share
2023
€ million
713
-0.7%
2023
36%
360
956
41%
100%
Share
€ million
Organic growth¹
Share
€ million
Organic growth¹
GlucophageⓇ
MavencladⓇ
54.4%
87
Latin America
Asia-Pacific
(APAC)
464
14.2%
2.4%
10.9%
421
1,025
€ million
Organic growth¹
ErbituxⓇ
North America
Europe
Total
- 2023
Product sales and organic growth¹ of Erbitux®, Mavenclad® and GlucophageⓇ by region
Healthcare
15.9%
The Cardiovascular, Metabolism and Endocrinology franchise, which includes drugs for the treatment of
cardiovascular, thyroid and growth disorders and diabetes, recorded solid year-on-year growth in net sales
in the past financial year. Net sales of the diabetes drug Glucophage® were largely stable, with organic
sales growth in Europe and Latin America not quite offsetting the organic downturn in the Asia-Pacific
(APAC) and Middle East and Africa (MEA) regions. Net sales of the beta-blocker ConcorⓇ increased slightly
in organic terms in the reporting period, while the thyroid product Euthyrox® enjoyed solid organic growth
compared with the previous year. The franchise also benefited from encouraging organic growth in the net
sales of SaizenⓇ in the mid-thirty percentage range, which was due to rising demand as well as supply
bottlenecks affecting a rival product.
3.4%
45%
20
-0.7%
The net sales in the individual quarters as well as the respective organic growth rates in 2022 are presented in
the following graph:
2022
1 Not defined by International Financial Reporting Standards (IFRS).
10%
23%
-12.8%
14.9%
-4.0%
53%
14%
100%
Share
2.9%
-0.5%
28.5%
4%
84
Middle East and
Africa (MEA)
53
-12.8%
5%
41
9%
45
62.6%
5%
203
467
128
882
2%
51%
38%
100%
490
23.2%
2,805
The reporting period saw a high-teens percentage decline in net sales of Rebif®, which is used to treat relapsing
forms of multiple sclerosis (MS). The sustained downturn in sales was anticipated and largely reflects the
momentum on the interferon market, which is expected to remain negative in the future due to the persistently
difficult competitive situation and the competition from oral dosage forms and high-efficacy MS therapies.
The Fertility franchise recorded strong organic net sales growth in the mid-teen percentage range in the
reporting period. Gonal-f®, a leading recombinant hormone used in the treatment of infertility, saw low
double-digit percentage growth in net sales on the back of higher demand as well as supply bottlenecks
affecting a rival product. Other Fertility products also contributed to the strong growth in the franchise with
organic net sales growth in the mid-teen percentage range in some cases. This development was also
attributable to supply bottlenecks affecting a rival product as well as higher demand.
In immuno-oncology, net sales of the oncology drug Bavencio® (avelumab) saw organic growth in the low-
twenties percentage range in the reporting period. This was driven by all regions, with Europe, North America
and Asia-Pacific (APAC) enjoying particularly strong performance with double-digit organic growth rates. The
main driver of this development was the continued growth in the drug's market share for first-line
maintenance treatment for patients with locally advanced or metastatic urothelial carcinoma (UC).
553
2.2%
-3.2%
5.4%
7%
565
thereof: EuthyroxⓇ
8%
590
-3.3%
-4.9%
1.6%
7%
571
thereof: ConcorⓇ
12%
930
-5.1%
-4.6%
-0.5%
11%
882
thereof: GlucophageⓇ
7%
MavencladⓇ, for the oral short-course treatment of highly active relapsing multiple sclerosis, recorded
encouraging organic net sales growth in the mid-teen percentage range in the past fiscal year and reached
blockbuster status with total net sales of more than US$ 1 billion. The North America region made a
particularly strong contribution to the positive sales performance, but Latin America, Europe and the Middle
East and Africa region also saw organic growth in net sales. Net sales in the Asia-Pacific (APAC) region
remained essentially unchanged year-on-year in organic terms.
thereof: SaizenⓇ
4%
The cancer drug Erbitux® (cetuximab) saw low double-digit percentage organic net sales growth in 2023,
largely on the back of increased demand in the Asia-Pacific (APAC), Latin America and Europe regions. By
contrast, organic net sales performance in the Middle East and Africa region in the reporting period was
negative.
70
70
Combined Management Report Report on Economic Position Course of Business and Economic Position Healthcare
1 Not defined by International Financial Reporting Standards (IFRS).
100%
7,839
2.7%
-5.8%
8.5%
100%
8,053
Healthcare
2%
161
3%
235
Other
3%
266
25.1%
-10.6%
35.7%
332
Development of sales and results of operations
9.2%
31.6%
€ 4,706 million in 2023 (2022: € 4,898 million). Science & Lab Solutions accounted for 51% of Life Science
net sales (2022: 47%). Geographically, Europe showed organic growth in 2023, while net sales in North
America and Asia-Pacific (APAC) declined organically.
The Process Solutions business unit, which markets products and services for the entire pharmaceutical
production value chain, saw an organic mid-teens percentage decrease in sales for 2023. This was
attributable to the continued decline in pandemic-related sales and a slowdown of the core business in
2023, driven mainly by the effects of destocking by key customers. Including an unfavorable foreign
exchange effect of -2.3%, net sales decreased across all core regions (North America, Europe, Asia-Pacific
(APAC)) with exception to Latin America and Middle East and Africa (MEA) to € 3,782 million in 2023
(2022: € 4,540 million). The percentage contribution of the Process Solutions business unit to Life Science
net sales was 41% (2022: 44%).
The Life Science Services business unit, which offers fully integrated Contract Development and
Manufacturing Organization (CDMO) and contract testing services, recorded a significant organic sales
decline in the mid-teens for 2023. This was driven by decreasing pandemic-related sale partially offset by
growth in the core business. Including an unfavorable foreign exchange effect of -2.0%, net sales
decreased across all regions to € 792 million (2022: € 943 million).
Net sales of the business sector by region developed as follows:
Life Science
Net sales by region
€ million
2023
Share
Organic
growth¹
Europe
3,178
34%
-7.6%
North America
The Science & Lab Solutions business unit, which provides products and services to support life science
research for pharmaceutical, biotechnology, academic research laboratories and researchers, and scientific
and industrial laboratories, had organically stable sales in 2023. While the core business¹ generated organic
growth in the first half of 2023, sales saw an organic decline in the second half of 2023 amid further
decreasing pandemic-related demand as well as decreasing demand in China due to the current economic
environment. Including an unfavorable foreign exchange effect of -3.3%, net sales decreased to
3,372
66
2 Previous year's figures were adjusted due to internal restructuring in the Life Science division.
792
9,281
8%
-14.6%
-2.0%
0.6%
100%
-7.9%
-2.7%
0.1%
-15.9%
-10.6%
943
9%
10,380
100%
1 Not defined by International Financial Accounting Standards (IFRS).
Combined Management Report Report on Economic Position Course of Business and Economic Position_ Life Science
36%
-12.0%
Exchange
rate effects
-0.2%
-2.3%
-10.8%
0.1%
Middle East and Africa (MEA)
116
1%
5.3%
Life Science
9,281
100%
-7.9%
-5.5%
-2.7%
-10.7%
-0.3%
-0.1%
2,536
25%
353
10.3%
4%
352
Latin America
Acquisitions/
divestments
Total change
2022
Share
-7.8%
3,445
33%
Life Science
0.1%
3,931
38%
Asia-Pacific (APAC)
2,263
25%
-5.1%
-5.6%
-14.2%
3%
Life Science Services
4,540
30.4%
36.2%
2 Not defined by International Financial Reporting Standards (IFRS); EBITDA corresponds to operating result (EBIT) adjusted by depreciation,
amortization, impairment losses, and reversals of impairment losses.
Development of sales and results of operations
The development of sales in the individual quarters in comparison with 2022 as well as the respective organic
growth rates are presented in the following graph:
Life Science
Net sales and organic growth¹ by quarter²
€ million/organic growth in %
Q1
Q2
Q3
Q4
2023
2,487
2,354
-25.0%
2,191
-940
2,820
9,281
10,380
1,850
2,808
-1,100
-958
-10.6%
-34.1%
19.9%
27.1%
2,731
3,678
-946
-25.7%
29.4%
35.4%
3,760
2,249
2022
2,445
Share
Science & Lab Solutions
4,706
51%
-0.6%
-3.3%
-3.9%
4,898
47%
Process Solutions
3,782
41%
-14.4%
-2.3%
-16.7%
20222
divestments Total change
growth¹ rate effects
Share
2,648
2,681
2,606
%
0.6%
-8.7%
-13.2%
44%
-9.7%
2 Quarterly breakdown unaudited.
Life Science
Net sales by business unit
Organic
Exchange
Acquisitions /
2023
1 Not defined by International Financial Reporting Standards (IFRS).
116
1%
0.1%
Integration expenses/IT expenses
53
-53
3,678
41
-41
24
-24
Gains (-)/losses (+) on the
divestment of businesses
Acquisition-related adjustments
6
-6
18
-18
-30
Other adjustments
30
2,731
expenses
Operating result (EBIT)¹
1,850
2,808
Depreciation/amortization/
impairment losses/reversals of
881
-34
848
870
-24
845
0.3%
impairment losses
EBITDA²
Restructuring expenses
EBITDA pre²
2,820
2,820
EBITDA pre¹ and change by quarter²
€ million/change in %
Q1
22
Q2
Q3
Q4
2023
901
712
615
592
2022
927
1 Not defined by International Financial Reporting Standards (IFRS).
2 Not defined by International Financial Reporting Standards (IFRS); EBITDA corresponds to operating result (EBIT) adjusted by depreciation,
amortization, impairment losses, and reversals of impairment losses.
Life Science
The development of EBITDA pre in the individual quarters in comparison with 2022 is presented in the following
overview:
68
Report on Economic Position Course of Business and Economic Position_ Life Science
3,760
of which: organic growth¹
of which: exchange rate effects
3,760
-25.0%
-21.4%
-3.3%
of which: acquisitions/
divestments
> 100.0%
1 Not defined by International Financial Reporting Standards (IFRS).
-0.3%
Adjusted gross profit for the Life Science business sector was lower in 2023 in comparison with 2022. This
was attributable to the organic sales decline following the continued decrease in pandemic-related sales
combined with a slowdown of the core business as well as plant fix costs. At 54.4%, the adjusted gross
margin in 2023 was below the year-earlier period (2022: 58.8%).
The decrease in marketing and selling expenses in 2023 was largely driven by lower logistics costs
following lower sales volume and a decline in personnel costs. In 2023, administration expenses and
Research & Development costs remained organically largely stable in comparison to 2022. In addition to
our organic development, positive foreign exchange effects impacted the development of costs compared to
2022. The net position of other operating income and expenses decreased compared to 2022 due to one-off
effects in 2022 which did not repeat in 2023. Among other items, there was one-off income from a
contractual arrangement with a supplier.
In 2023, EBITDA pre saw an organic mid-twenties percentage decline compared to 2022, resulting in an
EBITDA pre margin of 30.4% (2022: 36.2%).
40
67
Combined Management Report
2 Not defined by International Financial Reporting Standards (IFRS); EBITDA corresponds to operating result (EBIT) adjusted by depreciation,
amortization, impairment losses, and reversals of impairment losses.
-24
61
-85
Pre¹
Pre¹
9,281
9,281
10,380
10,380
-4,236
6
-4,230
-4,280
7
-4,273
-10.6%
-1.0%
Gross profit
5,044
Elimination of
adjustments
IFRS
Pre¹
Elimination of
adjustments
-10.6%
10,380
100%
1 Not defined by International Financial Accounting Standards (IFRS).
1 The core business consists of "Net sales excluding the Covid-19 pandemic business". This is a financial indicator that is not defined by International Financial
Reporting Standards (IFRS). It should not be taken into account in order to assess the performance of Merck in isolation or as an alternative to the financial
indicators presented in the consolidated financial statements and determined in accordance with IFRS.
Combined Management Report Report on Economic Position Course of Business and Economic Position_ Life Science
The following table presents the composition of EBITDA pre for 2023 in comparison with 2022. The
International Financial Reporting Standards (IFRS) figures have been modified to reflect the elimination of
adjustments included in the respective functional costs.
6
Life Science
2023
2022
Change
€ million
Net sales
Cost of sales
IFRS
Reconciliation EBITDA pre¹
%
5,050
7
3
-393
-399
-0
-399
-1.5%
Impairment losses and reversals
of impairment losses on financial
assets (net)
-2
-2
-9
-75.5%
Other operating income and
-126
48
-78
-396
Research and development costs
-1.4%
-377
6,107
-17.3%
Marketing and selling expenses
-2,245
12
-2,232
-2,400
6,100
16
-6.3%
Administration expenses
-425
53
-372
-400
22
-2,384
€ million
€ million
2023
€ million
2022
Dec. 31, 2023
Change
1 Not defined by International Financial Reporting Standards (IFRSS).
Net financial debt¹
Other current financial assets²
Cash and cash equivalents
less:
Financial debt
Lease liabilities
Liabilities from derivatives (financial transactions)
Loans from third parties and other financial debt
Liabilities to related parties
Bank loans
%
Bonds
7,802
-924
30
77
15.7%
9
59
68
30.1%
276
919
1,196
39.4%
80
203
283
-10.6%
8,726
€ million
Net financial debt¹
Merck Group
-19
-21
Acquisitions²
12
854
Payments from divestments²
-4
Change in lease liabilities
Currency translation difference
Other
December 31
201
187
Dividend payments/profit withdrawals²
1,164
Payments from the disposal of property, plant and equipment²
1,531
1,807
Payments for investments in property, plant and equipment²
The composition and the development of net financial debt were as follows:
61
Merck Group
Course of Business and Economic Position_
Report on Economic Position
Combined Management Report
8,328
47
8,753
-4,259
Payments for investments in intangible assets²
216
275
Payments from the disposal of intangible assets²
-136
-38
-3,784
> 100.0%
515
491
8,053
%
€ million
2022
2023
Change
Margin (% of net sales) 1
EBITDA pre¹
Margin (% of net sales)¹
EBITDA²
Margin (% of net sales) 1
Operating result (EBIT)¹
Net sales
€ million
Key figures
7,839
214
2.7%
2,225
31.6%
2.7%
66
2,477
2,543
30.4%
31.6%
Healthcare
6.7%
2,385
2,545
24.2%
27.6%
17.4%
330
1,895
160
967
Healthcare
Healthcare
-828
8,328
85.9%
212
247
6.9%
128
1,854
1,982
459
7,500
-4.7%
-487
10,428
9,941
5.0%
24
-9.9%
2 Excluding current derivatives (operational) and contingent considerations, which are recognized in the context of business combinations according to
IFRS 3.
Bonds were reduced by the repayment of a bond in the amount of € 600 million in December 2023 and the
partial repurchase of a nominal volume of € 275 million of hybrid bonds issued in 2019 and 2020.
Merck Group
Report on Economic Position Course of Business and Economic Position
Combined Management Report
-30.4%
-37.0%
850
2 Quarterly breakdown unaudited.
1 Not defined by International Financial Reporting Standards (IFRS).
69
-29.2%
%
976
1,006
Operating Cash Flow
January 1
€ million
Reconciliation of net financial debt¹
-2.9%
-30
Dec. 31, 2022
-258
45.7%
Liabilities (total)
1 Not defined by International Financial Reporting Standards (IFRS).
In the area of financial risks and opportunities, Merck uses an active management strategy to reduce the
effects of fluctuations in exchange and interest rates. This also includes the use of derivative financial
instruments. Further details on liquidity, counterparty and financial market risks and opportunities are
presented in the "Report on Risks and Opportunities” in the “Financial risks and opportunities" section.
In fiscal 2023, operating cash flow, which is one of the three most important key performance indicators
alongside net sales and EBITDA pre, decreased by -11.2% to € 3,784 million (2022: € 4,259 million). This was
mainly due to the development of EBITDA pre. This was countered by a reduction in working capital and lower
tax payments. Further information about the development of the operating cash flow can be found in the
“Internal Management System” chapter in this Combined Management Report, under "Consolidated Cash
Flow Statement" in the Consolidated Financial Statements and in Note (16) "Operating cash flow” in the
Notes to the Consolidated Financial Statements.
The distribution of operating cash flow across the individual quarters and the percentage changes in comparison
with 2022 were as follows:
Merck Group
Operative cash flow¹ and change by quarter²
€ million/change in %
Q1
2023
853
622
2022
840
852
37.3%
%
43.6%
40.0%
74.9%
75.8%
77.8%
79.4%
Total assets
Total equity
Asset coverage¹
74.1%
71.6%
62.3%
52.3%
51.5%
Non-current assets
Current liabilities
Finance structure¹
42.2%
1.5%
22
Q2
65
Combined Management Report
Report on Economic Position Course of Business and Economic Position_ Life Science
Life Science
Life Science
Key figures
€ million
Net sales
Operating result (EBIT) 1
Margin (% of net sales)¹
EBITDA²
Margin (% of net sales) 1
EBITDA pre¹
Margin (% of net sales) 1
1 Not defined by International Financial Reporting Standards (IFRS).
Change
Based on our solid net assets and financial position as well as our diversified operations, we view the
economic situation of the Merck Group as positive overall. Thanks to our resilient business model and our
clear positioning as a science and technology company, we are well positioned even in economically
challenging times.
The solid financing policies of the Merck Group were reflected in its consistently good key balance sheet
figures. The equity ratio remained at 55.2% as of December 31, 2023 (December 31, 2022: 53.6%). Net
financial debt was reduced further, amounting to € 7.5 billion at the end of the fiscal year (2022:
€ 8.3 billion).
All in all, the Merck Group's net sales declined by -5.6% or € -1.2 billion to € 21 billion in fiscal 2023. Our
most important key performance indicator, EBITDA pre, fell by -14.2% to € 5.9 billion. Earnings were
adversely affected by the challenging market conditions and exchange rate effects. We will propose to the
Annual General Meeting an unchanged dividend payment of € 2.20 per share for fiscal 2023.
Despite the challenging macroeconomic environment and headwinds in individual markets, Merck can look
back on a predominantly steady fiscal 2023 thanks to the diversified nature of its business sectors. As
anticipated, Life Science business declined as a result of the forecast downturn in demand for products in
connection with the Covid-19 pandemic and the slower than expected reduction in customer inventories in
the Process Solutions business unit. Additionally, the economic slowdown in the semiconductor industry led
to weak business performance in the Electronics business sector. However, Healthcare achieved strong
organic growth that partially offset the negative development in the other business sectors.
Q3
Q4
1,255
1,053
1,552
1,015
-27.0%
74.4%
1 Not defined by International Financial Reporting Standards (IFRS).
-19.1%
3.8%
64
Combined Management Report Report on Economic Position
Course of Business and Economic Position
86
Overall assessment of business performance and economic situation
2 Quarterly breakdown unaudited.
Asset ratio¹
Merck Group
Total assets
2027
2028
2029
| | |
500
500
500
750
1,502
500
842
3.375%
1.625%
0.125%
3.250%
1.875%
1.625%
600
2026
2025
2024
• Hybridbond²
Non-current assets
-3
7,500
8,328
1 Not defined by International Financial Reporting Standards (IFRS).
2 As reported in the Consolidated Cash Flow Statement.
Traditionally, the capital market represents a major source of financing for Merck, for instance via bond
issues. As of December 31, 2023, there were liabilities of € 3.9 billion from a debt issuance program most
recently renewed in fiscal 2023 (December 31, 2022: € 4.5 billion).
600
Loan agreements represent a further source of financing for Merck. A € 2.5 billion syndicated loan facility is
in place until 2028 to cover unexpected cash needs. This credit line is a backup facility that is intended to
be used in exceptional circumstances only. Merck also agreed upon several bilateral loan facilities.
Combined Management Report
Report on Economic Position
Course of Business and Economic Position
62
The maturities of our financial liabilities are aligned with our planned free cash flow. The repayment profile
of the issued bonds was as follows:
• Eurobond
• USD Bond¹
In addition, Merck has a commercial paper program with a volume of € 2.5 billion at its disposal. Within the
scope of this program, Merck can issue short-term commercial paper with a maturity of up to one year.
750
Merck Group
0.375%
The development of key balance sheet figures was as follows:
Merck Group
Key balance sheet figures
%
Total equity
Equity ratio¹
Dec. 31, 2023
83
Dec. 31, 2022
Dec. 31, 2019
55.2%
53.6%
47.2%
634
40.7%
40.9%
Dec. 31, 2021
63
Dec. 31, 2020
Course of Business and Economic Position_
2030
0.5%
Merck Group
2.875%
500
500
2031
800
2.375%
1 The nominal volumes of bonds denominated in U.S. dollars were converted into euros at the closing rate on December 31, 2023.
2 For the hybrid bonds, repayment is assumed at the earliest possible date.
The capital market uses the assessments published by rating agencies to help lenders assess the risks of a
financial instrument used by Merck. Merck is currently rated by Standard & Poor's and Moody's. Standard &
Poor's has issued a long-term credit rating of A with a stable outlook, while Moody's has issued a rating of
A3 with a stable outlook. An overview of the development of our rating in recent years is presented in the
“Report on Risks and Opportunities”.
Report on Economic Position
Combined Management Report
0.875%
The financial debt was not secured by liens or similar forms of collateral. The loan agreements do not
contain any financial covenants. There were no indications that the availability of extended credit lines was
restricted. Cash and cash equivalents included restricted cash amounting to € 404 million
(December 31, 2022: € 456 million). We pursue a sustainable dividend policy and aim for a target corridor
of 20% to 25% of earnings per share pre when determining the amount of the dividend. The average
borrowing cost on December 31, 2023, was 2.1% (December 31, 2022: 1.9%).
Corporate and Other
EBITDA²
Operating result (EBIT)¹
Key figures
Corporate and other
Corporate and Other comprises administrative expenses for central Group functions that cannot be directly
allocated to the business sectors.
76
EBITDA pre¹
Corporate and Other
€ million
1 Not defined by International Financial Reporting Standards (IFRS).
-713
2023
2022
€ million
%
-801
88
-11.0%
-603
-696
Course of Business and Economic Position
93
-13.4%
Change
Report on Economic Position
2023
2 Quarterly breakdown unaudited.
Electronics
-397
EBITDA pre¹ and change by quarter²
€ million/change in %
Q2
Q3
Q4
208
206
Q1
22
Combined Management Report
237
2022
289
293
%
-18.0%
302
308
-10.7%
-31.1%
-33.1%
1 Not defined by International Financial Reporting Standards (IFRS).
262
-579
In the context of constantly evolving external and internal requirements for the management of non-financial
risks, work continued in fiscal 2023 on the development of a procedural and organizational concept as well as a
roadmap for expanding non-financial risk management. An important decision was to consolidate the
management of financial and non-financial risks under unified organizational leadership (with the Chief Financial
Officer being responsible commencing with fiscal 2024) to increase efficiency and quality. This also includes the
non-financial internal control system.
-31.5%
Combined Management Report_
Report on Risks and Opportunities
79
All the structures and processes described in the foregoing relate to the Group Accounting procedures and are
subject to regular review by Group Internal Auditing based on an annual audit plan set out by the Executive Board.
The results of the self-assessments, quality reviews, and internal audits are dealt with by the Executive Board,
the Supervisory Board and the Audit Committee. The internal financial control system at Merck makes it
possible to lower the risk of material misstatements in accounting. However, residual risk cannot be entirely
ruled out as no internal control system is infallible, irrespective of its design.
Non-financial internal control system and overall evaluation*
For fiscal 2023, the Group Legal & Compliance function provides the organizational framework for the non-
financial internal control system. In line with the risk situation of the Group and to ensure regulatory
compliance, non-financial topics such as sustainability, cyber security and supply chain are core areas of the
internal control system. We base this on international standards, such as the framework for the governance of
Group Cyber Security, which includes organizational, process-related, and technical measures for information
security. The existing process of Cyber Security Risk Management is designed pursuant to ISO 27005:2018. In
comparison with the previous year, a monthly Group Security Forum has been established, where new risks
from the risk register are reported, and actions are tracked.
Additionally, the non-financial internal control system aligns with the sustainability strategy and ongoing projects
for implementing sustainability reporting (e.g. CSRD). The goal is to continuously improve regulatory compliance
pursuant to CSRD requirements through the implementation of organization-wide measures and controls.
The aim of our internal control system as the entirety of all systematically defined controls is therefore to
prevent and reduce the probability of potential risks occurring as well as actively steer risks in business
processes. Thereby, it helps to ensure the compliance of the company's activities with laws and regulations.
The entire internal control system and the applied methods are continuously developed further. The
responsibility for the effectiveness of the internal control system and the further development of the non-
financial key metrics lies with the respective responsible senior leaders or risk and process owners.
Relevant representatives from the business sectors and the enabling Group functions reported to the Executive
Board through the implemented control system in 2023. In this context, areas where potential for improvement
and optimization had been identified and relevant ongoing projects were also presented to the Executive Board.
Finally, the individual Group functions and business sectors issued an assessment to the Executive Board
regarding the appropriateness and effectiveness of the control system, considering the recommended
improvement opportunities, where applicable. Based on this as well as the review of the non-financial internal
control system, and reporting by Internal Auditing, as of December 31, 2023, the Executive Board was not
aware of any indications with regard to material issues that the system is not appropriate or effective.
Given the multi-layered process landscape and the high speed of change regarding the catalog of requirements
for non-financial information, the degree of development of the non-financial internal control system does not
yet match that of the (Group) accounting-related internal control system. Based on risk-based assessments of
the financial and non-financial internal control system, compliance and risk management and reporting by
Internal Auditing, as of December 31, 2023 the Executive Board was not aware of any indications with regard
to material issues that this system is not appropriate or effective.
* The contents of this chapter or section are voluntary and therefore not audited. However, our auditor has read the text critically.
Combined Management Report_
Report on Risks and Opportunities
Risk and opportunity management
Group Controlling & Risk Management provides the organizational framework for risk management and reports
to the Group Chief Financial Officer. We have established a holistic risk management system aimed at
safeguarding the long-term achievement of our Group's goals and addressing risks to ensure our continued
existence and future success. Within the scope of audits, Group Internal Auditing regularly reviews the
performance of risk management processes within the units on local level and, at the same time, the
communication of relevant risks from the operating businesses to Group Risk Management. Additionally, the
external auditor examines the risk early warning system in accordance with section 317 (4) of the German
Commercial Code (HGB) as part of the year-end audit of Merck KGaA.
Our risk management activities aim to continuously and promptly identify, assess and manage risks so that
appropriate measures can be implemented to mitigate their potential negative impact. The responsibilities,
objectives, and procedures of risk management are outlined in our internal group standard for risk
management. The designated risk owners, including business heads, managing directors of Merck subsidiaries,
and the heads of enabling Group functions, are responsible for overseeing and running local risk management
processes. These processes encompass various requirements, such as identifying risks considering internal and
external factors (impacting both financial and non-financial targets), analyzing risks, implementing appropriate
mitigation actions, establishing preventive measures and contingency plans if applicable, and documenting risks
and mitigation efforts.
The risk owners continuously assess the status of risks and report their risk portfolio to Group Risk Management
twice a year. To facilitate and support these activities, we employ dedicated risk management tools. Group Risk
Management coordinates and supervises the bottom-up risk reporting process. This includes validating the
plausibility of the reported risks, assessing the effectiveness of mitigation measures and time frames, and
determining the residual risk. The net risk is then presented in the internal risk report.
For the internal bottom-up risk reporting process, reporting is based on defined thresholds, and a variety of
distribution functions are used to reflect scenarios with varied occurrence probabilities. Risks below the global
reporting threshold are managed and monitored at a local level. The timeframe applied for internal risk and
opportunity reporting is five years. It may extend beyond this timeframe in specific cases, such as for
regulatory risks related to climate change. The outlined risks and their evaluation are based on respective
annual values within the reporting period. The assessment of the risks presented relates to December 31, 2023.
No significant changes occurred after the balance sheet date that would necessitate an amended presentation
of the Group's risk situation.
Group Risk Management analyzes the reported information to determine the current risk portfolio of the Group.
This assessment is presented in a comprehensive report, accompanied by detailed explanations, to the
Executive Board, the Supervisory Board, and relevant committees twice a year. This also encompasses a
quantitative aggregation of risks at Group level, using a Monte Carlo simulation. Moreover, any notable changes
in the assessment of existing risks or the identification of new significant risks can be reported at any time and
promptly communicated to the Executive Board.
Our internal controlling processes incorporate the opportunity management process, which is aligned with the
Group's strategy within the operating units. As part of the strategy and planning processes, the business
sectors analyze and evaluate possible business-related opportunities. In this context, investment opportunities
are carefully examined and prioritized primarily in terms of their potential value proposition, ensuring optimal
resource allocation. We target investment in growth markets to leverage the opportunities of dynamic
development and customer proximity at a local level.
Identified opportunities that are deemed likely to occur are integrated into the business plans and forecasts.
Additionally, trends and events that have the potential to positively impact EBITDA pre or Operating Cash Flow.
These opportunities have the potential to have a positive effect on our medium-term prospects.
88
80
The development of EBITDA pre in the individual quarters in comparison with 2022 is presented in the following
overview:
The overall effectiveness of our internal financial control system with regard to accounting and compliance with
financial reporting on the part of the relevant individual companies is confirmed by both the local Managing
Director and the local Chief Financial Officer by signing the single-entity reporting and a separate confirmation
regarding the effectiveness of the financial control system (internal financial control system sign-off letter). For
the accounting treatment of balance sheet items, Group Accounting closely cooperates with Group Risk
Management to correctly present potential risks in the balance sheet.
182
The operational effectiveness of our internal financial control system is regularly tested within the scope of self-
assessments by our legal entities and enabling Group functions including the Merck Business Services
organization. The quality is systematically reviewed by a dedicated global financial control and governance
team. Control deficiencies are properly recorded and, wherever necessary, adequate countermeasures are
taken to remediate control deficiencies in a timely manner.
Group Accounting provides support to the local contacts and ensures a consistently high quality of reporting
throughout the entire reporting process.
2 Not defined by International Financial Reporting Standards (IFRS); EBITDA corresponds to operating result (EBIT) adjusted by depreciation,
amortization, impairment losses, and reversals of impairment losses.
The year-on-year improvement in the operating result, EBITDA and EBITDA pre in fiscal 2023 was due in
particular to the positive currency result from cash flow hedging. Cross-business research and development
costs amounting to € 94 million (2022: € 119 million) were allocated to Corporate.
Combined Management Report_
Report on Risks and Opportunities
77
Report on Risks and
opportunities
As a global science and technology enterprise, identifying risks and opportunities is an intrinsic part of
making our businesses resilient and generating value. We operate in a highly complex, global and
interconnected business environment that further necessitates the competent management of risks and
opportunities. Therefore, managing risks and opportunities is an imperative and a core component of our
internal business planning and forecasting. We have processes, tools and responsibilities in place to enable
the early identification of risks and to supply effective and efficient mitigation strategies.
In our internal risk reporting framework, we define risks as potential future events or developments that
could result in unfavorable deviations from our financial and non-financial targets. Risk parameters in this
context are the probability of financial (quantitative) impact (EBITDA pre/Operating Cash Flow) or non-
financial (qualitative) impact (reputation/brand, Environment, Social, Governance (ESG) including
workforce and ethics, strategy, operations).
Opportunities imply favorable deviations from targets. Future events and expected developments are
considered in internal planning if a likely occurrence can be assumed within the planning period. The
following section presents the risks and opportunities that could result in favorable and unfavorable
deviations from existing plans and targets.
The following report is relevant from the perspective of both Merck KGaA and the overarching Merck
Group. For additional information and details regarding the non-financial topics, please refer to the "Non-
Financial Statement".
Three Lines of Defense
which
To organize risk management and controls, we use the well-established "Three Lines of Defense Model",
was developed by the Federation of European Risk Management Associations (FERMA), the European
Confederation of Institutes of Internal Auditing (ECIIA) and the Institute of Internal Auditors (IIA). The model
divides our company functions for controlling risks properly and effectively into three areas, the so-called lines
of defense:
The first line of defense consists of all functions that are responsible for the operational business and whose
day-to-day business risks can have an impact. Risk owners (i.e. the heads of the business units, enabling
Group functions and local Managing Directors) establish processes in accordance with the requirements set by
the second line of defense to identify, assess, and monitor risks and to develop measures for proper risk
mitigation. Results of these assessments are regularly communicated to the Executive Board.
The second line of defense includes enabling functions at both Group and local level that control and monitor
the operational business (first line of defense). This includes, among other things, the design and
implementation of methods and procedures for risk management and the internal control system (financial and
non-financial) as well as its regular monitoring.
The third line of defense is our Internal Auditing function. As an objective and independent auditing body, it
examines both the operational business (first line of defense) and the controls and monitoring functions
(second line of defense) to ensure that risks are effectively identified, evaluated and controlled vis-à-vis the
Executive Board and the Supervisory Board.
Both the second and third line of defense functions regularly report to the Executive Board and the Audit
Committee of the Supervisory Board.
78
Combined Management Report_ Report on Risks and Opportunities
Internal control system
Internal control system for the (Group) accounting process
The objective of the internal control system for the accounting process is to implement controls that provide
assurance that the financial statements are prepared in compliance with the relevant accounting laws and
standards. This system covers measures designed to ensure the complete, correct, and timely reporting and
presentation of information that is relevant for the preparation of the Consolidated Financial Statements and
the Combined Management Report.
Our internal control system for financial reporting is based on the COSO (Committee of Sponsoring
Organizations of the Treadway Commission) framework, a globally recognized standard divided into five
components: control environment, risk assessment, control activities, information and communication as well
as monitoring activities. Each of these components is regularly documented, tested and/or assessed. This
control system aims to ensure the accuracy of the consolidated accounting process through functioning internal
controls with reasonable assurance.
The Group Accounting function centrally steers the preparation of the Consolidated Financial Statements of
Merck KGaA as the parent company of the Merck Group. This Group function defines the reporting requirements
that all companies of the Merck Group must meet. At the same time, this function steers and monitors the
scheduling and process-related requirements of the Consolidated Financial Statements. The Merck Business
Services organization manages all changes to the equity holding structure and correspondingly adapts the
Group's scope of consolidation. The proper elimination of intragroup transactions within the scope of the
consolidation process is ensured. Group-wide accounting guidelines form the basis for the preparation of the
financial statements according to International Financial Reporting Standards (IFRS), which are reported to
Group Accounting; the guidelines are adapted in a timely manner to reflect changes in the financial regulatory
environment and are updated in accordance with internal reporting requirements. For special issues, such as
the accounting treatment of intangible assets within the scope of business combinations in accordance with
IFRS 3 or defined benefit obligations, external experts are additionally involved where necessary.
The individual legal entities, including Merck KGaA, have a local internal control system within a global
framework. Where financial processes are handled by the Merck Business Services organization, the internal
control system of the Merck Business Services organization is additionally applied. Both ensure that accounting
complies with IFRS and with the Group accounting guidelines.
For Group financial reporting purposes, most of our subsidiaries use standard SAP software. Consolidation
software from SAP is also used for the elimination of intragroup transactions. A detailed authorization concept
ensures the segregation of duties with respect to both single-entity reporting and the Consolidated Financial
Statements. The accounting process is generally designed to ensure that all units involved adhere to the
principle of dual control.
As a result, EBITDA pre was down year-on-year in fiscal 2023. The EBITDA pre margin declined to 25.0%
in the reporting period (2022: 29.7%), as the volume-based margin reduction and other factors affecting
gross profit outlined above were only partially compensated by good operating cost management, the sale
of a patent portfolio and lower logistics expenses.
-11
Adjusted gross profit for the Electronics business sector decreased in 2023 driven by the aforementioned
sales decline. At 37.3%, the adjusted gross margin declined compared with the previous year (2022:
42.9%) owing mainly to lower volumes to cover fixed costs, unfavorable price and mix in Liquid Crystals,
rising raw material costs and adverse foreign exchange effects.
-15
15
divestment of businesses
Acquisition-related adjustments
Other adjustments
EBITDA pre¹
of which: organic growth¹
of which: exchange rate effects
of which: acquisitions/
divestments
2,543
2,543
2,477
2,477
2.7%
17.1%
-14.4%
1 Not defined by International Financial Reporting Standards (IFRS).
Marketing and selling expenses decreased versus prior year, primarily due to lower logistics costs along
with favorable foreign exchange effects and tighter personal cost management. Research and development
costs were also favorable due to tighter cost management and project scrutiny and favorable foreign
exchange effects. Adjusted other operating income improved in 2023 compared to the prior year due to the
sale of a patent portfolio in the second quarter of 2023.
Combined Management Report Report on Economic Position Course of Business and Economic Position Healthcare
72
Adjusted gross profit increased slightly in fiscal 2023, while the gross margin declined slightly to 74.8%
(2022: 75.5%).
Marketing and sales costs and administrative expenses were essentially unchanged year-on-year in the
reporting period. The adjusted research and development costs increased slightly compared with the
previous year, which was largely due to the provisions recognized for follow-on obligations in connection
with the discontinuation of the development program for evobrutinib, a BTK inhibitor used in the treatment
of relapsing multiple sclerosis (RMS).
Net adjusted other operating expenses and income were negative but declined in fiscal 2023. This positive
development was mainly driven by the end of the strategic alliance with Pfizer Inc., United States, on the
co-development and co-commercialization of the oncology drug BavencioⓇ effective June 30, 2023. The
royalties paid to Pfizer Inc., United States, instead of the profit share previously reported in other operating
expenses have been reported in the cost of sales since July 2023, leading to a corresponding increase in
this item. This development outweighed the year-on-year reduction in license income, meaning that the net
figure improved as a result.
The moderate increase in EBITDA pre in fiscal 2023 meant that the EBITDA pre margin amounted to 31.6%
(2022: 31.6%).
The development of EBITDA pre in the individual quarters in comparison with 2022 is presented in the following
overview:
Healthcare
EBITDA pre¹ and change by quarter²
€ million/change in %
Q1
-16
2023
16
91
172
-198
-18.7%
expenses
Operating result (EBIT)¹
2,225
1,895
Depreciation/amortization/
impairment losses/reversals of
320
-10
310
490
-187
303
2.3%
impairment losses
EBITDA²
2,545
Restructuring expenses
32
-32
Integration expenses/IT expenses
20
-20
Gains (-)/losses (+) on the
-53
53
2,385
-91
-370
590
Q3
2023
2022
€ million
%
3,659
248
4,013
-354
-8.8%
572
-325
-56.8%
6.8%
14.3%
816
1,138
-322
-28.3%
22.3%
28.3%
913
25.0%
1,192
-279
-23.4%
29.7%
2 Not defined by International Financial Reporting Standards (IFRS); EBITDA corresponds to operating result (EBIT) adjusted by depreciation,
amortization, impairment losses, and reversals of impairment losses.
Development of net sales and results of operations
The net sales in the individual quarters as well as the respective organic growth rates in 2023 are presented in
the following graph:
Electronics
Change
Q2
1 Not defined by International Financial Reporting Standards (IFRS).
EBITDA pre¹
Q4
704
685
565
711
633
2022
529
604
%
11.4%
16.6%
1 Not defined by International Financial Reporting Standards (IFRS).
2 Quarterly breakdown unaudited.
-3.6%
-10.8%
Combined Management Report
_ Report on Economic Position
Course of Business and Economic Position Electronics
73
Electronics
Electronics
Key figures
€ million
Net sales
Operating result (EBIT)¹
Margin (% of net sales)¹
EBITDA²
Margin (% of net sales)¹
Margin (% of net sales) 1
-161
-41
-120
2,232
28%
6.4%
-7.7%
-1.3%
2,261
29%
Latin America
941
12%
23.1%
-10.8%
12.3%
838
10%
Middle East and Africa (MEA)
546
Healthcare
8,053
7%
100%
5.1%
-1.3%
3.8%
527
7%
8.5%
-5.8%
2.7%
7,839
Asia-Pacific (APAC)
100%
23%
0.6%
Combined Management Report
Report on Economic Position Course of Business and Economic Position
Healthcare
71
Net sales in the Healthcare business sector by region in 2023 developed as follows:
Healthcare
Net sales by region
€ million
2023
Share
Organic
growth¹
Exchange
rate effects
Acquisitions/
divestments
Total change
2022
Share
Europe
2,541
31%
9.6%
-5.1%
4.5%
2,433
31%
North America
1,793
22%
3.9%
-3.2%
1,781
1 Not defined by International Financial Reporting Standards (IFRS).
The following table presents the composition of EBITDA pre in fiscal 2023 in comparison with 2022. The IFRS
figures have been modified to reflect the elimination of adjustments included in the functional costs.
Healthcare
Marketing and selling expenses
-1,668
29
-1,644
13
-1,631
0.5%
Administration expenses
-314
20
-294
-313
18
-296
-0.7%
Research and development costs
Impairment losses and reversals
of impairment losses on financial
assets (net)
-1,657
2
-1,655
-1,694
73
-1,622
2.0%
-41
-41
2
2
> 100.0%
Other operating income and
1.8%
5,917
4
5,914
Reconciliation EBITDA pre¹
2023
2022
Change
€ million
Net sales
Cost of sales
IFRS
Elimination of
adjustments
Pre¹
IFRS
Elimination of
adjustments
Pre¹
Pre¹
Net sales and organic growth¹ by quarter²
8,053
7,839
7,839
2.7%
-2,029
-1
-2,030
-1,925
4
-1,921
5.7%
Gross profit
6,024
-1
6,023
8,053
€ million/organic growth in %
2 Not defined by International Financial Reporting Standards (IFRS); EBITDA corresponds to operating result (EBIT) adjusted by depreciation,
amortization, impairment losses, and reversals of impairment losses.
Q2
1,327
37
1,364
1,700
21
1,721
-20.7%
Marketing and selling expenses
-591
3
-588
-662
3
-659
-10.9%
Administration expenses
-147
29
-118
-128
8
-120
-1.0%
Research and development costs
-297
1
-297
Gross profit
0.1%
-2,292
21
4,013
100%
1 Not defined by International Financial Reporting Standards (IFRS).
The following table presents the composition of EBITDA pre for 2023 in comparison with 2022. The IFRS figures
have been modified to reflect the elimination of adjustments included in the respective functional costs.
Electronics
Reconciliation EBITDA pre¹
2023
2022
Change
€ million
Net sales
IFRS
Elimination of
adjustments
-308
Pre¹
Elimination of
adjustments
Pre¹
Pre¹
3,659
3,659
4,013
4,013
-8.8%
Cost of sales
-2,332
37
-2,295
-2,314
IFRS
-8.8%
2
-3.2%
24
-24
13
-13
Gains (-)/losses (+) on the
divestment of businesses
Acquisition-related adjustments
13
-13
11
Other adjustments
EBITDA pre¹
913
913
1,192
of which: organic growth¹
of which: exchange rate effects
1,192
-23.4%
-17.1%
-5.6%
-0.7%
of which: acquisitions/ divestments
1 Not defined by International Financial Reporting Standards (IFRS).
2 Not defined by International Financial Reporting Standards (IFRS); EBITDA corresponds to operating result (EBIT) adjusted by depreciation,
amortization, impairment losses, and reversals of impairment losses.
Combined Management Report.
_ Report on Economic Position Course of Business and Economic Position Electronics
75
Integration expenses/IT expenses
-31
31
-60
Impairment losses and reversals
of impairment losses on financial
assets (net)
Other operating income and
-44
70
26
-28
expenses
Q1
12
> 100.0%
Operating result (EBIT)¹
248
572
-306
Depreciation/amortization/
568
-42
526
565
-20
545
-3.5%
impairment losses
EBITDA²
816
1,138
Restructuring expenses
60
impairment losses/reversals of
0.3%
440
-5.1%
-7.3%
2,674
67%
Display Solutions
770
21%
-9.2%
-5.3%
-14.5%
900
22%
Surface Solutions
411
11%
-3.6%
-2.9%
-6.5%
Combined Management Report. _ Report on Economic Position
The Semiconductor Solutions business unit, which comprises two businesses, namely Semiconductor Materials
and Delivery Systems & Services (DS&S), reported a moderate decline in net sales in organic terms in fiscal
2023. The cyclical slow-down in the semiconductor industry, which has significantly impacted the sales
volumes of the Semiconductor Materials business, is proving to be both longer and more severe than the
industry initially expected and affected every quarter of 2023. DS&S partially compensated for the decline in
Semiconductor Materials due to the strong demand for equipment and projects throughout 2023 as our key
customers continue to invest in long-term capacity increases. The portfolio effect was due to the acquisition of
the chemical business of Mecaro Co. Ltd., Korea, trading as M Chemicals Inc., Korea, on December 30, 2022.
1 Not defined by International Financial Accounting Standards (IFRS).
100%
4,013
-8.8%
0.5%
0.3%
-5.1%
100%
3,659
Electronics
11%
439
-4.1%
-3.9%
-3.9%
68%
-6.3%
% - -7.1%
1,036
996
957
2022 ―
1 Not defined by International Financial Reporting Standards (IFRS).
943
899
901
2023
Q4
Q3
-4.1%
916
Course of Business and Economic Position Electronics
2 Quarterly breakdown unaudited.
Net sales by business unit
2,479
Semiconductor Solutions
Share
2022
Total change
Acquisitions/
divestments
Electronics
Exchange
rate effects
Share
2023
€ million
-3.2%
-4.0%
1,024
Organic
growth1
74
-1,639
The Surface Solutions business unit reported a moderate organic net sales decline in 2023. While the
Cosmetics business continued to show strength again in 2023, especially in Asia and EMEA, these gains
were more than offset by weaker demand for Industrials and Coatings across all regions.
67%
-11.8%
-4.5%
0.4%
-15.9%
72%
Latin America
39
1%
-2.3%
Middle East and Africa (MEA)
2,440
Electronics
2%
53.6%
-1.6%
-11.2%
-3.9%
40
1%
42.4%
53
2%
100%
Net sales of the Display Solutions business unit, consisting mainly of the business with liquid crystals,
photoresists for display applications as well as OLED materials, decreased sharply in organic terms in 2023.
Even though utilization at key customers in Liquid Crystals improved in the second half of 2023, this was
more than offset by the combined impact of lower first-half utilization, weaker pricing stemming from
continued competitive pressure, and an unfavorable product mix.
75
3,659
Asia-Pacific (APAC)
2,901
649
Exchange
rate effects
-0.6%
-13.6%
9%
318
16%
Europe
Organic
growth1
Share
2023
€ million
Net sales by region
Total change
Electronics
Share
-14.2%
371
9%
Net sales of the Electronics business sector by region developed as follows:
North America
787
21%
25.2%
-3.8%
21.3%
2022
Acquisitions/
divestments
==
-
Consequently, faster market growth driven by the aforementioned industry shifts can lead to a more positive
development compared with our latest plan.
Report on Risks and Opportunities
Combined Management Report_
Our Life Science Services business unit fully integrates Contract Testing, Development, and Manufacturing
Organization (CTDMO) services to meet the evolving needs of our global customers across all stages of drug
development, from preclinical to commercialization. Our CTDMO services cover a wide range of modalities,
including monoclonal antibodies (mAbs), high-potency active pharmaceutical ingredients (HP-APIs), antibody-
drug conjugates (ADCs), viral and gene therapies (VGTS), and end-to-end mRNA offerings. We continually
invest in expanding our portfolio and production capabilities to offer specialized solutions for both traditional
and innovative therapies. This positions us to capitilize on the potential of the growing biopharmaceutical
market by providing leading CTDMO services to our customers. Through quicker establishment of model
modalities on the market in combination with our broad and integrated portfolio, we can increase the potential
beyond the assumptions reflected in our plan.
The growing use of biologics is creating a need for more efficient and higher-yield manufacturing processes.
This represents an opportunity for us to enable continuous and intensified processing through our ongoing
innovation in single-use technologies and advancements in bioproduction.
The portfolio of our Process Solutions business unit encompasses a broad range of pharmaceutical development
and manufacturing solutions, including filtration devices, chromatography resins, single-use assemblies and
systems as well as processing chemicals and excipients. We have strategically positioned ourselves to capture
numerous opportunities from the industry's shift towards biologics, coupled with the growing demand for
bioproduction driven by many drug candidates and more regulatory approvals. In addition, we are well-
prepared to benefit from our customers' investments in expanding bioreactor capacity. Our commitment to
innovation and our customer-focused approach positions us to advance the field of biomanufacturing.
Risks and Opportunities in Life Science
We compete with numerous companies in the pharmaceutical, chemical, and life science sectors. Rising
competitive pressure can have a significant impact on the quantities that can be sold and prices attainable
for our products.
Market risks and opportunities
The net risks of negative geopolitical and macroeconomic developments are seen as possible and might have
significant to critical effects. However, our assumptions on geopolitical developments exclude extreme scenarios
with severe escalation of tensions. The materialization of such scenarios would jeopardize entire industries and the
balance of geopolitical and economic structures, posing a substantial challenge for us, as for any other company.
Further details on the macroeconomic development can be found under "Macroeconomic and Sector-
Specific Environment”.
Global economic growth is projected to slow down with growing regional divergences. Weak economic growth or
even a recession could lead to less government spending or other cost-containment policies. Global inflation
declined gradually in 2023, but remained significantly above target levels, keeping costs at an elevated level
which could negatively impact our business. Persistently high inflation could increase our operating expenses
(e.g. raw materials, operating costs and logistics) as well as capital expenditures. It could also prompt central
banks to increase interest rates further and curb fiscal policy for some economies. In the course of 2022 and
2023, the European Central Bank as well as the U.S. Federal Reserve increased key interest rates significantly,
which may affect our refinancing costs. Financial markets remain volatile, which could have numerous potential
impacts.
the demand shifting from Asia to other geographies (i.e. the United States and Europe). Also, given the
considerable investments of several countries in the domestic chip industry (e.g. the U.S. Chips Act, EU Chips
acts) to establish local supply of this critical component. Besides that, strategic geopolitical risk management is
in place at the Group and business sector levels to continuously monitor and assess the global developments
and to prepare Merck holistically for foreseeable risks.
Our Science & Lab Solutions business unit serves customers in the pharmaceutical and biotech industries and
other industries in production, testing and research, as well as public authorities and research institutions.
Despite current headwinds - a complex macroeconomic environment, and softer market demand, especially in
the United States and China the business unit is well-positioned to deliver long-term, profitable growth. We
aim to offer our customers a streamlined experience and a comprehensive portfolio of offerings to facilitate
their research and analytical processes. This includes several customer solutions in the area of innovative
digitalization and automation. A faster recovery from the aforementioned macroeconomic adverse development
as well as greater commercial success of our innovative digital and automation solutions could imply an
increased potential compared to our latest plans.
83
84
Further details on the industry, market developments and associated risks, such as the challenging market
environment in the life science industry, can be found under “Risks due to increased competition and
customer technology changes as well as related opportunities" and "Macroeconomic and Sector-
Specific Environment".
Innovation driven by R&D is a major element of the Group strategy – including fostering innovation at the
intersection of our business sectors and is particularly important in the Healthcare business sector. In regular
portfolio management reviews, we continually evaluate and, if necessary, realign research areas and R&D
pipeline projects to focus our investments in areas where patient needs are served best. Nevertheless, R&D
projects can experience delays, expected budgets can be exceeded, or targets can remain unmet. Sometimes,
development projects are discontinued after high levels of investment at a late phase of clinical development.
Decisions - such as those relating to the transition to the next clinical phase - are taken with a view to balance
risks and opportunities.
Our Semiconductor Solutions business unit leverages a broad portfolio of independent technologies. This
enables us to supply products for all essential production steps of wafer processing, helping our customers to
achieve their technology roadmaps.
Combined Management Report_
More detailed descriptions on our R&D activities worldwide can be found under "Research and Development"
in "Fundamental Information about the Group".
In addition, we see opportunities in organic light-emitting diode (OLED) materials in high-quality display
applications. We have been conducting R&D in the area of OLED technology for more than 15 years and have
grown into a well-positioned material supplier for OLEDs. Through our semiconductor and display knowledge,
we will be able to contribute to the new display devices including foldable displays and Augmented Reality/
Virtual Reality applications, which require a broad set of materials.
Moreover, in Electronics, we will also continue to invest heavily in R&D in leading-edge material solutions. The
aim is to seize growth opportunities arising from the increasing global demand for innovative semiconductors.
Promising opportunities for innovation are constantly arising throughout our Semiconductor Solutions business.
We work closely with our customers to exploit these. Technology inflection points bring opportunities to our
material solutions and the chance to differentiate from competition. We are further developing new dielectric
platforms in cooperation with our key customers for 3D NAND applications.
The aforementioned development opportunities are associated with different types of risks. There is the risk
that regulatory authorities either do not grant or delay approval or grant only restricted approval. The risk that
undesirable side effects of a pharmaceutical product could remain undetected until after approval or registration
could result in a restriction of approval or withdrawal from the market. Furthermore, we cannot guarantee that
all the assets we are currently developing will achieve the desired commercial success. The failure to meet
targets in this area could have significant effects, for example due to lower net sales or the non-occurrence of
milestone payments from collaboration agreements. These risks are evaluated with probabilities ranging from
possible to likely.
In addition to in-house R&D efforts, strategic alliances with external partners and the in- and out-licensing of
programs also form part of the catalog of measures to develop innovative medicine and ensure the efficient
allocation of resources. Strategic alliances with partners as well as in- and out-licensing transactions always
follow a stringent selection process along clear strategic and financial decision criteria. An example of such in-
licensing deals is the recently announced partnership with Jiangsu Hengrui Pharmaceuticals Co. Ltd. for a next-
generation selective PARP1 (poly (ADP-ribose) polymerase 1) inhibitor and ADC (antibody drug conjugate)
which represents a strong strategic fit leveraging our internal DNA damage response expertise and in-house
ADC capabilities. This agreement provides the opportunity to advance more therapeutic options for patients
with difficult-to-treat cancers. However, in general, there is a possibility that we may not be able to identify a
sufficient number of in-licensing assets on financially acceptable terms.
Report on Risks and Opportunities
-
Risks and opportunities of research and development
Further details on the industry and market development can be found under "Macroeconomic and Sector-
Specific Environment", e.g. on the market challenging environment in the life science industry.
In the Life Science and Electronics business sectors, risks are posed by not only cyclical business fluctuations but
also changes in the technologies used or customer sourcing strategies. We use close customer relationships and
in-house further developments as well as market proximity, including precise market analyses, as mitigating
measures. Overall, the occurrence of these risks is possible to likely and could have a significant impact.
are no new competing products or if our competitors deliver less promising data, this could represent
opportunities for us in therapeutic areas in which we are active.
85
Report on Risks and Opportunities
Combined Management Report_
Risks due to increased competition and customer technology changes as well as related opportunities
In the Healthcare business sector, both our biopharmaceutical products and classic pharmaceutical business are
exposed to increased competition from other rival products, especially in the form of biosimilars and generics
but also in innovative R&D. We compete with other pharmaceutical companies in various therapeutic indications
and rely on high quality data to successfully market our products. For this reason, we closely observe our
competitive landscape and make assumptions with regard to future competitor entries that pose competition to
our products. Due to the uncertainty that is inherent to clinical trials, there is the possibility that competitor
trials fail to meet primary endpoints in their studies or deliver inferior data than we initially anticipated. If there
The aforementioned trends and the continued announcements of major capacity expansions in the industry in
the coming years also benefit our DS&S business. With this portfolio of gas and chemical cabinets and the
potential to provide our largest customers with turnkey solutions for the delivery of bulk gases in the
manufacturing process, we are well positioned to capture upcoming opportunities.
Irrespective of the current turbulent macroeconomic situation, the positive medium- and long-term growth
prospects of our markets remain unchanged. We see long-term growth opportunities in the semiconductor
market due to the significantly accelerating global demand for innovative semiconductor materials with
potential growth upside beyond the assumptions reflected in our plan, driven by a faster market adaptation and
penetration. This demand is driven by exponential data growth and highly impactful technology trends such as
autonomous driving, electric vehicles, Internet of Things (IoT) and 5G. We will benefit from the high material
requirement of these AI chips and are working with our customers on almost all of these groundbreaking
technological innovations in the semiconductor sector. That is why we are investing in our highly attractive
growth markets and purposefully expanding production capacities with a smart localization of our footprint to
further boost customer proximity and ensure supply stability. Having the right capacity in the right place to
bring new products and higher volumes to our customers enables us to stay flexible about the timing of the
market upswing and can serve as a competitive advantage.
The underlying semiconductor industry is cyclical by nature. The current downturn has been exacerbated by a
post-Covid-19 pandemic recession. The economic weakening has led to a temporary weakness of the traditional
industry growth drivers such as PCs, smartphones and traditional data centers, while the new growth drivers
such as AI and automotive are still too small to compensate for these effects. The multi-layered macro-
economic effects and poor transparency throughout the supply chain cause a certain degree of uncertainty
when estimating the timing and shape of the industry recovery. However, it may also imply upsides compared
with our plan if the industry recovers faster and stronger than expected. The semiconductor cyclical correction
risk is considered as likely with a significant impact.
Risks and opportunities in the semiconductor industry
Combined Management Report_
Likely
The current political and macroeconomic situation, characterized by high uncertainty and volatile global
developments, is a strategic factor for us as potential negative developments can also impact our businesses. The
ongoing general trend of bloc building and reshoring of critical supplies and processes is leading to a further
increase in the establishment of trade barriers and the general weaponization of trade to assert interests. While
the global economy continues to gradually recover from the aftermath of the Covid-19 pandemic and Russia's
invasion of Ukraine, the increased threat from armed conflicts including the resurgent conflict in the Middle East as
well as the tensions between the United States and China could lead to further sanctions and economic measures
that harm global trade and affect bilateral and multilateral relationships. For example, multiple countries have
already implemented measures to restrict the export and transfer of technology to China, particularly in relation to
advanced chips that could be utilized for AI, quantum computing and military applications.
More likely than not
Report on Risks and Opportunities
Possible
Highly improbable
Improbable
Explanation
> 50%
20 - 50%
5 -20%
Degree of impact
1 - 5%
Probability of occurrence
Probability of occurrence
The underlying scales for measuring these factors are shown below:
The significance of a risk is evaluated based on its potential unfavorable deviation from our financial and non-
financial targets in conjunction with the probability of occurrence of the respective risk.
Risk and opportunity assessment
81
Report on Risks and Opportunities
Combined Management Report_
< 1%
These risks can have a negative impact on our supply chains and sales in our key countries and regions. Such
risks are considered as fully as possible in the business plans of the affected countries and regions, and are
mitigated through product, industry and regional diversification as well as measures to ensure resilience of
supply chains and networks. For instance, in the Electronics business sector, a strong local presence in China
enables us to remain competitive in the country while our global footprint could provide opportunities to capture
Degree of impact
€ 100 500 million
Risk of negative political and macroeconomic developments
We must adhere to a multitude of regulatory requirements regarding the manufacturing, testing and marketing
of many of our products. Specifically, in the European Union, we are subject to the EU chemicals regulation
REACH. Similar regulations are emerging globally in relevant markets, particularly in Asia. These regulations
demand comprehensive tests for chemicals. Moreover, the use of chemicals, such as per- and polyfluorinated
alkyl substances (PFAS), in production and final products could be restricted, which would negatively impact the
ability to manufacture and market certain products. With the EU Chemicals Strategy for Sustainability, an
initiative of the European Green Deal, we expect increasing demands concerning the substitution of specific
hazardous substances. We are constantly pursuing research and development (R&D) in substance
characterization and the possible substitution of critical substances so as to mitigate this risk. Nevertheless,
risks of stricter regulations are classified as possible to likely with moderate to significant impacts.
Our business is affected by numerous regulations that are continuously changing - and could even become
more stringent. For example, in the Healthcare business sector, the known trend towards increasingly
restrictive requirements in terms of drug pricing, reimbursement, and the expansion of rebate groups is
continuing. With globally rising healthcare expenditures, both in absolute amounts and relative to GDP,
healthcare budgets around the globe face increasing pressure. Specifically, in the United States, a pricing
reform on prescription drugs is part of the agenda of the current administration. These requirements can
negatively influence the profitability of our products, as can market referencing between countries, and the
success of market launches. Foreseeable effects are considered as far as possible in the business sector's plans.
Close communication with health and regulatory authorities serves as a preventive measure to avert such risks.
The remaining risks beyond the current plans resulting from restrictive regulatory requirements are possible to
likely with a moderate to significant impact. While we consider the possibility of resulting price cuts in our
forecasts, there is also an opportunity that price pressure from healthcare systems worldwide is less
pronounced than expected or materializes at a later point in time versus the base assumption. Additionally, as a
global specialty innovator that pursues a focused leadership approach in attractive therapeutic areas, we are
positioned to benefit from attractive pricing schemes for demonstrated major therapeutic improvements.
Risk of stricter regulations for the manufacturing, testing, and marketing of products
As a global corporate group, we face political and regulatory changes in a large number of countries and markets.
Risk of more restrictive regulatory requirements regarding drug pricing and reimbursement as well
as pricing-related opportunities
Political and regulatory risks and opportunities
Business-related risks and opportunities
82
82
> € 500 million
Report on Risks and Opportunities
Investment opportunities are primarily evaluated and prioritized using metrics such as net present value,
internal rate of return, return on capital employed (ROCE), and the payback period of the investment. These
indicators are used to assess the potential of investment projects and prioritize them accordingly. Similarly,
scenarios are used to simulate the impact of possible fluctuations and changes in the respective parameters on
results.
Opportunities are assessed within their respective business environment. During short-term and strategic
planning, general measures of business functions are quantified, typically in relation to EBITDA pre (earnings
before interest, taxes, depreciation, and amortization), and operating cash flow. In addition, we identify and
leverage opportunities as part of our regular business operations and through our daily observation of internal
processes and markets.
To enable a thorough evaluation of both financial and non-financial risks, a qualitative rating scale is available
to evaluate the indirect financial impact. The use of this scale is mandatory for the assessment of non-
quantifiable and qualitative risks such as Environmental, Social, and Governance (ESG), reputational, strategic,
and operational risks as well as for material risks that also require a qualitative evaluation. The scale
categorizes the risks as low, moderate, significant, or critical and provides a comprehensive reference for
assessment.
Critical negative impact on EBITDA pre and/or Operating Cash Flow
Significant negative impact on EBITDA pre and/or Operating Cash Flow
Moderate negative impact on EBITDA pre and/or Operating Cash Flow
Minor negative impact on EBITDA pre and/or Operating Cash Flow
Immaterial negative impact on EBITDA pre and/or Operating Cash Flow
Explanation
< € 10 million
€ 10 25 million
€ 25 100 million
Combined Management Report_
86
Nevertheless, reputational risks could result, for instance through public dialogues on social media. On the
qualitative rating scale, we thus rate this risk as significant.
Opportunities arising from capacity expansion
2013
2012
2011
• Moody's
• S&P
BBB / Baa2
BBB+ / Baa1
A- / A3
2014
A / A2
S&P/Moody's
Overview of Rating Development
The capital market uses the assessments published by rating agencies to help lenders assess the risks of
financial instruments used by Merck. We are currently rated by Standard & Poor's and Moody's. Standard &
Poor's has issued a long-term credit rating of A with a stable outlook and Moody's a rating of A3 with a stable
outlook. In line with market procedures, our financing conditions are closely tied to our rating. The better the
rating, the more favorably we can generally raise funds on the capital market or from banks.
Assessment by independent rating agencies
To the extent that pension obligations are covered by plan assets consisting of interest-bearing securities,
shares, real estate, and other financial assets, decreasing or negative returns on these assets can adversely
affect the fair value of plan assets and thus result in further additions to pension provisions. By contrast, rising
returns increase the value of plan assets, thereby resulting in excess cover of plan liabilities. We increase the
opportunities of fluctuations in the market value of plan assets on the one hand and reduce the risks on the
other by using a diversified investment strategy. The possible risk due to pension obligations could have minor
effects.
We have commitments in connection with pension obligations. The present value of defined benefit obligations
can be significantly increased or reduced by changes in the relevant valuation parameters, for example the
interest rate or future salary increases. Pension obligations are regularly assessed as part of annual actuarial
reports. The obligations are covered by the pension provisions reported in the balance sheet based on the
assumptions as of the balance sheet date. Some of these obligations are funded by plan assets (further
information can be found under "Provisions for pensions and other post-employment benefits" in the
"Notes to the Consolidated Financial Statements").
Risks and opportunities from pension obligations
The carrying amounts of individual balance sheet items are subject to the risk of changing market and business
conditions and thus to changes in fair values as well. Necessary impairments could have a significant negative
non-cash impact on earnings and affect the accounting ratios. This applies specifically to the high level of
intangible assets including goodwill, which mainly derive from the purchase price allocations made in connection
with past acquisitions (further information can be found under "Goodwill" and "Other intangible assets” in
the "Notes to the Consolidated Financial Statements"). This qualitative risk might have a significant effect
on reputation.
A+ / A1
Risks of impairment of balance sheet items
2015
2017
2022
2023
Combined Management Report_ Report on Risks and Opportunities
90
90
Risks due to the divestment, acquisition and integration of companies and
businesses
Successfully acquiring and subsequently integrating new businesses entails risks. These are primarily centered
around the uncertainty of achieving business targets and synergy goals as well as remaining within the planned
integration budget. Divestments, on the other hand, could lead to liabilities and additional expenses related to
potential indemnifications and commitments guaranteed in the sale transaction. We leverage our solid
acquisition track record to reduce the probability of any transaction-associated risks by integrating lessons
learned from past transactions, strong due diligence, and closely managed integration processes. Currently, we
are not aware of any significant risks in this area.
Tax risks
2016
Merck and its subsidiaries operate worldwide and are consequently subject to different national tax laws and
regulations. National tax audits of our entities are conducted on an ongoing basis by the tax authorities of the
respective countries in which we operate. Tax risks originate particularly from the changes in national tax laws
and regulations, and case laws and interpretations by national tax authorities as well as from significant
transactions such as acquisitions, divestments and reorganizations.
The tax function at Merck regularly and systematically assesses the relevant tax risks. Appropriate standards are
put in place to identify tax risks at an early stage in order to review, assess and mitigate them effectively and
efficiently. Group Tax coordinates mitigation measures with the subsidiaries. Risks in addition to those already
accounted for in the balance sheet are classified as improbable to possible with moderate to significant impact.
Information on the accounting and measurement policies for income taxes can be found under "Income tax"
in the "Notes to the Consolidated Financial Statements".
Legal risks
Generally, we strive to minimize and control our legal risks. To this end, we have taken the necessary
precautions to identify threats and defend our rights where necessary. Nevertheless, we are still exposed to
risks from litigations or legal proceedings. In particular, these include risks in the areas of product liability,
competition and antitrust law, pharmaceutical law, patent law, trademark law, data protection law, tax law, and
environmental protection. As a research-based company, we have a valuable portfolio of industrial property
rights, patents, and brands that could become the target of attacks and infringements. The outcome of future
proceedings or those currently pending is difficult to foresee. For instance, we are currently involved in litigation
with Merck & Co. Inc., Rahway, New Jersey (USA) (outside the United States and Canada: MSD), against whom
we have filed lawsuits in various countries. This company has also sued us in the United States for trademark
infringement, among other things.
Due to long statutes of limitations or in some cases the absence thereof, it is not possible to rule out that we
will face third-party claims arising from the same issue despite the conclusion of legal proceedings. Court or
official rulings or settlements that we consider as "highly improbable" to "more likely than not” could lead to
expenses with a significant to critical impact on our business and earnings. Despite extensive precautionary
measures, non-compliance with laws and regulations leading to related consequences can never be completely
excluded. In our opinion, the lawsuits described below constitute the most significant legal risks. This should
not be seen as an exhaustive list of all legal disputes currently ongoing.
2021
2020
2019
2018
Findings of the national audit authorities of the various countries may lead to higher tax expenses and
payments and may also have an impact on the amount of tax receivables, and tax liabilities as well as on
deferred tax assets and liabilities.
Risks and opportunities related to the quality and availability of products
Report on Risks and Opportunities
89
Merck, like many other market players in other industries, has been exposed in the recent past to
unprecedented events such as the Covid-19 pandemic and other geopolitical events. Throughout these
challenging times, we have been able to avoid any major supply disruptions for our customers. A significant
part of this success is rooted in our efforts to build resilient supply chains over the years with our strategic
suppliers and reduce the probability of these risks. These strong and esteemed relationships have enabled
Merck to respond to the changes in a difficult environment and adapt to the new circumstances quickly.
Risks of dependency on suppliers and opportunities from supply reliability
Although the occurrence of these risks is considered improbable, an individual event could have a critical
negative effect.
Further risks include operational failures due to fire or force majeure, for example natural disasters such as
floods, droughts or earthquakes, which could lead to a substantial interruption or restriction of business
activities. As far as possible and economically viable, the Group limits its damage risks with insurance coverage,
the nature and extent of which is constantly adapted to current requirements. Likewise, we are exposed to risks
of production outages and the related supply bottlenecks that can be triggered by technical problems in
production facilities with very high-capacity utilization. Furthermore, there are risks of supply bottlenecks due
to a lack or disappearance of capacity. We work towards continual mitigation of such risks by making regular
investments, setting up alternative sourcing options and maintaining sufficient inventory levels.
Risks of production availability
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Combined Management Report_
For example, the promise of our Healthcare business sector to reliably serve our patients is a top priority for us
and requires a strong and resilient supply chain. In 2023, we proved that we could continue to reliably supply
our patients with highly needed drugs while competitors in Fertility and Endocrinology ran out of stock. This
stock-out situation faced by competitors could continue in the near future and would provide us with
opportunities to gain additional market share by serving patient demand.
We are required to comply with the highest standards of quality in the manufacturing of pharmaceutical
products (Good Manufacturing Practice or official pharmacopoeia). In this regard, we are subject to the
supervision of the regulatory authorities. Conditions imposed by national regulatory authorities could result in a
temporary ban on products/production facilities and possibly affect new registrations with the respective
authority. We make the utmost effort to ensure compliance with regulations, regularly perform own internal
audits, and carry out external inspections. Thanks to these quality assurance processes, the occurrence of a
risk with a significant impact is improbable to possible; however, it cannot be entirely ruled out and depends on
the product concerned and the severity of the objection.
By employing these strategies, we mitigate project execution risks, ensuring successful project delivery,
improved efficiency, and alignment with our strategic objectives. Overall, the possible risks could have a
moderate to significant impact.
To proactively address project execution risks, we apply well-established project planning and internal control
practices, collaborate closely with stakeholders, and conduct regular project reviews through teams and
steering committees. This approach enables us to detect risks early on and implement corrective actions or
discontinue projects that are unlikely to succeed. Through comprehensive planning, accurate cost estimations
and re-evaluations, we monitor costs and ensure efficient resource allocation. Effective project governance and
prioritization further contribute to desired project outcomes.
In a rapidly evolving market, there is also a risk of missing out on market growth and development by delaying
or deferring investments. To mitigate this risk, we actively monitor industry trends, conduct market research,
and maintain a flexible project portfolio. By aligning our investment decisions with market dynamics, we aim to
capture opportunities and minimize the risk of being left behind. This is particularly important in industries like
semiconductors, where market cycles present substantial risks.
In today's dynamic business environment, we prioritize innovation and growth. Projects are essential for
achieving our strategic objectives, driving expansion, and promoting sustainable development. To effectively
support further business growth and enhance efficiency, we continuously invest in projects, such as IT systems,
distribution centers, office buildings and other projects. However, project execution involves significant capital
expenditures, making effective project management crucial to avoid delays and higher spending. Inadequate
planning, execution errors, and ineffective change management can lead to inefficiencies and disruptions,
resulting in increased costs and lower sales.
Risks arising from project execution
In fiscal 2023, we announced several new investments to expand capacity and product capabilities at facilities
around the world. These include investments in biosafety testing, the expansion of our production for highly
purified reagents and expanded lab space and production capability to manufacture cell culture media. Having
the right capacity in the right place to ensure supply security, to bring new products to the market and to serve
higher customer demand offers us the opportunity to capture higher market shares and can serve as a
competitive advantage. However, market dynamics naturally influence our expansion activities as well as
utilization. We therefore regularly review our expansion plans and adapt them accordingly.
During the Covid-19 pandemic, supply chains experienced unprecedented disruption, with customers placing
greater emphasis on supply security. In Life Science, we responded to this trend by actively diversifying our
global presence by moving to a production network in the region and for the region to increase resiliency and
meet the local needs of customers in North America, Europe and Asia-Pacific.
We make targeted investments worldwide to expand our regional capacities and drive sustainable growth in all
three of our business sectors.
Risk of a temporary ban on products/production facilities or of non-registration of products due to
non-compliance with quality standards
Combined Management Report_
However, part of our supply chain remains vulnerable to certain events. Therefore, we continue to invest in the
improvement of our supply chain, by for example, avoiding single-source situations wherever possible and
economically sensible, and by increasing stock levels for essential materials in close collaboration with our
suppliers. Through these measures we keep our dependencies on individual partnerships as low as possible
within the highly regulatory environment we operate in. Overall, the likely risks might have a moderate to
significant impact.
As a leading global science and technology company and manufacturer of innovative products of the highest
quality, we are exposed to various security- and crime-related risks. Due to the complexity of international
trade and global supply chains, our products are at risk of being counterfeited, stolen, illegally diverted and
misused. If left unaddressed, this would not only lead to financial loss, reputational damage and business
disruption, but also compromise patient and customer safety. Consequently, we have implemented technical,
operational and procedural measures aimed at protecting the integrity of our products and supply chains, while
also ensuring that new threats are identified and managed appropriately.
As a result of our international business activities and global corporate structure, we are exposed to risks and
opportunities from fluctuations in exchange rates. These result from financial transactions, operating
receivables, and liabilities as well as future cash flows from sales and costs in foreign currency. We use
derivatives to manage and reduce these risks and opportunities (further information can be found under
"Derivative financial instruments" in the "Notes to the Consolidated Financial Statements"). Foreign
exchange rate risks are rated as possible with a significant effect on EBITDA pre or operating cash flow.
Variable interest and current financial liabilities are exposed to the risks and opportunities of interest rate
fluctuations. Interest rate risks have a negative impact, are considered possible, and pose a minor negative risk
overall.
Financial market risks and opportunities
Counterparty risks are classified as possible risks and might have moderate effects.
The solvency and operational development of trading partners are regularly reviewed as part of the
management of operational counterparty risks. Sovereign risks are also analyzed. The volume of receivables of
each customer is capped in line with their credit ratings. Risk-mitigating measures, such as credit insurance,
are utilized as appropriate. Nevertheless, defaults by isolated trading partners, even those with outstanding
credit ratings, cannot be entirely ruled out, although rated as unlikely.
As for counterparty risks from financial transactions, we review all central positions relating to trading partners
and their credit ratings daily. We manage financial risks of default by diversifying our financial positions and
through the related active management of our trading partners. Significant financial transactions involving
credit risk are entered into with banks and industrial companies that have a good credit rating. Moreover, our
large banking syndicate - the renewed syndicated loan facility of € 2.5 billion was syndicated among 15 banks
in 2023 - reduces possible losses in the event of default.
Counterparty risks arise from the potential default by a partner in connection with financial investments, loans,
and financing commitments on the one hand and receivables in operating business on the other.
Counterparty risks
To ensure continued existence, we must be able to fulfill our commitments arising from operating and financial
activities at any time. Therefore, to reduce potential liquidity risks, we have a central Group-wide liquidity
management system in place, and a balanced maturity profile. The maturities of our financial liabilities are
aligned with our planned free cash flow. Furthermore, we have a syndicated loan facility of € 2.5 billion with a
term until 2028, which ensures continuing solvency if any liquidity bottlenecks occur. As our loan agreements
do not contain any financial covenants, these agreed lines of credit can be accessed even if Merck's credit rating
should deteriorate. Additionally, we have a commercial paper program with a maximum volume of € 2.5 billion.
Risks due to product-related crime
Liquidity risks
As we operate internationally, and due to our presence in the capital markets, we are exposed to various
financial risks and opportunities. Above all, these are liquidity and counterparty risks, financial market risks and
opportunities, and risks of fluctuations in the market values of operational tangible and intangible assets as well
as risks and opportunities from pension obligations.
Financial risks and opportunities
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Combined Management Report_
We and our employees are active on numerous social media platforms. The consistent and legally compliant use
of such platforms and their content is important in terms of increasing awareness of our brand, among other
things. We take all necessary precautions and have implemented processes to ensure awareness regarding the
proper handling of social media as well as actively manage and control our publications and communication.
Risks from the use of social media
Overall, the threat resulting from product-related crime is likely with a moderate impact.
In the area of financial risks and opportunities, we use an active management strategy to reduce the effects of
fluctuations in exchange and interest rates. The management of financial risks and opportunities by using
derivatives is regulated through extensive guidelines. Speculation is prohibited, and derivative transactions are
subject to constant risk controls. The strict separation of functions between trading, settlement, and control
functions is ensured.
BBB-/Baa3